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It has been exactly a year to the day Part I of this post went up. The Internal Revenue Service decided to put an end to the Offshore Voluntary Disclosure Program {aka OVDP} on September 28th, 2018. That was just a precursor of the tumultuous changes to come at the Internal Revenue Service.
In November of 2018, the IRS released a Memorandum with updated procedures regarding voluntary disclosure both domestic and foreign submitted to them after September 28th, 2019. Notwithstanding the closure date, the IRS has the discretion to apply the new procedures to domestic voluntary disclosures received on or before September 28th, 2018.
Procedures Under the New OVDP:
Procedures Under the New OVDP:
1. All taxpayers, whether offshore or domestic need to submit a preclearance request on Form 14457 for screening to Criminal Investigation {CI} to determine eligibility. This can be requested via Fax or Mail to the IRS Criminal Investigation unit in Philadelphia.
2. As soon as the CI grants preclearance, the taxpayer must promptly submit all non-disclosed information for voluntary disclosure to CI along with a narrative regarding facts and circumstances for past non-compliance on Form 14457. Once CI has accepted a preliminary preclearance, the taxpayer will be notified via a letter and the CI will then forward the information to LB&I Austin. CI will not process tax returns or payments.
3. LB&I Austin will establish the most recent tax year covered by the voluntary disclosure and route the case to the appropriate Business Division and Exam function for civil examination. The taxpayer can remit payment to the LB&I before the case is assigned. The IRS will not require taxpayers to provide additional documents to LB&I Austin.
4. Examiners at this stage will determine proper tax liabilities and applicable penalties. Taxpayers are expected to be prompt and cooperative. The IRS expects that all taxes, interest and penalties will be paid by the taxpayer for the disclosure period. Examiners may request CI to revoke preclearance for non-cooperation.
5. The Disclosure Period is now six years. The examiners has the discretion to expand the period to include all non-compliant years.
6. Penalty for underpayment of tax is now 75 percent (75%). This civil penalty for fraud under §'s 6663 and 6651(f) will be assessed to the tax year in the disclosure period with the highest tax liability. The Memorandum states "limited circumstances" under which these penalties can be expanded to other years in the disclosure period.
7. There will be willful FBAR penalties imposed on taxpayers. This penalty in most cases will be 50 percent (50%) of the highest aggregate balance of all unreported balances during the disclosure period. This penalty is discretionary and an examiner may recommend a higher or lower penalty not exceeding 100 percent (100%) of the highest aggregate balance. The taxpayer may request that non-willful penalties be imposed if they can provide convincing evidence. We do not know at this time what the success rate has been on taxpayers' requests for non-willful penalties.
8. Penalties to file other information returns will not be imposed automatically. This may be resolved by agreement with the taxpayer. The examiners have the discretion to impose these penalties if they deem necessary.
9. The taxpayer has the right to go to Appeals if they are unable to reach an agreement with the IRS. At this time there is no guidance what the taxpayer's recourse is if they are unable to reach an agreement with the examiner. Experts weighing in on this expect that the taxpayers will retain protection from criminal liability as under the old OVDP.
10. Once an examination is concluded, we assume there will be a closing agreement via a Form 906, and there is finality for the disclosing taxpayer on future prosecution on this income.
3. LB&I Austin will establish the most recent tax year covered by the voluntary disclosure and route the case to the appropriate Business Division and Exam function for civil examination. The taxpayer can remit payment to the LB&I before the case is assigned. The IRS will not require taxpayers to provide additional documents to LB&I Austin.
4. Examiners at this stage will determine proper tax liabilities and applicable penalties. Taxpayers are expected to be prompt and cooperative. The IRS expects that all taxes, interest and penalties will be paid by the taxpayer for the disclosure period. Examiners may request CI to revoke preclearance for non-cooperation.
5. The Disclosure Period is now six years. The examiners has the discretion to expand the period to include all non-compliant years.
6. Penalty for underpayment of tax is now 75 percent (75%). This civil penalty for fraud under §'s 6663 and 6651(f) will be assessed to the tax year in the disclosure period with the highest tax liability. The Memorandum states "limited circumstances" under which these penalties can be expanded to other years in the disclosure period.
7. There will be willful FBAR penalties imposed on taxpayers. This penalty in most cases will be 50 percent (50%) of the highest aggregate balance of all unreported balances during the disclosure period. This penalty is discretionary and an examiner may recommend a higher or lower penalty not exceeding 100 percent (100%) of the highest aggregate balance. The taxpayer may request that non-willful penalties be imposed if they can provide convincing evidence. We do not know at this time what the success rate has been on taxpayers' requests for non-willful penalties.
8. Penalties to file other information returns will not be imposed automatically. This may be resolved by agreement with the taxpayer. The examiners have the discretion to impose these penalties if they deem necessary.
9. The taxpayer has the right to go to Appeals if they are unable to reach an agreement with the IRS. At this time there is no guidance what the taxpayer's recourse is if they are unable to reach an agreement with the examiner. Experts weighing in on this expect that the taxpayers will retain protection from criminal liability as under the old OVDP.
10. Once an examination is concluded, we assume there will be a closing agreement via a Form 906, and there is finality for the disclosing taxpayer on future prosecution on this income.
When the old OVDP was terminated, many tax professionals such as myself were wondering what the new rules would entail. These procedures have somewhat eased my fears. Taxpayers who do not fit into the requirements for Streamlined Filing Compliance Procedures or Delinquent FBAR Submission Procedures or Delinquent International Information Returns still have another option to bring their undisclosed foreign bank balances and income into US Tax Compliance.
My biggest concern with the new procedures is that unlike under the old OVDP, we have no way of predicting what the final cost of voluntarily disclosing non-compliant accounts. Under the old OVDP, the size and number of penalties were known. This helped the taxpayer to set aside the cost of going into the program. Under the new procedures, the IRS has large discretionary powers for assessing penalties.
As always I advise you to consult experienced Tax professionals to calculate their exposure and determine if this is a viable or appropriate option for you. Although more onerous than the previous one, the new OVDP is still the best option for you to minimize criminal exposure.
My biggest concern with the new procedures is that unlike under the old OVDP, we have no way of predicting what the final cost of voluntarily disclosing non-compliant accounts. Under the old OVDP, the size and number of penalties were known. This helped the taxpayer to set aside the cost of going into the program. Under the new procedures, the IRS has large discretionary powers for assessing penalties.
As always I advise you to consult experienced Tax professionals to calculate their exposure and determine if this is a viable or appropriate option for you. Although more onerous than the previous one, the new OVDP is still the best option for you to minimize criminal exposure.
Bibliography: Memorandum LB&I-09-1118-014; LB&I AUSTIN stands for Large Business & International Unit in Austin; IRM 9.5.11.9; IRS FAQ's On Closing 2014 OVDP .
