Deputy Commissioner Wielobob, in her November 20th memorandum, addresses how taxpayers can “come into compliance with the law and potentially avoid criminal prosecution” following the closure of the Offshore Voluntary Disclosure Program.
On September 28, 2018, the U.S. government closed its 2014 Offshore Voluntary Disclosure Program. Under the Offshore Voluntary Disclosure Program (“OVDP”), taxpayers who voluntarily came forward and reported their previously undisclosed foreign accounts and income were excused from criminal prosecution. The 2014 OVDP was a modified version of the OVDP launched in 2012, which was similar to the OVDPs of 2011 and 2009. Since the OVDP’s inception, more than 56,000 taxpayers have participated in one of the programs, paying a total of $11.1 billion in back taxes, interest, and penalties.
The procedures outlined below were recently released by the IRS and are effective, retroactively, for all voluntary disclosures received after the closing of the 2014 OVDP on September 28, 2018. These procedures still provide taxpayers the opportunity to avoid criminal prosecution.
Consolidation
The Internal Revenue Service (“IRS”) is essentially consolidating its offshore program with the onshore system taxpayers use to disclose U.S. assets. Accordingly, Criminal Investigation will now screen all voluntary disclosure requests (domestic, offshore, or other) to determine if a taxpayer is eligible to make a voluntary disclosure. This will require taxpayers to file a soon to be revised Form 14457 requesting preclearance to make a voluntary disclosure. Once granted, taxpayers would then submit all required documents including “a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.” Next, the voluntary disclosure is forwarded to the Large Business and International division (“LB&I”) for case preparation.
Civil Processing
The LB&I will determine the most recent tax year involved and then forward cases to the appropriate Business Operating Division and Exam function for civil examination. The LB&I will also accept payment from taxpayers wanting to pay prior to case assignment.
Less Time but Steeper Penalties: Civil Resolution Framework
The IRS has set forth a civil resolution framework for voluntary disclosures received after September 28, 2018. Generally, voluntary disclosures will require examination of the six most recent tax years (previously eight years under the OVDP), including all required returns and reports. Now, voluntary disclosures will face a 75% penalty (previously 20% under the OVDP). Accordingly, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. Taxpayers have the option of requesting the imposition of the accuracy related penalties under I.R.C. § 6662 instead of the civil fraud penalties on the presentation of convincing evidence justifying why the civil fraud penalties should not be imposed.
The IRS will also assert willful FBAR penalties which will generally top out at 50%. Taxpayers also have the option of requesting the imposition of the non-willful FBAR penalties based on a showing of appropriateness. Other penalties, such as those for failure to file, excise taxes, employment taxes, as well as estate and gift taxes may also be imposed. The taxpayer still retains the right to request an appeal with the Office of Appeals.
Takeaways
Much uncertainty lingered when the closure of the OVDP was first announced. Taxpayers can breathe a sigh of relief knowing the new procedures preserve a pathway to compliance. The cost, however, is that the new procedures provide the IRS with a great deal of discretion in regards to penalties, making participation a more costly endeavor. Nevertheless, voluntary disclosure remains a pivotal option for taxpayers facing potential criminal prosecution.
If you have any questions on the material in this alert, please contact Martin Press, Lu-Ann Dominguez, Alan Lederman or Andrew Piper
