On November 29, 2018, the Internal Revenue Service (IRS) unveiled its updated Voluntary Disclosure Program, following the conclusion of the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. The new procedures are effective for all Voluntary Disclosures (offshore and domestic) postmarked after September 28, 2018. In addition, the IRS reserves discretion to apply the new procedures any Domestic Voluntary Disclosures received on or before September 28, 2018.
The new Voluntary Disclosure procedures are part of the IRS’s ongoing effort to encourage taxpayers with potential criminal exposure to come into compliance with the law and avoid criminal prosecution. The first OVDP was introduced in 2009, with subsequent programs following in 2011, 2012, and most recently in 2014, a program that remained in place until September 2018.
The new guidelines provide for a uniform procedure for both domestic and offshore disclosures and introduce a number of changes from the previous OVDP and Domestic Voluntary Disclosure programs. Among other changes, the new procedures limit the disclosure window to six years (as opposed to eight under the 2014 OVDP), adjust the penalty structure, and provide for a right to an administrative appeal. Previously, the IRS generally applied a 20 percent penalty on the tax liability for each disclosure year. Under the new guidelines, however, the IRS will impose the 75 percent penalty for civil fraud (or fraudulent failure to file, as the case may be) against the one tax year with the highest tax liability. The IRS further reserves the right to assert the civil fraud penalty for additional years in limited circumstances, such as failure to cooperate. The IRS may apply a lower penalty under exceptional circumstances, but the IRS has indicated that such circumstances will be rare.
In addition, where there are unfiled FBARs, the IRS will assert the willful FBAR penalty against the year with the highest unreported account balance. This penalty could be as much as the greater of $100,000 or 50% of the unreported balance, though the IRS maintains discretion to assert a greater or lesser amount. Under the previous OVDP, the penalty in most cases was limited to 27.5 percent of the highest unreported balance. In some cases, the penalty could be as high as 50 percent of the highest unreported balance. Although the penalties may be higher under the new guidelines, the look-back period is limited to six years, while the previous OVDP required an eight-year look-back.
The IRS plans to continue the Streamlined Filing Compliance Procedures and the delinquent FBAR submission procedures. These voluntary disclosure programs have stricter eligibility guidelines but may allow for a lower penalty structure and shorter look-back period where a taxpayer’s failure to comply with reporting obligations was “not willful.”
Taxpayers who wish to avoid the risk of IRS Criminal Investigation for unreported offshore accounts or improperly filed tax returns should take advantage of the Voluntary Disclosure Program before it is too late. Contact the experienced tax attorneys at Daniel Rosefelt & Associates as soon as possible to review your legal options.