Taxpayers who have willfully failed to report foreign financial assets, pay all taxes due in connection with those assets, or otherwise have potential exposure to criminal liability related to willful or fraudulent tax noncompliance are encouraged by the Internal Revenue Service (IRS) to voluntarily come forward to correct past wrongs and potentially receive protection from criminal prosecution and mitigation of civil penalties.
The IRS Voluntary Disclosure Program, effective for all domestic and offshore disclosures submitted after September 28, 2018, replaces the Offshore Voluntary Disclosure Program (OVDP) and Domestic Voluntary Disclosure Program (DVD). The new procedures were announced in November 2018 and provide a uniform procedure for both domestic and offshore disclosures.
Under the new Voluntary Disclosure Program, taxpayers must submit a request for preclearance with the IRS Criminal Investigation Division (CI). The preclearance request will require information related to the noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance.
Upon CI preclearance and acceptance into the Voluntary Disclosure Program, the taxpayer must submit all required voluntary disclosure documents using an updated Form 14457. The taxpayer’s disclosure will then be subjected to examination by the IRS under standard IRS examination procedures.
The new guidelines introduce significant changes from the previous OVDP and DVD programs. Among the 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 or if there is no agreement as to the tax liability. 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 was 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 new guidelines provide that penalties for failure to file information returns will not be imposed automatically but, rather, that decision will be left to the discretion of the examining Revenue Agent. Similarly, penalties related to excise taxes, employment taxes, and estate and gift tax will be handled based upon the facts and circumstances of each case.
The new Voluntary Disclosure Program guidelines also provides for a right to an administrative Appeal if an agreement cannot be reached during the examination. Although this provision appears to be beneficial to taxpayers at first glance, that may not be the case. In a public discussion of the new guidelines, the IRS has indicated that, when a taxpayer requests review by the Office of Appeals, examiners may assert the civil fraud penalty for all years in dispute, even where the disagreement is non-frivolous, made in good faith, and the taxpayer has otherwise been fully cooperative.
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 dual-licensed tax attorney-CPA’s at the law firm of Daniel Rosefelt & Associates as soon as possible to review your legal options.
To learn more about the Voluntary Disclosure Program and any other options available to you, contact the dual-licensed Attorney-CPA’s at the law firm of Daniel Rosefelt & Associates, LLC, Attorney & CPA at (301) 656-4424 or reach out by completing our ten-second contact us form to know your real options. We serve clients from around the world at our offices in Bethesda, Maryland (Greater Washington D.C. Metro area), or from our satellite offices by appointment in Fairfax, Virginia and Saint Petersburg Florida.