Since 2009, the IRS has used a series of initiatives to encourage U.S. taxpayers with unreported income from offshore sources and undisclosed offshore assets to become fully compliant with their tax obligations.The reward offered was freedom from criminal prosecution and reduced monetary penalties. The four iterations of the Offshore Voluntary Disclosure Program (OVDP) are generally considered to have been highly successful; according to IRS statistics published earlier this year, over 56,000 taxpayers participated and the IRS recovered over $11.1 billion in taxes, interest, and penalties.
Earlier this year, the IRS announced that it would stop accepting OVDP submissions on September 28, and issued updated Frequently Asked Questions (FAQs) regarding the wind-down of the program. On November 29, the IRS released to the public an internal memorandum (dated November 20) that describes how the long-standing voluntary disclosure program operated by the Criminal Investigation Division (CID) will be modified for the post-OVDP environment. The new policies will eventually be reflected in amendments to Section 126.96.36.199 of the Internal Revenue Manual and a revised Form 14457.
It is important to note that new policies are intended to apply only to taxpayers whose noncompliance is deemed to have been willful. Three other programs for taxpayers who can certify under penalty of perjury that their noncompliance was not willful—the Streamlined Filing Compliance Procedure, the Delinquent FBAR Submission Procedure, and the Delinquent International Information Return Submission Procedure—remain in effect, and taxpayers who can qualify for these procedures should seriously consider taking advantage of them (the memorandum notes that these procedures could be terminated at any time). The IRS defines non-willful conduct as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
The revised policy will require taxpayers wishing to make a voluntary disclosure to be pre-cleared by CID. Where pre-clearance is granted, taxpayers will be expected to promptly make a detailed submission of the relevant facts and circumstances to a specialized unit of the Large Business and International division (LB&I) located in Austin, Texas. If the Austin staff provides preliminary acceptance, the case will be sent to the appropriate local Examination function (Exam) for further development in accordance with standard Exam procedures.
Assuming the taxpayer fully cooperates with Exam and accepts the resolution proposed by Exam, cases will be closed in the following manner:
- The settlement will extend to the six most recent completed taxable years (or, if fewer, all years of noncompliance) (the disclosure period);
- Taxpayers must submit all required returns for the disclosure period;
- Exam will determine the amount of tax due for the disclosure period;
- Except in unusual circumstances, the only income tax penalty applied will be the civil fraud penalty for the one tax year with the highest liability (75 percent of the portion of the underpayment which is attributable to fraud);
- Existing penalty guidelines will determine whether and how penalties for willful failure to file FBARs will apply;
- Taxpayers can request more lenient treatment (accuracy-related penalties in lieu of the civil fraud penalty, or penalties for non-willful failure to file FBARs)—but it is anticipated that such relief will only be granted in “exceptional” cases; and
- Penalties for failure to file information returns will not be automatically applied, but will be within Exam’s discretion.
Although it is not explicitly stated in the memorandum, it appears that taxpayers who fully cooperate and agree to Exam’s proposed resolution can expect that they will not be considered for prosecution.
The penalties imposed under the new procedure will in many cases exceed (sometimes significantly) what would have been imposed under OVDP. However, for taxpayers with significant potential exposure, the new procedure may still be more attractive than risking prosecution.
For more information about the OVDP, please contact us.
Published on December 11, 2018