On November 29, 2018, the IRS released a memorandum that addressed the process for all voluntary disclosures following the end of the Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018. The new voluntary disclosure procedure provides uniformity to domestic and offshore voluntary disclosures.
The OVDP was initiated in 2009 and was designed to bring taxpayers with undisclosed foreign income, accounts and assets into U.S. tax compliance. Taxpayers who were eligible to participate in the OVDP and made timely voluntary disclosures were provided the opportunity to receive protection from criminal referrals and to resolve their civil tax and penalty obligations on a standardized framework. When that program terminated on September 28, 2018, there was uncertainty as to how the IRS was going to apply its general Internal Revenue Manual (“IRM”) voluntary disclosure practice going forward. The IRS memorandum answers these questions and provides the civil resolution framework for all voluntary disclosure cases received after September 28, 2018. Notwithstanding the effective date, the IRS has the discretion to use the new procedures for domestic voluntary disclosures received on or before September 28, 2018.
The new procedures continue to provide taxpayers an ability to come into tax compliance and generally eliminates the risk of criminal prosecution but there are many changes from the former OVDP. Some of the changes are logistical, such as no longer requiring the filing of required tax returns and additional documents until an IRS agent is assigned to the case. Other changes are more substantive, including changes to the disclosure period and the penalties imposed.
The Disclosure Period
The disclosure period is now 6 years (previously 8 years for offshore disclosures). However, IRS agents have the discretion to expand the 6-year disclosure period to include all noncompliant years. In addition, taxpayers also may be allowed to expand the disclosure period to correct tax issues in years outside of their disclosure. As with OVDP, taxpayers must file all required returns and reports for the disclosure period, and pay tax and interest on all previously unreported income.
Penalties
The civil penalty cost has increased substantially.
The presumed penalty for an underpayment of tax has increased from a 20 percent accuracy-related penalty to a 75 percent fraud penalty. The penalty is applied to the tax year during the disclosure period with the highest tax liability. Generally, taxpayers will be assessed a single civil penalty for fraud or for the fraudulent failure to file income tax returns. It is not clear whether other civil penalties will be imposed on the other years in the disclosure period. No mention is made, for example, to penalties for late filing or late payment of taxes. Also, based on the facts and circumstances found by the examining IRS agent, the memorandum permits an agent to apply the civil fraud penalty to more than one year during the disclosure period. Taxpayers who wish to request the imposition of lower accuracy-related penalties may do so, but must present evidence to support their requests.
The penalty with respect to Foreign Bank Account Reports (“FBAR”) has also been changed under the new procedures. In most cases, the IRS will assert a willful FBAR penalty of 50 percent applied to the year with the highest aggregate balance of all unreported foreign financial accounts during the disclosure period. But willful FBAR penalties are subject to discretion and, accordingly, IRS agents may recommend a higher or lower penalty based on the taxpayer’s facts and circumstances with one caveat. The total penalty imposed cannot exceed 100 percent of the highest aggregate account balances. Taxpayers may request the imposition of non-will FBAR penalties based on a showing of appropriateness.
The IRS will not automatically impose penalties for the failure to file information returns. Nonetheless, IRS agents have the discretion to assert these penalties, such as the $10,000 (up to $60,000) penalty for failing to file a return with respect to certain foreign corporations or foreign partnerships. For taxpayers with non- income tax issues, such as excise taxes, employment taxes, and estate and gift taxes, IRS agents will coordinate with subject matter experts when determining penalties but the IRS has offered no benchmarks for penalties in these situations.