What are the new procedures after the “OVDP” was terminated?

On September 28, 2018, the IRS officially terminated the Offshore Voluntary Disclosure Program (“OVDP”). The OVDP has been in existence since 2009, which is a form of the tax amnesty program. It allowed U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to the IRS.

The OVDP allowed taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (“SFCP”), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures.

The Updated Voluntary Disclosure Practice

Since the 2014 OVDP was terminated on September 28, 2018, the IRS has issued a memorandum to provide taxpayers who are concerned that their conduct is willful or fraudulent, and that it may rise to the level of tax and tax-related criminal acts, with a means to make voluntary disclosures and potentially avoid criminal prosecution. These procedures will be effective for all voluntary disclosures received by the IRS after September 28, 2018. These procedures are applicable to both domestic and foreign matters, and the terms of the memo only apply to taxpayers that make timely voluntary disclosures and who fully cooperate with the IRS.

The IRS has provided the following new procedures:

First, the taxpayer must request pre-clearance from the IRS Criminal Investigation (CI) via fax or mail. CI will screen all voluntary disclosure requests to see if the taxpayer is eligible to make a voluntary disclosure. To accomplish this, the CI will require that all taxpayers that wish to make a voluntary disclosure submit a pre-clearance request on the new Form 14457.

Once the CI grants the pre-clearance, the taxpayer must then submit to CI all the required voluntary disclosure documents using the Form 14457. This form will require that information related to the taxpayer’s noncompliance, include a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance. When the CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, the CI will notify the taxpayer by letter and also forward the letter and attachments to the IRS’s division in Austin, Texas to case preparation before the official examination. The CI will not process tax returns or payments.

When the Texas division receives information from CI they will route the case as appropriate. The IRS will not require taxpayers to provide any additional documents to the Austin division. In general, the IRS expects that the voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period.

The IRS memorandum provides the following framework for the IRS to resolve noncompliance of taxpayers who make voluntary disclosures:

Generally, the voluntary disclosures will include a six-year disclosure period. This disclosure period will include an examination of the most recent six (6) tax years. However, this period may vary depending on the situation. If the voluntary disclosures are not resolved by agreement, the examiner has the discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management. In cases where noncompliance involves fewer than the most recent six (6) tax years, the voluntary disclosure must correct noncompliance for all tax periods involved. If the IRS reviews and consents, the taxpayer may be allowed to request to expand the disclosure period. Taxpayers must submit all required returns and reports for the applicable disclosure period.

Penalties will be assessed accordingly:

  • The civil penalty for fraud or the civil penalty for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability.
  • In limited circumstances, the examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case.
  • Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines.
  • A taxpayer is not precluded from requesting the imposition of accuracy-related penalties instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties.
  • Requesting lessor penalties requires evidence to justify why the civil fraud penalty should not be imposed. Taxpayers have the right to request an appeal with the Office of Appeals.
  • Penalties for the failure to file information returns will not be automatically imposed.
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    If you are interested in the changes to the IRS voluntary disclosure program, please do not hesitate to contact one of our knowledgeable attorneys at EPGD Business Law, located in beautiful Coral Gables and historic Washington, D.C. Call us at (786) 837-6787 or email us to schedule a consultation.

    *Disclaimer: This blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*