New IRS Voluntary Disclosure Procedures

The U.S. Internal Revenue Agency has created a new voluntary disclosure process for citizens who haven’t complied with tax rules around offshore earnings or assets.

Many U.S. taxpayers have failed to properly report assets or income earned outside the United States. For some time, there have been several ways to “come in from the cold” and get right with the Internal Revenue Service (IRS):

• Streamlined filing compliance procedures
• Delinquent international information return submission procedures
• Delinquent Foreign Bank and Financial Accounts Report (FBAR) submission procedures
• Offshore Voluntary Disclosure Program (OVDP)

The first three programs were designed for inadvertent errors. The OVDP was designed for people who had a good idea they were not compliant and wanted to avoid large penalties and criminal sanctions. It closed September 28, 2018.

Two months later, on November 20, 2018, the IRS created new process to replace the OVPD. The main targets are taxpayers whose conduct is “willful and fraudulent” and whose behavior “may rise to the level of tax and tax-related criminal acts.”

The New Framework

To start the voluntary disclosure process, the taxpayer must submit a preclearance request to Criminal Investigation (CI) by filing Form 14457 (which is in the process of revision). The new form will require a narrative of facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.

The IRS is interested not just in noncompliant taxpayers, but in advisors who have been assisting improper avoidance or evasion.

CI will then notify the taxpayer of preliminary acceptance. Disclosures will be subject to standard examination procedures. Examiners are required to follow the civil resolution framework outlined in the memorandum:

• In general, disclosures will cover a six-year period
• Taxpayers must submit all required returns and reports for the period
• Examiners will determine applicable taxes, interest and penalties
• The service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate

One significant difference with the old OVDP is the new procedures now apply the civil fraud penalty on the one tax year with the highest tax liability. This penalty is 75 percent of the tax underpayment. In limited circumstances, examiners may apply the civil fraud penalty to more than one year.

Willful FBAR penalties will normally be asserted in accordance with existing IRS penalty guidelines. Penalties for failing to file information returns will not be automatically imposed.

Entering into the program has become a much costlier alternative for those taxpayers who did not take advantage of the old OVDP. Taxpayers who qualify for this program should discuss all available options with their advisors.

For more information, contact Kevyn Nightingale, LLM, CPA, CA, CPA (IL), TEP at 416.596.1711 or [email protected].