On June 20, 2019, the National Taxpayer Advocate (TA), an independent organization within the IRS that helps taxpayers and protects taxpayer rights, issued a final Report to Congress. A section of the report focused on the TA’s request for the assistance of Congress with obtaining clarity and certainty regarding certain aspects of the IRS Updated Voluntary Disclosure Practice.
Beginning in 2009, IRS offered an Offshore Voluntary Disclosure Program (OVDP) for Taxpayers that failed to report offshore income and file one or more related information returns (Report of Foreign Bank and Financial Accounts (FBAR)). The OVDP was a program designed for Taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. The OVDP was designed to provide a Taxpayer with “protection” from criminal liability and for resolving Taxpayer civil tax and penalty obligations. To qualify, a Taxpayer was required to make a “Timely” disclosure and fully cooperate with the IRS.
On September 28, 2018, IRS ended the OVDP and on November 20, 2018, the U.S. Department of the Treasury issued Temporary Guidance under an Updated Voluntary Disclosure Practice (UVDP). The UVDP has the same objective as the OVDP; that is to provide Taxpayers with a means for coming into compliance and avoiding criminal prosecution. Unlike the OVDP, the UVDP is based on the premise that the Taxpayer’s conduct has been “fraudulent”, shifting the burden of proof to the Taxpayer. In the OVDP, the burden of proof was the responsibility of the IRS.
As with the OVDP, the Taxpayer is required to make a Timely disclosure and fully cooperate with the IRS. In the UVDP, the IRS examiner has an ability to impose more onerous financial penalties, particularly if the Taxpayer failed to enter the closed OVDP.
Here are the highlights of the UVDP:
- Taxpayers are required to submit a preclearance request to IRS Criminal Investigation (IRS-CI).
- Once IRS-CI grants preclearance, Taxpayers must then promptly submit to IRS-CI all the pertinent documentation utilizing the revised Form 14457; including, a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved with the noncompliance.
- IRS-CI notifies the Taxpayer of preliminary program acceptance by letter and simultaneously forwards the voluntary disclosure letter and attachments to the Large Business and International Division (LB&I) Austin, Texas unit for case preparation before examination.
- The LB&I Austin unit receives information from IRS-CI and routes the matter as it considers appropriate.
- The disclosure period will require examinations of the most recent six tax years.
- Taxpayers must submit all required returns and reports for the disclosure period.
- The civil fraud penalty under I.R.C. § 6663 or a civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability.
- Examiners have discretion to apply the civil fraud penalty (I.R.C. § 6663 or I.R.C. § 6651(f)) to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case.
- Examiners may apply the civil fraud penalty (I.R.C. § 6663 or I.R.C. § 6651(f)) beyond six years if the Taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
- Taxpayers retain the right to request an appeal with the Office of Appeals.
Although IRS has stated that these programs may also be eliminated at any time, in non-willful scenarios, Taxpayers with unfiled returns or unreported income may come into compliance via:
- Streamlined Filing Compliance Procedures
- Delinquent FBAR submission procedures
- Delinquent international information return submission procedures.
Don’t be a Victim of your own making
It seems clear that IRS is coordinating efforts between the IRS Criminal and Civil Divisions for Taxpayers whose conduct is willful or fraudulent and which could result in tax and tax-related criminal acts being charged. IRM 18.104.22.168 clearly states that a voluntary disclosure will not automatically guarantee immunity from prosecution. However, a voluntary disclosure may result in prosecution not being recommended. Taxpayers with illegally sourced income do not qualify for a Voluntary Disclosure under any circumstance.
IRS expects that a Voluntary Disclosure will be resolved by a Taxpayer agreement to pay all taxes, interest and penalties in full for the disclosure period and that Taxpayers will cooperate promptly and fully. If Taxpayers do not cooperate during the examination period, IRS-CI may at its sole discretion revoke its preliminary acceptance. The Internal Revenue Manual (I.R.M. 22.214.171.124.4) states that: “Special agents will inform the taxpayers or his/her representative that a subsequent determination that the taxpayer has not fully cooperated or provided materially false information may result in the matter being referred for criminal investigation and/or the imposition of civil sanctions”.
Taxpayers with undisclosed foreign assets ought to consult with a specialized tax advisor in order to assess potential criminal exposure.