There was and IRS termination of the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. On November 20, 2018, following the OVDP notice of termination, there was a release of a Memorandum announcing the Voluntary Disclosure Practice. On May 29, 2020 there was the release by IRS of a new Voluntary Disclosure Practice Preclearance Request and Application and Instructions (updated Form 14457) which is a new vehicle for willfully noncompliant Taxpayer to resolve their noncompliance . Taxpayers who participate in the VDP seeking protection from potential criminal prosecution.
The Updated Procedures under the VDP state that:
- Taxpayers must submit a preclearance request to IRS Criminal Investigation (IRS-CI) on the revision of Form 14457 (available as of May 29, 2020)
- Once IRS-CI grants preclearance, Taxpayers must promptly submit all pertinent documentation to IRS Criminal Investigations (IRS-CI) utilizing the revision of Form 14457; including, a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.
- IRS-CI notifies the Taxpayer of preliminary program acceptance by letter while simultaneously forwarding the voluntary disclosure letter and attachments to the Large Business and International Division (LB&I) Austin, Texas unit for case preparation prior to examination.
- The LB&I Austin unit receives information from IRS-CI and routes the case as 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 penalty under I.R.C. § 6663 for fraud or the 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 may 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.
While revisions to Form 14457 are here, Applicants must obtain Pre-Clearance before moving on to fully use Form 14457
Part I of Form 14457 is the beginning of the process. IRS uses it for Pre-Clearance phase of A VDP matter. If an Applicant receives Pre-Clearance, the Applicant can proceed with submitting Part II to request preliminary acceptance. Submitting the information requested in Part I of Form 14457 does not guarantee acceptance. All answers and attachments must be in English. If a preliminary acceptance has been granted to an Applicant, IRS- CI will notify an Applicant of a case control number. An applicant must wait for contact from an IRS examiner who will request additional documents.
Part II of Form 14457 requires Applicants to explain the cause(s) of their willful noncompliance with tax obligations. The Applicant must complete and submit Form 14457, Part II, within 45 days of receiving the preclearance confirmation from IRS-CI.
The Part II Applicant explanation, the must include an explanation of the reasonable causes for a willful failure to report income, pay tax, and submit all required tax and information returns. It must contain a detailed description, if it exists, of any role that a professional advisor played in the Applicant’s noncompliance.
A voluntary disclosure will not automatically guarantee immunity from prosecution
IRS states that although a voluntary disclosure will not automatically guarantee immunity from prosecution, it may result in a non-prosecution recommendation. IRS-CI will only consider timely, accurate, and complete voluntary disclosures under consideration when determining whether to recommend criminal prosecution. A voluntary disclosure occurs when the Applicant provides a truthful, timely, and complete disclosure to IRS-CI.
The Applicant must:
- Cooperate with IRS-CI in determining the Applicant’s correct tax liability.
- Make good faith arrangements with IRS-CI to fully pay the unpaid tax, interest and applicable penalties.
A disclosure is timely if IRS-CI receives the Application before IRS-CI:
- Commences a civil examination or criminal investigation.
- Receives information from a third party (informant, another governmental agency, John Doe summons, etc.) alerting IRS-CI of the Applicant’s noncompliance.
- Acquires information, from a criminal enforcement action (search warrant, grand jury subpoena, etc.), directly relating to the Applicant’s specific noncompliance.
Who can apply?
- Individuals: U.S. Citizens, Green Card Holders, Non-Resident Aliens, Expatriates
- Entities: Corporations, Partnerships, LLCs, Trusts, Estates, Executors
Reasons for Disclosure:
- Domestic Issues
- Estate & Gift Issues
- Virtual Currency Issues
- Offshore Issues
- Employment Tax Issues
- Other Issues
Non-Willful Taxpayers currently retain the following options to correct past mistakes
Although IRS has stated that these options may be eliminated at any time, in non-willful scenarios Taxpayers with unfiled returns or unreported income can still come into compliance via:
- Streamlined Filing Compliance Procedures
- Delinquent FBAR submission procedures
- Delinquent international information return submission procedures
Taxpayers with undisclosed foreign assets ought to consult with a specialized tax advisor to potentially diminish criminal exposure
It is evident that IRS is coordinating efforts between the IRS Criminal and Civil Divisions for Taxpayers whose conduct is willful or fraudulent which could result in tax and tax-related criminal acts being charged. IRM 184.108.40.206 clearly states that a voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. Importantly, taxpayers with illegally sourced income do not qualify for a Voluntary Disclosure under any circumstance.
IRS expects that Voluntary Disclosures will be resolved by a Taxpayer’s agreement to pay in full all taxes, interest and penalties for the disclosure period and that Taxpayers will cooperate promptly and fully. If Taxpayers do not cooperate during the examination period, IRS-CI may revoke the preliminary acceptance at its sole discretion.
Consult your Specialized Tax Advisor.