Disclosing Voluntarily to the IRS to potentially avoid Criminal Prosecution is still an Option for Taxpayers, but with some changes going forward……

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On September 28, 2018, the IRS closed the Offshore Voluntary Disclosure Program (2014 OVDP).  The 2014 OVDP (and prior 2011 and 2009 programs) had the purpose of providing Taxpayers that WILLFULLY failed to report foreign financial assets and pay all related respective taxes with protection from potential criminal liability and with terms for resolving their civil tax penalty and related interest amounts.  On November 20, 2018, the US Department of Treasury released an Updated Voluntary Disclosure Practice Memorandum (LB&I-09-1118-014).

Highlights of the Updated Voluntary Disclosure Practice Procedures

The US Treasury Department provides Taxpayers whose conduct is willful or fraudulent and could result in tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution via its Procedures. The Department also stated that the eligibility for Taxpayers to qualify will continue to be based on the Internal Revenue Manual Voluntary Disclosure Practice dated 12/2/09 (IRM 9.5.11.9).  The Updated Procedures state that:

  • Taxpayers have to submit a preclearance request to IRS Criminal Investigation (IRS-CI) on the forthcoming revision of Form 14457
  • Once IRS-CI grants preclearance, Taxpayers must then promptly submit to IRS-CI all the pertinent documentation utilizing the forthcoming 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 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 will route 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.

Non-Willful Taxpayers continue to have the same options to correct past mistakes (at least for now)

Although IRS has stated that these options can 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.

Don’t be a Victim of your own making

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 9.5.11.9 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 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.

Taxpayers with undisclosed foreign assets ought to consult with a specialized tax advisor in order to potentially diminish criminal exposure.       

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