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:
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:
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 126.96.36.199 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. 188.8.131.52.4) 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.