The IRS has a new voluntary disclosure practice for offshore assets. The new practice replaces replaced the Offshore Voluntary Disclosure Program (OVDP).
Like OVDP, the new procedure is for taxpayers who:
- willfully failed to report foreign assets; or
- pay tax on those assets.
Unlike OVDP, the new procedure gives examiners flexibility to impose criminal or substantial civil liability on uncooperative taxpayers.
New Voluntary Disclosure Practice
IRS voluntary disclosure programs and procedures go back to 2009 in various iterations. Current procedures include:
- Streamlined Filing Compliance Procedures (SFCP) for taxpayers with unfiled returns or unreported income who with no exposure to criminal liability or substantial civil penalties due to willful noncompliance;
- delinquent FBAR submission procedures or international information return submission procedure for taxpayers who only has information reporting failures.
Old OVDP Program
Prior to closing in September 2018, taxpayers could use the OVDP to eliminate the risk of criminal liability in exchange for a relatively fixed cost. The taxpayer had to:
- file correct returns for 8 years;
- pay all tax and interest;
- pay the 20% accuracy penalty or non-filing penalty,\; and
- pay an “offshore penalty.”
The offshore penalty was 27.5% of the highest aggregate value of OVDP assets during the period covered by the voluntary disclosure. It increased to 50% if the taxpayer’s offshore bank or advisor was under current investigation.
New Civil Resolution Framework for Willful Violations
For all voluntary offshore disclosures received after September 28, 2018, the IRS applies a civil resolution framework. Unlike OVDP, taxpayers do not receive automatic protection against criminal liability or significant civil penalties. IRS has wide discretion to impose penalties based on the taxpayer’s level of cooperation.
Rules for the New Voluntary Disclosure Procedure
Here are some highlights of the new procedure:
- Six-year disclosure period is standard, but examiners may reduce that if the noncompliance involves fewer years, or expand it if the voluntary disclosures are not resolved by agreement or if a cooperative taxpayer for some reason wants to expand the disclosure;
- Taxpayers must submit all required returns and reports for the disclosure period;
- Examiners will determine applicable taxes, interest, and penalties under existing law and procedures;
- In general, the civil fraud penalties under I.R.C. §6663 or I.R.C. §6651(f) (fraudulent failure to file income tax returns) will apply to the one tax year with the highest tax liability, but examiners may apply it to more than one year up to all six years if there is no agreement to the tax liability, or more than six years if the taxpayer is uncooperative and fails to resolve the issues by agreement;
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17;
- A taxpayer may request imposition of accuracy related penalties under I.R.C. §6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties, but to succeed a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed;
- Penalties for the failure to file information returns will not be automatically imposed, and examiner discretion will take into account the application of other penalties and resolve the examination by agreement;
- Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts; and.
- Taxpayers retain the right to request an appeal with the Office of Appeals.
At the IRS’s discretion, the civil resolution framework may extend to non-offshore voluntary disclosures that have not been resolved but were received on or before September 28, 2018.
The IRS will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases.
New Form 11457 Voluntary Disclosure Practice Preclearance and Application
Form 14457, was published on April 11, 2019. The updated form is submitted by the taxpayer in two parts.
Part I is a preclearance request. Once a taxpayer receives preclearance, the taxpayer will submit Part II.
Part II is the voluntary disclosure application.
Prior versions of this form are out of date as the OVDP closed on September 28, 2018.
Streamlined Procedures for Non-Willful Conduct
The streamlined filing compliance procedures can be used only by individual taxpayers including their estates. The procedures are for taxpayers who:
- failed to report all income;
- pay all tax; and
- submit all required information returns, including Report of Foreign Bank and Financial Accounts (FBAR). .
The streamlined procedures are available to both U.S. individual taxpayers residing:
- outside the United States under the Streamlined Foreign Offshore Procedures, and
- in the United States using the Streamlined Domestic Offshore Procedures.
In either case, the taxpayer certifies that the failure to report all income, pay all tax and submit all required information returns was due to non-willful conduct.
Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Taxpayers use one of these two forms for certification:
- Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures; or
- Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.
Late FBARs and International Tax Forms
Taxpayers who have not filed a FBAR should file the delinquent FBARs according to the FBAR instructions if they are:
- are not under a civil examination or a criminal investigation by the IRS; and
- have not already been contacted by the IRS about the delinquent.
Taxpayers must do the following:
- include a statement explaining why the taxpayer is filing the FBARs late;
- file all FBARs electronically at FinCEN; and
- on the cover page of the electronic form, select a reason for filing late.
The FBAR Form taxpayer must file is FinCEN Form 114. Previously, they filed Form TD F 90-22.1.
Late International Tax Forms
Taxpayers who have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.
As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.
If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
In addition, all delinquent international information returns other than Forms 3520 and 3520-A should be:
- attached to an amended return; and
- filed according to the instructions for the amended return.
All delinquent Forms 3520 and 3520-A also should be filed according to the instructions for those form.
Taxpayers must also attach a reasonable cause statement each delinquent information return filed for which reasonable cause is being requested.
Information returns filed with amended returns will not be automatically subject to audit. However, those returns may be selected for audit through the existing audit selection processes..
By James Solheim, J.D.