First off, it is important to note that there has been no changes to any of the Streamlined Disclosure procedures. These are the procedures that most of our clients qualify for. You can visit our Streamlined Disclosure FAQ page to learn more. The changes we are discussing here primarily affect taxpayers who are concerned about getting protection from criminal expsoure.
On September 28, 2018, the IRS ended the 2014 Offshore Voluntary Disclosure Program (OVDP). With no offshore disclosure program available, we received a lot of inquiries of what to do next. Essentially, our advice was similar to our advice after the 2009 Offshore Voluntary Disclosure Initiative (OVDI) ended with no other program in sight: Utilize the standard voluntary disclosure for criminal protections and gear up for a civil examination, and look to FBAR mitigation strategies along with reasonable cause arguments for any missing foreign informational returns like Form 5471, as there are no pre-set civil penalty regime like the 2014 OVDP with its 27.5% penalty on a taxpayer's foreign asset base.
With this memorandum, however, the IRS laid out processes that include a more variable civil penalty structure, and solidified coordination between the IRS criminal divisions and civil divisions.
In particular the new 2018 OVDP process involves:
- An initial pre-clearance that is sent to IRS Criminal Investigations.
- After pre-clearance granted, a taxpayersmust submit Form 14457 (which will soon be revised) with a proper narrative and supporting facts related to the non-compliance.
- Once Form 14457 is accepted by IRS Criminal Investigations, the case will then be transferred for civil processing with the Large Business & International (LB&I) group in Austin.
- Austin will then assign the case to a civil examiner to commence an audit.
- Taxpayer must file correct original or amended returns for the last six year (note: this is better than the 2014 OVDP whiich requires 8-year look back). However the IRS says they may extend the look-back period in certain cases.
- A 75% civil fraud penalty will be assessed on the year with the highest tax liability. For instance, if 2014 was your highest tax liabilty in the amount of $100,000 of unpaid tax, the civil fraud penalty would add another $75,000. But this too, is subject to examiner discretion.
- Taxpayers can argue for a lower accuracy-related penalties than the 75% civil fraud penalty.
- If unfiled or incorrect FBAR existed, an FBAR examination will be conducted and the IRS will assess willful FBAR penalties. Note: The guidance mentioned nothing about non-willful penalties.
- Penalties for unfiled informations returns like Form 5471, Form 8938, Form 5472, Form 926, Form 8865 will not be automatically assessed. This appears to be a slightly better standard for taxpayers than previous, but the guidance mentions that examiners will still maintain discretion.
- Penalties related to excise taxes (we see these on foreign life insurance premiums), and any other taxes like employment taxes, estate and gift taxes will be handle on a case-by-case basis.
- A right to appeal to the IRS Office of Appeals remains intact. We've used IRS Appeals extensively to lower penalties.
Attorney Hanson and I will be presenting a CLE with Strafford on Wednesday December 12th at 1 pm – 2:50 pm EST (10 am – 11:50 PST) addressing all of these changes. Joining us will be our colleague Dennis Brager of Brager Tax Law who has also been at the forefront of voluntary disclosure practice and international compliance initiatves. You may review the course outline here.
We thank Jack Townsend for posting this notice on his Federal Tax Crimes blog. This is quite helpful as the memo does not seem to have made its way to irs.gov or the Internal Revenue Manual (IRM).
The entire memorandum on these updated OVDP procedures follows below in a text format.
* * *
November 20, 2018
Control Number: LB&I-09-1118-014
Expiration Date: 11/20/2020
Affected IRM: 9.5
MEMORANDUM FOR DIVISION COMMISSIONERS
CHIEF, CRIMINAL INVESTIGATION
FROM: Kirsten B. Wielobob /s/ Kirsten B. Wielobob Deputy Commissioner for Services and Enforcement
SUBJECT: Updated Voluntary Disclosure Practice
This memorandum addresses the process for all voluntary disclosures (domestic and
offshore) following the closing of the Offshore Voluntary Disclosure Program (2014
OVDP) on September 28, 2018.
Background and Overview of Updated Procedures
The 2014 OVDP began as a modified version of the OVDP launched in 2012, which
followed voluntary disclosure programs offered in 2011 and 2009. These programs were
designed for taxpayers with exposure to potential criminal liability or substantial civil
penalties due to a willful failure to report foreign financial assets and pay all tax due in
respect of those assets. They provided taxpayers with such exposure potential
protection from criminal liability and terms for resolving their civil tax and penalty
obligations. Taxpayers with unfiled returns or unreported income who had no exposure
to criminal liability or substantial civil penalties due to willful noncompliance could come
into compliance using the Streamlined Filing Compliance Procedures (SFCP), the
delinquent FBAR submission procedures, or the delinquent international information
return submission procedures. Although they could be discontinued at any time, these
other programs are still available.
Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with
criminal exposure a means to come into compliance with the law and potentially avoid
criminal prosecution. See I.R.M. 9.5.11.9. This memorandum updates that voluntary
disclosure practice. Taxpayers who did not commit any tax or tax related crimes and do
not need the voluntary disclosure practice to seek protection from potential criminal
prosecution can continue to correct past mistakes using the procedures mentioned
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above or by filing an amended or past due tax return. When these returns are
examined, examiners will follow existing law and guidance governing audits of the
issues.
Procedures in this memo will be effective for all voluntary disclosures received after the
closing of the 2014 OVDP on September 28, 2018. All offshore voluntary disclosures
conforming to the requirements of “Closing the 2014 Offshore Voluntary Disclosure
Program Frequently Asked Questions and Answers” FAQ 3 received or postmarked by
September 28, 2018 will be handled under the procedures of the 2014 OVDP. For all
other voluntary disclosures (non-offshore) received on or before September 28, 2018,
the Service has the discretion to apply the procedures outlined in this memorandum.
The objective of the voluntary disclosure practice is to provide taxpayers concerned that
their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related
criminal acts, with a means to come into compliance with the law and potentially avoid
criminal prosecution.
Proper penalty consideration is important in these cases. A timely voluntary disclosure
may mitigate exposure to civil penalties. Civil penalty mitigation occurs by focusing on a
specific disclosure period and the application of examiner discretion based on all
relevant facts and circumstances including prompt and full cooperation (see IRM
9.5.11.9.4) during the civil examination of a voluntary disclosure. Managers must ensure
that penalties are applied consistently, fully developed, and documented in all cases.
The terms outlined in this memorandum are only applicable to taxpayers that make
timely voluntary disclosures and who fully cooperate with the Service.
Criminal Investigation Procedures
Criminal Investigation (CI) will screen all voluntary disclosure requests whether
domestic, offshore, or other to determine if a taxpayer is eligible to make a voluntary
disclosure. To accomplish this, CI will require all taxpayers wishing to make a voluntary
disclosure to submit a preclearance request on a forthcoming revision of Form 14457.
IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility.
Taxpayers must request preclearance from CI via fax or mail.
Fax: (267) – 466-1115
Or
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Mail: IRS Criminal Investigation
Attn.: Voluntary Disclosure Coordinator
2970 Market St.
1-D04-100
Philadelphia, PA 19104
For all cases where CI grants preclearance, taxpayers must then promptly submit to CI
all required voluntary disclosure documents using a forthcoming revision of Form
14457. This form will require information related to taxpayer noncompliance, including a
narrative providing the facts and circumstances, assets, entities, related parties and any
professional advisors involved in the noncompliance. Once CI has received and
preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of
preliminary acceptance by letter and simultaneously forward the voluntary disclosure
letter and attachments to the LB&I Austin unit for case preparation before examination.
CI will not process tax returns or payments.
Civil Processing
Once the LB&I Austin unit receives information from CI, LB&I will route the case as
appropriate. The IRS will not require taxpayers to provide additional documents to the
LB&I Austin unit. If a taxpayer or representative wishes to make a payment prior to case
assignment with an examiner, payments may be remitted to the LB&I Austin unit. The
LB&I Austin unit will establish the most recent tax year covered by the voluntary
disclosure for examination. Then, the LB&I Austin unit will forward cases for case
building and field assignment to the appropriate Business Operating Division and Exam
function for civil examination. Civil examiners receiving the disclosure will establish any
additional controls necessary on IRS systems.
Case Development
All voluntary disclosures handled by examination will follow standard examination
procedures. Examiners must develop cases, use appropriate information gathering
tools, and determine proper tax liabilities and applicable penalties. Under the voluntary
disclosure practice, taxpayers are required to promptly and fully cooperate during civil
examinations. In general, the Service expects that voluntary disclosures will be resolved
by agreement with full payment of all taxes, interest, and penalties for the disclosure
period. In the event a taxpayer fails to cooperate with the civil examination, the
examiner may request that CI revoke preliminary acceptance. See I.R.M. 9.5.11.9.4
(discussing cooperation).
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Civil Resolution Framework
For all voluntary disclosures received after September 28, 2018, the Service will apply
the civil resolution framework outlined below. At the Service’s discretion, this civil
resolution framework may extend to non-offshore voluntary disclosures that have not
been resolved but were received on or before September 28, 2018.
Examiners are authorized to resolve tax and tax related noncompliance of taxpayers
who make voluntary disclosures in the following manner:
a) In general, voluntary disclosures will include a six-year disclosure period. The
disclosure period will require examinations of the most recent six tax years.
Disclosure and examination periods may vary as described below:
i. In voluntary disclosures not resolved by agreement, the examiner has
discretion to expand the scope to include the full duration of the
noncompliance and may assert maximum penalties under the law with the
approval of management.
ii. In cases where noncompliance involves fewer than the most recent six tax
years, the voluntary disclosure must correct noncompliance for all tax
periods involved.
iii. With the IRS’ review and consent, cooperative taxpayers may be allowed
to expand the disclosure period. Taxpayers may wish to include additional
tax years in the disclosure period for various reasons (e.g., correcting tax
issues with other governments that require additional tax periods,
correcting tax issues before a sale or acquisition of an entity, correcting
tax issues relating to unreported taxable gifts in prior tax periods).
b) Taxpayers must submit all required returns and reports for the disclosure period.
c) Examiners will determine applicable taxes, interest, and penalties under existing
law and procedures. Penalties will be asserted as follows:
i. Except as set forth below, 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. For purposes of this memorandum, both penalties are referred to
as the civil fraud penalty.
ii. In limited circumstances, examiners may apply the civil fraud penalty to
more than one year in the six-year scope (up to all six years) based on the
facts and circumstances of the case, for example, if there is no agreement
as to the tax liability.
iii. Examiners may apply the civil fraud penalty beyond six years if the
taxpayer fails to cooperate and resolve the examination by agreement.
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iv. Willful FBAR penalties will be asserted in accordance with existing IRS
penalty guidelines under IRM 4.26.16 and 4.26.17.
v. A taxpayer is not precluded from requesting the imposition of accuracy
related penalties under I.R.C. § 6662 instead of civil fraud penalties or
non-willful FBAR penalties instead of willful penalties. Given the objective
of the voluntary disclosure practice, granting requests for the imposition of
lesser penalties is expected to be exceptional. Where the facts and the
law support the assertion of a civil fraud or willful FBAR penalty, a
taxpayer must present convincing evidence to justify why the civil fraud
penalty should not be imposed.
vi. Penalties for the failure to file information returns will not be automatically
imposed. Examiner discretion will take into account the application of
other penalties (such as civil fraud penalty and willful FBAR penalty) and
resolve the examination by agreement.
vii. 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.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals.
d) The Service will provide procedures for civil examiners to request revocation of
preliminary acceptance when taxpayers fail to cooperate with civil disposition of
cases.
e) All impacted IRM sections will be updated within two years of the date of this
memorandum.
If you have any questions about this memorandum, please contact Scott Roberts, Team
Manager at the LB&I Austin unit at (737) 800-7616 or Christine Stone, LB&I WIIC IPN
Technical Specialist at (781) 876-1186.
cc: IRS.gov
