Two months following the end of the Offshore Voluntary Disclosure Program, the Internal Revenue Service has now released updated guidelines for all voluntary domestic and offshore disclosures.
The new procedures are effective for all voluntary disclosure cases received after Sept. 28, 2018. However, the IRS also has discretion to apply the new procedures for domestic voluntary disclosures received on or before that date, meaning those that timely filed under the OVDP may nevertheless be subject to the new rules.
Updated Procedures
The new procedures come with many changes from the OVDP, and a few of those changes are particularly noteworthy.
The disclosure period has been reduced from eight years to six years. As with the OVDP, taxpayers must submit all required returns and reports for the disclosure period. However, the IRS has discretion to expand that period to include all noncompliant years and “may assert maximum penalties under the law.” Taxpayers may also be permitted, subject to review and approval by the IRS, to include additional tax years outside the disclosure period for various reasons, including to correct tax issues.
The penalty for underpayment of tax has increased from 20 percent to 75 percent. Generally, the IRS will assess a civil fraud penalty applied to the tax year with the highest tax liability. Note, however, that in some cases, IRS auditors may apply the penalty to more than one tax year and “beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”
Taxpayers will now also face willful Foreign Bank Account Report penalties. In most cases, the penalty will be limited to 50 percent of the highest aggregate balance of all unreported, foreign financial accounts during the disclosure period.
Taxpayers who can’t reach an agreement will retain the right to request an appeal with the IRS Office of Appeals. The new guidelines will also allow auditors to seek the withdrawal of preliminary acceptance to the program for those taxpayers who fail to cooperate with the civil outcome of the case. It’s unclear whether those taxpayers who choose to appeal will retain their protection from criminal liability, as they did under the OVDP.
For Better or Worse?
There are both pros and cons to the updated procedures, and “advisors should carefully consider which program to use on a case by case basis,” says Kevin Sweeney, senior counsel at Chamberlain Hrdlicka in Philadelphia and former federal tax prosecutor. “Now more than ever, you have to consider the exposure to the client; some of the other available programs may be a less intrusive option,” he added, referring to the IRS’s ability to expand the disclosure period to include all noncompliant years under the newly released procedures, which ostensibly leaves it a lot of wiggle room in assessing additional penalties. Because of such new discretion, which wasn’t previously available to the IRS under the OVDP, along with its ability to now enforce maximum FBAR penalties, clients will no longer be able to estimate potential liability beforehand.
Sweeney also mentions a potential upside for clients seeking to make domestic voluntary disclosures, as the new procedures have made the domestic voluntary disclosure program more in line with the OVDP. The previous domestic voluntary disclosure program lacked a bright line disclosure period or penalty regime. Though some clients may have fared better in certain situations under the previous iteration of the program, the streamlined guidance leaves less to chance for many.
Despite the changes, the new procedures seem to remain optimal for those clients who are seeking to avoid criminal prosecution due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets, as the other programs generally don’t extinguish criminal liability.