In September 2018, the IRS permanently discontinued its Offshore Voluntary Disclosure Program (OVDP), which previously created an avenue for noncompliant taxpayers to report foreign accounts and, in so doing, avoid the worst of the potential penalties for nondisclosure – including the danger of federal criminal prosecution. To replace the OVDP, the Internal Revenue Service recently introduced updated procedural guidelines for making voluntary disclosures. These new voluntary disclosure procedures, which are geared toward taxpayers with criminal exposure (i.e. indicators of willfulness / Badges of Fraud), offer critical opportunities for making disclosures with relative safety. “Relative,” however, is the key word here, with new regulations bringing new risks. Before making a voluntary disclosure (streamlined Expat or Domestic or delinquent information filing with penalty abatement) of any kind, be sure to discuss your options thoroughly with an experienced international tax lawyer, like David W. Klasing, who can help you evaluate the pros and cons of various approaches to offshore account reporting.
4 Cons (and 1 Pro) of the New IRS Voluntary Disclosure Procedures
In November 2018, the Internal Revenue Service released a memo (see “updated procedural guidelines” above) introducing new IRS standards and practices for offshore and domestic voluntary disclosures. The memo – which is applicable to “all voluntary disclosures received after the closing of the 2014 OVDP on September 28, 2018,” and, at the IRS’ discretion, “other voluntary disclosures (non-offshore) received on or before September 28, 2018” – makes at least five major departures from previous IRS guidelines in this area:
- Variable penalties replace fixed penalties. Under the OVDP, a flat penalty of either 27.5% or 50% of the noncompliant account balance was uniformly applied. In contrast, the new disclosure procedures allow the IRS to impose penalties based on a range of factors “in accordance with existing IRS penalty guidelines under IRM [Internal Revenue Manual] 4.26.16 and 4.26.17”. Willful penalties for failing to file FBAR (Foreign Bank Account Report) may be “higher or lower than 50% of the highest aggregate account balance of all unreported foreign financial accounts.”
- Civil fraud penalties are mandatory. The OVDP established various penalties, including accuracy-related penalties and failure-to-file penalties, but excluded the civil fraud penalty. This changes under the new guidelines, which require taxpayers to pay a civil fraud penalty equivalent to 75% of the unpaid amount. As a result, some taxpayers will see increased fraud penalties under the new IRS disclosure rules.
- The window of time for auditing is longer. Unfortunately for taxpayers, the new disclosure procedures grant the IRS more time to conduct tax audits. In comparison to the old OVDP procedures, which effectively prevented the IRS from going back farther than eight years, the updated procedures enable the IRS to widen the auditing period to cover “the full duration of the noncompliance.” (That being said, the memo states that audits will generally cover “the most recent six tax years,” with some variation.)
- Taxpayers now need to submit more detailed information. The new disclosure procedures require applicants to jump through two procedural hoops that were absent from the OVDP. First, per memo instructions the taxpayer must “submit a preclearance request on a forthcoming revision of Form 14457” to the IRS Criminal Investigation Division (IRS-CI). Assuming IRS-CI grants this request, “taxpayers must then promptly submit to CI all required voluntary disclosure documents” (once more, “using a forthcoming revision of Form
14457”), which ask for information about business entities, financial assets, tax preparers or other third parties (where applicable), and the general circumstances surrounding the noncompliance.
- Taxpayers now have broader rights to appeal. While many of these regulatory changes will likely make life harder on taxpayers, there is at least one positive: taxpayers will now have expanded rights when it comes to appealing, or disputing, tax liabilities assessed due to a disclosure.
Danger: The IRS has publicly stated that if a taxpayer attempts to utilize their appeal rights in an offshore voluntary disclosure, they will apply protectively apply the civil fraud penalty to multiple tax years, instead of just one, or open up more years (8 instead of 6) to the voluntary disclosure procedure in response.
International FBAR Tax Attorneys Can Help You with Foreign Account Reporting
It is essential to report foreign investments and financial accounts to the IRS. Ordinarily, this is accomplished by filing an FBAR, filing Form 8938 (Statement of Specified Foreign Financial Assets), reporting the funds on income tax returns, and/or filing other tax forms as needed, such as Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). Taxpayers who willfully fail to take these actions, especially where coupled with concealing offshore income from the IRS, are placing themselves at risk for tax evasion and willful information reporting noncompliance criminal prosecution and substantial civil penalties. For individuals in this situation, the updated disclosure guidelines may offer the safest and least costly path back to offshore tax compliance. However, it is essential to assess the situation and explore alternative options, such as streamlined disclosures, where appropriate.
If you need to report an undisclosed foreign account, are concerned about a foreign account tax audit, or have questions about whether reporting requirements like FBAR and the Foreign Account Tax Compliance Act (FATCA) apply to you or your business, the FBAR attorneys at the Tax Law Office of David W. Klasing can help. Contact us online to arrange a reduced-rate consultation or call us today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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