The Internal Revenue Service previously operated a program known as the Offshore Voluntary Disclosure Program (OVDP), which offered non compliant taxpayers mitigated civil penalties – in addition to protection from criminal prosecution – in exchange for voluntarily reporting foreign income which was previously concealed from the IRS. On September 28, 2018, the IRS permanently closed the OVDP, marking the end of an era – and leaving many to wonder what would come next. Our IRS tax attorneys now have breaking news updates on this developing situation. On November 20, 2018, the IRS issued a memo describing new procedures for all voluntary disclosures, including both offshore voluntary disclosures and domestic voluntary disclosures, after September 28, 2018, the date of the OVDP’s closing. Note that these procedures primarily affect taxpayers who are concerned about criminal liability. For others, it is likely sufficient to follow alternative procedures, such as delinquent FBAR & international information return submission procedures, or the offshore or domestic streamlined voluntary disclosure procedures. If you need to report undisclosed domestic or foreign income, you should consult with an experienced criminal tax defense attorney, who can help you choose the right strategy to reenter compliance and reduce your exposure to criminal tax prosecution.
Do not discuss potential domestic or foreign criminal tax issues with anyone other than a properly trained and experienced criminal tax defense attorney as the very tax professional you turn to for help can be forced to testify against you if the communication is not conveyed while under attorney client privilege. The common pattern of non-filed foreign information returns combined with even de minimis amounts of unreported foreign income can in an of itself create exposure for criminal tax prosecution if evidence exists (badges of fraud) that the foreign information reporting was avoided to facilitate evasion of U.S. taxes related to non-reported offshore income.
IRS Updates Rules for Domestic and Offshore Voluntary Disclosures Received After September 28, 2018
To reiterate, our readers should note that the updated voluntary disclosure procedures described below are applicable only to taxpayers with criminal exposure. Note: Only a properly trained and experienced criminal tax defense attorney can render legal advice as to the potential for criminal tax prosecution without the non-attorney engaging in the unauthorized practice of law and malpractice. The alternative procedures linked above are generally more appropriate for straight civil cases. It is also important to note that the guidelines below generally apply to offshore, domestic, and other voluntary disclosures received after the OVDP ended on September 28, 2018.
The new process begins when the taxpayer submits Form 14457 (Offshore Voluntary Disclosure Letter) to the IRS Criminal Investigation Division (IRS-CI). Note that current versions of this form are outdated, with the correct version described only as “forthcoming” in the memo. However, the IRS notes that the new version of Form 14457 “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.”
If, upon review of Form 14457, IRS-CI grants preclearance and approves the case to proceed, the taxpayer’s information will be forwarded to the IRS Large Business and International Division (LB&I), specifically the LB&I Austin unit. At this stage, the case will be transferred to the pertinent IRS civil division so that a tax audit, or “examination,” can be conducted, subject to normal auditing standards and procedures.
Critically, the IRS is applying a new “civil resolution framework,” summarized below. In addition to all disclosures received after September 28, 2018, this civil resolution framework may also be applied, “At the Service’s discretion… to non-offshore voluntary disclosures that have not been resolved but were received on or before September 28, 2018.”
- Update #1: Under the new rules, voluntary disclosures will typically cover a six-year period. In other words, tax forms submitted during the previous six years will be subject to examination. As the IRS notes, “Disclosure and examination periods may vary,” depending on certain circumstances. For example, if the noncompliance occurred over a period of less than the six most recent tax years (e.g. three out of six years), the disclosure is required to “correct [the] noncompliance for all tax periods involved.”
- Update #2: Here, the memo provides simply that “Taxpayers must submit all required returns and reports for the disclosure period.” While this may seem like a relatively straightforward requirement, taxpayers should still obtain professional tax preparation services – ideally from an international tax attorney with extensive experience making voluntary disclosures – to ensure that all documents are completed accurately and correctly.
- Update #3: IRS auditors “will determine applicable taxes, interest, and penalties under existing law and procedures.” These penalties include, but are not limited to, the following:
- Civil penalties for (1) failure to file a tax return or pay tax (26 U.S. Code § 6651(f)) or (2) fraud (26 U.S. Code § 6663), applied “to the one tax year with the highest tax liability.” Note that there are cases where such penalty may be applied to more than one tax year. Moreover, the IRS specifies that auditors “may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”
- In additional to civil fraud penalties, taxpayers may also face willful FBAR penalties.
- Taxpayers who disagree with IRS assessments will maintain their existing right to request appeals with the IRS Office of Appeals. We provide IRS appeals representation to taxpayers in California and beyond.
- Update #4: The IRS will allow auditors to seek the withdrawal of “preliminary acceptance.” Under the new guidelines, preliminary acceptance is granted (or denied) by IRS-CI at the outset of the process.
- Update #5: The IRS will update the relevant portions of the Internal Revenue Manual (IRM) to reflect these changes. The affected sections will be updated within the next two years.
Tax Attorneys for Help Making Voluntary Offshore, Domestic, and Streamlined Disclosures
If you need to make a streamlined disclosure or other voluntary disclosure, whether of U.S. or foreign income, do not take action before receiving counsel from a knowledgeable and experienced FBAR tax lawyer. Depending on the situation, there are numerous disclosure options that may be available to you – some of which are likelier to achieve better legal and financial outcomes than others.
With years of experience providing OVDP representation prior to the closure of the program, the attorneys, CPAs, and EAs at the Tax Law Office of David W. Klasing are well-equipped to provide comprehensive, on-point guidance concerning the updated disclosure rules. We represent taxpayers throughout California and around the globe. To discuss your options confidentially in a reduced-rate consultation, contact us online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
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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