With the end of the Offshore Voluntary Disclosure Program (OVDP), the IRS has provided new guidance for taxpayers facing charges of tax evasion to come into compliance with their reporting requirements and avoid criminal prosecution.
On November 20, 2018, the Treasury Department issued new guidance for U.S. taxpayers who have willfully failed to report domestic and/or foreign financial holdings and did not apply to the OVDP (before it closed on September 28th) or to any other voluntary disclosure program.
Outline for resolving noncompliance in a civil process
The Memorandum clearly outlines the resolution process for voluntary disclosures, as consistent with Internal Revenue Manual 9.5.11.9, and includes many elements of the now-defunct OVDP:
- Submit a preclearance request via fax or mail on a forthcoming revision of Form 14457. This form includes a narrative of the taxpayer’s noncompliance, including “the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.” The disclosure period is up to six years (the statute of limitations for criminal matters), but may be expanded by the examiner or the taxpayer with governmental consent. Note that there is no limitations period for civil tax fraud, or for any tax year in which a taxpayer never filed a return.
- If the IRS Criminal Investigation Division (CI) approves the preclearance request by letter and will forward the letter and attachments to the Large Business and International (LB&I) Division in Austin for case preparation.
- The LB&I Division will forward the case to the appropriate division for examination. Civil examiners will conduct an audit through “standard examination procedures.”
- Taxpayers are expected to cooperate fully with the civil examiners, who will determine the appropriate tax liability, interest and penalties. If a taxpayer does not cooperate in the process, their preliminary acceptance into the program may be revoked.
Assessment of penalties
As part of the voluntary disclosure process, the examiner may apply the following penalties:
Civil fraud penalties under 26 U.S. Code § 6663 (civil fraud) and 26 U.S. Code § 6651 (failure to file tax return or to pay tax). As a general rule, the civil fraud penalty applies to the tax year with the highest tax liability. However, depending on the facts and circumstances of the taxpayer’s case, these penalties may be applied to more than one year within the six-year examination period, and if a taxpayer is especially non-cooperative penalties may be applied to more than the six years under examination. Note that civil fraud penalties are not automatic, and will depend on the imposition of other penalties.
Willful FBAR penalties under 26 U.S. Code § 5321 per IRM 4.26.16 and IRM 4.26.17.
Taxpayers may request that an accuracy-related penalty be imposed under 26 U.S. Code § 6662 instead of civil fraud penalties, and non-willful FBAR penalties instead of willful FBAR penalties. These requests must be justified via facts and law.
The Memorandum specifies further that the government may consult with subject matter experts to determine appropriate penalties connected with excise taxes, employment taxes, estate and gift taxes, etc.
A taxpayer may appeal their penalty assessment with the Office of Appeals.
Not facing criminal prosecution?
Note that voluntary disclosures applies only to taxpayers facing criminal tax liability or civil fraud charges – others are advised to take advantage of Streamlined Filing, delinquent FBAR procedures, and delinquent international return submissions (all of which are still available).
Voluntary disclosure assistance
The California tax law firm of Moskowitz, LLP is ready to help you come forward with undisclosed domestic and/or foreign income while avoiding criminal and civil tax fraud charges. To learn more, contact our San Francisco office today.