What to do after the Offshore Voluntary Disclosure Program ends?

Foreign Nationals & Expats

Houston Tax Attorney

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What to do after the Offshore Voluntary Disclosure Program ends?

Earlier this year the IRS announced that it would be ending the offshore voluntary disclosure program on September 28, 2018. There are signs that the the program could be replaced by a new program. After the announcement, the IRS requested comments from the public for its federal register on the following topics pertaining to the OVDP (link):

  • whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;
  • the accuracy of the agency’s estimate of the burden of the collection of information;
  • ways to enhance the quality, utility, and clarity of the information to be collected;
  • ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and
  • estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

It would be strange for the IRS to seek comments on how to improve a program that it intends to terminate. A reasonable inference is that the IRS may replace or extend the OVDP with modifications.

If the IRS does not replace the program, what options are there for taxpayers who do not qualify under the streamlined filing compliance procedures? One would be a manual disclosure where the taxpayer files FBARs and amended (or delinquent) tax returns for the periods that remain open under the assessment statute and wait for the IRS to audit and assess penalties (or worse). Another option could be a domestic voluntary disclosure.

Domestic Voluntary Disclosure

The domestic voluntary disclosure program has been around since the 1950s. It is used by persons who have two specific types of tax issues – those who have seriously delinquent (unfiled) tax returns and those with significant unreported income. The OVDP is based upon on the same principles as the Domestic Voluntary Disclosure Program, but it’s limited to taxpayers who have unreported foreign income and assets. In addition, the OVDP is structured, unlike a domestic voluntary disclosure. In the event of the OVDP terminating and not replaced with another program, a domestic voluntary disclosure may be the only way for a willful individual to become compliant with his or her unreported foreign assets without fear of criminal prosecution. A domestic voluntary disclosure is often a highly unpredictable “handshake deal” and results could vary.

Voluntary Disclosure Practice (IRM 9.5.11.9)

(1)  It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

(2)  A voluntary disclosure will not automatically guarantee immunity from  prosecution; however, a voluntary disclosure may result in prosecution not being recommended.  This practice does not apply to taxpayers with illegal source income.

(3)  A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

a.  the taxpayer shows a willingness to cooperate (and  does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b.   the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

(4) A disclosure is timely if it is received before:

a.  the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b.  the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c.  the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d.  the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

(5)  Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure.  Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues.

(6)  Examples of voluntary disclosures include:

a.  a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.  This is a voluntary disclosure because all elements of (3), above are met.

b.  a disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges; however the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so.  In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and  because all other elements of (3), above are met

c.  a disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme regarding which the IRS has begun a civil compliance project and already obtained information which might lead to an examination of the taxpayer; however, the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so.  In addition, the  taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met.

d.  A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year.  The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full.  This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met.

(7) Examples of what are not voluntary disclosures include:

a.  a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met.

b.  a disclosure made by a taxpayer who is under grand jury investigation.  This is not a voluntary disclosure because the taxpayer is already under criminal investigation.  The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.

c.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership.  This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.

d.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently  under examination.  This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.

e.  a disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer’s double set of books.  This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer’s noncompliance.  The conclusion would be the same whether or not the taxpayer knew of the informant’s contact with the IRS.

Update 6/6/18: At a recent conference at the Texas Federal Tax Institute in San Antonio, an IRS attorney the Office of Chief Counsel confirmed that the agency would not replace the OVDP program in the future.