Foreign Nationals & Expats
Houston Tax Attorney
- 1 IRS Updates Voluntary Disclosure Practice
- 1.1 What is IRS Voluntary Disclosure?
- 1.2 Steps for Making a Voluntary Disclosure Under the Revised Guidelines
- 1.3 Disclosure Periods and Examination Process
- 1.4 Penalty Calculation
- 1.5 Who Needs to Use the Voluntary Disclosure Practice?
IRS Updates Voluntary Disclosure Practice
The IRS issued a memorandum on November 29, 2018 that updates the process for domestic and offshore voluntary disclosures after the 2014 offshore voluntary disclosure program ended on September 28, 2018.
The OVDP program began in 2014 as a modified version of the 2012 OVDP program, which itself followed voluntary disclosure programs offered in 2011 and 2009.
What is IRS Voluntary Disclosure?
Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution.
The traditional IRS Voluntary Disclosure Practice is outlined in I.R.M. 18.104.22.168. The IRS memorandum updates this IRM section. The traditional voluntary disclosure process did not have much of a framework. These new procedures provide more certainty, much like the now-discontinued OVDP program.
Steps for Making a Voluntary Disclosure Under the Revised Guidelines
1. Make a pre-clearance request
Criminal Investigation (CI) will screen all voluntary disclosure requests whether domestic, offshore, or other to determine if a taxpayer is eligible to make a voluntary disclosure.
To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request.
2. Submit required voluntary disclosure documents
3. Go through an examination
Disclosure Periods and Examination Process
Like the OVDP, the updated voluntary disclosure practice has a civil resolution framework with a discrete disclosure period.
- In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management
- In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved
- With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).
Taxpayers must submit all required returns and reports for the disclosure period
Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
- The civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
- A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties.
- Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
- Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
- Taxpayers retain the right to request an appeal with the Office of Appeals.
Who Needs to Use the Voluntary Disclosure Practice?
The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.
Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures, or or by filing an amended or past due tax return.