OVDP IRS Update

The Inter­nal Rev­enue Ser­vice (“IRS”) issued a mem­o­ran­dum on Novem­ber 20, 2018 to address the vol­un­tary dis­clo­sure process after the clo­sure of the Off­shore Vol­un­tary Dis­clo­sure Pro­gram (“OVDP”) on Sep­tem­ber 28, 2018. The vol­un­tary dis­clo­sure process remains a prac­tice of the IRS to pro­vide tax­pay­ers who may have crim­i­nal expo­sure, an avenue to come into com­pli­ance with the tax law and poten­tial­ly avoid crim­i­nal pros­e­cu­tion. The mem­o­ran­dum cov­ers vol­un­tary dis­clo­sures received after the clos­ing of OVDP on Sep­tem­ber 28, 2018 and specif­i­cal­ly cov­ers off­shore dis­clo­sures sub­mit­ted at that time. For vol­un­tary dis­clo­sures, both domes­tic and inter­na­tion­al, that are sub­mit­ted after Sep­tem­ber 28, 2018, they will be sub­ject to new vol­un­tary dis­clo­sure pro­ce­dures. As well, tax­pay­ers who sub­mit­ted non-off­shore vol­un­tary dis­clo­sures pri­or to the Sep­tem­ber 28, 2018 dead­line, they too may be sub­ject to the new pro­ce­dures at the dis­cre­tion of the IRS. The IRS Crim­i­nal Inves­ti­ga­tion will screen all appli­cants to the vol­un­tary dis­clo­sure pro­gram to deter­mine if a tax­pay­er is eli­gi­ble to make a vol­un­tary dis­clo­sure. To be eval­u­at­ed, tax­pay­ers will be required to sub­mit a pre­clear­ance request using an updat­ed Form 14457, Off­shore Vol­un­tary Dis­clo­sure Let­ter to deter­mine the taxpayer’s eli­gi­bil­i­ty for the pro­gram. Once accept­ed, the tax­pay­er is required to sub­mit all required infor­ma­tion under the updat­ed Form 14457 and will be sub­ject to exam­i­na­tion. The IRS expects that vol­un­tary dis­clo­sure cas­es will be resolved by agree­ment with the tax­pay­er for full pay­ment of all tax­es, inter­est, and penal­ties for the dis­clo­sure peri­od. A tax­pay­er who fails to com­ply with the exam­i­na­tion by the IRS, once they are accept­ed into the vol­un­tary dis­clo­sure pro­gram, may have their pre­lim­i­nary accep­tance revoked. New vol­un­tary dis­clo­sures will be resolved in the fol­low­ing man­ner:

1. The vol­un­tary dis­clo­sure peri­od will cov­er the most recent six years. If not resolved by agree­ment, the IRS reserves the right to expand the scope of a case to all years of non­com­pli­ance. The IRS may also expand the scope by agree­ment with the tax­pay­er.
2. The tax­pay­er must sub­mit all required returns and reports for the dis­clo­sure peri­od.
3. The IRS will deter­mine applic­a­ble tax­es, inter­est and penal­ties under the exist­ing law and pro­ce­dures:
   1. Civ­il penal­ty for fraud or fraud­u­lent fail­ure to file tax return will apply to one tax year with the high­est tax lia­bil­i­ty and will be imposed at up to 75 per­cent of that lia­bil­i­ty. The IRS has dis­cre­tion to extend this civ­il penal­ty to addi­tion­al years if the tax­pay­er can­not come to agree­ment with the IRS.
   2. Will­ful FBAR penal­ties will be assessed as the greater of $100,000 or 50 per­cent of the amount in the account at the time of the vio­la­tion.
   3. Tax­pay­ers may sub­mit requests for reduced penal­ties in the form of accu­ra­cy relat­ed penal­ties, as opposed to fraud penal­ties and non-will­ful penal­ties for FBAR. This could lead to a reduc­tion in penal­ties to 20 per­cent, if the penal­ties are accu­ra­cy relat­ed rather than fraud­u­lent. This requires con­vinc­ing the IRS of an excep­tion­al cir­cum­stance, sup­port­ed by the law.
   4. Penal­ties for fail­ure to file infor­ma­tion returns will not be auto­mat­i­cal­ly imposed.
   5. Addi­tion­al penal­ties for excise tax­es, employ­ment tax­es and gift tax­es will be assessed on a case by case basis by the IRS.
   6. This mem­o­ran­dum is good news for tax­pay­ers who may be eli­gi­ble for the pro­gram and tax pro­fes­sion­als who have been anx­ious­ly await­ing the IRS’s next move after clos­ing the pre­vi­ous OVDP.