Voluntary Disclosure after the end of the OVDP

Taxpayers who have failed to comply with their tax obligations and wish to bring themselves into compliance have options.

For those for which failure was not as a result of intentional negligence, the Streamlined Filing Procedures outlined here continue to be available.

Missed filing your FBARs or informational returns?

Individuals who have reported all of their income but have failed to file the FBARs may use the delinquent FBAR submission procedures. Similarly, taxpayers who have failed to file various international informational returns but have paid all relevant tax and who have reasonable cause for their failure to file may use the delinquent international informational return submission procedure.

Updated Voluntary Disclosure Practice

For individuals who do not qualify for the above procedures and who are concerned their failure could lead to criminal charges, the following civil resolution program, referred to as the Updated Voluntary Disclosure Practice, may apply.

However, to avail themselves of this procedure taxpayers must first submit a preclearance request to the IRS Criminal Investigation (CI) department. If CI grants preclearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents which will include 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.

After CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter. Note: Clearance will not be granted if the taxpayer is already under examination by the Internal Revenue Service (IRS) or the IRS is already aware of the taxpayer’s non-compliance through third party sources.

Next steps, Civil Processing

Examiners are authorized to resolve tax and tax-related noncompliance of taxpayers who make voluntary disclosures in the following manner:

• In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
  – Involuntary disclosures not resolved by agreement, the examiner has the 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 review and consent of the IRS, 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:
  – Except as set forth below, the civil fraud penalty (75% of the tax due) will apply to the 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, for example, if there is no agreement as to the tax liability.

• Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
  – Wilful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines. The lesser of $100,000 or 50% of the account.
  – A taxpayer is not precluded from requesting the imposition of accuracy-related penalties, which are generally less than the civil fraud penalties, however, granting this request will only occur in exceptional cases
  – 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 wilful FBAR penalty) and resolve the examination by agreement. These penalties normally have a minimum penalty of $10,000. The IRS has not provided any indication of the factors it will consider when determining whether to impose these penalties.

Last Note

In general, the IRS expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In the event a taxpayer fails to cooperate with the civil examination, the examiner may request that CI revoke preliminary acceptance. In matters this important and that will affect individuals and entities far into the future, we cannot stress enough that professional advice is essential during voluntary disclosure of any kind.