Igor S. Drabkin, Esq.
On September 28, 2018, the Internal Revenue Service ended the Offshore Voluntary Disclosure Program (2014 OVDP), which was designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. The 2014 OVDP provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. Taxpayers who failed to file returns or report income attributable to foreign assets due to non-willful conduct could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures. These programs designed for non-willful violations continue to be open and available for qualified taxpayers.
On November 20, 2018, the IRS issued a Memorandum, describing the process for all voluntary disclosures following the closing of the 2014 OVDP on September 28, 2018. The new procedures are effective for all disclosures after September 28, 2018. Under the new procedures, the taxpayers with hidden foreign bank accounts, whose behavior may be considered willful, will find stricter requirements and higher penalties. A civil fraud penalty on unreported income, and a willful FBAR penalty for offshore cases where taxpayers intentionally failed to file a foreign bank account report, will now be applied to one of the six years of the disclosure period, or less if the noncompliance occurred over a shorter period of time.
The taxpayers are required to make submissions through the IRS Criminal Investigation Division (CI). The taxpayers first have to obtain a preclearance from CI, confirming that there’s no ongoing investigation. For all cases where CI grants preclearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents using Form 14457. This form will require 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. Once CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the IRS examination. The amended or delinquent returns will be examined by the IRS field agents using standard audit procedures. Auditors will have certain discretion in applying higher or lower penalties in limited circumstances. Cooperation with the civil examination is required and, if not given, could lead to revocation of preliminary acceptance into the program. At the end of the day, taxpayers who go through this voluntary disclosure process will be relieved of criminal exposure. In general, the Service expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period.
Taxpayers with undisclosed offshore accounts or foreign assets should carefully consider available options to determine an appropriate course of action and strategy suitable to their particular set of facts. Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC, have successfully represented numerous clients in voluntary disclosure cases, FBAR audits and criminal investigations. To schedule a consultation, please contact us at (310) 550-6200.