IRS updates voluntary disclosure practices for hidden offshore funds

The Internal Revenue Service has updated its voluntary disclosure procedures for taxpayers with previously undisclosed funds, instituting tougher procedures.

IRS deputy commissioner for services and enforcement Kirsten Wielobob issued a memorandum last week that the IRS posted publicly Thursday, outlining the process for all voluntary disclosures following the closing of the IRS’s Offshore Voluntary Disclosure Program on Sept. 28, 2018. She noted in the memo that the 2014 OVDP began as a modified version of the OVDP that launched in 2012 after earlier programs in 2009 and 2011. “These programs were 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,” she wrote. “They provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations.”

The new procedures are effective for all disclosures after Sept. 28, 2018. The penalties have grown steadily stiffer for taxpayers who continue to hide their funds in foreign bank accounts, and the latest version of the program may give taxpayers and tax practitioners pause.

“Under the new procedures, taxpayers will find that the cost of making a disclosure has increased,” commented Barbara Kaplan, a tax attorney and shareholder at the law firm Greenberg Traurig, in an email from the firm. “A number of things have changed: the number of years for the program, the application of penalties, a right to go to Appeals to contest the IRS findings after examination, the making of the offshore and domestic programs the same and the requirement to include an explanatory narrative. It also appears that the examination phase is more like a true IRS audit than just a compliance review.”

A fraud penalty, 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, she noted.

“Additional civil penalties can be expected,” Kaplan wrote in an email. “CI [IRS Criminal Investigation] will continue to screen all disclosures to determine if a taxpayer is eligible to make the disclosure. Once pre-clearance is granted, the taxpayer will have to disclose the nature of the non-compliance, including a narrative providing facts and circumstances, assets, entities and any related parties or professional advisors involved in the noncompliance.”

That could have an impact on tax professionals who have advised taxpayers who have been hiding their funds. But taxpayers and their representatives will have to weigh the pros and cons of the new procedures.

“The amended or delinquent returns will be examined and, at the end of the process, it is expected that an agreement will be reached,” said Kaplan. “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 afford themselves of this process will be relieved of criminal exposure but not the civil ramifications. For those who do not have criminal exposure, this program should not be used.”

Andrew Harrer/Bloomberg