IRS Announces New Voluntary Disclosure Program for Willful Tax Delinquency
On September 28, 2018, the IRS officially terminated its increasingly unpopular Offshore Voluntary Disclosure Program (OVDP), leaving willfully delinquent taxpayers open to the full gambit of potential criminal and civil penalties.
While the termination was expected at some point due to repeated warnings by the IRS that the program would not last forever, the move still seemed like an abrupt ending to a program that was at least initially quite successful in encouraging a large group of delinquent taxpayers to come clean with the IRS.
In its wake, however, the IRS recently announced that it has essentially reopened the program, but with major changes as to its scope and implications. In this blog, we compare the former OVDP with the new modified program.
The former OVDP was designed for taxpayers who were concerned that their failure to report income, and failure to disclose foreign financial accounts, might be viewed by the IRS as willful and who seek to avoid potential criminal penalties.
U.S. expats were required to file delinquent tax returns, with all required information returns, and FBARs for the prior 8 years.
A taxpayer who complied with the procedures would have to pay back taxes with interest. In lieu of all other penalties that may apply to the undisclosed foreign assets and entities including FBAR, a reduced penalty of 27.5% was calculated based on the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure. The penalty was increased to 50% if the taxpayer had a foreign financial account, or had a facilitator who helped the taxpayer establish or maintain an offshore arrangement, and the financial institution or the facilitator had been publicly identified as being under investigation by the IRS or Department of Justice.
New Voluntary Disclosure Program
In a significant contrast to the former OVDP, the new “VDP” applies to all voluntary disclosures, whether domestic or offshore.
Under the new program, voluntary disclosures will generally include a six-year disclosure and examination period, but can vary depending on the circumstances of the taxpayer. Taxpayers must submit all required returns and reports for the disclosure period, and then examiners will determine applicable taxes, interest, and penalties under existing law and procedures.
As stated in the IRS announcement, penalties under the new program will be imposed as follows:
i. 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 (together, the “civil fraud penalty”) will apply to the one tax year with the highest tax liability.
ii. 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.
iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
iv. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines.
v. 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. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
vi. 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.
vii. 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.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals.
Streamlined Program Still Lives On
In announcing the new voluntary disclosure program, the IRS made sure to confirm that the current program for non-willfully delinquent tax filer, known as the “Streamlined Filing Compliance Procedures” (SFCP), still remains open.
These procedures generally can be used if: (1) the taxpayer has failed to report income from a foreign financial asset and failed to pay the required tax, and may have failed to file a required FBAR, and (2) The taxpayer has committed the failures due to non-willful conduct.
Under this program, U.S. expats are required to delinquent file tax returns, with all required information returns, for the prior 3 years, and file any delinquent FBARs for the prior 6 years. They must also file a non-willful certification with their submission.
A taxpayer who complies with the procedures will have to pay previously unpaid taxes with interest, but will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
Most of our expat clients entering the disclosure programs choose the Streamlined Procedures due to the non-willful nature of their tax delinquency and the desire to come clean without incurring onerous penalties. The cost-effectiveness of this program makes it a great way to get on track with your taxes and put your IRS worries behind you for good.
The Takeaway for U.S. Expats
Currently, an estimated 9 million U.S. citizens are living abroad. A growing number of expats have begun to realize that their U.S. tax compliance obligations did not end upon their change in residency.
Constant changes to the voluntary disclosure programs should come as a stark warning that these programs may come to a complete end at some point in the not-so-distant future.
For now, the Streamlined Procedures remain a great option for coming clean with the IRS. Several other amnesty options are also available, depending on your situation. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.
Our experts at Expat Tax Professionals are available to help discuss your options and guide you through each step of the disclosure process.
By Joshua Ashman, CPA & Nathan Mintz, Esq.