Treasury Dept. Announces New Voluntary Disclosure Practice
Now that the OVDP is no longer available, what will taxpayers with undisclosed foreign assets do? The U.S. Department of Treasury has announced a new voluntary disclosure practice as an option for those trying to avoid possible criminal consequences. However, the chances are that the program won’t save taxpayers nearly as much money in fines and penalties.
In this blog post I will review the United States Department of Treasury memorandum dated November 20, 2018, describing the Updated Voluntary Disclosure Practice following the end of the Overseas Voluntary Disclosure Program (OVDP). I will go over the possible penalties under the new process and will explain whether this new procedure will be helpful to taxpayers seeking to avoid willful FBAR penalties and other tax consequences.
2018 Marked the End of the OVDP
Since 2009, taxpayers with undisclosed assets overseas have been able to use the Offshore Voluntary Disclosure Program (OVDP) to correct tax returns, file missing foreign financial reports (including FBARs). The program provided taxpayers certainty that they would not face criminal prosecution and the ability to pay less in fines and penalties for FBAR violations. The OVDP did not make a distinction between willful and non-willful FBAR violations, but did provide for a cumbersome “opt-out” mechanism for non-willful violators seeking more lenient treatment.
The IRS announced its Streamlined Filing Compliance Procedures (SFCP) in June 2014, creating parallel domestic and non-domestic tracks enabling FBAR violators able to demonstrate that their failure to file FBAR reports was non-willful to make voluntary disclosures and achieve compliance while paying a drastically reduced (or in the case of non-domestic filers eliminated) penalties.
All told, the ODVP program (in its various forms) generated over $10 billion in payments to the federal government. Then last year, the Internal Revenue Service announced it was ending the OVDP. Citing a decline in the number of new applications filed, the IRS ended the program as of September 28, 2018. Other voluntary disclosure procedures, including SFCP, remain available to those who qualify.
Treasury Department Announces New Voluntary Disclosure Practice
To fill the void left by the OVDP’s closure, on November 20, 2018, the Treasury Department released a memorandum updating its Voluntary Disclosure Practice. This informal practice has been an option of last resort for taxpayers for some time. It allows taxpayers facing possible criminal consequences for tax fraud or willful FBAR violations to come into compliance with the law in exchange for avoiding criminal penalties.
But historically, the Voluntary Disclosure Practice’s lack of formal structure or guidelines made its outcomes difficult to predict. Under the new process, many believe the Voluntary Disclosure Practice will come to serve as a replacement for OVDP. Here is how it will work.
Step 1: Apply for Eligibility for Preliminary Acceptance
Anyone seeking to use the Voluntary Disclosure Practice must first be found eligible. Criminal Investigation (CI) within the Treasury Department is responsible for screening all voluntary disclosure requests -- both domestic and overseas -- to see if the taxpayers are eligible for the practice.
Step 2: Full Voluntary Disclosure
When CI grants a taxpayer preclearance, the taxpayer must gather all information related to tax noncompliance and failure to file FBARs, and prepare a narrative describing the facts and circumstances of their case. This narrative will include a description of the taxpayer’s assets, entities, and related parties, along with any tax attorneys, accountants or other professional advisors involved.
Once CI receives these documents, the taxpayer’s matter will be transferred to the Large Business & International division which will in turn assign the matter to the appropriate Business Operating Division for civil examination.
Step 3: Civil Examination and Agreement
When a case is assigned to a Civil Examiner in the Business Operating Division, that examiner will gather information from the taxpayer and other sources to determine the amount of tax, interest, and penalties owed over the time covered by the disclosure (usually 6 years). The taxpayer will be expected to complete all missing tax returns and financial reports, and to cooperate with the examination process.
The IRS expects the taxpayer to agree to pay all taxes, interest, and penalties assessed as part of that examination. The Voluntary Disclosure Practice does allow for a taxpayer to request non-willful FBAR penalties instead of willful, and accuracy penalties instead of fraud, but otherwise it appears all applicable penalties will be assessed. If the taxpayer doesn’t agree, or fails to make the payments and come into compliance, the IRS can revoke preliminary acceptance and use all the information gathered in any later criminal prosecution.
Voluntary Disclosure Practice Limits Criminal Liability, But Imposes Heavy Penalties
The IRS Voluntary Disclosure Practice still uses all the same penalties and interest as if the taxpayer had not come forward voluntarily. Even granting requests to use the lower non-willful FBAR and accuracy penalties is “expected to be exceptional”. That means unless there is a significant chance of criminal consequences, most taxpayers will be better off using the Streamlined Filing Compliance Procedures (if they qualify), filing amended returns and reports, or simply not coming forward at all.
With the OVDP officially closed, taxpayers with undisclosed foreign financial accounts have limited options to avoid severe fines, penalties, and even jail time. The new Voluntary Disclosure Practice provides a limited outlet to avoid federal prison. But before filing an application, taxpayers should speak with an experienced tax attorney to be sure the process is worth the risk.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about the Voluntary Disclosure Practice or other tax disclosure programs, contact Joe Viola to schedule a consultation.