Posted by: Robert Horwitz | December 6, 2018

IRS Updates Its Voluntary Disclosure Program to Include Foreign and Domestic Disclosures by Taxpayers with Potential Criminal Liability by Robert S. Horwitz

On November 20, 2018, the IRS rolled out its new updated procedures for taxpayers who wish to make voluntary disclosures.  The notice emphasizes that the voluntary disclosure procedures are designed for taxpayers who could face potential criminal prosecution.  Taxpayers who do not face potential criminal prosecution but failed to report all income from foreign sources or to file all forms to report foreign accounts or assets can come into compliance through the Streamlined Filing Compliance Procedures, the delinquent FBAR submission program, or the delinquent international information return submission procedures.  Other taxpayers who do not face potential criminal prosecution “can continue to correct past mistakes” by filing amended or past due tax returns.  To determine whether to apply for admission into the voluntary disclosure program, a taxpayer should consult with an attorney experienced in criminal tax cases who can advise on whether the taxpayer could face criminal prosecution.

The new program applies to any voluntary disclosures received after the date the 2014 Offshore Voluntary Disclosure Program closed, September 28, 2018.  Any taxpayer wishing to make a voluntary disclosure after that date must request preclearance from Criminal Investigation by either fax (267-466-1115) or by mail addressed to “IRS Criminal Investigation/Attn: Voluntary Disclosure Coordinator/2970 Market St./1-D04-100/Philadelphia, PA 19104.”  If CI grants preclearance, a taxpayer is then required to submit all required voluntary disclosure documents using an updated Form 14457, which will require detailed information from the taxpayer.  A copy of the current Form 14457 is here.  If CI preliminarily accepts the taxpayer’s voluntary disclosure, the case will then go to Large Business & International in Austin, Texas, which will route the case for civil examination.

Civil examiners are to apply a “civil resolution framework” to all cases.  The framework will require a taxpayer to file returns and reports and be examined for a six-year period.  This compares with the eight year period under the 2014 OVDP.  A taxpayer who makes a voluntary disclosure will be subjected to a 75% fraud penalty under either §6651(f) (fraudulent failure to file) or 6663 (fraudulent return) for the year with the largest tax liability.  If the taxpayer failed to file FBARs, willful penalties will be imposed in accordance with the guidelines in IRM 4.26.16 and 4.26.17.  These guidelines allow a penalty equal to 50% of the highest aggregate account balance and, where there are multiple years for which a willful penalty applies, an amount of up to 100% of the highest aggregate account balance.  The IRS examiner, at his or her discretion, can assert fraud penalties for more than one year “based on the facts and circumstances of the case” and can also assert penalties for failure to file information returns, again based on facts and circumstances.  If the taxpayer “fails to cooperate and resolve the examination by agreement” the examiner can apply a fraud penalty for more than six years.  IRS managers are to ensure that “penalties are applied consistently, fully developed and documented” in every case.  Taxpayers who fail to cooperate with civil disposition of the case can have preliminary acceptance revoked.

The text of the civil framework is:

  1. a) 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:
  2. In voluntary disclosures not resolved by agreement, the examiner has 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.
  3. In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.

iii. With the IRS’ review and consent, 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).

  1. b) Taxpayers must submit all required returns and reports for the disclosure period.
  2. c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
  3. Except as set forth below, 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 will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
  4. 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.

  1. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
  2. 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.

  1. 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.

  1. d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases.
  2. e) All impacted IRM sections will be updated within two years of the date of this memorandum.

The original OVDP was criticized by National Taxpayer Advocate Nina Olsen for its “one-size-fits all” cookie-cutter approach that treated taxpayers who made honest mistakes the same as those who acted willfully.  As Ms. Olsen noted in a recent NTA Blog, “the IRS’s initial failure to design programs for benign actors probably eroded trust for the IRS, posing risks to voluntary compliance.”  The new voluntary disclosure program, with its emphasis on fraud penalties and FBAR willful penalties, is designed for those taxpayers Ms. Olsen would designate as truly bad actors.

While the IRS will update its IRM sections impacted by the new guidelines, the basics of its voluntary disclosure practice will remain in place: a) the disclosure must be truthful, complete and timely, b) the taxpayer must cooperate with the IRS to determine his or her correct tax liability, c) the taxpayer must pay or makes good faith arrangements to pay in full any tax, interest and penalties owed, and d) voluntary disclosure does not apply if the taxpayer had income from illegal sources.  And, as in the past, a voluntary disclosure will not immunize a taxpayer from criminal prosecution, although the IRS will probably not recommend criminal prosecution where the taxpayer complies with the program.

Contact Robert S. Horwitz at or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez, P.C., former Chair of the Taxation Section, California Lawyers’ Association, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at

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