For all voluntary disclosures received after September 28, 2018, the IRS has a new program called the Voluntary Disclosure Practice (VDP). It is replacing the old Offshore Voluntary Disclosure Program (OVDP) which was closed on September 28, 2018. It applies to both domestic and offshore voluntary disclosures. It is an option designed for taxpayers to get back into compliance with the IRS (file late tax returns, pay back the taxes and penalties), moreover, limit exposure to criminal prosecution.
Highlights of the new procedure
Disclosure period for both returns and FBARs: previously 8 years —> now 6 years
(examiners may reduce that if the noncompliance involves fewer years, or expand it if the voluntary disclosure is disputed)
In general, the civil fraud penalties of 75% (fraudulent failure to file income tax returns) will apply to the one tax year with the highest tax liability, but examiners may apply it to more than one year up to all six years if there is no agreement to the tax liability, or more than six years if the taxpayer is uncooperative and fails to resolve the issues by agreement;
I.R.C. §6663 or I.R.C. §6651(f)
Willful FBAR penalties will be “the greater of $100,000 or 50% of the amount in the account at the time of the violation,” and for cases “involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful.”
[IRM 220.127.116.11.5.3 (11-06-2015) (Penalty for Willful FBAR Violations-Calculation)].
- Other penalties
Penalties for failure to file foreign information returns (Form 5471, 8938, etc.) will not be automatically applied. The amount of the penalty varies by return, and examiner discretion will take into account the application of other penalties and resolve the examination by agreement. Penalties in connection with estate and gift taxes, employment taxes, and excise taxes based on the facts and circumstances of the particular case may also apply.
Form 14457 Voluntary Disclosure Practice Preclearance Request and Application
Part I = Preclearance request (to determine if you are eligible to use the VDP)
Part II = Program application (once you have received preclearance confirmation)
– Avoidance of criminal prosecution if taxpayer is willing to comply with the instructions.
– A solution for non-compliant taxpayers with a high risk who are willing to pay penalties to mitigate risk.
– Unpredictability of the penalty amounts if failure to reach an agreement or cooperate with examiner.
– Costs could be high due to willful penalty.
The above is for general and informational purposes only and should not be used as legal or other tax advice. Please consult your own professional CPA or lawyer for clarification.
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