The US Internal Revenue Service (IRS) has issued guidance on the voluntary disclosure regime now in force, following the termination of its offshore predecessor on 28 September 2018.
The new rules are effective for all disclosures after that date. And the possible penalties have gone up quite significantly.
One of the biggest differences is that the IRS now says taxpayers will be required to request preclearance (which used to be optional). The criteria for preclearance are unaffected. Therefore, a taxpayer denied preclearance under the old OVDP would probably also be denied preclearance under the new disclosure program.
The OVDP was initiated in 2009 and was designed to bring taxpayers with undisclosed foreign income, accounts and assets into US tax compliance. Taxpayers who were eligible to participate in the OVDP and made timely voluntary disclosures were provided the opportunity to receive protection from criminal referrals and to resolve their civil tax and penalty obligations on a standardized framework.
When that program terminated on September 28, 2018, there was uncertainty as to how the IRS was going to apply its general Internal Revenue Manual ("IRM") voluntary disclosure practice going forward.
The disclosure period is now six years (previously eight years for offshore disclosures). However, IRS agents have the discretion to expand the six-year disclosure period to include all noncompliant years. In addition, taxpayers also may be allowed to expand the disclosure period to correct tax issues in years outside of their disclosure.
As with OVDP, taxpayers must file all required returns and reports for the disclosure period, and pay tax and interest on all previously unreported income.
The civil penalty cost has increased substantially.
The presumed penalty for an underpayment of tax has increased from a 20% accuracy-related penalty to a 75% fraud penalty.
The guidance applies to all voluntary disclosures, offshore or otherwise, received after that date, but is aimed principally at taxpayers with potential criminal exposure from their "wilful or fraudulent" conduct. It gives them a chance to become compliant with the law and potentially avoid criminal prosecution, said the IRS's Deputy Commissioner for Services and Enforcement Kirsten Wielobob. It may also reduce their exposure to civil penalties.
The IRS will not automatically impose penalties for the failure to file information returns. Nonetheless, IRS agents have the discretion to assert these penalties, such as the $10,000 (up to $60,000) penalty for failing to file a return with respect to certain foreign corporations or foreign partnerships.