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Offshore Voluntary Disclosure Program (OVDP)

ovdp

Zaher Fallahi, Tax Attorney, CPA, licensed in California and Washington D. C., represents taxpayers nationwide with IRS audit, offshore voluntary disclosure program (OVDP), streamlined procedures, delinquent FBAR filing, delinquent international information return filing and foreign gifts.  For an Attorney-Client Privileged Consultation, Call: (877) 687-7558 Nationwide Toll Free, (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County) and E-mail taxattorney@zfcpa.com

Harvard Law School

Zaher Fallahi has completed “Negotiation and Leadership” and “Leveraging the Power of Emotions as You Negotiate” Certificate Programs at Harvard Law School.

Americans with undisclosed foreign financial accounts

US taxpayers with undisclosed foreign financial accounts and assets, including those held through undisclosed foreign entities, may choose one of the following options to become compliant with the US tax laws:

  1. Offshore Voluntary Disclosure Program (OVDP)
  2. Streamlined Filing Compliance Procedures (Domestic and Foreign)
  3. Quiet Disclosure
  4. Forward Compliance
  5. Delinquent FBAR Submission Procedures
  6. Delinquent Information Returns Submission Procedures
  7. Seek Relief based on “Reasonable Cause” or:
  8. Do nothing.

Taxpayers should consult an OVDP Tax Attorney experienced in handling undisclosed foreign financial accounts, because each option has its own nuances and advantages and disadvantages.

1- IRS Updates Offshore Voluntary Disclosure Program

IRS Updates Offshore Voluntary Practice     Source: Department of Treasury     November 20, 2018

SUBJECT: Updated Voluntary Disclosure Practice

This memorandum addresses the process for all voluntary disclosures (domestic and offshore) following the closing of the Offshore Voluntary Disclosure Program (2014 OVDP) on September 28, 2018.

Background and Overview of Updated Procedures

The 2014 OVDP began as a modified version of the OVDP launched in 2012, which followed voluntary disclosure programs offered in 2011 and 2009. These programs were designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. They provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures. Although they could be discontinued at any time, these other programs are still available.

Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution. See I.R.M. 9.5.11.9. This memorandum updates that voluntary disclosure practice. Taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the procedures mentioned  above or by filing an amended or past due tax return. When these returns are examined, examiners will follow existing law and guidance governing audits of the issues.

Procedures in this memo will be effective for all voluntary disclosures received after the closing of the 2014 OVDP on September 28, 2018. All offshore voluntary disclosures conforming to the requirements of “Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers” FAQ 3 received or postmarked by September 28, 2018 will be handled under the procedures of the 2014 OVDP. For all other voluntary disclosures (non-offshore) received on or before September 28, 2018, the Service has the discretion to apply the procedures outlined in this memorandum.

The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.

Proper penalty consideration is important in these cases. A timely voluntary disclosure may mitigate exposure to civil penalties. Civil penalty mitigation occurs by focusing on a specific disclosure period and the application of examiner discretion based on all relevant facts and circumstances including prompt and full cooperation (see IRM 9.5.11.9.4) during the civil examination of a voluntary disclosure. Managers must ensure that penalties are applied consistently, fully developed, and documented in all cases.

The terms outlined in this memorandum are only applicable to taxpayers that make timely voluntary disclosures and who fully cooperate with the Service.

Criminal Investigation Procedures

Criminal Investigation (CI) will screen all voluntary disclosure requests whether domestic, offshore, or other to determine if a taxpayer is eligible to make a voluntary disclosure. To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a pre-clearance request on a forthcoming revision of Form 14457. IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility.

Taxpayers must request pre-clearance from CI via fax or mail.

Fax: (267) – 466-1115

Or

Mail: IRS Criminal Investigation

Attn.: Voluntary Disclosure Coordinator

2970 Market St.

1-D04-100

Philadelphia, PA 19104

For all cases where CI grants pre-clearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisers involved in the noncompliance. Once CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the LB&I Austin unit for case preparation before examination. CI will not process tax returns or payments.

Civil Processing

Once the LB&I Austin unit receives information from CI, LB&I will route the case as appropriate. The IRS will not require taxpayers to provide additional documents to the LB&I Austin unit. If a taxpayer or representative wishes to make a payment prior to case assignment with an examiner, payments may be remitted to the LB&I Austin unit. The LB&I Austin unit will establish the most recent tax year covered by the voluntary disclosure for examination. Then, the LB&I Austin unit will forward cases for case building and field assignment to the appropriate Business Operating Division and Exam function for civil examination. Civil examiners receiving the disclosure will establish any additional controls necessary on IRS systems.

Case Development

All voluntary disclosures handled by examination will follow standard examination procedures. Examiners must develop cases, use appropriate information gathering tools, and determine proper tax liabilities and applicable penalties. Under the voluntary disclosure practice, taxpayers are required to promptly and fully cooperate during civil examinations. In general, the Service expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In the event a taxpayer fails to cooperate with the civil examination, the examiner may request that CI revoke preliminary acceptance. See I.R.M. 9.5.11.9.4 (discussing cooperation).

Civil Resolution Framework

For all voluntary disclosures received after September 28, 2018, the Service will apply the civil resolution framework outlined below. At the Service’s discretion, this civil resolution framework may extend to non-offshore voluntary disclosures that have not been resolved but were received on or before September 28, 2018.

Examiners are authorized to resolve tax and tax related noncompliance of taxpayers who make voluntary disclosures in the following manner:

(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:

(i) 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.

(ii) 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).

(b) Taxpayers must submit all required returns and reports for the disclosure period.

(c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:

(i) 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.

(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 under IRM 4.26.16 and 4.26.17.

(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.

(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.

(e) All impacted IRM sections will be updated within two years of the date of this memorandum.

End of IRS Update

Important:

On March 13, 2018, the IRS announced it will end the Offshore Voluntary Disclosure Program (OVDP), and it actually ended on September 28, 2018. It should be noted that the Streamlined Procedures and other programs are still available. See IRS Closing OVDP Frequently Asked questions

For additional information, see Taxpayers Having Undisclosed Foreign Accounts

For the latest OVDP Frequently Asked Questions and Answers, see: IRS OVDP FAQ

2-Streamlined Filing Compliance Procedures

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from pre-clearance conduct.

The streamlined procedures are designed to provide to taxpayers in such situations:

  1. streamlined procedure for filing amended or delinquent returns and
  2. terms for resolving their tax and penalty obligations.

The non-willfulness is determined based on facts and circumstances of each taxpayer. It is crucial to discuss the underlying facts with a tax attorney experienced in this particular tax law before selecting this option.

These procedures will be available for an indefinite period until otherwise announced.

Tax returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS.

However, generally they are sent from the office of tax attorney with writing in red at the top of the returns stating that “Processed under Streamlined Filing Compliance Procedures”.

Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS. This is unlike the OVDP which ends in a closure by singing the IRS form 906.

IRS Warning regarding OVDP or Streamlined Procedures

The IRS has indicated that Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurance that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating the Offshore Voluntary Disclosure Program and should consult with their professional or legal advisers.

 A- Streamlined Foreign Offshore Procedures

Eligible taxpayers residing overseas submit:

  1. Statement of non-willfulness (IRS form 14653) under penalty of perjury
  2. Last three years’ amended tax returns
  3. Last six years’ Report of Foreign Bank and Financial Accounts (FBAR, FinCen form 114) FBAR
  4. No FBAR penalty.

For more information visit Foreign Streamlined

B- Streamlined Domestic Offshore Procedures

Eligible taxpayers residing in the US submit:

  1. Statement of non-willfulness (IRS form 14654) under penalty of perjury
  2. Last three years’ amended tax returns
  3. Last six years’ Report of Foreign Bank and Financial Accounts (FBAR, FinCen form 114) FBAR
  4. 5% of the highest December 31st balance of the last six years, as FBAR penalty.

For more information visit Domestic Streamlined

3-Quiet Disclosure

Under this option, non-compliant taxpayer would file amended prior years and file the delinquent FBARs. The IRS has already warned these taxpayers and stated that they are aware of these filings and may audit them.

4-Forward Compliance

Under this option, non-compliant taxpayers ignore the past requirements and start complying from this point on.
This may expose the taxpayer to the IRS inquiry since they will receive new information with no comparable past information, especially the FBAR form 114 and FATCA form 8938, that contain questions about the inception of the financial accounts, and trigger IRS audit.

5-Delinquent FBAR Submission procedures

This method may be appropriate in cases where the client:

  1. Has not filed FBARs; (Comparable to former IRS FAQs 17 and 18)
  2. Is not under an IRS civil examination or CI
  3. Has not been contacted by the IRS about the delinquent FBARs
  4. Adds a statement explaining the reason for late FBAR filing
  5. On the e-file forms FinCEN 114, selects and explains the reason for late filing; and,
  6. Generally, no penalty, if the related foreign income reported on B.

Although, delinquent FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

Advice of a Tax Attorney experienced in delinquent FBAR filing will be crucial in proper handling this method.

6-Delinquent Information Returns Submission procedures

Taxpayers who have not filed “information tax returns” may use this alternative under the advice of their Tax Attorney, if they:

  1. Have not filed required international information returns
  2. Have reasonable cause (RC) for not timely filing them
  3. Are not under the IRS civil examination or a criminal investigation
  4. Have not been contacted by the IRS on delinquent information returns
  5. File the returns
  6. Attach a RC statement for late filing to each return
  7. On the RC, certify that any entity for which the underlying entity was not engaged in tax evasion
  8. Attach all Forms other than 3520 & 3520-A, to an amended return; and
  9. File the Forms 3520 &3520-A according to their instructions.

Although, delinquent returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes.

Establishing Reasonable Cause

The following facts and circumstances should be taken into account in establishing reasonable cause:

  1. What happened and when did it happen?
  2. What prevented filing returns and paying taxes?
  3. How did the facts & circumstances affect filing, paying taxes, or perform other responsibilities?
  4. Once the facts and circumstances changed, what actions did you take to file and pay taxes?
  5. In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

IRS Frequently Asked Question and Answer: The following is the IRS Frequently Asked Question and Answer with respect to Delinquent International Information Return Submission Procedures:

Question: Are the Delinquent International Information Return Submission Procedures announced on June 18, 2014 different from the procedures described in 2012 OVDP FAQ 18 (in effect prior to July 1, 2014)?

Answer: Yes. The IRS eliminated 2012 OVDP FAQ 18, which gave automatic penalty relief, but was only available to taxpayers who were fully tax compliant. The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

7- Seek Relief based on Reasonable Cause

Taxpayers, who are not eligible for any of the above programs, may seek relief under “Reasonable Cause”, with consultation with their Tax Attorney:

  1. Reasonable Cause (RC), based on “facts and circumstances”
  2. “Ordinary business care and prudence” to meet their Federal tax obligations, but were unable
  3. The IRS will consider sound reasons
  4. Sound reasons; fire, casualty, natural disaster or other disturbances, inability to obtain records, death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family, others (specify); and
  5. Lack of funds, not RC. The reasons for the lack of funds may be RC.

Establishing Reasonable Cause

The following facts and circumstances should be taken into account in establishing reasonable cause:

  1. What happened and when did it happen?
  2. What prevented filing returns and paying taxes?
  3. How did the facts & circumstances affect filing, paying taxes, or perform other responsibilities?
  4. Once the facts and circumstances changed, what actions did you take to file and pay taxes?
  5. In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

 8- Do nothing

Considering the tremendous efforts launched by the US government to combat tax evasion, this may not be reasonable option. Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and foreign jurisdictions, automatic third-party account reporting began this year (Canada and Britain, being the first two as of this writing), making it less likely that offshore financial accounts will go undetected by the IRS.

There are approximately 100 countries, and over 90,000 foreign financial institutions that have signed some type of cooperation agreements with the US.

End of OVDP material.

In addition to OVDP, the IRS has also a Domestic Voluntary Disclosure Program, see below:

How to Make a Domestic Voluntary Disclosure

The IRS stresses that acceptance into a voluntary disclosure arrangement depends on the individual facts and circumstances involved in each case. Taxpayers with unreported income should weigh their options on how to comply with their tax obligations, including taking advantage of coming in voluntarily.

Taxpayers or taxpayer representatives wishing to make a domestic voluntary disclosure may fax the taxpayer’s name, date of birth, social security number, and address to the IRS Criminal Investigation, Attn: Domestic Voluntary Disclosure Coordinator at 267-466-1115 or mail the information to the following address: (An executed power of attorney, Form 2848, must be included if the taxpayer is represented by a tax professional).

Internal Revenue Service
Criminal Investigation
Attn: Domestic Voluntary Disclosure Coordinator
1-D04-100
2970 Market Street
Philadelphia, PA 19104

If a taxpayer or representative has questions regarding the voluntary disclosure program, they may contact the IRS Criminal Investigations Voluntary Disclosure hotline (which is for both Offshore and Domestic disclosures) at 267-466-1607

Domestic Voluntary Discloure

How Can We Help

Zaher Fallahi, Tax Attorney, CPA, licensed in California and Washington D. C., represents taxpayers nationwide with IRS audit, offshore voluntary disclosure program (OVDP), streamlined procedures, delinquent FBAR filing, delinquent international information return filing and foreign gifts.  For an Attorney-Client Privileged Consultation, Call:

(877) 687-7558 Nationwide Toll Free

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

E-mail taxattorney@zfcpa.com