February 2, 2019
Imposition of a civil fraud penalty among the features of the “Updated Voluntary Disclosure Practice”
As we had signaled, the IRS closed its long-running Offshore Voluntary Disclosure Program (OVDP). However, an interim guidance memo published by the IRS in late November of 2018, makes it plainly clear that the Service will provide for some form of a platform for those who wish to remedy their past noncompliance, but have reasons to believe that their conduct might be interpreted as willful. Throughout its existence, OVDP served as a vehicle for that specific category of individuals; it was (per IRS website) "specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets". The information provided below is solely in regard to the ‘new’ OVDP (not an official name attributed to the revised procedures by the IRS); the changes have no bearing on the two existing and entirely distinct streamlined programs (foreign offshore and domestic offshore).
The now inoperative OVDP required the entrants to pay the accuracy related penalty under IRC §6662 – often dubbed in the IRS parlance as the “negligence penalty,” notwithstanding the fact that this penalty could be assessed for a number of other reasons – in an amount equal to 20% of the applicable portion of the underpayment of tax. Moreover, the old procedures called for a payment of the failure-to-file and failure-to-pay penalties. The revised procedures, however, dictate an imposition of the so-called civil fraud penalty. A waiver may be apparently granted only in exceptional cases. The authority for the penalty can be found in two separate code sections: §6663 in cases of underpayment being due to fraud and §6651(f) in cases of a fraudulent failure to file. The civil fraud penalty equals 75% of the underpayment due to either fraud or fraudulent failure to file.
The IRS memo also covers, among other things, the following key revisions to the original and now discontinued OVDP:
(A) The pre-clearance process with the Internal Revenue Service, Criminal Investigation (IRS-CI) will call for a more expansive disclosure on the part of the taxpayer.
(B) The IRS civil examiners will have discretion to examine all tax years within the period of noncompliance; the old OVDP limited the scope of the audit to 8 years.
(C) The old OVDP’s fixed 27.5% penalty, which was imposed on the balances of undisclosed offshore accounts, is being replaced with the penalties that per the Internal Revenue Manual guidelines are currently imputed in cases of willful failure to file FBARs. Thus calculated penalty will amount to the grater of $100,000 or 50% of the account balance at the time of the violation. Multiple year penalties and/or downward or upward departures from the 50% rate may be recommended by the examiners, depending on the circumstances.
The presented here information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Moreover, the information is presented here for educational purposes and is not specific to any individual’s personal circumstances. As such, this information should not be used for the purpose of avoiding penalties that may be imposed by law. In matters relating to the Offshore Voluntary Disclosure Program, or any continuation thereof, it is generally recommended that a determination as to how one's specific circumstances may relate to the presented material should be made by means of a consultation with an attorney that specializes in these matters.
Cezary Tchorznicki, CPA LLC does not provide legal or investment advice.