Let me begin by saying - this is not the offshore voluntary disclosure program (OVDP). The OVDP is gone with no prospect of returning. This voluntary disclosure program is considered the successor program to the OVDP by many, but the voluntary disclosure program goes well beyond the scope of the OVDP, and applies to individuals with either domestic or international issues. Most importantly, the terms of the IRS Criminal Investigation Voluntary Disclosure Practice are much worse than the terms of the OVDP.
The IRS released a memorandum on November 20th, 2018 regarding their updated voluntary disclosure practice. That memo can be found here: https://www.irs.gov/pub/foia/ig/spder/lbi-09-1118-014.pdf
This program is for individuals that have criminal exposure. It is for individuals who have willfully committed tax or tax-related crimes. This is not a program that should be entered into lightly and not a program that anyone should be applying for without a thorough understanding of the applicable penalties.
The Mechanics
Utilization of this program, much like the OVDP, starts with a preclearance that has to be sent to IRS criminal investigations (CI). This preclearance is required because this program is only available if the IRS hasn’t already notified you, your spouse, or any related entities, that an investigation has already begun.
This preclearance is done through Form 14457 and requires an explanation of the facts and circumstances, the noncompliant assets, any entities or related parties, and any advisors who aided in the noncompliance. Note that this form will include a list of all of the noncompliant assets, both foreign and domestic.
Once IRS criminal investigations processes your preclearance and determines that you are eligible to proceed, they will send you a letter informing you that you’ve been pre-cleared and they will forward your information to prepare for the upcoming audit.
You should not wait on this preclearance to begin the substantive preparation of your submission. Once you send in this pre-clearance, the IRS will be aware of your noncompliance and you can expect that one way or another your returns will be corrected, whether that correction occurs through the program or after your removal from the program by the IRS.
Your submission will go through an exam, and the IRS will follow their standard audit procedures. Failure to provide timely cooperation throughout the IRS examination can result in the IRS revoking the preliminary acceptance initially issued by criminal investigations.
Your disclosure will include the most recent six tax years for both FBAR and tax return purposes(this is a deviation from the OVDP which required eight years of returns). The returns submitted through this program are not considered amended returns and will not be processed like amended returns. The examiner will review these returns and all of the information at their disposal to determine the accuracy of the information enclosed on the amended returns. The IRS examiner will then make any information and document requests that they deem necessary to inform their review of your returns. Their review will result in the creation of Form 4549-A, which will contain the IRS’ proposed adjustments to your filings.
Once the IRS has issued their 4549-A, it’s time to discuss the auditor’s determinations and present disagreements and legal arguments. It is always important to thoroughly review any IRS adjustments through an audit, especially in the international context as it is not uncommon for auditors, even auditors who previously worked OVDP and who have familiarity with international cases, to have an incomplete understanding of how certain items should be taxed.
Penalties
Once the details of your filings have been finalized and agreement has been reached with the IRS on substantive issues regarding your filings, the next, and most important part of this process is the determination of the appropriate penalties. This is where I, once again, want to reiterate that this is a harsh and unforgiving program.
There is a presumption that individuals utilizing this program will be subject to willful FBAR penalties (these scale based on the value of the noncompliant accounts, up to $100,000 per account or 50% of the account values) as well as a civil fraud penalty (75% of underpaid tax) for the tax year with the highest tax liability. The examiner will have the discretion to apply the civil fraud penalty to more than one year. The examiner will also have the discretion to impose accuracy related penalties instead of the civil fraud penalty as well as non-willful FBAR penalties instead of willful FBAR penalties, but “granting requests for the imposition of lesser penalties is expected to be exceptional.”
The examiner will also have the ability to impose any informational filing penalties (i.e. 8938, 5471, etc) for each year for each form that was either unfiled or not substantially complete as originally filed.
Conclusion
You should only use this program if you could potentially have criminal liability that the IRS is likely to pursue. The penalty framework of this program is much much harsher than the terms of the OVDP and it is fairly likely that the magnitude of the applied penalties will exceed the amount that would have been paid if the IRS were to independently initiate an audit of your filings.