Page 4 - International Enforcement: What’s Old, What’s New and What We Can Expect

InTernATIonAl enForCemenT: WhAT’S olD, WhAT’S neW AnD WhAT We CAn expeCT

■ ■ Failed to file required tax returns (including income returns, will not be “automatically” assessed. Rather,
tax returns, applicable gift tax returns, information “[e]xaminer discretion will take into account the appli-
returns) and to pay taxes and penalties for the years cation of other penalties (such as civil fraud penalty and
at issue due to non-willful conduct. willful FBAR penalty) and resolve the examination by
If these requirements are met, the procedures provide for agreement.” 4
complete relief from expatriation tax under Code Secs. Every voluntary disclosure will be subject to an audit
877 and 877A and any back taxes owed for prior years. that will be conducted in accordance with standard
Finally, for those taxpayers who engaged in willful con- examination procedures, including detailed requests for
duct and are at risk for criminal investigation and prosecu- information and documents and taxpayer interviews. At
tion, the IRS has updated its voluntary disclosure practice the conclusion of the audit, the taxpayer may request a
following the conclusion of the Offshore Voluntary Closing Agreement pursuant to Code Sec. 7121.
Disclosure Program (“OVDP”) on September 28, 2018. For most taxpayers, the cost of coming into a volun-
On November 20, 2018, the IRS issued a memorandum tary disclosure under the new guidance will be greater
setting forth the new procedures and penalty framework, than the cost of participating in the OVDP. This was
which are expected to be incorporated into the Internal certainly a consideration of the IRS, which did not want
Revenue Manual by the end of 2020. to send a general message that the longer you wait to
The new procedures contain the same eligibility require- come into compliance, the better the deal. Still, there are
ments as those applied by the IRS with respect to voluntary some benefits of the new policy. For example, a taxpayer
disclosures over the last 50 years. A taxpayer must: (i) who entered the OVDP to disclose a small amount of
disclose his or her conduct before the IRS learns of it; (ii) rental income from a foreign property would have paid
cooperate with the IRS in determining the correct amount an offshore penalty on the full value of the property.
of tax due; and (iii) pay or arrange to pay the amount of tax, Under the new guidance, only the tax liability at issue
interest, and penalties determined to be due. Moreover, the would be subject to a penalty. Similarly, under the
practice only applies to legal source income so income from OVDP, examiners had no discretion to exclude certain
illegal conduct, such as narcotics trafficking, embezzlement, bank accounts from the OVDP’s penalty base, even if
and money-laundering, cannot be the subject of a voluntary the circumstances surrounding one account were differ-
disclosure. The mere failure to report income or pay tax ent than the circumstances surrounding other foreign
does not convert legal source income into illegal source. accounts held by the taxpayer. Under the new guidance,
If a taxpayer successfully completes a voluntary disclosure, a taxpayer may be subject to a large willful FBAR penalty
the IRS agrees not to refer the taxpayer to the DOJ Tax for any foreign accounts that were willfully not reported
Division for criminal investigation or prosecution. but can seek leniency with respect to any accounts where
Under the new guidance, taxpayers seeking to make the noncompliance was not willful.
an offshore-related voluntary disclosure generally will It is clear that the IRS and the DOJ continue to pur-
be required to file delinquent or amended income tax sue those individuals and entities that seek to evade, or
returns, along with all international information returns facilitate the evasion of, U.S. tax and reporting obliga-
and FBARs, for the past six years. In addition, taxpayers tions. It is also clear that the IRS continues to welcome
will be subject to estimated tax penalties, a single civil wayward taxpayers into compliance, but these programs
fraud penalty under Code Secs. 6663 and 6651(f) equal and submission procedures are at the discretion of the
to 75% of tax due for the year with the highest tax liability, IRS, which has made it clear that the SFCP will not be
and, where the taxpayer failed to disclose foreign financial available forever.
accounts, a single willful FBAR penalty equal to 50% of Taxpayers and their advisors need to carefully
the aggregate high balance of the undisclosed accounts. consider all options available to a taxpayer with prior
The IRS notes that other applicable penalties, includ- noncompliance, and keep in mind that time is of the
ing penalties for failure to file international information essence.

ENDNOTES

1 See www.irs.gov/pub/irs-utl/j5-media- Procedures for John Doe Summonses (Feb. 18, 4 See www.irs.gov/pub/foia/ig/spder/lbi-09-1118-
release-6-5-2019.pdf. 2016). 014.pdf.
2 Code Secs. 7609(c)(3) and 7609(f); see also 3 31 USC 5321.
Internal revenue manual 25.5.7, Special

52 JOURNAL OF TAX PRACTICE & PROCEDURE SPRING 2020