Page 2 - The IRS's Updated Voluntary Disclosure procedures for Offshore Accounts and Assets

01-0119 TPP.qxp_zEssentials.temp 1/10/19 4:03 PM Page 55

fixed miscellaneous offshore penalty; however, no civil fraud penalty imposed. unreported foreign accounts are associ-
instead, the new procedures provide that Under the new voluntary disclosure pro- ated with either large amounts of unre-
“willful FBAR penalties will be asserted cedures, taxpayers must pay either the ported income or large account balances,
in accordance with existing IRS penalty “civil penalty under IRC section 6663 or as to whom there may be some indicia
guidelines under IRM [Internal Revenue for fraud or the civil penalty under IRC of willfulness in failing to report their
Manual] 4.26.16 and 4.26.17.” Taxpayers section 6651(f) for the fraudulent failure foreign accounts, making it important to
will, however, be permitted to request to file income tax returns” for at least protect these taxpayers against the risk
the imposition of “non-willful FBAR one tax year at issue, and IRS examiners of criminal prosecution.
penalties instead of willful penalties.” have the authority to assert the civil fraud In order to address less serious
Under the IRM, willful FBAR penal- penalty for multiple tax years in partic- instances of unreported foreign accounts,
ties will be “the greater of $100,000 or ularly egregious cases. The civil fraud the IRS instituted two other programs.
50% of the amount in the account at the penalty will essentially amount to 75% The first is a Streamline Filing
time of the violation,” and for cases of the unpaid tax. Although the new vol- Compliance Procedure, which was insti-
“involving willful violations over multi- untary disclosure procedures permit tax- tuted in 2012 (Streamline Program) and
ple years, examiners may recommend a payers to argue in any particular case that is still in effect. Under the Streamline
penalty for each year for which the the civil fraud penalty should be replaced Program, taxpayers submit a certification
FBAR violation was willful.” [IRM with a lesser accuracy penalty, the new that their failure to report their foreign
4.26.16.6.5.3 (11-06-2015) (Penalty for procedures provide that the civil fraud accounts and foreign account income was
Willful FBAR Violations-Calculation)]. “nonwillful,” simultaneously submit
The IRM also notes that while examiners amended or delinquent tax returns and
“may recommend a penalty that is higher FBARs, and, for taxpayers residing in the
or lower than 50 percent of the highest United States, pay a 5% miscellaneous
aggregate account balance of all unre- offshore penalty. The second is the
ported foreign financial accounts,” it is Delinquent FBAR Submission
expected that “in no event will the total The new voluntary Procedures, which is for taxpayers who
penalty amount exceed 100 percent of failed to file FBARs for their foreign
the highest aggregate balance of all unre- disclosure procedures account but do not have any unreported
ported foreign financial accounts during income from those accounts, either
the years under examination.” Nonwillful because the accounts did not generate any
FBAR penalties “for each year [are] lim- require the imposition income or because the taxpayers properly
ited to $10,000,” and examiners are reported any such income on timely filed
expected to use “their discretion in each of a civil fraud penalty. tax returns. Under the Delinquent FBAR
case to determine whether a lesser penal- Submission Procedures, taxpayers file
ty amount is appropriate” [IRM delinquent FBARs together with an
4.26.16.6.4.1 (11-06-2015) (Penalty for explanation for the delinquent filing. That
Nonwillful Violations-Calculation)]. program is also still in effect.
Thus, the new voluntary disclosure pro- By announcing a new framework for
cedures may result in a wide degree of taxpayers to voluntarily disclose off-
variation in the offshore penalties that shore noncompliance, the IRS has con-
may be imposed. penalty will only be waived in “excep- tinued to make available different pro-
Fourth, the new voluntary disclosure tional” circumstances. grams and procedures for noncompliant
procedures require the imposition of a Fifth, unlike the prior OVDP, taxpay- taxpayers, with differing penalty levels
civil fraud penalty. Under the prior ers will now have the right to appeal the based on the taxpayer’s purported
OVDP program, taxpayers were required liabilities imposed in connection with a degree of culpability. Taxpayers and
to pay 20% accuracy-related penalties voluntary disclosure to the IRS Office their CPAs or other tax or financial
under Internal Revenue Code (IRC) sec- of Appeals. advisors should carefully evaluate the
tion 6662(a) on the full amount of their different programs before choosing the
offshore-related underpayments of tax for Other Disclosure Options one in which to participate. q
all years, as well as any applicable fail- Offshore voluntary disclosures (which
ure-to-file penalties under IRC section must now be made under the auspices Usman Mohammad, JD, is of counsel
6651(a)(1) or failure-to-pay penalties of the updated voluntary disclosure pro- at Kostelanetz & Fink LLP, New York,
under IRC section 6651(a)(2). There was, cedures) are meant for taxpayers whose N.Y.

JANUARY 2019 / THE CPA JOURNAL 55