IRS Revises Voluntary Disclosure Practice

On November 20^th, the IRS issued Memorandum LB&I-09-1118-014 (here) updating the process for both domestic and foreign voluntary disclosures. The IRS voluntary disclosure program is found in section 9.5.11.9 of the Internal Revenue Manual and is a long standing practice of the IRS to provide taxpayers who have potential criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution.  In a prior blog post , we discussed the basics of the IRS voluntary disclosure program.

The November 20^th IRS memorandum comes on the heels of the expiration of the IRS Offshore Voluntary Disclosure Initiative on September 28, 2018 and provides new guidance including penalty framework and taxpayer access to IRS Appeals. The new guidance is applicable to voluntary disclosures submitted after September 28, 2018.  For all domestic voluntary disclosures received on or before September 28, 2018, the IRS has the discretion to apply the procedures outlined in the memorandum.  

A taxpayer seeking to make a voluntary disclosure must do so by first requesting preclearance on a soon-to-be-amended Form 14457.  The taxpayer must fax or mail the completed Form 14457 to the IRS Criminal Investigation division (CI) for review and consideration.  If CI preclears a taxpayer, he or she will use the Form 14457 to make additional disclosures.  If CI ultimately accepts the voluntary disclosure, the taxpayer’s submission will be sent to IRS examination for review and examination. The taxpayer must cooperate with the IRS examiner or else the examiner can request that CI revoke its acceptance of the disclosure.  However, according the memo if the taxpayer and examination cannot agree, “taxpayers retain the right to request an appeal with the Office of Appeals. ”

A voluntary disclosure will involve the six most recent tax years, although the IRS examiner can expand the scope of the examination if the voluntary disclosure does not result in an agreement.   It is anticipated that voluntary disclosures will be resolved through the use of a closing agreement executed by both the taxpayer and the IRS.

Generally the IRS will assess one 75 percent civil fraud penalty for the year with the highest tax liability.  The examiner will have the discretion to either expand the use of the civil fraud penalty or downgrade it to a 20 percent negligence penalty.    In cases involving undisclosed foreign bank accounts, the IRS will follow its willful penalty guidance which typically caps the penalty at 50 percent of the highest year’s balance.   The examiner will have the discretion to apply the non-willful FBAR penalty instead of the 50 percent willful penalty.

For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com .