New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (11/29/18; 11/30/18)

I link the IRS's new guidance on voluntary disclosure.  Memorandum from Kristen B. Wielobob, Deputy Commissioner for Services and Enforcement, re Voluntary Disclosure Practice (LB&I-09-1118-014 dated 11/20/18), here.  The memorandum is short (5 pages) and straight-forward.  I encourage all practitioners and affected taxpayers to read it carefully.

I will try to summarize what I think are the key points on my initial reading.

1.  The guidance applies to all voluntary disclosures, whether offshore or otherwise, received after 9/28/18.  Readers will recall that that date was the conclusion of the IRS's OVDP 2014, the program (with predecessors) that applied to offshore voluntary disclosures.  But, remember that this guidance applies to all voluntary disclosures.

2.  Voluntary disclosures are for the bad actors -- those with potential criminal exposure.  Here is the relevant paragraph:

The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.

For those without criminal exposure, as with OVDP, the IRS has other procedures, including filing amended returns (that may be qualified amended returns avoiding the accuracy related penalties) and the special procedures for correcting offshore filings outside OVDP.

3.  The practice covers tax and tax-related criminal acts, so tax-related FBAR violations are included.

4.  Voluntary disclosure starts with the taxpayer submitting to CI a preclearance request under "a forthcoming revision of Form 14457." The current version of Form 14457, titled Offshore Voluntary Disclosure Letter, is here. "IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility."  IRM 9.5.11.9 is here.

5.  Upon acceptance, the taxpayer is notified and the case then processed for civil examination (going through LB&I Austin).  The case will be transferred to the appropriate civil division for examination. All voluntary disclosures will follow "standard examination procedures," requiring that examiners develop the case with its usual information gathering tools.

6.  The civil resolution framework (apparently inspired by OVDP and its various iterations) is (this is just cut and paste because the actual wording is so important):

a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
i. In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
ii. In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.
iii. With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods). 

b) Taxpayers must submit all required returns and reports for the disclosure period. 

c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
i. Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
ii. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
iv. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
v. A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
vi. Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
vii. Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals. 

d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases. 

JAT Comments (added 11/30/18 at 12:30pm):

1.  This updated voluntary disclosure adds considerable structure and predictability to the voluntary disclosure process.  The framework seems to be inspired by the OVDP which started the process of preclearance and gave a predictable civil resolution framework.

2.  The voluntary disclosure process, like the OVDP, was for the bad actors -- those with criminal prosecution exposure.  And, even where the actors do not necessarily have material criminal prosecution exposure, the process will mitigate the fraud like civil penalty analogs (such as the civil fraud penalty in § 6663).  In this regard, the general rule will be that only the highest year civil fraud penalty will apply.

3.  Those without criminal exposure or the need to mitigate the civil penalty costs for fraud type conduct (civil fraud or willful in the case of FBAR) should not make a voluntary disclosure under these procedures.  In the case of offshore noncompliance, they can pursue the Streamlined Procedures; in the case of other noncompliance, they can file amended returns which, assuming no civil fraud, will be qualified amended returns requiring only the payment of tax and interest (i.e., the accuracy related penalty will not apply).  Filing amended returns is sometimes referred to as "quiet disclosure," but that description is usually employed for bad actor amended returns rather than good actor amended returns.  I would suspect that, as with quiet disclosures for offshore accounts, the IRS will be giving more scrutiny to amended returns to see if some pattern of problem may exist that would justify civil or criminal investigation.

4.  The covered period--six years--generally corresponds with the criminal statute of limitations.  Note that, in the case of fraud or no returns, the statute is open forever.  There is some opportunity for taxpayers to expand the covered period if appropriate to do so.

5.  The civil fraud penalty in § 6663 will apply only to the high year in the covered period.  I don't see it in the policy, but I presume that the accuracy related penalties § 6662 for the other years are not forecloses.  In this regard, that seems to the be inference in the provision permitting a taxpayer may request accuracy related penalties in lieu of civil fraud and FBAR penalties.  (Another observation, persons who might qualify for that "relief" would seem to be those persons who probably should not have invoked the voluntary disclosure procedure to begin with, but may have done so protectively.)

6.  Taxpayers may invoke the right to an Appeals conference.