IRS Updated Voluntary Disclosure Practice is a Game-Changer
Last week the IRS released a memorandum with new procedures for an “Updated Voluntary Disclosure Practice” impacting all voluntary disclosures. The new updated voluntary disclosure practice (VDP) is a game-changer for offshore voluntary disclosures for US persons with unreported foreign assets.
The Updated VDP Procedures
The new procedures continue to provide taxpayers an ability to come into tax compliance and eliminate the risk of criminal prosecution, but with many changes. Some of the changes are procedural changes, such as no longer requiring the filing of required tax returns and additional documents until an IRS agent is assigned to the case. Other changes are more substantive, including changes to the disclosure period and penalties. The new Updated VDP Procedures DO NOT change other IRS programs, such as the IRS Streamlined Compliance Procedures (for non-willful US persons) including the popular Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.
The Updated VDP Disclosure Period
In general, the disclosure period has been reduced to six years.
Under the new procedures, the penalty for underpayment of tax has increased to 75%. The IRS will assess a civil-fraud penalty to the tax year during the disclosure period with the highest tax liability. In exceptional cases, taxpayers can request the imposition of the lower 20% accuracy-related penalty.
The FBAR penalty has also been changed under the new procedures whereby the IRS will assert willful FBAR penalties. In most cases a penalty for a willful FBAR violation will likely be 50% of the highest aggregate balance of all unreported foreign financial accounts during the disclosure period. In exceptional cases, taxpayers again can request the imposition of the lower non-willful FBAR penalty.
Right to IRS Appeals
An additional procedural change is that taxpayers who cannot reach an agreement with the IRS will retain the right to go to IRS Appeals.
Noncompliant U.S. persons should consult with experienced legal counsel to analyze their legal options and determine whether filing a voluntary disclosure under the new rules is appropriate.