New IRS Voluntary Disclosure in 7 Steps
The following are the seven steps of the new updated IRS voluntary disclosure process:
- A taxpayer will make a voluntary disclosure preclearance request using IRS Form 14457 to IRS Criminal Investigation (CI). Taxpayers can request preclearance via mail or fax. No need to fear IRS Criminal Investigation (CI)’s involvement since they have always been involved in IRS voluntary disclosures for decades (In our experience, almost all clients have been cleared from CI).
- IRS Criminal Investigation (CI) will screen the preclearance request to determine taxpayer eligibility for the program. After preclearance is granted, taxpayer must submit to CI all required voluntary disclosure documents for a six (6) year disclosure period using Form 14457, including information related to taxpayer noncompliance; a narrative providing the facts and circumstances, assets entities, related parties; and any professional advisors involved in the noncompliance. Form 14457 will be revised soon (this form was previously used the old OVDP program). CI will not process tax returns or tax payments.
- CI will notify the taxpayer by letter of preliminary acceptance of the voluntary disclosure submission. CI will forward the voluntary disclosure letter and attachments to the IRS Large Business & International (LB&I) Austin unit for case preparation before examination. LB&I will receive and process all tax returns and tax payments. Taxpayers who wish to save some interest can make a payment can remit payment to the LB&I Austin unit.
- LB&I routes the voluntary disclosure case for case building and assignment to the appropriate Business Operating Division and Exam for civil examination.
- The assigned IRS examiner (generally an IRS Revenue Agent) will review the voluntary disclosure and handle it in accordance with standard examination procedures, i.e., normal audit rules apply.
- Assuming taxpayer cooperation, the voluntary disclosure will be finally resolved by a closing agreement with full payment of all taxes, interest and penalties for the disclosure period. In case of lack of taxpayer cooperation, the IRS examiner can expand the years of the voluntary disclosure and/or assess more penalties.
- Taxpayers who disagree with the exam, with no resolution agreed upon, retain the right to go to Appeals. More guidance is needed to explain the Appeals process in cases where no resolution is reached through the new voluntary disclosure program.
Overall, the change from 8 years of disclosures in OVDP to 6 years for disclosures in this new program is good news. However, some of the increases in penalties are not favorable. The program provides more structure and clarity than the prior voluntary disclosure procedures. However, there is more uncertainty due to “facts and circumstances” than previous OVDP procedures. As a result, it may be harder to estimate the total tax liability for clients prior to submitting their voluntary disclosure application. We expect more guidance to be issued on the new voluntary disclosure program, so stay tuned. If you need assistance please contact us for a free consultation.