From the Tax Law Offices of David W. Klasing: IRS Drastically Increasing Penalties Under New Offshore Voluntary Disclosure Guidelines

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Tax Law Offices of David W. Klasing, PC

Dec 19, 2018, 18:43 ET

IRVINE, Calif., Dec. 19, 2018 /PRNewswire/ -- In 2009, the IRS introduced the Offshore Voluntary Disclosure Program (OVDP), which enabled taxpayers to receive reduced civil penalties and receive amnesty against criminal tax liability – for voluntarily reporting previously hidden offshore bank accounts, income producing foreign assets and businesses. In September 2018, the IRS permanently ended the OVDP, citing, among other factors, dropping rates of taxpayer participation. The Service has preserved several existing disclosure programs and guidelines – for instance, international delinquent information return submission procedures and the domestic and expat streamlined voluntary disclosure programs that are designed for taxpayers who need to resolve non-criminal disclosure matters.

For those taxpayers who do have concerns about offshore criminal tax exposure, the Internal Revenue Service recently introduced new IRS voluntary disclosure guidelines, which were announced in a November 2018 memo. Unfortunately, for taxpayers the "new OVDP" is in some ways a sharp departure from its predecessor, featuring several substantial penalty increases. In light of the enhanced penalties taxpayers now face and the IRS's incredible amount of discretion available to them, it is of the utmost importance to work with a highly experienced criminal tax defense lawyer who possesses a strong background in the areas of willful FBAR and FATCA noncompliance.

Taxpayers now face heightened penalties and potentially, longer disclosure periods as compared to the original OVDP. While the new guidelines might seem to reduce the years at issue from eight to six years, the IRS can extend the six-year period to cover all years in which noncompliance occurred, as necessary. Depending on the circumstances, that means the disclosure period could be potentially extended to eight years, just as in the original program – or even longer.

Among various penalties within the updated guidelines, one of the most noticeable is the civil fraud penalty for fraudulent underpayments of tax, which can equal up to 75% of the underpayment. While this penalty may only be applied to the year where the taxpayer's liabilities were highest, there is also a risk that the IRS could apply the 75% penalty to two years, three years, four years, or more. This depends largely on whether or not the taxpayer "fails to cooperate and resolve the examination," making legal representation and professional tax guidance essential – particularly because the IRS has indicated that, in the event of a dispute between the taxpayer and the IRS, the Service may increase penalties protectively. For example, if a taxpayer appeals, the IRS may seek to impose the fraud penalty for multiple years and increase the FBAR penalty from 50% to 100%.

Unfortunately for taxpayers, it seems likely that more civil tax audits and foreign account audits will ultimately result in these outcomes. An experienced tax attorney – in addition to affording you the attorney-client privilege – can help to ensure that you navigate these processes cautiously, correctly, and thoroughly, decreasing the level of danger involved.

Finally, it bears mentioning that the new program has also altered various regulations which formerly governed passive foreign investment companies (PFIC) – yet again, to the detriment of taxpayers. Under the original OVDP, if a taxpayer had a PFIC with excess distributions, he or she could potentially avoid certain penalties and utilize a simplified version of the PFIC regulations, which is not possible under the new guidelines.

There may be one positive change for taxpayers: under the new IRS guidelines, the original 27.5% offshore penalty on the fair market value (FMV) of undisclosed unreported income generating assets will no longer be assessed. See the full version of this article HERE.

Public Contact: Dave Klasing Esq. CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC