The IRS Indicates a Second Voluntary Disclosure Program for Offshore Assets is “Very Likely” But Continues to Remain Silent on its Terms
As we previously reported here, tax practitioners at the annual ABA Criminal Tax Institute lobbied for the Internal Revenue Service (IRS) to extend its voluntary disclosure program, which ended on October 15, 2009. The voluntary disclosure program permitted taxpayers who failed to report their offshore assets to voluntarily come forward in exchange for relief from criminal prosecution and partial relief from civil penalties.
IRS Commissioner Douglas H. Shulman’s speech before the Annual Institute on Current Issues in International Taxation seems to show that these practitioners’ efforts were successful. During his speech on December 9, 2010, Commissioner Shulman briefly discussed the first program and stated, “Given its success, we are seriously considering another special offshore voluntary disclosure program.” While acting “in the interest of being fair to the 15,000 taxpayers who came forward in the first offshore voluntary disclosure program”, Commissioner Shulman also indicated that taxpayers coming forward during the second program would be subject to higher penalties and different terms of participation.
Tax practitioners understand the need for the higher penalty, but believe “there is no need to raise it much beyond the previous 20 percent.” In short, a much higher penalty could deter taxpayers from entering into the program, since in some cases penalties already far exceed the tax owed. Wish List for the Possible Second U.S. Offshore Voluntary Disclosure Program. 2011 WTD 9-1, Tax Analysts, Worldwide Tax Daily. January 13, 2010.
It is important to note, however, that even penalties significantly exceeding the previous 20 percent are likely to be less than the “failure to comply” penalties imposed by new legislation. Earlier this year, we reported the enactment of the Foreign Account Tax Compliance Act (FATCA), which according to Commissioner Shulman, “provides the IRS with better tools to cracks down on Americans hiding assets overseas.” FATCA, which becomes effective in 2013, imposes significantly increased information reporting on taxpayers and financial institutions, requiring the disclosure of any information pertaining to U.S. taxpayers holding financial assets outside of the U.S. Among the IRS’s newest “tools” are the severe penalties for failure to comply.
The IRS hopes that imminent implementation of FATCA will seriously deter U.S. taxpayers from hiding assets overseas. Commissioner Shulman believes that the passage of FATCA “makes the world a riskier place for U.S. taxpayers still trying to hide their money anywhere around the world.” Of course, this provides taxpayers currently holding assets overseas with greater incentive to disclose under a second voluntary disclosure program.
Practitioners have expressed concerns regarding the lack of flexibility in the first voluntary disclosure program. Including some who were completely unaware of their Foreign Bank and Financial Accounts (FBAR) filing obligations, many taxpayers who participated in the first voluntary disclosure program expressed frustration with IRS officials refusing penalty relief in situations with mitigating circumstances. Critics of the original program who are lobbying for more flexibility in the new program have stated that “building flexibility into the systems would help lawyers reduce the concerns of prospective voluntary disclosure program participants who want to know that the IRS will at least hear them out.” Wish List for the Possible Second U.S. Offshore Voluntary Disclosure Program. 2011 WTD 9-1, Tax Analysts, Worldwide Tax Daily. January 13, 2010.
Such critics also support the idea of the IRS implementing a second voluntary disclosure program without a set expiration date. “Setting a firm deadline requires any subsequent program to have higher penalties, and higher penalties reduce the incentive to come in.” Id. Other practitioners have offered an alternative solution to the issues presented by an “end date” to the program.
A new VDP should be in the form of the mitigation guidelines in the Internal Revenue Manual (IRM) and reflect ongoing IRS policy with respect to previously undisclosed interests in foreign accounts. Efforts to increase foreign account compliance should not be allowed to destroy the overall voluntary disclosure practice of the IRS and the Department of Justice.
It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.
This language is highly unlikely to entice taxpayers to come forward. Voluntary disclosure guidelines should require IRS personnel to impose criminal or civil penalties only after considering the wide range of circumstances in which taxpayers intentionally or unintentionally failed to report their offshore assets. This type of ongoing approach is much more likely to meet Commissioner Shulman’s goal of “bringing taxpayers with underreported assets and income overseas back into the fold.”
Other than Commissioner Shulman’s speech portraying the likelihood of a second voluntary disclosure program, however, the IRS has yet to comment on when such a program may be implemented, much less its associated penalties or terms.
If you have any questions regarding voluntary disclosure programs, IRS penalties, FBAR, or any other tax provision, please contact Fuerst Ittleman, PL at firstname.lastname@example.org.