In Information Release 2018-52, the Internal Revenue Service announced on March 13, 2018, that it will shut down and end its Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. Thus, taxpayers with undisclosed foreign financial assets have time to utilize the OVDP before the program closes, but need to act ASAP and consult with experienced tax controversy counsel so that a complete filing submission is made by Sept. 28, 2018.

Since its inception in 2009, more than 56,000 taxpayers have used the IRS OVDP to voluntarily inform the IRS about untaxed money overseas and pay a set penalty to avoid prosecution; and have paid a total of $11.1 billion in back taxes, interest and penalties.

The planned end to the OVDP reflects advances in third-party reporting, a more transparent information sharing landscape than existed a decade ago, and U.S. taxpayers' increased awareness of their offshore tax and reporting obligations. The IRS remains engaged in ferreting out the identities of those with undisclosed foreign accounts through the use of information resources and increased data analytics, whistleblower leads, civil examinations, and criminal prosecutions.

For individuals and business entities with undisclosed foreign accounts and unreported income from international sources, time is of the essence to review the remaining options available. These are dangerous times … nothing is more destructive than a criminal tax investigation with the real possibility of prison time and draconian fraud and FBAP—foreign bank account reporting penalties. Doing nothing is not a viable option for anyone who wants to be able to use and enjoy undisclosed foreign accounts or assets.

Fortunately, options still exist. First, it is important to note that although the OVDP is shutting down, other offshore disclosure programs will remain open and available to eligible taxpayers.

Specifically, the IRS Streamlined Procedures, Delinquent International Information Returns Procedure, and Delinquent FBAR Procedures need to be considered. A final option that will now come back into practice is the IRS Voluntary Disclosure Policy, which, after OVDP ends, can be used in situations involving offshore assets.

With respect to the IRS Streamlined Procedures, relief continues to be available to a wider range of taxpayers living both inside and outside the U.S. There is now both a Streamlined Domestic Offshore Procedure (for taxpayers residing in the U.S.) and a Streamlined Foreign Offshore Procedure (for taxpayers residing outside the U.S.). Under both procedures, there is a three-year (versus eight years under the 2014 OVDP) lookback period for filing amended income tax returns, and a six-year lookback period for filing delinquent FBARSs. For eligible taxpayers residing in the U.S., the only penalty that will be assessed is a miscellaneous offshore penalty equal to 5 percent (versus 27.5 or 50 percent under the 2014 OVDP) of the foreign financial assets that triggered the tax compliance issue—calculated on the highest year-end balance and asset values over the past six FBAR years. For eligible taxpayers residing outside the U.S., no penalty will be assessed.

Both Streamlined Procedures require that taxpayers certify under penalties of perjury that previous failures to comply were due to non-willful conduct and in that regard are required to submit a detailed narrative statement of the facts explaining the taxpayer's failure to disclose offshore accounts/assets. Note, however, there is no criminal tax investigation/prosecution guarantee under the Streamlined Procedures.

With respect to the IRS Delinquent International Information Return Submission Procedures, this option can be utilized for taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed one or more required international information returns (e.g., Forms 3520, 3520-A); have reasonable cause for not timely filing the information returns; are not under a civil examination or a criminal investigation by the IRS; and have not already been contacted by the IRS about the delinquent information returns. Those eligible taxpayers can utilize this procedure by filing the delinquent information returns with a statement of the facts establishing reasonable cause for the failure to file.

In addition, there is an IRS Delinquent FBAR Submission Procedures for taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed an FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs. These taxpayers should file the delinquent FBARs and include a statement explaining why they are filing the FBARs late.

The IRS has represented that it will not impose a penalty for the failure to file the delinquent FBARs by taxpayers who properly reported the existence of the accounts on their tax returns, and paid all tax on the income from a foreign financial account reported on the delinquent FBARs, and have not previously been contacted regarding an income tax examination or a request for delinquent tax returns for the years for which the delinquent FBARs are submitted.

A final option that will now come back into practice is the IRS Voluntary Disclosure Policy, which, after OVDP closes, will be available to utilize in situations involving offshore assets.

The IRS's voluntary disclosure policy generally provides that, in determining whether to recommend criminal prosecution, the IRS will take into account the fact that a taxpayer came forward voluntarily to file delinquent returns or correct false and fraudulent returns. Both the IRS's Internal Revenue Manual and the Department of Justice's (DOJ) Criminal Tax Manual have provisions discussing the policy. IRM 9.5.11.9; Criminal Tax Manual 4.01. The IRM provisions set out, among other things, the requirements that a taxpayer must satisfy in order for the taxpayer's filings to be considered a “voluntary” disclosure, including details regarding what constitutes a “timely” disclosure. The Criminal Tax Manual provides that compliance with the IRS's voluntary disclosure policy may be considered by the DOJ, among other factors, in the Department's exercise of prosecutorial discretion.

At the outset, it must be noted that the IRS and DOJ guidelines regarding voluntary disclosures are simply that—guidelines. The agencies have sought to make clear that these guidelines do not have the force of law and may not be invoked to bind the IRS or DOJ. Indeed, the guidelines themselves provide that the IRS and DOJ may decide to prosecute even in the face of a voluntary disclosure. A taxpayer must therefore endure not only the risk that a voluntary disclosure will not be considered truly voluntary, but that a prosecution may result even if the disclosure is so viewed. As a result, making a voluntary disclosure is a matter of judgment, not black-and-white law.

The Current IRS Policy on Voluntary Disclosure

Over the years there have been a number of amendments to the IRS voluntary disclosure policy. Currently, it reads, in part, as follows:

• A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

• A voluntary disclosure occurs when the communication is truthful, timely [and] complete….

A disclosure is timely if it is received before:

• The IRS has initiated a civil examination or criminal investigation of the taxpayer.

• The IRS has received information from a third party … alerting the IRS to the specific taxpayer's noncompliance.

• The IRS has initiated a civil examination or criminal investigation that is directly related to the specific liability of the taxpayer.

• The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action ….

IRM 9.5.11.9(2)-(4).

The “triggering events” that distinguish a “compelled” from a “voluntary” disclosure have been narrowed significantly through relatively recent amendments, thus broadening the situations in which the voluntary disclosure program can be viably used. For example, currently, even if the IRS is conducting a civil enforcement program into the area of noncompliance by the taxpayer (such as a civil enforcement initiative into particular business or tax practices that the taxpayer engaged in), it will not disqualify that taxpayer from making a timely, voluntary disclosure so long as the IRS has not yet specifically focused on the taxpayer or an entity with which the taxpayer is affiliated. See IRM 9.5.11.9(6)&(7).

However, it is important to note a number of limitations on the availability of the program. For instance, the benefits of voluntary disclosure are available only in respect to legal source income. IRM 9.5.11.9(2). Furthermore, there is a requirement of cooperation with the IRS, which includes paying, or making bona fide arrangements with the IRS to pay, the outstanding tax liabilities. IRM 9.5.11.9(3). Offering a payment arrangement that the IRS views as based in bad faith can precipitate prosecution. See, e.g., United States v. Tenzer, 127 F.3d 222, 226-28 (2d Cir. 1997); United States v. Tenzer, 213 F.3d 34, 40-41 (2d Cir. 2000). Moreover, the guidelines impose the further expectation of cooperation in the prosecution of others involved in the wrongdoing. Criminal Tax Manual 4.01[1].

Putting Policy and Theory into Practice

Although the Internal Revenue Manual provisions set forth a procedure for making a formal voluntary disclosure directly with an employee of IRS's Criminal Investigation Division, some practitioners favor making a voluntary disclosure directly with the relevant IRS Center by filing delinquent or amended returns with a remittance of tax and interest. Whereas a taxpayer making a formal disclosure that is truthful, timely, complete, and accompanied by cooperation is very likely to obtain a commitment that he or she will not be criminally investigated, an individual utilizing the informal approach will not receive formal absolution. However, by causing these filings to be at the Service Center, thereby getting to the IRS before it gets to the client, counsel may effectively accomplish the same result. In such cases, it is likely that the taxpayer will never be contacted by an IRS employee concerning the years for which the delinquent or amended filings were made, other than a bill for interest and perhaps a delinquency penalty in a failure to pay situation. In addition, the formal approach involves detailed scrutiny by the Criminal Investigation Division as to the matters such as timeliness and the accuracy of the amended returns and a higher likelihood of imposition of the 75 percent civil fraud penalty—factors that may make some clients prefer the informal approach.

Counsel, in general, must bear in mind the risks of an effort to make a voluntary disclosure, particularly in connection with fraudulent return cases. Multiple issues must be considered. Is the disclosure truly voluntary? Do the amended returns contain all the income attributable to the client? Are the odds of a favorable outcome worth the risks resulting from admission of earlier understatements of income through the submission of amended returns? Is the district where the disclosure is to be made one that allows the lawyer to obtain a pre-indication of the IRS's view by proffering facts without divulging the client's identify, and, if not, how does that impact the desirability of proceeding?

The practitioner must exercise great care in an individualized factual and legal inquiry, and carefully apply his or her judgment to help the client assess the potential risks and rewards of attempting a voluntary disclosure. Painstakingly detailed interviews of the client must take place, an accountant should be engaged to prepare delinquent or amended returns in order to determine if the taxpayer has the means to pay the tax, interest and any civil penalty, and all due care should be taken to structure the accountant's role in a manner that preserves the attorney-client privilege. The issues of triggering events, the risk of causing a new criminal statute of limitations to begin if the amended returns are also false, the IRS's lookback period and the statute of limitation, anonymity and formal versus informal disclosure must be carefully addressed in advising a client whether and how to make a voluntary disclosure.

An additional problem facing practitioners in jurisdictions that have state income taxes is to determine what impact the federal filing will have on federal/state return information sharing agreements, and whether a simultaneous state voluntary disclosure should be attempted. Many state tax authorities have their own versions of voluntary disclosure policies, such as the Voluntary Disclosure Programs administered by the New York State Department of Taxation and Finance, the New Jersey Division of Taxation and the Connecticut Department of Revenue Services.

In closing, a voluntary disclosure carries considerable potential rewards, but also significant risks. Whether the client should pursue such a course will depend on the client's individual circumstances, which should be carefully analyzed in light of all relevant legal and strategic considerations by counsel experienced in criminal and civil tax controversy matters.

Alter is a partner at McElroy, Deutsch, Mulvaney & Carpenter in Morristown, and past chairman of the Section of Taxation of the N.J. State Bar Association. He specializes in representing business and individual clients in civil and criminal tax disputes with state and federal tax authorities.