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IRS Voluntary Disclosure Program » New Voluntary Disclosure Guidance

The IRS Voluntary Disclosure Program is being made available to taxpayers with legally sourced income who make accurate and complete disclosure to the IRS by September 23, 2009 and pay (or make arrangements to pay), the taxes due. This program can be used by US taxpayers who failed to properly, timely and accurately file a tax return and pay income taxes on income earned on offshore accounts or failed to file information returns, know as FBAR returns) related to such accounts. Although voluntary disclosure does not guarantee immunity from prosecution, it is an effective way to try to avoid prosecution.

The modifications in IRS policy, announced on March 23, 2009, provide non-compliant taxpayers with a predictable and effective way to address their use of offshore accounts without proper disclosure or tax payments. The program is a direct result of the litigation between the IRS and UBS Bank and arises of the IRS UBS John Doe Summons litigation and UBS’s Deferred Prosecution Agreement.

New Voluntary Disclosure Guidance

The new IRS program authorizes IRS personnel to apply a modified penalty framework to Voluntary Disclosure requests regarding unreported offshore accounts and entities. The new guidance is applicable for six-months, commencing March 23, 2009, so it will terminate, unless extended, on September 22, 2009. The new program is intended to resolve the tax liabilities of non-compliant US taxpayers who used offshore accounts to avoid or evade taxes and who are otherwise eligible to make a Voluntary Disclosure request.

Framework of the program:

  • The IRS will assess taxes and interest for the prior six years (except where an account or an entity was formed or acquired within the six year look-back period, in which case taxes and interest will be assessed starting with the earliest year in which an account was opened or acquired, or an entity was formed).
  • Taxpayers will be required to file or amend all returns for the applicable period, including FBARs.
  • The IRS will assess either an accuracy penalty (20 percent of the understatement of tax) or a delinquency penalty (up to 25 percent of the net tax required to be shown on the tax return) on taxes required to have been reported in years within the applicable period (without application of the reasonable cause exception).
  • In lieu of all other penalties that may apply, including FBAR and information return penalties; the IRS will assess a penalty equal to 20 percent of the amount in foreign bank accounts or entities in the year with the highest aggregate account or asset value. The penalty will be reduced to 5 percent in the case of certain inherited accounts provided the following conditions are satisfied:
  • The taxpayer did not open or cause any accounts to be opened or entities to be formed;
  • There has been no activity in any account or entity (such as deposits or withdrawals during the period the account or entity was controlled by the taxpayer); and
  • All applicable US taxes have been paid on the funds deposited in the accounts or transferred to the entities (except for taxes on income or earnings of the account or the entity).

FHI’s analysis

The new Voluntary Disclosure program is intended to (1) incentivize noncompliant, eligible taxpayers to become compliant by setting forth a favorable penalty framework achieved by the much reduced FBAR penalty compared to that of current law and (2) to recoup lost tax revenues.

The new Voluntary Disclosure program is available only to taxpayers whose disclosure meets the "voluntary" requirements set out in Internal Revenue Manual 9.5.11.9. which have been in place, essentially unchanged, for over 20 years.  Under the program all Voluntary Disclosure requests must pass initial screening with the Criminal Investigation Division.  If the taxpayer’s initial eligibility for the program is apparent, the Voluntary Disclosure request will be forwarded to the offshore account identification unit in Philadelphia for civil processing.

This new program solidifies the IRS position on the off shore account cases in a number of ways.  First, it limits the look back to a six-year period.  Second, it provides for the imposition of either the accuracy or delinquency penalty for income tax understatements/underpayments.  Third, it imposes a 20 percent (or a 5 percent in limited cases) FBAR penalty.  The penalty rate is calculated on the highest amount of a non-compliant taxpayer’s account balance for one year, which is much less than the normally applicable FBAR penalty.  The tax year of measurement is the year in the six year look back period in which the account had its highest balance.  As you can see from the chart, the regular FBAR penalties, assessable for each tax year in which the taxpayer owned a reportable account that was not reported, are huge.

Negligent Violation

Up to $500 

Non-Willful Violation

Up to $10,000 for each negligent violation

Pattern of Negligent Activity

In addition to penalty under IRC § 5321(a)(6)(A)
with respect to any such violation, not more than $50,000

Willful - Failure to File FBAR or retain records of account

Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.

Willful - Failure to File FBAR or retain records of account while violating certain other laws

Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.

Knowingly and Willfully Filing False FBAR

Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.

The IRS announced that "offshore cases sent to the field are work of the highest priority.” The program announcement stated that even IRS already has or will receive the name of the non-compliant taxpayer, if the taxpayer voluntary comes forward prior to the commencement of a criminal or civil investigation, the taxpayer may be able to benefit from Voluntary Disclosure program.  A non-compliant taxpayer that elects not to make a voluntary disclosure faces a much more uncertain future, to include potential criminal prosecution and significantly greater penalties.

In that regard, Douglas Shulman, the Commissioner of Internal Revenue, stated about the new IRS Voluntary Disclosure Policy guidance:

My goal has always been clear -- to get those taxpayers hiding assets offshore back into the system…. We believe the guidance represents a firm but fair resolution of these cases and will provide consistent treatment for taxpayers. The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can.

In the guidance to our people, we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement….

We have instructed our agents to resolve these taxpayers' cases in a uniform, consistent manner. Those who truly come in voluntarily will pay back taxes, interest and a significant penalty, but can avoid criminal prosecution.

At the same time, we have also provided guidance to our agents who have cases of unreported offshore income when the taxpayer did not come in through our voluntary disclosure practice. In these cases, we are instructing our agents to fully develop these cases, pursuing both civil and criminal avenues, and consider all available penalties including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty.

For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.

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