The Changing State of Voluntary Disclosure

Michael DeBlis
9 min readDec 10, 2018


A new year brings with it many things, including, of course, news and updates from the IRS. As tax year 2019 draws closer, it’s time to start thinking about the many changes to come, like the IRS’ recently published updates to the 2018 OVDP and Voluntary Disclosure rules.

As with most situations regarding the IRS, nothing stays constant for long — and, often, that’s not a good thing. However, for those facing the challenging waters of errors in international reporting, the IRS’ updates are a welcome breath of fresh air, or at least only slightly stale air. After the shutdown of the Offshore Voluntary Disclosure Program on September 28th, 2018, individuals with unreported foreign bank accounts and income found themselves in a murky world of uncertainty with limited options in preventing potential fees and both criminal and civil penalties. With these updates, the path forward becomes far clearer — but, as with all things government-related, ambiguity is never fully out of the question.

Defining the Offshore Voluntary Disclosure Program

Voluntary disclosure is at the cornerstone of the American tax system and is a critical option for those potentially facing significant challenges otherwise. As omitting information willingly from things like international information returns can result in penalties, steep fees, and even criminal charges, coming forward voluntarily with said omitted information often garners a more positive outcome, creating an incentive to speak up, enter into a program, and make wiser choices in the future. Voluntary disclosure rules and regulations alleviate the pressure on those who made a poor choice out of ignorance, confusion, or negligence, supporting taxpayers who could inadvertently (or intentionally, for those who willfully ignore requirements or, worse, actively work against them) find themselves in a world of hurt.

The Offshore Voluntary Disclosure Program, better known as OVDP, was first launched in 2012 and amended in 2014, creating a set of policies most noncompliant foreign asset-holders and tax attorneys now know and appreciate. This process was designed to replace previous versions of offshore disclosure programs launched in 2009 and 2011 respectively. Via this program, those who willfully chose not to follow reporting requirements for assets like foreign bank accounts had a way to forego the risk of criminal penalties by complying with the law and paying all taxes due.

Those who are not willfully noncompliant and thus not at risk for criminal penalties do still have options in place, including the Streamlined Filing Compliance Procedures (SFCP), procedures for delinquent FBAR submissions, or even the process for delinquent international information returns. It is important to note that these processes are still in place, regardless of the withdrawal of OVDP. However, as with the sudden banishment of the OVDP option, there’s no guarantee these conduits will last forever, either. In short? If you’re in non-willful violation and thus not at risk for criminal penalties by speaking up, now is the time to take action.

Moving Forward Without OVDP

The termination of OVDP in September 2018 was a big blow to those living in a land of limbo, terminating the largest and most effective conduit for reducing the likelihood of criminal charges for taxpayers who intentionally disregarded the rules. At the time of the announcement, the alternatives not terribly clear, generating confusion and, in severe cases, panic in affected taxpayers and their representatives. Luckily, the IRS has provided further clarification via a Department of the Treasury memo issued on November 20, 2018 outlining procedures for affected individuals to follow. The IRS has also published a mildly helpful FAQ fact sheet centered around handling the end of the OVDP.

Per the memo, anyone who provides a disclosure that adheres to the restrictions outlined in the fact sheet by the cut off of September 28th, 2018 will have their case treated under existing OVDP rules. However, those who provide returns after this point will be subject to a new course of action that, while significantly less streamlined, is still likely to result in a similar outcome at the end of the process. Taxpayers who do not qualify for the other voluntary disclosure programs due to willful violations are encouraged to make a timely voluntary disclosure, preferably as soon as the updated versions of required forms are available.

For those who are eligible, the following steps will apply. This updated process features coordination between the criminal and civil divisions of the IRS to come to one complete picture of the unique circumstances surrounding a case in order to help a taxpayer avoid as many serious penalties as possible.

Criminal Investigation Procedures

The criminal investigation (CI) element of this updated process is intended to determine the validity of any voluntary disclosure, domestic, offshore, and otherwise. In order to do this, taxpayers who would like to make a disclosure are required to file the newly revised version of Form 14457, Offshore Voluntary Disclosure Letter. IRM will still serve as the basis for evaluating these cases.

A request must be made via mail or fax to the appropriate IRS addresses. Those who fax data should use number (267) 466–1115. All mail for voluntary disclose purposes must be directed to the following address: IRS Criminal Investigation, Attn.: Voluntary Disclosure Coordinator, 2970 Market St., 1-D04–100, Philadelphia, PA 19104.

Taxpayers who are approved must send all disclosure documents, including a copy of revised Form 14457, to CI. In order to do so effectively, taxpayers must provide all information related to noncompliance with IRS protocols, including a narrative that states all related facts of the case at hand, covering all assets, related parties, professional advisors, situational circumstances, and any other information that the CI department may find relevant. For taxpayers who aren’t entirely sure of the extent of noncompliance or who aren’t clear on the ins and outs of a narrative likely to be accepted, professional input on this form is encouraged. It is best to ensure this Form is submitted properly the first time to avoid criminal penalties stemming from an incorrect assumption of the facts.

If the CI accepts the voluntary disclosure, the taxpayer will be noted via letter and all information will be forwarded alone to Large Business and International (LB&I) division in Austin.

Civil Processing

LB&I Austin will gather all information related to the taxpayer’s case and forward it along as appropriate. At this stage, the IRS will not require further information from the taxpayer. If a taxpayer wants to make a payment in relation to the case prior to a ruling by any department of the IRS, this payment can be remitted to LB&I Austin as well.

After receiving data from CI, LB&I Austin will determine the most recent tax year that is covered by the voluntary disclosure. Once this is made clear, the case will be sent to the appropriate Business Operating Division and Exam function to open a civil investigation into the taxpayer’s violations. Once civil examiners receive the information provided by LB&I Austin, further examination steps, like a field assessment, can begin. Any additional controls necessary will be established at this point and may vary from one case to another.

Development of the Taxpayer’s Case

All voluntary disclosures are examined using the same protocols as any other IRS examination, making this part of the process similar to the audit protocols with which many taxpayers are already familiar. Examiners will build a case using standard tools for information gathering and determine all applicable penalties and tax liabilities. During the course of an examination, taxpayers must be fully compliant with requests by the IRS. In general, voluntary disclosure procedures assume that an examination will conclude with a full payment of unpaid tax liabilities, penalties, and interest for all years in the disclosure period. If the taxpayer does not agree to comply with the IRS’ findings, the examiner may choose from a number of penalties, including requesting that CI revoke the preliminary acceptance granted to the taxpayer.

The Framework for Civil Resolution

For voluntary disclosures received by the IRS after the OVDP termination date, September 28th, 2018, a provided framework will be utilized. Per the IRS, this framework can also apply to non-offshore disclosures that were received on or before this date on a case by case basis.

Examiners in the investigation of voluntary disclosure cases are to use the following guidelines to conclude a taxpayer’s unique voluntary disclosure case:

  • Voluntary disclosures are to use a six-year disclosure period, and all examinations will involve evaluation of the six most recent tax years.
  • If disclosures are not remedied by an agreement to pay all determined penalties and liabilities, the examiner has the ability to expand the scope of examination to involve the full extent of noncompliance and all of the penalties that apply.
  • Should a disclosure cover fewer than the six most recent tax years, the disclosure must correct noncompliance of all relevant periods.
  • With the review and consent of the IRS, taxpayers who cooperate with the IRS may be allowed to expand the given disclosure period. There are numerous reasons for which taxpayers may wish for additional years to be included in a review, including the correction of tax issues with other governments that may require additional information or correction of tax issues prior to the sale of an asset or other entity.
  • All returns for the given periods must be submitted by the taxpayer.
  • Examiners are responsible for determining taxes, interest, and penalties according to all existing procedures and tax laws. Penalties will be applied as such:
  • Except as outlined below, the civil penalties under Section 6663 for fraud or Section 6651(f) related to the fraudulent failure to file will be applied to the single tax year with the highest liability.
  • In some circumstances, these civil fraud penalties can be applied to more than one year, including all six years, should the examiner deem it necessary, like if the taxpayer doesn’t agree to pay the sums determined by the examiner in the course of the examination. These penalties can be expanded beyond six years if the examiner finds it appropriate; this is rare, but can happen in instances in which the taxpayer does not cooperate.
  • Willful FBAR penalties will follow the regulations outlined in the Internal Revenue Manual.
  • A taxpayer is permitted to request application of the accuracy-related penalties in Section 6662 rather than civil fraud penalties if the circumstances warrant. This is not likely to be accepted frequently and the taxpayer must present significant evidence as to why civil penalties should not be imposed in order to take this route.
  • While a failure to file penalty likely applies in most, if not all, cases, it is not automatically applied and is instead up to the examiner based on other penalties.
  • Other possible penalties, like those that apply to excise taxes, estate and gift tax, or employment taxes will be determined as needed.
  • An appeal with the Office of Appeals is permitted on a case by case basis, such as if the taxpayer disagrees with the conclusions found by the examiner.
  • If a taxpayer chooses not to cooperate with the civil disposition, the IRS permits examiners to request a revocation of the taxpayer’s acceptance into the voluntary disclosure program by CI. This is a possibility for those who do comply with the civil examiner’s determinations. Taxpayers are encouraged strongly to avoid this result as criminal penalties may apply if the revocation is granted.

The IRS published their memo prior to releasing all updated all necessary forms, but promises to revise all applicable passages in the Internal Revenue Manual within two years of memo publication.

Next Steps for Affected Taxpayers

As the IRS has illustrated, the process left behind in the wake of OVDP’s termination is, effectively, very little true process at all. Gone is the safety net of protections put in place by OVDP 2014, leaving behind a less clear outcome that may or may not come with civil fraud penalties of one sort or another. Taxpayers possibly affected are essentially required to move through the standard voluntary disclosure procedures for criminal protections to mitigate the risk of facing fines or jail time, and those who take this option can likely expect a long and drawn-out civil investigation. Taxpayers in particular jeopardy are encouraged to look at FBAR minimization strategies and any potential arguments for reasonable cause to reduce the likelihood of a truly poor outcome coming to pass. Those considering this route are encouraged to provide as much information as possible and cooperate fully with the IRS. As is clearly stated above, failure to cooperate can lead to additional penalties or even a revocation of program acceptance. In these cases, the taxpayer’s fate is entirely in the IRS’ hands.

The best advice for taxpayers in all situations, whether international holdings are in play or not, is to follow the IRS’ policies to the letter. With the end of OVDP, it’s clear that the IRS is willing to pull protections previously in place whenever it is convenient to do so, putting taxpayers who don’t have any regard for the law in further jeopardy. However, if it’s too late for that, the sooner corrective action can be taken, the better. The last thing any taxpayer with a shady history of submitting international information returns should want is the IRS to find out about omissions independently — in which case, the results would be far, far worse. After all, civil penalties identified in a voluntary disclosure case are one thing; criminal penalties that may include fines and jail time are certainly another.



Michael DeBlis

Michael is an attorney specializing in entertainment law and a professionally-trained actor. He is a partner in the law firm of DeBlis Law.