With its special agent ranks significantly depleted after years of budget cuts, the Criminal Investigation Division of the Internal Revenue Service announced this week that it is hiring new special agents. IRS-CI is responsible for investigating potential criminal violations of the tax laws and related financial crimes, and it currently has barely 2,000 special agents to carry out this critically-important mission, not just in the U.S. but across the globe. The job posting for IRS special agents was unveiled on February 11, 2019, and it will remain open for only five business days.

IRS-CI has been particularly hard hit by the years of reduced Congressional appropriations for the agency as a whole, as well as by retirements of veteran agents. From an all-time high of 3,363 special agents in 1995, the total number of special agents decreased precipitously over the next two decades. The following graphic – reproduced from IRS-CI Annual Report for 2016 – tells the story:

In FY2017, the number of special agents dropped further, to 2,159, and in FY2018, the number dipped to 2,019.

The hiring of new classes of IRS special agents will not, however, result in an immediate increase in the number of criminal investigations and prosecutions for tax crimes. New special agents undergo an extensive six-month training program at the Federal Law Enforcement Training Center in Glynco, Georgia. And some experienced special agents will be pulled from the field in order to help train the new recruits. As a result, this new hiring initiative may in fact lead to a reduction in new criminal investigations, at least in the short term. Nevertheless, it is good news that IRS-CI has the funding to hire a new crop of special agents and this development should be welcomed by practitioners and law-abiding taxpayers alike. Tax evaders, on the other hand, should take heed.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

As part of its continuing guidance to taxpayers and practitioners about how its resumption of activities following the government shutdown is impacting pending matters, the Internal Revenue Service has published Frequently Asked Questions (entitled “Appeals Resumption FAQs“) regarding cases pending in IRS Appeals.  These FAQs provide information regarding the shutdown’s effect on Appeals hearings, Appeals correspondence, and communications with Appeals Officers.  The text of those FAQs follows:

1. How soon will Appeals hearings resume?

Once Appeals Officers have reviewed mail, voice messages, the status of their assigned inventory and completed administrative tasks to restart operations, they will begin to re-establish contact and schedule hearings. This process will take several business days to complete.

2. My Appeals hearing was cancelled prior to the shutdown. When will it be rescheduled?

After completing the assessment of their assigned inventory, your Appeals Officer will reach out to you to reschedule your hearing.  It will take several business days before your Appeals Officer is able to reach out to their assigned taxpayers.

3. My Appeals hearing was scheduled for one of the days when the government was shutdown.  I have not heard from my Appeals Officer.  What should I do?

Since your Appeals Officer was furloughed during the shutdown, they were prohibited from performing their duties. Once your Appeals Officer has completed a review of their inventory, they will reach out to you to reschedule your hearing. This process will take several business days to complete.

4. I left a message for my Appeals Officer but have not received a call back.

Since your Appeals Officer was furloughed during the shutdown, they were prohibited from performing their duties. Upon their return, your Appeals Officer will assess the status of their inventory.  Your Appeals Officer will retrieve their messages and return calls, but it may take several business days before he or she is able to reach out. If you have not heard after several days, place another call to the Appeals Officer.

5. When can I call my Appeals Officer to discuss my case?

Each Appeals Officer will reach out to their assigned taxpayers after they review and assess the status of their assigned inventory.  This may take several days.  In the meantime, you can reach out to your Appeals Officer during normal business hours.

6. I received a correspondence from my Appeals Officer giving me a deadline to respond.  I was unable to respond due to the shutdown. How should I proceed?

If you have additional information, you should send the information to your Appeals Officer immediately and call them to discuss options.  Your Appeals Officer will also be reaching out to you to re-establish contact before they take additional actions on your case.  At that time, they will discuss any information still needed.  It will take several days for your Appeals Officer to contact all of their assigned taxpayers.

7. I received a Statutory Notice of Deficiency during the shutdown.  What should I do?

On cases where Appeals issued a Statutory Notice of Deficiency, the notice sets forth the time parameters you have to petition the Tax Court if you want to protest the adjustments. Please review this carefully.  If you agree with the adjustments, you can sign and return it to the Appeals Officer. If you feel you received the Notice of Deficiency in error, you should contact the Appeals Officer immediately.

8. I requested an Appeals hearing but have not heard from Appeals.

If you submitted a request for Appeals consideration on your case, contact the IRS office that offered the Appeals request for an update on the status. If the IRS office states that your request was sent to the Office of Appeals and you have not received anything from Appeals after 60 days after the government has reopened, call Appeals Customer Service at 559-233-1267.

9. I filed a petition with the Tax Court during the government shutdown. What happens next?

We recognize it will take time for the Tax Court to work through its backlog of petitions needed to be served on the IRS. You should check with the Tax Court’s website for the latest updates and news from the court.

10. I received a Form 872, Consent to Extend the Time to Assess Tax, from my Appeals Officer. It was mailed prior to the shutdown, but I received it after the shutdown started.  What are my options?

The Form 872, Consent to Extend the Time to Assess Tax, was solicited to allow additional time for you and your Appeals Officer to address issues still open in the Appeals hearing. Included with Form 872 you also received Publication 1035.  Publication 1035 provides guidance and explains your options. If you have additional questions beyond those in the publication, you should contact your assigned Appeals Officer.  Your Appeals Officer will also be reaching out to you to discuss the process, but this may take several business days to accomplish.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

As part of its continuing guidance to taxpayers and practitioners about how its resumption of activities following the government shutdown is impacting pending matters, the Internal Revenue Service has published Frequently Asked Questions (entitled “IRS Update on Shutdown Impact on Tax Court Cases; Important Information for Taxpayers, Tax Professionals with Pending Cases“) regarding Tax Court activities.  These FAQs provide information regarding the shutdown’s effect on Tax Court proceedings, including mail being returned and issues with petitions not being processed.  The text of those FAQs follows:

What should I do if a document I mailed or sent to the Tax Court was returned to me?

The Tax Court website indicates that mail sent to the court through the U.S.  Postal Service or through designated private delivery services may have been returned undelivered.  If a document you sent to the Tax Court was returned to you, as the Tax Court website indicates, re-mail or re-send the document to the Court with a copy of the envelope or container (with the postmark or proof of mailing date) in which it was first mailed or sent. In addition, please retain the original.

My case was calendared for trial.  What does the Tax Court’s closure mean for my pending case?

The Tax Court canceled trial sessions for January 28, 2019 (El Paso, TX; Los Angeles, CA; New York, NY; Philadelphia, PA; San Diego, CA; and Lubbock, TX), February 4, 2019 (Hartford, CT; Houston, TX; San Francisco, CA; Seattle, WA; St. Paul, MN; Washington, DC; and Winston-Salem, NC) and February 11, 2019 (Detroit, MI; Los Angeles, CA; New York, NY; San Diego, CA; and Mobile, AL). The Tax Court will inform taxpayers who had cases on the canceled trial sessions of their new trial dates.

The Tax Court’s website indicates that it will make a decision about the February 25, 2019 trial sessions (Atlanta, GA; Chicago, IL; Dallas, TX; Kansas City, MO; and Philadelphia, PA) on or before February 7, 2019. Taxpayers with cases that are scheduled for trial sessions that have not been canceled or that have not yet been scheduled for trial should expect their cases to proceed in the normal course until further notice.

If my case was on a canceled trial session, when will I have an opportunity to resolve my case with Appeals or Chief Counsel after the government reopens?

After the IRS and Chief Counsel reopen, we will make our best efforts to expeditiously resolve cases.

Where can I get more information about my Tax Court case?

If someone is representing you in your case, you should contact your representative. In addition, the Tax Court’s website is the best place for updates.  The IRS Chief Counsel and Appeals personnel assigned to your case may be furloughed and will not be available to answer your questions until the government reopens.  In addition, The American Bar Association (ABA) is conducting a webinar on January 28, 2019, and you can get more information from the ABA Tax Section website. Taxpayers seeking assistance from Low Income Taxpayer Clinics (LITCs) can find a list of LITCs on the Tax Court’s website.

During the shutdown, does interest continue to accrue on the tax that I am disputing in my pending Tax Court case?

Yes. To avoid additional interest on the tax that you are disputing in your pending Tax Court case, you can stop the running of interest by making a payment to the IRS.  Go to www.irs.gov/payments for payment options available to you.  The IRS is continuing to process payments during the shutdown.

What should I do if I received a bill for the tax liability that is the subject of my Tax Court case?

If you receive a collection notice for the tax that is in dispute in your Tax Court case, it may be because the IRS has not received your petition and has made a premature assessment.  When the government reopens, the IRS attorney assigned to your case will determine if a premature assessment was made and request that the IRS abate the premature assessment.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

As part of its guidance to taxpayers and practitioners about how its resumption of activities this week following the government shutdown is impacting pending matters, the Internal Revenue Service has published Frequently Asked Questions (entitled “Collection Resumption FAQs“) regarding collection activities.  These FAQs provide information regarding the shutdown’s effect on liens, levies, notices of deficiency, penalties, passports, and private debt collection.  The text of those FAQs follows:

IRS employees returned to work on January 28, 2019 and resumed activities. Upon their return to the office, they will begin to review mail, voice messages, and their audit and collection files as well as completing administrative tasks to reopen operations.

1. I received a Statutory Notice of Deficiency during the shutdown.  What should I do?

On cases where the statute of limitations was nearing expiration, the IRS issued a Statutory Notice of Deficiency to protect the government’s interest.  If you received a Notice, you have 90 days to petition the Tax Court if you want to protest the adjustments.  If you agree with the adjustments in the report, you can sign and return the report.  If you feel you received the Notice in error, you should contact the person listed on the letter or your assigned auditor.

2. Will failure to pay and failure to file penalties be abated during the shutdown period?

The lapse in federal appropriations during the government shutdown did not affect the federal tax law. Individuals and businesses were required to keep filing their tax returns and making payments with the IRS. Failure to pay and failure to file penalties are charged on tax from the due date of the return until the date of payment. Taxpayers who make their deposits and payments in-person at an IRS Taxpayer Assistance Center and were unable to do so due to the shutdown can file a request that the penalty be abated for reasonable cause.

3. How does the shutdown period affect my repayment plan with my Revenue Officer (RO)? I was working with the RO towards an installment agreement.

Once your revenue officer has reviewed mail, voice messages, the status of their assigned inventory and completed administrative tasks to restart operations, they will begin to reestablish contact to work with you towards resolution of your tax account issue.  This process will take several business days to complete.

4. I missed an appointment with my Revenue Officer, am I going to be penalized?

Because your Revenue Officer was furloughed during the shutdown, they were prohibited from performing their duties. Once your Revenue Officer has completed a review of their inventory, they will reach out to you to reschedule your appointment. This process will take several business days to complete.

5. I needed to make a payment and provide information to my assigned Revenue Officer during the shutdown period, I was unable to do so, will this affect me?

No. Since your Revenue Officer was furloughed during the shutdown, they were prohibited from performing their duties. Your assigned Revenue Officer will work with you to secure the necessary information to move your case forward to resolution.  In the meantime, you can reach out to your Revenue Officer during normal business hours.

6. If a Notice of Levy has been issued/received, who should I contact?

Please use the telephone number provided on the notice.

7. I filed a request for a notice of discharge and I have an imminent closing.  Is there contact information available?

For additional information regarding a request for discharge, you can refer to Publication 4235 to find your local Collection Advisory Office for lien issues.

8. Where should questions regarding lien release/withdrawal issues be directed?

For additional information regarding a lien release or withdrawal issue, you can refer to Publication 4235 to find your local Collection Advisory Office.

9. My case is assigned to a Private Collection Agency (PCA) contracted by the IRS. How soon can I expect to be contacted?

The PCAs are currently working through correspondence and incoming voice messages received during the shutdown. We anticipate that the PCAs will begin to reestablish contact with taxpayers no later than Friday, February 1st, 2019.   If you have a prior-established payment arrangement with a PCA, you should continue to make your regular payments as previously agreed.

10. My passport application was denied because of delinquent tax debt. What should I do?

Contact the IRS at 1-855-519-4965 (International callers 1-267-941-1004) to make arrangements to resolve your tax debt, or to provide information and receive assistance if you have already resolved the debt. Visit irs.gov/passport for more information about passport denial due to Federal tax debt.

11. I submitted a request for a Collection Due Process (CDP) hearing but have not heard from anyone.  What should I do?

We will be processing CDP requests received.  Since work has resumed, you can expect to be contacted soon.  If you have any questions or concerns, you can contact the office where you submitted your hearing request.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

We wrote yesterday that the Internal Revenue Service has issued guidance to taxpayers and practitioners about how the agency’s resumption of activities this week following the government shutdown is impacting pending matters, such as audits, collection cases, and Tax Court cases.  With respect to pending audits, the IRS has published helpful Frequently Asked Questions (entitled “Exam Resumption FAQs“) about a variety of issues impacted by the shutdown.  The text of those FAQs follows:

IRS employees returned to work on January 28, 2019 and resumed activities. Upon their return to the office, they will begin to review mail, voice messages, and their audit and collection files as well as completing administrative tasks to reopen operations.

1. I sent documents to my auditor but have not heard back.  What should I do?

Your auditor will be reviewing mail they have received and will reach out to you to re-establish contact. It may take several business days before your auditor is able to make contact.

2. I planned on sending material to my auditor but did not do so since the government was shut down. What should I do now?

If you have assembled the material requested, you can immediately send the material to your auditor. You may call your auditor to discuss any items on your document request if you need clarification.  Your auditor will also be reaching out to you to re-establish contact in the next several business days.  During this contact, your auditor will be able to answer questions you have and will address the timeframe on when the requested information is due.

3. I sent my signed audit report and a check to my auditor during the shutdown. How do I know if they were received?

Once your auditor has completed their initial review of their inventory and associated mail received with each audit, the auditor will reach out to you to confirm that they received your agreement and check.

4. How soon will examinations resume?

Once auditors have reviewed mail, voice messages, the status of their assigned inventory and completed administrative tasks to restart operations, they will begin to re-establish contact. This process will take several business days to complete.

5. My audit appointment was cancelled prior to the shutdown. When will it be rescheduled?

After completing the assessment of their assigned inventory, your examiner will reach out to you to reschedule your appointment.  It will take several business days before your auditor is able to reach out to their assigned taxpayers.

6. My audit appointment was scheduled for one of the days when the government was shutdown.  I have not heard from my auditor.  What should I do?

Since your auditor was furloughed during the shutdown, they were prohibited from performing their duties. Once your auditor has completed a review of their inventory, they will reach out to you to reschedule your appointment. This process will take several business days to complete.

7. I left a message for my auditor but have not received a call back.

Since your auditor was furloughed during the shutdown, they were prohibited from performing their duties. Upon their return, your auditor will assess the status of their inventory.  Your auditor will retrieve their messages and return calls, but it may take several business days before he or she is able to reach out.

8. When can I call my auditor to discuss my audit?

Each auditor will reach out to their assigned taxpayers after they review and assess the status of their assigned inventory.  This may take several days.  In the meantime, you can reach out to your auditor during normal business hours.

9. I received an audit report from my auditor giving me 10 days to respond.  I was unable to respond due to the shutdown. How should I proceed?

If you have additional information, you should send the information to your auditor or call them to discuss options.  If you agree with the report, you can sign the report and return it to your auditor.  Your auditor will also be reaching out to you to re-establish contact before they take additional actions on your case.  At that time, they will discuss any information still needed.  It will take a number of days for your auditor to contact all of their assigned taxpayers.

10. I received a 30-day letter asking for my position on audit issues.  Will the time limit be extended due to the shutdown?

If you are unable to meet the original due date, you may contact your assigned auditor to discuss options. Your auditor will also be reaching out to you to re-establish contact before taking additional actions on your case.

11. I received a Statutory Notice of Deficiency during the shutdown.  What should I do?

On cases where the statute of limitations was nearing expiration, the IRS issued a Statutory Notice of Deficiency to protect the government’s interest.  If you received a Notice, you have 90 days to petition the Tax Court if you want to protest the adjustments.  If you agree with the adjustments in the report, you can sign and return the report.  If you feel you received the Notice in error, you should contact the person listed on the letter or your assigned auditor.

12. I filed a petition with the Tax Court during the government shutdown. What happens next?

We recognize it will take time for the Tax Court to work through its backlog of petitions needed to be served on the IRS.  The IRS will only make assessments when the legal assessment period (statute of limitation) is near expiration.  For cases in which the legal assessment period (statute of limitation) is not nearing its expiration, the IRS will delay defaulting those Notices and making assessments for the period in which the Tax Court needs to work through its backlog of petition.

13. I received a Form 872, Consent to Extend the Time to Assess Tax, from my auditor. It was mailed prior to the shutdown, but I received it after the shutdown started.  What are my options?

The Form 872, Consent to Extend the Time to Assess Tax, was solicited to allow additional time for you and your auditor to address issues still open on your exam. Included with Form 872 you also received Publication 1035.  Publication 1035 provides guidance and explains your options. If you have additional questions beyond those in the publication, you should contact your assigned auditor.  Your auditor will also be reaching out to you to discuss the process, but this may take several business days to accomplish.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

The Internal Revenue Service reopened for business on Monday, January 28, 2019, after having been closed for over one month as a result of the federal government shutdown.  On the same day, the IRS opened the 2019 tax filing season.  Anticipating an avalanche of questions and inquiries from taxpayers about how the shutdown affected pending audits, collection activities, Tax Court cases, and the nascent filing season, the IRS has published helpful information, including Frequently Asked Questions for each of these areas, for taxpayers and practitioners.  The text of the IRS notice is as follows:

The IRS has reopened following the end of the government shutdown, and IRS employees are working hard to resume normal operations and help taxpayers as much as possible.

As the IRS resumes operations, there are some important pieces of information for taxpayers and tax professionals to keep in mind in several areas:

Audits. For taxpayers and tax professionals with questions about examinations affected by the shutdown, we have Frequently Asked Questions.

Collections. For taxpayers and tax professionals with a collection issue affected by the shutdown, visit the Frequently Asked Questions.  This section includes information related to liens, levies, notices of deficiency, penalties, passports and private debt collection.

Tax Filing for individuals. The IRS successfully opened the 2019 filing season for taxpayers on Jan. 28. The IRS will be doing everything it can to have a smooth tax season and minimize the impact on taxpayers.

Tax Court. Important updated information  for taxpayers and tax professionals with Tax Court cases, including mail being returned and issues with court petitions not being processed.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

January 28, 2019Alerts

Following the termination last fall of its immensely successful Offshore Voluntary Disclosure Program (OVDP), the Internal Revenue Service (IRS) has announced a new regime to govern all voluntary disclosures regarding tax noncompliance. These new procedures apply to both domestic and offshore voluntary disclosures, and in many ways they replicate the procedures under the now-shuttered OVDP.

In other ways, the new procedures are significantly different, particularly the new civil penalty framework. Taxpayers who now take advantage of the updated voluntary disclosure program will potentially face a 50 percent penalty on their undisclosed offshore financial assets, and a 75 percent civil fraud penalty on the unpaid taxes, and both of these penalties can, in certain circumstances, be applied for multiple years. In addition, the new procedures place greater emphasis on taxpayer cooperation during the voluntary disclosure process, and make clear that non-cooperative taxpayers may face greater penalty exposure. This significantly more stringent penalty framework may well cause some taxpayers to question whether the new program is worth the price of admission, especially when other voluntary disclosure options continue to exist.

Voluntary Disclosure Background

The IRS has for years maintained a self-disclosure regime whereby taxpayers can voluntarily disclose instances of noncompliance with the tax laws and in most cases avoid criminal prosecution. The critical underlying principal of voluntary disclosure is that the taxpayer must self-disclose before the IRS learns of the noncompliance; if the IRS already knows of the taxpayer’s noncompliance from whatever source (for example, from third-party reporting or a whistleblower), the taxpayer is ineligible to make a voluntary disclosure.

In March 2009, following the landmark agreement regarding offshore tax evasion struck by the United States with Switzerland’s largest bank, UBS AG, the IRS unveiled its now-famous “Offshore Voluntary Disclosure Program.” This was a specially-designed voluntary disclosure program – premised upon the IRS’s longstanding voluntary disclosure practice – for taxpayers with secret foreign bank accounts and other types of offshore financial assets. Participating taxpayers were required to file eight years of amended tax returns and to pay all back taxes, interest, and a “miscellaneous” offshore penalty calculated at 20 percent of the aggregate highest balance of undisclosed offshore financial assets. The IRS subsequently announced various modifications to the OVDP in 2011, 2012, and 2014, with the primary change each time consisting of an elevation of the penalty rate, which ultimately reached 27.5 percent in the 2014 iteration. In addition, under certain circumstances, the miscellaneous penalty could be elevated to 50 percent if the taxpayer maintained an account at a financial institution, or did business with an offshore service provider, identified on a list maintained by the IRS.

The OVDP was designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due associated with those assets. The OVDP provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using other options, including the Streamlined Filing Compliance Procedures, the delinquent FBAR submission procedures, or the delinquent international information return submission procedures.

By the time the OVDP ended in September 2018, more than 56,000 taxpayers successfully completed the program, paying more than $11.1 billion in back taxes, penalties and interest. The total number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 individuals came forward. In addition, more than 65,000 taxpayers took advantage of the Streamlined Filing Compliance Procedures, a related voluntary disclosure initiative unveiled in 2014 as an alternative to OVDP for taxpayers whose conduct was non-willful. Collectively, the OVDP and the Streamlined Filing Compliance Procedures represented the most successful voluntary disclosure program ever offered by the IRS, far eclipsing all prior initiatives. Participation in OVDP declined in recent years, however, with only 600 disclosures occurring during 2017, prompting the IRS to announce that the program would close as of September 28, 2018.

Highlights of the New Voluntary Disclosure Regime

On November 20, 2018, the IRS announced the new voluntary disclosure procedures by releasing publicly a five-page internal guidance memorandum. These new procedures are effective for all voluntary disclosures – both offshore and domestic – received after September 28, 2018. The objective of the new voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution. The guidance emphasizes that taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the Streamlined Filing Compliance Procedures or by filing an amended or past due tax return.

Preclearance by IRS-Criminal Investigation

As with the OVPD, IRS-Criminal Investigation will screen all voluntary disclosure requests (whether domestic or offshore) to determine if a taxpayer is eligible to make a voluntary disclosure. To do so, the IRS will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. Internal Revenue Manual section 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility. If IRS-CI determines that the taxpayer satisfies the voluntary disclosure requirements, it will issue a “preclearance letter” to the taxpayer.

For all cases where IRS-CI grants preclearance, taxpayers must then promptly submit all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance. Once IRS-CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, it will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the IRS Large Business & International unit in Austin, Texas, for case preparation before examination. As with the OVDP, IRS-CI will not process tax returns or payments.

Civil Processing and Case Development

Once the LB&I Austin unit receives information from IRS-CI, it will route the case for audit. If a taxpayer or representative wishes to make a payment prior to case assignment with an examiner, payments may be remitted to the LB&I Austin unit. The LB&I Austin unit will select the most recent tax year covered by the voluntary disclosure for examination and then forward cases for case building and field assignment to the appropriate Business Operating Division and Exam function for civil audit. All voluntary disclosures will follow standard audit procedures. Examiners will be required to develop cases, use appropriate information-gathering tools (such as Information Document Requests and summonses, as appropriate), and determine proper tax liabilities and applicable penalties.

Six-Year Disclosure Period in Most Cases

In general, voluntary disclosures will include a six-year disclosure period, which means that participating taxpayers will be required to file corrected tax returns for the most recent six-year period, even if their tax noncompliance covered a greater period of time. However, IRS agents have the discretion to expand the disclosure period to cover additional years – including what the IRS calls “the full duration of the noncompliance” – if the taxpayer refuses to resolve the audit by agreement. In addition, cooperative taxpayers may be allowed to expand the disclosure period to include additional tax years in the disclosure period for various reasons (such as correcting tax issues with other tax authorities that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, or correcting tax issues relating to unreported taxable gifts in prior tax periods).

Importance of Taxpayer Cooperation

The new voluntary disclosure procedures are notable for the emphasis they place on taxpayer cooperation, and perhaps more importantly, the consequences to taxpayers of non-cooperation. The IRS’s historical voluntary disclosure process has always required taxpayer cooperation, specifying that “[a] voluntary disclosure occurs when the communication is truthful, timely, complete, and when . . . the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability.” Similarly, the OVDP required taxpayer cooperation as a condition of participating in the program, which included making full disclosure of all offshore assets; agreeing to extend the applicable statutes of limitations; and fully paying all back taxes, interest, and penalties, or making satisfactory payment arrangements.

Under the new procedures, taxpayer cooperation takes on greater significance, and by “cooperation” the IRS means more than just making full disclosure of offshore assets, extending the time to assess, and arranging for payment. Rather, the extent of a taxpayer’s cooperation (or lack thereof) will have a direct bearing on the type and magnitude of penalties to be asserted. The new guidance states that the IRS expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In other words, taxpayers are expected to assent to all adjustments that result from the audit, and not to exercise their legal rights to contest audit adjustments and seek review by IRS Appeals. In particular, taxpayers are warned that in cases that are not resolved by agreement (and the taxpayer exercises his or her right to take the case to Appeals), the agent “may assert maximum penalties under the law with the approval of management” and may expand the disclosure period beyond six years. Also, if a taxpayer fails to cooperate with the civil examination, the examiner may request that IRS-CI revoke preliminary acceptance, potentially triggering the opening of a criminal investigation.

Penalty Framework

The new voluntary disclosure procedures make clear that the nature and extent of penalties to be assessed will in large part be a function of the taxpayer’s cooperation during the process. As noted above, taxpayers whose cases that are not resolved by agreement can face “maximum penalties under the law.” On the other hand, taxpayers who provide “prompt and full cooperation during the civil examination of a voluntary disclosure” are entitled to civil penalty mitigation.

The following penalty terms will be applied to taxpayers who make timely voluntary disclosures and who fully cooperate with the IRS during the voluntary disclosure process:

Civil Fraud Penalty
The civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. In limited circumstances, the IRS may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. The IRS may assert the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement. The new procedures provide that taxpayer may request imposition of accuracy-related penalties under I.R.C. § 6662 instead of civil fraud penalties, although granting such requests is expected to be exceptional. Where the facts and the law support the assertion of the civil fraud FBAR penalty, a taxpayer must present convincing evidence to justify why such penalty should not be imposed.

FBAR Penalty
Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines contained in the Internal Revenue Manual, which include mitigation guidelines that permit the IRS to reduce FBAR penalties if certain criteria are met. Taxpayers may request that the IRS impose non-willful FBAR penalties, but granting such requests is expected to be exceptional, and taxpayers must present convincing evidence to justify lower penalties.

Information Return Penalties
The new voluntary disclosure procedures provide that penalties for failure to file information returns will not be automatically imposed. This is a positive development for taxpayers, as the penalties for not filing information returns such as Forms 5471 (requiring disclosure of ownership of foreign corporations), Forms 8938 (requiring disclosure of foreign financial assets), and Forms 3520 (requiring disclosure of information regarding foreign trusts), can be significant, especially if the taxpayer’s noncompliance spans multiple years. The procedures provide that agents will exercise discretion as to these types of penalties and will take into account the application of other penalties (such as the civil fraud penalty and the willful FBAR penalty) and the extent of the taxpayer’s cooperation.

Other Penalties
Other types of penalties, such as those relating to excise taxes, employment taxes, and estate and gift taxes, will be handled based upon the facts and circumstances with IRS agents coordinating with appropriate subject matter experts.

Ability to Request an Appeal

In a break from prior practice under the OVDP, the new voluntary disclosure procedures provide that taxpayers retain the right to request an appeal with the IRS Office of Appeals. Taxpayers accepted into the OVDP were not permitted to request an appeal under any circumstances; the only recourse for taxpayers who did not wish to accept the OVDP civil resolution terms was to “opt-out” of the program and face a full-scope audit. The ability to take an appeal is another positive development for taxpayers under the new voluntary disclosure procedures, but this is a double-edged sword. It appears that taxpayers who exercise their appeal rights – one of the fundamental rights enumerated in the “Taxpayer Bill of Rights” – will be deemed non-cooperative and can face imposition of greater penalties than taxpayers who agree to resolve their voluntary disclosure cases and do not appeal.

Application of the New Civil Penalty Framework

As noted, the new voluntary disclosure procedures are described in a five-page internal guidance memorandum released in November. The IRS has not yet published any additional guidance on how the new program will work in practice, such as Frequently Asked Questions which were a large part of the OVDP and largely helpful to taxpayers and practitioners.

At the American Bar Association’s National Institute on Criminal Tax Fraud and National Institute on Tax Controversy in December 2018 – held only a few weeks after the IRS issued the new voluntary disclosure guidance – an attorney from the IRS Office of Chief Counsel presented the following three scenarios to illustrate how the new voluntary disclosure penalty framework will be applied to various fact patterns.

Hypothetical 1

Taxpayer 1 is a US citizen who lives in California, but he was born in Italy and lived in Italy for parts of his adult life. Taxpayer 1 has several bank accounts in Italy and a Swiss bank account established by his grandfather’s estate for Taxpayer l’s inheritance. Taxpayer 1 accessed the Swiss account and never informed the Swiss bankers of his US citizenship. Taxpayer 1 had no interests in or control over any foreign entities. He intentionally did not tell his return preparer about his foreign bank accounts and checked “no” to the question about having foreign bank accounts on Schedules B filed with his tax returns.

Taxpayer 1 fully cooperates with the civil examination. The examiner asserts the civil fraud penalty for one year and a willful FBAR penalty totaling 50% of the highest aggregate balance in all foreign bank accounts.

This scenario represents what appears to be a relatively straightforward case of willful conduct by the taxpayer, as evidenced by the taxpayer’s deliberate concealment of his offshore accounts from his return preparer and his “no” answer to the question about foreign bank accounts on Schedule B. The taxpayer is cooperative during the examination, and presumably resolves the audit by agreement (and does not request an appeal). Because the taxpayer’s conduct was willful, the IRS revenue agent asserted a one-year civil fraud penalty and a one-year willful FBAR penalty.

Hypothetical 2

Taxpayer 2 owns a restaurant in Dallas as a sole proprietorship. Taxpayer 2 reports all credit card receipts, but only 20% of cash receipts. Taxpayer 2 kept a second set of books tracking his actual income. Taxpayer 2 had no other tax or information reporting noncompliance. Taxpayer 2 used the unreported cash to pay various personal expenditures and to buy gold bullion. Taxpayer 2 accumulated $2 million in gold bullion in his personal safety deposit box over the last 10 years with his cash skimming scheme. In Taxpayer 2’s voluntary disclosure letter to CI he expresses willingness to sell his bullion to pay all outstanding tax liabilities if he doesn’t have sufficient liquid assets to pay his taxes. Taxpayer 2 fully cooperates including providing his second set of books tracking his actual income to the examiner. The examiner asserts the civil fraud penalty for one tax year.

This scenario, which involves solely domestic conduct, demonstrates the value that the IRS will place on taxpayer cooperation during the voluntary disclosure process. The scenario presents numerous examples of fraudulent conduct by the taxpayer, including a typical “cash skim,” maintaining a second set of books, payment of personal expenses, and accumulation of a “cash hoard” (albeit in the form of gold bullion). Outside of the voluntary disclosure process, an IRS agent would undoubtedly assert the civil fraud penalty for multiple years. Because this is a voluntary disclosure case, the civil fraud penalty is limited to a single year, a significant concession to the taxpayer.

Hypothetical 3

Taxpayer 3 is a US citizen who lives in New York. Taxpayer 3, through nominees, owned 100% of a Panamanian corporation that held several foreign financial accounts in Singapore and interests in two businesses in China. Taxpayer 3 willfully and fraudulently failed to disclose his ownership of the CFC and his control over the foreign financial accounts. Taxpayer 3 actively traded securities and held mutual funds in one of the foreign financial accounts. During the course of the examination, Taxpayer 3 and the IRS cannot agree on the proper PFIC tax calculations for the last three years of the six-year disclosure period and transition tax under Section 965. Taxpayer 3’s positions on the issues are made in good faith and are non-frivolous. The examiner and her manager coordinated the issues internally and disagree with Taxpayer 3. Although agreement is not reached on those years, Taxpayer 3 fully cooperates throughout the examination including providing all documents requested and answering questions in an interview. Taxpayer 3 requests review by the Office of Appeals. The examiner asserts the civil fraud penalty for the last three years of the disclosure period and a willful FBAR penalty totaling 65% of the highest aggregate balance in all foreign bank accounts.

This scenario presents the most objectionable application by the IRS of the new voluntary disclosure penalty framework. The taxpayer’s conduct in this hypothetical is unquestionably willful, as evidenced by the taxpayer’s use of nominees to hold offshore accounts in tax haven countries and deliberate concealment of ownership of a controlled foreign corporation and control over foreign accounts. During the audit, the taxpayer fully cooperates but cannot reach an agreement with the agent as to a technical issue relating to application of the highly complex passive foreign investment company (PFIC) rules. The audit is resolved on an unagreed basis, and the taxpayer exercises his legal right to review by IRS Appeals. Despite the taxpayer’s assertion of a good faith, non-frivolous position regarding the PFIC issue, the IRS agent asserts a whopping array of penalties consisting of three years of civil fraud (a 225-percent penalty in total) and multiple willful FBAR penalties that total 65 percent in the aggregate. Taxpayers should not be punished for asserting good-faith legal positions and seeking review by IRS Appeals, but this scenario makes clear that taxpayers who do so may face what can only be described as retaliatory penalty assertions by IRS agents.

Other Voluntary Disclosure Options Still Exist

It is important to note that the new voluntary disclosure regime unveiled in November is not the only pathway for noncompliant taxpayers. Other viable, and less expensive, voluntary disclosure options still remain available depending, of course, on individual facts and circumstances. As noted, the highly-popular Streamlined Filing Compliance Procedures may still be used by taxpayers whose conduct was non-willful. For taxpayers whose only noncompliance was omission of certain information returns, the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures are good options. Finally, although the IRS discourages the practice, taxpayers may still make so-called “quiet” disclosures by filing amended tax returns and following the procedures described in section 9.5.11.9 of the Internal Revenue Manual.

Conclusion

The new IRS voluntary disclosure regime is a mixed bag for taxpayers and practitioners. On the one hand, they should be welcomed by taxpayers and practitioners because they make clear that voluntary disclosure practice for both domestic and offshore issues is alive and well despite closure of the OVDP. On the other hand, the new procedures dramatically increase the range of available penalties as compared to OVDP and authorize IRS revenue agents ostensibly to punish non-cooperating taxpayers by significantly ratcheting up the potential penalty exposure, even when taxpayers assert good faith positions and/or seek to exercise their appeal rights. The increased price of admission may well discourage taxpayers from making formal voluntary disclosures and instead drive taxpayers into using other options, such as the Streamlined Filing Compliance Procedures or quiet disclosures.

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According to a notice posted on its website over the weekend, the United States Tax Court will reopen for business and resume full operations tomorrow morning, January 28, 2019.  The Tax Court has been closed for nearly one full month due to the federal government shutdown.  The website further notes that trial sessions scheduled for the weeks of January 28, February 4, and February 11 have been cancelled.  The February 25 trial sessions will proceed as scheduled.

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On December 28, 2018, at 11:59 p.m., the United States Tax Court closed its doors in light of the federal government shutdown, and has not reopened for business since then. The closure of Tax Court has caused significant concern to many taxpayers and professionals regarding the filing of petitions, the status of scheduled trials, and collection activity, among other issues.

Today, as the president was announcing a deal to temporarily reopen the government, the IRS published a list of frequently asked questions to provide answers to taxpayers and tax professionals about Tax Court cases during the current appropriations lapse. The text of the FAQs follows:

What should I do if a document I mailed or sent to the Tax Court was returned to me?

The Tax Court website indicates that mail sent to the court through the U.S. Postal Service or through designated private delivery services may have been returned undelivered. If a document you sent to the Tax Court was returned to you, as the Tax Court website indicates, re-mail or re-send the document to the Court with a copy of the envelope or container (with the postmark or proof of mailing date) in which it was first mailed or sent. In addition, please retain the original.

My case was calendared for trial. What does the Tax Court’s closure mean for my pending case?

The Tax Court canceled trial sessions for January 28, 2019 (El Paso, TX; Los Angeles, CA; New York, NY; Philadelphia, PA; San Diego, CA; and Lubbock, TX), February 4, 2019 (Hartford, CT; Houston, TX; San Francisco, CA; Seattle, WA; St. Paul, MN; Washington, DC; and Winston-Salem, NC) and February 11, 2019 (Detroit, MI; Los Angeles, CA; New York, NY; San Diego, CA; and Mobile, AL). The Tax Court will inform taxpayers who had cases on the canceled trial sessions of their new trial dates.

The Tax Court’s website indicates that it will make a decision about the February 25, 2019 trial sessions (Atlanta, GA; Chicago, IL; Dallas, TX; Kansas City, MO; and Philadelphia, PA) on or before February 7, 2019. Taxpayers with cases that are scheduled for trial sessions that have not been canceled or that have not yet been scheduled for trial should expect their cases to proceed in the normal course until further notice.

If my case was on a canceled trial session, when will I have an opportunity to resolve my case with Appeals or Chief Counsel after the government reopens? 

After the IRS and Chief Counsel reopen, we will make our best efforts to expeditiously resolve cases.

Where can I get more information about my Tax Court case? 

If someone is representing you in your case, you should contact your representative. In addition, the Tax Court’s website is the best place for updates. The IRS Chief Counsel and Appeals personnel assigned to your case may be furloughed and will not be available to answer your questions until the government reopens. In addition, The American Bar Association (ABA) is conducting a webinar on January 28, 2019, and you can get more information from the ABA Tax Section website . Taxpayers seeking assistance from Low Income Taxpayer Clinics (LITCs) can find a list of LITCs on the Tax Court’s website.

During the shutdown, does interest continue to accrue on the tax that I am disputing in my pending Tax Court case? 

Yes. To avoid additional interest on the tax that you are disputing in your pending Tax Court case, you can stop the running of interest by making a payment to the IRS. Go to www.irs.gov/payments for payment options available to you. The IRS is continuing to process payments during the shutdown.

What should I do if I received a bill for the tax liability that is the subject of my Tax Court case? 

If you receive a collection notice for the tax that is in dispute in your Tax Court case, it may be because the IRS has not received your petition and has made a premature assessment. When the government reopens, the IRS attorney assigned to your case will determine if a premature assessment was made and request that the IRS abate the premature assessment.

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In January, the New York Department of Taxation and Finance issued a notice regarding sales tax registration requirements for businesses with no physical presence in New York.  The notice responds to the U.S. Supreme Court’s ruling in South Dakota v. Wayfair, 138 S.Ct. 2080 (2018), which overruled prior precedent prohibiting states from imposing sales tax collection requirements on businesses with no physical presence in the state.

The notice requires a business (1) that made more than $300,000 in sales of tangible personal property delivered in New York, and (2) that conducted more than 100 sales of tangible personal property delivered in New York, in the four preceding sales tax quarters, to register as a sales tax vendor and collect and remit New York and local sales taxes.  This rule applies even if a business has no physical presence in New York.

The New York Department of Taxation and Finance urges businesses that meet this threshold, but that have not registered as vendors, to register now.  Information about the sales tax registration process is found in the New York Tax Bulletin, How to Register for New York State Sales Tax (TB-ST-360).