When the United States Internal Revenue Service announced in March 2018 that it would be terminating the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018, many taxpayers and practitioners were left wondering whether there would be a successor program that would provide potentially "willful" taxpayers who have failed to disclose foreign financial assets and accounts (Foreign Accounts) to the US government with an avenue to disclose such Foreign Accounts while potentially avoiding criminal prosecution.1 On November 29, 2018, the IRS released a much-anticipated memorandum (Memorandum that explains its updated voluntary disclosure practice (VDP).

The Memorandum sets forth the procedures that taxpayers with undisclosed Foreign Accounts must follow to avoid potential criminal prosecution and mitigate exposure to monetary penalties. Notably, the VDP is available in connection with both domestic and offshore disclosures. Applications to the VDP require preclearance from the IRS Criminal Investigation Division, which requires taxpayers to submit specific information. Once the preclearance is granted, taxpayers must submit more detailed information to the IRS Criminal Investigation Division for preliminary acceptance. Once accepted, the case is routed for civil examination under the Civil Resolution Framework set forth in the Memorandum. Under the VDP, the taxpayer generally must provide information spanning the most recent six tax years. It should be noted that the IRS has discretion to apply the VDP to disclosures made prior to September 28, 2018.


Individual US taxpayers have an annual obligation to report and pay income tax on income from all sources and to disclose certain Foreign Accounts to the IRS and to the Treasury Department's Financial Crimes Enforcement Network (FinCEN). Taxpayers face significant monetary penalties and potential criminal charges if they fail to disclose their interests in Foreign Accounts.

To encourage compliance with these reporting obligations, the IRS launched the OVDP as an amnesty program in 2009, with subsequent iterations offered through September 28, 2018. The OVDP enabled US taxpayers to voluntarily resolve past tax and reporting noncompliance with respect to Foreign Accounts by correcting past reporting errors or failures and disclosing and paying all taxes due with respect to such assets. The OVDP was the only program available to taxpayers whose noncompliance could be determined to be "willful," which generally means that the taxpayer knew or should have known that he had an obligation to report the Foreign Accounts to the US government. In exchange for completing the program, taxpayers were provided with reduced civil monetary penalties and protection from criminal prosecution related to the tax noncompliance.

Overview of the Procedures Currently Available to Taxpayers

Separate from the OVDP, the IRS developed a series of additional programs and procedures for noncompliant taxpayers. For example: (i) the Streamlined Filing Compliance Procedures (Streamlined Procedures) for individual taxpayers whose failure to report Foreign Accounts was not due to willful or fraudulent conduct; (ii) the Delinquent International Information Return Submission Procedures (Delinquent Procedures) for taxpayers who do not need to use the OVDP or the Streamlined Procedures; and (iii) procedures contained in the Internal Revenue Manual for taxpayers to disclose and remedy past tax noncompliance.

For taxpayers wishing to disclose their Foreign Accounts, the best method of disclosure depends upon each taxpayer's particular facts and circumstances. However, the OVDP was the only IRS procedure that provided potential protection against criminal prosecution for noncompliance that could be viewed as intentional. As such, the VDP fills an important void that was created when the OVDP ended.

Similar to the OVDP and many of the existing procedures provided for noncompliant taxpayers, the VDP requires participating taxpayers to pay certain civil penalties. However, there are important differences in how the penalties under the VDP are applied. Specifically under the VDP, the field agent assigned to the taxpayer's case has discretion to determine the amount and type of penalties imposed against the taxpayer, and the "baseline" penalty guideline is generally higher than the penalty framework provided under the OVDP. For example, under the VDP the default is the imposition of a 75 percent fraud penalty on the unpaid tax due in the tax year with the highest tax liability. This represents a significant increase when compared to penalties imposed under the existing procedures and the OVDP. Additionally, under the VDP there is also a default 50 percent "willful" FBAR penalty imposed on the highest aggregate balance of all unreported Foreign Accounts.

We also note that unlike the OVDP, within the VDP framework, taxpayers who disagree with the field agent's determination of taxes and penalties due retain their right to appeal the field agent's determination. Overall, the VDP allows for a significantly broader set of potential outcomes than the OVDP.

Although the closure of the OVDP may have surprised many taxpayers, Acting IRS Commissioner David Kautter explained that "[t]axpayers have had several years to come into compliance with US tax laws under this program. . . . All along, we have been clear that we would close the program at the appropriate time, and we have reached that point."2 Although there are currently several options available to taxpayers seeking to remedy past tax noncompliance with respect to their Foreign Accounts, this is an important reminder that none of the above mentioned options are permanent.


1 See our previous Advisory on the closure of the OVDP: "IRS Announces Last Chance for Taxpayers with Undisclosed Foreign Assets to Enter the Offshore Voluntary Disclosure Program."

2 IRS to End Offshore Voluntary Disclosure Program; Taxpayers With Undisclosed Foreign Assets Urged to Come Forward Now, IRS (March 13, 2018).

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