Our Blog

The Current State of the IRS OVDP and an Overview of the Pre-Clearance IRS CI Form 14457

The Current State of the IRS OVDP and an Overview of the Pre-Clearance IRS CI Form 14457

By Anthony Diosdi

As most tax practitioners know, on September 28, 2018, the Internal Revenue Service ended the most recent interaction of the Offshore Voluntary Disclosure Program (“OVDP”). While the OVDP as we know it sunset on September 28, 2018, this does not mean that individuals with undisclosed foreign financial accounts and/or unreported foreign income no longer have an avenue to make a voluntary disclosure to the IRS. On November 20, 2018, announced a new way of disclosing previously undisclosed foreign assets and/or foreign income. Since November 20, 2018, individuals who wish to disclose previously undisclosed foreign financial accounts and/or unreported foreign will need to rely on traditional voluntary disclosure practices when making voluntary disclosures to the IRS. This article discusses the current state of the IRS offshore voluntary disclosure program.

The History of the Offshore Voluntary Disclosure Program and New Offshore Voluntary Disclosure Program Based on Traditional Voluntary Disclosure Practices

On November 20, 2018, the IRS issued a Memorandum addressing the protocol for processing all voluntary disclosure (both foreign and domestic) in the wake of the closure of the Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018 (the “Memorandum”). The Memorandum is organized in multiple parts: background and overview, IRS Criminal Investigation (“IRS CI”) procedures, civil processing, case development, and civil resolution framework, each of which is discussed below:

Since 2003, the IRS has offered the following different versions of the OVDP:

On January 14, 2003 the IRS announced the 2003 OVCI. The 2003 OVCI program expired on April 15, 2003. The 2003 OVCI program was considered a failure by the IRS because it resulted in only about 1,300 disclosures.

On March 23, 2009, the IRS announced the 2009 OVDP. The OVDP was launched a little over a month following the UBS AG deferred prosecution agreement-premised settlement with the U.S. government. The program was considered a huge success by the IRS because it resulted in approximately 15,000 disclosures. The OVDP expired on October 15, 2009.

On February 8, 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (“2011 OVDI”) was considered a success by the IRS because it resulted in more than 18,000 disclosures. The 2011 OVDI expired on September 9, 2011.

On January 9, 2012 the IRS announced the Offshore Voluntary Disclosure Program (“2012 OVDP”). The 2012 OVDP resulted in approximately 12,000 disclosures and was later modified and expanded on January 18, 2014 (the “2014 OVDP”). The 2014 OVDP expired on September 28, 2018. The 2009 OVDP, 2011 OVDI, 2012 OVDP, and 2014 OVDP resulted in more than 56,000 disclosures to the IRS. In addition, the United States Department of Justice established the first ever voluntary disclosure program for foreign banks. 

On November 20, 2018, the IRS announced a new offshore voluntary disclosure program for individuals with unreported foreign income and/or unreported foreign bank accounts in a Memorandum. The Memorandum states that the intent of the official voluntary disclosure program is to address taxpayers with either potential criminal liability or substantial civil penalty exposure due to a willful failure to report foreign financial assets and pay appropriate income tax thereon. The Memorandum indicates that the individual who did not commit any tax or tax-related crimes do not need to utilize the voluntary disclosure practice due to the absence of potential criminal prosecution. However, these individuals can still come forward to rectify historical mistakes by utilizing existing procedures (e.g., Streamlined Filing Compliance Procedures) or alternatively by filing an amended return or past due tax return. However, delinquent or amended tax returns filed in this manner will be reviewed by IRS examiners following existing law and guidance governing audits of those issues but not necessarily imposing the tax and penalties discussed in the Memorandum.

The procedures discussed in the Memorandum are effective for both domestic and offshore disclosures. Contrary to the “take-it-or-leave-it” or “one size fits all” penalty structure for the 2009 OVDP, 2011 OVDI, 2012 OVDP, and 2014 OVDP programs, the Memorandum delegates potential civil penalty mitigation by focusing on a specific disclosure timeframe along with the application of “examiner discretion” based on all relevant facts and circumstances.

IRS Criminal Investigation Procedures

The Memorandum set forth the procedure by which individuals wanting to make a voluntary disclosure may submit a pre-clearance request to the IRS. Upon submission, the IRS Criminal Investigation (“CI”) will screen all voluntary disclosure requests, whether domestic or offshore, to determine the eligibility of the individual. Eligibility depends on the timeliness of the submission. In other words, if the application was submitted prior to the IRS discovering undisclosed foreign financial accounts and/or undisclosed foreign income, the IRS may accept the voluntary disclosure. The Memorandum directs individuals seeking to participate in the voluntary disclosure process to submit a pre-clearance request on IRS Form 14457. The rules for determining an individual’s eligibility are governed by Internal Revenue Manual (“IRM”) Assuming that the IRS CI grants pre-clearance status, participants must “promptly” submit to IRS CI all required voluntary disclosure documents discussed on IRS Form 14457.

IRS Form 14457 requires information related to the individual’s noncompliance, a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance. After receipt of the voluntary disclosure documents, IRS CI will determine whether or not the individual is preliminarily accepted into the voluntary disclosure process and notify the individual of its decision. Acceptance notification is made by letter and simultaneously IRS CI will forward the voluntary disclosure letter with all attachments to the Large Business and International (“LB&I”) Austin unit for case preparation before examination.

Processing of the Voluntary Disclosure

Upon receipt of the relevant information from IRS CI, LB&I, Austin, Texas will “route” the case as appropriate. In order to mitigate interest exposure, Autism will accept payment prior to case assignment for those individuals wanting to make prompt payment. All distributed voluntary disclosures from Austin handled by the IRS exam will follow standard examination procedures. Unlike the earlier “take it or leave it” or “one size fits all” offshore voluntary disclosure programs, examiners are directed to develop cases by using appropriate information-gathering tools to determine proper tax liabilities and applicable penalties. The Memorandum cautions that under the voluntary disclosure practice, individuals are required to promptly and fully cooperate during civil examinations.

The IRS expects that all disclosures made under the practice will be resolved by a closing agreement with full payment of taxes, interest and penalties for the relevant disclosure period. Failure to cooperate with civil examination could result in the IRS examiner requesting IRS CI to revoke the preliminary acceptance. The Memorandum relies on IRM for purposes of providing guidance on the meaning of cooperation, which includes assisting the IRS in determining the correct tax liability. This could include in an interview.

Civil Resolution Framework

The Memorandum provides for a “Civil Resolution Framework” and grants the IRS discretion to extend this framework to non-offshore or domestic voluntary disclosures. The Civil Resolution Framework calls for a six-year disclosure period (down from eight years in previous offshore voluntary disclosure programs). However, while this is a general rule to apply to the most recent six years, the IRS may expand the scope of the disclosure beyond six years in certain cases. A major hazard for anyone considering making a voluntary disclosure to the IRS is Internal Revenue Code Section 6501(c)(8) which can open up prior years to audit back to 1998. With IRS review and consent, the six-year disclosure period may be expanded for cooperative individuals who wish to include additional tax years for various reason such the failure to filing certain information returns (e.g., IRS Forms 3520, 8938, or 5471) with large penalties.

Under the Civil Resolution Framework, participants must submit all required returns and reports for the disclosure period. Based on such submission examiners will determine applicable taxes, interest, and penalties. As to the assertion of penalties, the Memorandum provides guidance as follows:

1. The civil fraud penalty set forth in Internal Revenue Code Section 6663 will apply to one tax year with the highest tax liability. Alternatively, the civil penalty under Internal Revenue Code Section 6651(f) for the fraudulent failure to file tax returns can apply.

2. In “limited circumstances” IRS examiners may apply the civil fraud penalty to more than one year within circumstances of the case.

3. In the event individuals fail to cooperate and resolve the examination by agreement, examiners are authorized to potentially apply the civil fraud penalty beyond the six-year disclosure period to all “open” tax years.

4. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRS 4.26.16 and 4.26.17 for one year during the disclosure timeframe. This would be tantamount to a willful FBAR penalty equal to 50 percent of maximum aggregate undisclosed amount of offshore assets, potentially subject to expansion to 100 percent in extraordinary cases.

5. Individuals are permitted to request imposition of accuracy-related penalties under Internal Revenue Code Section 6662 in lieu of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. However, the Memorandum cautions that given the “objective of the voluntary disclosure practice” granting such requests for lesser penalties “is expected to be exceptional.” No examples are given in the Memorandum; however, the participant must be prepared to provide convincing evidence to justify why civil fraud and willful FBAR penalties should not be imposed where the facts and law support such penalties.

6. Penalties for failure to file information returns will not be automatically applied (e.g., failure to file Forms 3520, 5471, and 8858). IRS examiners are granted discretion to take into account the application of other penalties such as civil fraud penalty and the willful FBAR penalty penalty and resolve the examination by agreement.

7. In a major departure from the prior “take-it-or-leave-it” or “one size fits all” voluntary disclosure programs, participants may reserve the right to request an appeal” of the decision of the examiner with the IRS Office of Appeals.


Although the current method of making a voluntary disclosure of previously undisclosed foreign assets and income may have changed somewhat since the IRS closed its most recent iteration of its OVDP, making a voluntary disclosure to the IRS is still a viable option. Not only is an offshore voluntary disclosure still a viable option, contrary to the previous “take-it-or-leave it” or “one size fits all” voluntary disclosure programs, the new flexible version of the voluntary disclosure program appears to be more participant friendly.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony Diosdi focuses a part of his practice on criminal tax enforcement, broad-based civil tax compliance and white collar matters generally. He also advises clients on the IRS voluntary disclosure program, with particular focus on disclosure related to offshore banking accounts.

Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.

Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.