MEMORANDUM

RE: IRS VOLUNTARY DISCLOSURE (UPDATE)

On March 23, 2009, the IRS issued a series of three

memoranda to update voluntary disclosure policies, primarily in
connection with offshore transactions. According to IRS
Commissioner Douglas H. Shulman, “The goal is to have a
predictable set of outcomes to encourage people to come forward to
take advantage of (IRS) voluntary disclosure practices while they still
can.” The Commissioner set a 6-month deadline for disclosures
under the forms of the guidance (i.e., thru September 2009) at which
time the program will be re-evaluated.
Under the IRS new policy, the following tax rules apply:
1. Payment of back taxes for up to the last 6 years (with
interest) on the newly disclosed assets;
2. Either a 20% accuracy-related penalty under IRC
§6662, or a 25% delinquency penalty under IRC §6651
for each Tax Year at issue;
3. During the past 6 years, a 20% penalty on the total
balance of all the Taxpayer’s foreign bank accounts
or assets during the year (among the past 6 years) in
which the account had their highest aggregate value.
The IRS Commissioner stated:
1. The IRS will not pursue charges of criminal tax
evasion against Taxpayers who voluntarily disclose
their offshore assets under this new policy;
2. The IRS will not pursue other penalties against
participating Taxpayers, such as IRC §6663 fraud
penalties (75% of the unpaid tax) or the statutory
penalty for willful failure to file a TD F 90-22.1 Report
of Foreign Bank and Financial Accounts (FBAR) (the
greater of $100,000 or 50% of the foreign account

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 balance) that apply annually to undisclosed accounts
(and assets) during the relevant Tax Years;
3. The IRS advises field personnel that they should give
priority treatment to offshore transactions and
entities during examinations, with a special emphasis
on detecting unreported income.
More troubling is an SBSE 3/23/09 memorandum, Subject:
Routing of Voluntary Disclosure Cases, which addresses a
change in the processing of voluntary disclosure requests
containing offshore issues.
1. Such requests will continue to be initially screened
by Criminal Investigation to determine eligibility for
voluntary disclosure, and, if involving only domestic
issues will be forwarded to Area Planning and Special
Programs for Civil Processing;
2. Voluntary disclosure eligibility for offshore issues will
be initially screened by Criminal Investigation and
forwarded to the Philadelphia Offshore Identification
Unit (POIU) for processing.
The IRS 3/23/09 memo is ambiguous. It distinguishes between
domestic issues (which will be subject to civil processing) and
offshore issues which will be screened by Criminal Investigation for
processing. It appears offshore issues may have a higher risk of
criminal prosecution (contrary to the IRS Commissioner’s
statements).
The IRS policy may “spotlight” unreported offshore income
(which if not a domestic issue, may be referred for criminal
prosecution).
Voluntary Disclosure risks include:
1. Heightened risk of criminal prosecution (since initial
screening is by the IRS Criminal Investigation Division);
2. A voluntary disclosure may be used as an evidentiary
admission of Taxpayer’s unreported income;
3. A voluntary disclosure may waive Taxpayer’s 5th
Amendment right against self-incrimination;

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 4. While a voluntary disclosure is pending the IRS may
request more information, commence an audit or initiate
criminal prosecution.
As an alternative strategy to a voluntary disclosure, the
“quiet filing” (for the Tax Years at issue) of an amended tax
return (or original tax return) may instead:
1. Pre-empt criminal charges for both failure to file tax
returns and failure to pay tax;
2. Pre-empt a 75% civil tax fraud penalty, for failure to
file or pay tax;
3. If the income is properly reported (i.e., no substantial
understatements), the tax filing will commence the 3
year statute of limitations (for each year) for IRS
audit.

Gary S. Wolfe
A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 530 East
Beverly Hills, CA, 90212
Tel: 310-274-8847 Fax: 310-274-3118
http://www.gswlaw.com
email: gsw@gswlaw.com