In 2014, the IRS established its offshore voluntary disclosure program. At that time, companies and individuals alike were given the opportunity to disclose their offshore assets as a means of avoiding potential criminal liability or civil penalties for failure to disclose those assets and pay taxes on them. Although cryptocurrencies were in circulation at the onset of this program, they were not specifically required to be disclosed as there were no definitive regulations around such assets. However, in the last few years, cryptocurrencies have become more prevalent and in some cases are traded on various stock exchanges. As a result on April 12, the IRS released the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, found here. Virtual currency issues are now listed as a disclosure special feature in part one of the new form. Although it is clear that the addition of virtual currencies on this form is a means of providing the IRS with insight as to the volume of noncompliance in this space, there is still some uncertainty around what is required to be disclosed and what disclosure requests are deemed to be overly broad as discussed below.
In September 2018, the IRS closed the offshore voluntary disclosure program and announced new guidelines in November requiring that the disclosure period for participation in the program would include the six most recent tax years, with the examiner maintaining discretion over this requirement. However, by allowing examiner discretion, it is unclear whether those that are less noncompliant are truly required to disclose all six tax years. For example, part two, question eight, requires that a list of all entities owned or controlled by the taxpayer that was reported in part one be provided covering the entire six year period provided in the guideline released in November 2018; however, other parts of the form seem to indicate that the disclosure period may be less if the period of noncompliance is less.
Failure to define law enforcement authority
Part one, question nine of the form, requires the taxpayer to disclose whether they are under audit or criminal investigation by the IRS or another law enforcement agency; however, it does not define the latter. Therefore, it is unclear whether an examination by a state revenue authority would be deemed to be a “law enforcement agency.”
Value of offshore holdings
Part two, question six of the form requires the disclosure of an estimate of the highest total value of offshore holdings yet does not clarify whether the total for all offshore holdings are required to be disclosed or simply those that are noncompliant. It is unclear whether an assumption can be made that only the value of the noncompliant holdings are required to be disclosed as the prior question references the disclosure of the annual unreported income.
Narrative of noncompliance
Of all the questions posed on the form, part two, question nine is considered to be the most overly broad specifically because it requires the taxpayer to provide a narrative of their noncompliance which includes details on all attorneys, accounts, financial planners etc. that provided services to the taxpayer while they were noncompliant whether those individuals or institutions were aware of the noncompliance or not. This would encompass the entirety of the period of noncompliance which could be as little as a year to several plus years. In addition, the form does not indicate if those individual/institutions must be related to the actual noncompliance.
As can be seen from the information provided above, the form in its current state will require some additional clarification and guidance from the IRS before it can be effectively used to hone in on the pattern of noncompliance and limit the amount of confusion around the disclosure requirements. We expect that with feedback from the industry that such updates will hopefully be made in the near future.
For further information on the above, please refer to our FATCA page.