IRS Voluntary Disclosure Practice update and pushout adjustments under CPAR

Examinations

The IRS recently updated Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the form’s instructions. The Voluntary Disclosure Practice (VDP) generally offers criminal protection for taxpayer noncompliance in exchange for six years of tax returns and a civil fraud penalty. The recent updates to VDP include the following highlights:

• The revised instructions establish that the VDP can be used, under certain circumstances, to resolve estate tax liabilities. The prior version of the VDP instructions said that estates were ineligible for the VDP. This is welcome news for executors that may face personal liability.
• The revised instructions leave open the possibility for willful foreign bank account reporting penalties (FBAR penalties). Willful FBAR penalties, which equal 50% of the bank account balance each year, can be very large. Consequently, taxpayers should carefully evaluate whether to enter the VDP or the Streamlined Filing Compliance Procedures, which was created for non-willful taxpayers.
• The instructions also make clear that the VDP is unavailable to taxpayers engaged in illegal activity. As an example, because the sale of cannabis is illegal under federal law, the IRS excludes these taxpayers from the VDP.

Practitioners should carefully evaluate the partner-level implications of any pushout election under the centralized partnership audit regime (CPAR). Partners complete and attach IRS Form 8978 to their income tax returns in the year the pushout statement is received. TACS has confirmed that IRS’s Office of Chief Counsel takes the position that when a CPAR partnership files an Administrative Adjustment Request, any negative adjustments that reduce a partner’s tax liability act as nonrefundable credits for the partners in the statement year. A nonrefundable credit could produce a disastrous result for clients. Consider the following example:

• Partner A reports a 2018 tax liability of $200,000.
• During the 2020 calendar year, Partner A receives a partnership a pushout statement,