Domestic Voluntary Disclosure IRS

Domestic Voluntary Disclosure IRS

Domestic Voluntary Disclosure IRS Program

Domestic Voluntary Disclosure: In recent years, the IRS has emphasized offshore tax and reporting compliance. In 2009, the Internal Revenue Service developed a specific offshore disclosure program referred to as OVDI/OVDP (Offshore Voluntary Disclosure Program) — the program was later terminated in 2018.

The domestic version of voluntary disclosure has been on the books for many years. It is referred to as the voluntary disclosure or “traditional” voluntary disclosure, and it is used by taxpayers who have unreported domestic income (or domestic and foreign income).

The program is designed for taxpayers who do not qualify for reasonable cause.

There are many taxpayers who can benefit from the domestic voluntary disclosure program.

We will provide a brief summary of the domestic voluntary disclosure IRS program.

What is Domestic Voluntary Disclosure?

When a U.S. person is not in compliance for U.S. tax related matters, they have two main options available. 

If they are non-willful, they will usually qualify to submit a reasonable cause statement alongside the amended returns (or original returns) and informational returns.

The reasonable cause statement is a detailed legal submission that seeks the avoidance of penalties for various taxes related to the noncompliance.

It also avoids the quiet disclosure problem of just submitting prior returns, or filing forward.

When a person cannot certify under penalty of perjury that they are non-willful, they lose the ability to make a reasonable cause statement and should consider a domestic voluntary disclosure.

Why?

Because a reasonable cause submission presumes that a person is non-willful.

If a person is willful, then according to the IRS that person could not have acted with reasonable cause. 

The alternative approach to reasonable cause is for a person to submit a domestic voluntary disclosure program.

How do I Submit?

In 2019 the Internal Revenue Service updated the form 14457 which was previously used as part of the OVDP submission process.

The new version of the form serves as a standardized pre-clearance letter (and more) for making a domestic or offshore voluntary disclosure submission.

In order to submit to the program a person completes that form and then sends it to the IRS and waits for confirmation that they have been accepted. 

Sometimes, it may take several months if not longer for the IRS to respond.

Common Domestic Voluntary Disclosure Applicants

Common industries represented in Domestic Voluntary Disclosure, include:

  • Entrepreneurs
  • Construction industry
  • Medical industry
  • Entertainment industry
  • Finance industry

Examples of Domestic Voluntary Disclosure

In Tax (and life) our team has found the best way to learn and digest highly complex information is through examples.

Here are four (4) examples of common domestic voluntary and combined domestic and offshore voluntary disclosure submissions.

Domestic Voluntary Disclosure (Example 1)

Ralph runs a construction business.  He earns significant income, but some of the subcontractors pay him in cash. When times were tough – or when Ralph just wanted to go out and spend some more money — Ralph did not report the income to the IRS.

In addition, Ralph failed to withhold employment tax on certain staff members who are employees instead of independent contractors.

Finally, Ralph also embellished his expenses.

Ralph may be a good candidate for the domestic voluntary disclosure program.

Domestic Voluntary Disclosure (Example 2)

Victor is your typical entrepreneur. 

Victor put his nose to the grind for 80-to-100+ hour work weeks trying to build up a small record label. 

One of Victor’s musicians hit it big, and Victor took it upon himself to spend a lot of money — without reporting the income to the IRS.

As his record company grows, Victor still fails to fix any of the issues, while still skimming off the top.

Victor may be a good candidate for the domestic voluntary disclosure program.

Domestic & International Business Disclosure (Example 3)

Continuing from the previous example, one of Victor’s acts is located in Costa Rica. 

Victor is hanging out at a Costa Rican bar with some expats when Victor gets the idea of not reporting a majority of the income from his foreign musician, because how will the IRS know?

Instead of repatriating to the U.S., he uses the money to purchase a few Costa Rican homes for rental properties — and opens a few Costa Rican bank accounts.

He works with a local attorney and thinks the money is safe since he does not have signature authority over the accounts — his business partner handles money in Costa Rica through a Sociedad Anonima.

Victor gets cold feet.

Victor may be a good candidate to submit for both domestic and foreign issues.

Domestic & International Business Disclosure (Example 4)

Andre works as a consultant in United States. 

He formed his own LLC, and became very successful. Unfortunately, Andre is a little too smart for his own good, and failed to pay income tax on some of the earnings.

He had U.S. and foreign clients divert some of the domestic and foreign income — which he used to purchase rental properties overseas — to accounts overseas.

He did not report the income, and claimed deduction for fringe benefits that he knew he should have included as income.

Andre intentionally underreported his US earnings, and then shifted them into a couple of Swiss banking “numbered accounts,” thinking he could keep the money hidden.

Unfortunately, Andre got wind that there might be a whistleblower at one of his client’s companies.

Moreover, it turns out that the foreign bank edited to a deferred prosecution agreement the United States.

Victor may be a good candidate to submit for both domestic and foreign issues.

Plan Before Submitting to Preclearance

It is important for Taxpayers to asses their situation in detail prior to submitting to the program, because once the person submits to VDP it is important that they complete process.

We Specialize in Voluntary Disclosure

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

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