IRS Voluntary Disclosure
IRS Voluntary Disclosure Program: New Practice Update: The IRS Voluntary Disclosure Program (VDP) was updated in 2019 and continues to evolve. Voluntary Disclosure is an IRS program that pre-dates the streamlined procedures. VDP is designed for taxpayers as an alternative to the streamlined program.
A common misconception perpetuated by inexperienced offshore tax attorneys is that Voluntary Disclosure is only for people who were willful, but this is absolutely false. And, with the Internal Revenue Service making foreign accounts compliance a key enforcement priority, IRS voluntary disclosure may be the best option for certain taxpayers, especially those unable to certify non-willfulness under penalty of perjury.
The IRS voluntary disclosure program has been around for many years. While OVDP was terminated in 2018, the traditional voluntary disclosure was then updated and revamped. Alternatively, if the taxpayer has no foreign accounts or unreported income, but has previous years’ unreported international information returns (but taxpayer does not qualify for delinquency procedures) – the IRS may waive all penalties under IRS Voluntary Disclosure.
Updated Voluntary Disclosure Practice
In 2019, IRS Voluntary Disclosure Program was updated and OVDP was ended. The submission process has changed significantly, especially for offshore related issues. In the prior year version of the offshore program, the taxpayer was not required to submit a preclearance letter – it was optional. In addition, the preclearance was not a pre-printed form.
We will summarize the New Updated IRS Voluntary Disclosure Program, as well as summarize the key distinctions from the IRS.
Eligibility for the New IRS Voluntary Disclosure Program
Eligibility for IRS Voluntary Disclosure Program is different than the streamlined program. Unlike the streamlined program, there is no non-willfulness element.
Three (3) important aspects of making a submission, are:
- Legally sourced funds
- No Placeholder submission
- Full disclosure
Legally Sourced Funds
Essentially, a person must have legally earned the money that was not previously disclosed. This is to avoid the taxpayer from using IRS voluntary disclosure to launder money. For example: let’s say Peter sold illegal drugs in Peru and left the money in a Peruvian bank account that was never reported. Peter cannot use the IRS Voluntary Disclosure Program to report the money. Why? Because once the money is reported, then it would have been “cleaned” through the disclosure process.
No Placeholder Submissions
A placeholder is used to hold a spot open for the taxpayer. The IRS does not allow that for IRS Voluntary Disclosure. In other words, a person must make a full submission during the process.
When it comes time to submit to IRS voluntary disclosure, the person must make a full submission. In other words, all unreported foreign accounts, assets, investments and income must be reported. This is true, even if the chance of the IRS finding a particular offshore account or income stream is slim, and/or the account was dormant or sleeping.
The tax treatment under IRS voluntary disclosure is essentially the same as it would be if a tax return was filed timely (with penalties and interest tacked on). For example, if a type of income is categorized as employment income if the income had been reported timely, it would be categorized as employment income when it is finally reported. The same with interest income, dividend and capital gain.
If a person has unreported PFIC income, they may lose the opportunity to make a QEF or MTM election (Under prior OVDP, the taxpayer could use the MTM instead of sec 1291 excess distribution calculation).
Unlike OVDP, the penalties under the new updated IRS Voluntary Disclosure are different, and less firm. Some of the penalties, include:
Under the prior OVDP, the taxpayer paid a 20% penalty on the outstanding taxes due for each year of the compliance period. Under the updated procedures, the IRS voluntary disclosure compliance period was reduced from 8-years to 6-years.
And, instead of an annual 20% penalty, the taxpayer pays a single 75% on the highest year’s amount of tax liability. Under the revised procedures, the taxpayer can try to negotiate that penalty to a lesser penalty.
With OVDP, the taxpayer paid a 27.5% or 50% penalty on the highest year’s unreported balance of accounts and assets for the compliance period. Under the updated IRS Voluntary Disclosure procedures the taxpayer does not have a set penalty. Rather, the IRS agent will follow the rules of the IRM (Internal Revenue Manual).
Under the IRM, a person is (generally) subject to a 50% penalty on the highest year’s unreported balance. Under the revised procedures, the taxpayer can also try to negotiate the FBAR (offshore account) penalty to a lesser penalty.
International Information Returns
Under the revised procedures, a taxpayer may be able to avoid all fines and penalties for international information returns. In other words, there is no set penalty for unfiled information returns
Streamlined or Voluntary Disclosure
When it comes time to decide whether to apply to the Streamlined program or IRS Voluntary Disclosure, the taxpayer should be careful to evaluate all options. There are many issues to consider, but the main issue is always non-willful vs. willful. Complicating the analysis further, is the fact that willfulness does not always require knowledge (willful blindness) or intent (reckless disregard).
We recommend you speak with an experienced offshore disclosure specialist attorney before making an affirmative representation or communications to the IRS.
We Specialize in Streamlined & Offshore 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.
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Recent Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
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- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
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