When it comes to voluntary disclosures in taxation, most taxpayers struggle with understanding the intricacies of eligibility, procedures, and potential outcomes.
Using this comprehensive guide on the Voluntary Disclosures Program, you can successfully navigate the complex rules and maximize the benefits of participation.
You'll get a full overview of the program, from types of voluntary disclosure and eligible assets to reduced penalties, risks to consider, eligibility factors, and step-by-step instructions on how to disclose. You'll also understand the vital role of a tax professional in ensuring accuracy and savings.
Introduction to the Voluntary Disclosures Program
The IRS Voluntary Disclosures Program allows taxpayers to correct previous errors or omissions in their tax filings in order to become compliant with US tax laws. This program has a long history of enabling taxpayers to get current with their US tax obligations without facing criminal prosecution or substantial civil penalties.
To be eligible for the Voluntary Disclosures Program, the taxpayer must:
- Voluntarily come forward to disclose prior non-compliance before the IRS has initiated an audit or investigation
- Provide complete and accurate amended or delinquent tax returns and tax information
- Pay back taxes and interest owed, as well as certain accuracy or delinquency penalties
The program provides protection from criminal liability and may reduce penalties that would otherwise apply. However, the Voluntary Disclosures Program does not eliminate all civil penalties.
By self-disclosing prior mistakes, taxpayers can avoid much larger civil penalties and criminal prosecution that would apply if the IRS discovered the errors first. The program enables taxpayers to become fully compliant with US tax law.
What is voluntary disclosure in taxation?
The Voluntary Disclosure Practice is an IRS program that allows taxpayers who have failed to properly report offshore assets or income to come forward voluntarily and resolve their tax noncompliance. This can help taxpayers avoid potential criminal prosecution and minimize civil penalties.
Some key things to know about the Voluntary Disclosure Practice:
- It is available to taxpayers with exposure to criminal liability and/or substantial civil penalties due to willful failure to report foreign assets or income.
- Taxpayers must provide full disclosure of the unreported assets or income and pay taxes, interest, and penalties on the unreported amount.
- In exchange, taxpayers can generally avoid criminal prosecution and may qualify for reduced civil penalties.
- Taxpayers must submit a variety of forms and documents, including amended or delinquent returns and Form 2848 Power of Attorney.
The IRS has offered various offshore voluntary disclosure programs over the years to encourage noncompliant taxpayers to come forward. The current program has no set deadline, but the IRS may end it at any time.
Coming forward voluntarily before the IRS detects the noncompliance is key to avoiding higher penalties and potential criminal prosecution. Those already under IRS examination do not qualify for the Voluntary Disclosure Practice.
Consulting with a tax advisor is highly recommended before applying to ensure eligibility and proper completion of the process. The Voluntary Disclosure Practice presents an opportunity for noncompliant taxpayers to resolve their situation but must be approached carefully.
What are eligible assets for voluntary disclosure program?
A wide variety of assets could potentially be eligible for disclosure under the Voluntary Disclosure Program (VDP). Some examples of eligible assets include:
- Foreign financial accounts like bank accounts, investment accounts, insurance policies, etc. that were not previously reported to the IRS. These are common assets disclosed through the VDP.
- Foreign income and investments like rental properties, businesses, trusts, etc. that generate foreign income that has not been reported in prior years.
- Cryptocurrency or virtual currency holdings that have appreciated substantially but have not had taxes paid. These emerging asset types are becoming more common in VDP disclosures.
- Other offshore assets that have not been reported properly, like foreign pensions, real estate, valuable artwork or collectibles, or inheritances kept overseas.
The key requirements for assets to be eligible are:
- They are owned directly or beneficially by the taxpayer making the VDP disclosure.
- They produce income that is considered taxable by the IRS.
- They have not been previously reported on tax returns or FBAR filings as required.
So in summary, a wide range of foreign financial assets can potentially qualify for the VDP if they meet requirements around ownership, taxability, and lack of prior IRS reporting. The VDP gives taxpayers a chance to correct these past reporting omissions and become compliant by paying back taxes, interest, and penalties on the previously undeclared assets.
What is the traditional IRS voluntary disclosure program?
The IRS voluntary disclosure program provides a pathway for taxpayers who have previously failed to properly report offshore income or file foreign information returns. This program enables these taxpayers to voluntarily come forward, disclose their noncompliance, pay applicable taxes and interest, and generally avoid criminal prosecution.
Some key things to know about the traditional IRS voluntary disclosure program:
- It applies to those with undisclosed foreign bank accounts or assets that were not properly reported on their tax returns. This includes income earned from these foreign accounts or assets.
- It does not apply to taxpayers who earn income through illegal activities. The program is solely focused on enabling people to come into compliance related to offshore assets and income.
- The program has been a longstanding practice of the IRS for many years. It provides incentives for taxpayers to voluntarily disclose lapses in reporting, rather than continuing to avoid detection and enforcement action.
- Upon acceptance into the program, taxpayers generally avoid criminal prosecution and may qualify for reduced civil penalties on taxes owed, compared to if the IRS discovered the noncompliance first.
So in summary, the traditional IRS voluntary disclosure program gives taxpayers who have failed to properly report foreign assets or income a pathway to voluntarily disclose this, pay owed taxes with interest and certain penalties, and avoid criminal prosecution. This enables them to come into compliance and resolve these offshore tax matters.
What are the types of voluntary disclosure?
There are a few main types of voluntary disclosure programs available from the IRS for taxpayers with undisclosed foreign income or assets:
- Offshore Voluntary Disclosure Program (OVDP): This program is designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign assets and pay taxes on offshore income. It requires payment of taxes, interest, and penalties on previously unreported income.
- Streamlined Filing Compliance Procedures: This program is available for taxpayers with non-willful failure to report foreign assets and income. It requires filing amended returns and payment of taxes and interest. Penalties may be waived.
- Delinquent FBAR Submission Procedures: Taxpayers who have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) can file previous reports where the failure to file was non-willful. No penalties will be asserted if there are no underreported tax liabilities.
- Delinquent International Information Return Submission Procedures: Taxpayers with delinquent international information returns can file Forms 5471, 5472, or 8938 under these procedures to avoid potential penalties.
The type of voluntary disclosure depends on the specifics of each taxpayer's situation, such as willfulness of failures to report, potential penalties, and eligibility for penalty waivers. Consulting with a tax professional is highly recommended when considering voluntary disclosure options.
Understanding the Voluntary Disclosure Practice
The IRS Voluntary Disclosure Practice allows taxpayers who have failed to properly report foreign income or file international information returns to come forward and correct prior mistakes. This process enables taxpayers to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution.
Voluntary Disclosure: Questions and Answers
Here are answers to some common questions about the voluntary disclosure process:
- Who qualifies for a voluntary disclosure? Any U.S. taxpayer who has unreported foreign income or failed to file required international information returns qualifies. This includes individuals, corporations, partnerships, trusts, and estates.
- What are the benefits of voluntary disclosure? Taxpayers can avoid substantial civil penalties and generally eliminate the risk of criminal prosecution by coming forward voluntarily before the IRS contacts them first.
- What years of tax returns must be filed? Taxpayers will generally need to file amended or delinquent returns and Reports of Foreign Bank and Financial Accounts (FBARs) for the previous 6 years. Additional years may need to be filed in some cases.
- What information must be provided? Taxpayers need to provide detailed information about all foreign income sources and foreign financial assets. Supporting documentation for income and assets declared is also required.
Form 2848: Power of Attorney and Declaration of Representative
Taxpayers making a voluntary disclosure often appoint a qualified representative to handle the process on their behalf. Form 2848 authorizes this representative to receive confidential information and sign documents related to the voluntary disclosure. Key items to know about Form 2848:
- It must be completed and signed by both the taxpayer and the authorized representative.
- Details like the taxpayer's name, address, tax identification number and tax years covered must be provided.
- The representative's access and authority is limited to what is declared on the form.
Appointing a skilled representative can streamline the voluntary disclosure process and ensure proper adherence to IRS rules.
IRS Commissioner John Koskinen's Statements on Voluntary Disclosures
IRS Commissioner John Koskinen has repeatedly emphasized the importance of the voluntary disclosure process in enabling taxpayers to correct past failures to report foreign assets or income:
"The voluntary disclosure process provides an opportunity for people to get their returns up to date, pay the tax they should have paid years ago, and generally eliminates the risk of criminal prosecution."
Koskinen has promised continued support for voluntary disclosures as part of a "balanced approach" to offshore tax compliance. He highlights that over 45,000 taxpayers have utilized voluntary disclosures to declare over $6.5 billion in taxes, interest and penalties since 2009.
However, Koskinen warns that increased IRS enforcement and the implementation of the Foreign Account Tax Compliance Act (FATCA) have made trying to hide assets abroad extremely difficult. He advises taxpayers to utilize the voluntary disclosure process before the IRS learns about their tax non-compliance through other means.
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Benefits of Participating in the Program
Making a voluntary disclosure can provide taxpayers with significant benefits, including reduced penalties and avoidance of criminal prosecution.
Reduced Penalties and Amended Return Procedures
Participants in the Voluntary Disclosure Program may qualify for reduced civil penalty rates compared to if the IRS had discovered the errors first. Specifically:
- The penalty for failure to file Form TD F 90-22.1 (FBAR) is capped at $10,000 per year
- No penalty will be asserted for failure to file Form 3520, 3520-A, or 5471
- The accuracy-related penalty under IRC section 6662 is capped at 20%
To correct past errors, taxpayers must file amended returns and report any additional tax due for the last 3 years. The Voluntary Disclosure letter will specify the required procedures.
Avoid Criminal Prosecution
Taxpayers who voluntarily disclose unreported offshore income before being contacted by the IRS are generally not referred for criminal prosecution. The Voluntary Disclosure Program provides protection against criminal penalties and prosecution, provided full cooperation and payment of tax, interest, and penalties.
However, if the IRS already has information about a taxpayer's noncompliance through other means, acceptance into the Voluntary Disclosure Program is at the discretion of the Criminal Investigation Division. The IRS warns that voluntary disclosure does not prevent criminal prosecution if there is evidence of fraud, deceit, or criminal tax violations.
Risks and Considerations
While beneficial overall, the program does come with some risks that taxpayers should consider first.
Possibility of Audit and Transition Rules: FAQs
Voluntary disclosures may increase the chances of being audited by the IRS. According to IRS Commissioner John Koskinen, the agency has increased its focus on international tax compliance, so there is a possibility of audit even after making a voluntary disclosure.
Some key frequently asked questions about the transition rules for the programs over the years include:
- What if I missed the deadline to apply for the 2012 Offshore Voluntary Disclosure Program? The IRS provided transition rules where taxpayers had additional time to apply.
- How do the requirements compare between the 2012, 2011, and 2009 Offshore Voluntary Disclosure Programs? While specifics vary, all programs require back payment of taxes owed, interest, and reduced penalties. Higher penalties applied for taxpayers who waited longer to participate.
- Where can I find the full details on the transition rules and extensions for the various programs over the years? The IRS published an FAQ document titled "Transition Rules: FAQs" that outlines the transition rules for taxpayers who missed certain deadlines.
Required Back Payments and Delinquent Return Procedures
Participants in the voluntary disclosure program must pay back taxes and interest owed for the previous 8 years, in addition to paying reduced penalties. The reduced penalties can still be significant depending on the specifics of the case.
For delinquent returns that were not filed, taxpayers should follow the Amended Return Procedures published by the IRS. These procedures include filing the appropriate 1040X forms along with the back payments owed. Interest will accrue from the initial due date, and failure to file penalties may still apply under some circumstances.
In summary, while voluntary disclosures enable reduced penalties and avoidance of criminal prosecution, taxpayers must still pay all back taxes owed, interest, and possibly substantial penalties based on the scope of delinquency. Thorough review of the procedures and individual consultation is highly recommended before proceeding.
Eligibility and Disqualification Factors
The IRS has strict eligibility rules in place for the Offshore Voluntary Disclosure Program. This section covers the key qualifications taxpayers must meet to participate as well as reasons for disqualification.
Understanding the Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (OVDP) was created to encourage taxpayers with undisclosed foreign accounts or assets to come forward voluntarily and become compliant. Specifically, the OVDP allows these taxpayers to avoid criminal prosecution and negotiate reduced civil penalties.
To be eligible, the taxpayer must:
- Have failed to report income from a foreign account and pay tax on it
- Make a voluntary disclosure before the IRS contacts them first
- Cooperate fully by providing requested information and records
By meeting these conditions, the taxpayer can avoid criminal charges and negotiate lower penalties under the OVDP.
Compliance History
A key factor in OVDP eligibility is having a clean history of tax compliance. Specifically, the taxpayer must not:
- Already be under IRS audit or investigation
- Have been contacted by the IRS about the undisclosed assets
- Be under indictment or criminal investigation
If any of the above apply, the taxpayer would be ineligible for the OVDP. The program rewards those who come forward voluntarily before the IRS detects the non-compliance.
Disqualification Reasons
There are several reasons the IRS may disqualify an applicant from the OVDP:
- Failing to properly file amended returns: Applicants must file accurate amended returns and include offshore income for the last 3 years. Errors can lead to rejection.
- Understating account balances or omitting accounts: Applicants must fully disclose all foreign accounts and assets. Intentionally underreporting can result in removal from OVDP.
- Not responding to requests for additional information: Applicants must respond promptly to all IRS requests for records, statements or other documentation. Failure to cooperate will disqualify them.
In summary, eligibility depends on voluntary disclosure, tax compliance history, cooperation with requests, and accurately reporting all foreign assets. Intentional omissions or errors may result in removal from the program.
How to Make an Offshore Voluntary Disclosure
Making an offshore voluntary disclosure can help resolve past non-compliance related to foreign income and assets. Here is an overview of the step-by-step process:
Gather Records
The first step is to gather any relevant statements, documents, or records that may be needed to prepare your voluntary disclosure, such as:
- Foreign bank account statements
- Information on foreign assets like real estate or investments
- Records showing the source of foreign income
Organize these documents so they can be easily referenced when preparing your disclosure.
File Amended Returns
Next, you will need to file amended tax returns for the previous 8 years, reporting any previously undeclared foreign income or assets. The following forms are typically required:
- Form 1040X - Amended personal tax return
- FBAR Form - Report of Foreign Bank and Financial Accounts
- Form 2848 - Power of Attorney authorization
When filing, be sure to arrange proper payment plans for any additional back taxes or interest owed. The IRS charges interest and sometimes penalties on unpaid taxes.
Pay Owed Taxes
Once your offshore voluntary disclosure is accepted, you will receive a closing agreement outlining the final tax bill, interest, and any penalties based on the disclosure.
There are a few options to pay what you owe:
- Lump-sum payment in full
- Installment agreement allowing you to pay over several years
- Offer in compromise to settle tax debts for less than what you owe
Be sure to explore all payment options to find the right approach for your financial situation. Paying back taxes owed can take time but resolving outstanding tax issues through voluntary disclosure is an important step towards becoming compliant.
Using a Tax Professional
Consider hiring an experienced tax attorney or CPA to assist with the complex disclosure process. Their expertise can help ensure full compliance and maximize penalty reductions.
Ensuring Accuracy
Tax professionals have extensive knowledge of the intricate disclosure rules and procedures. They can review your situation in detail and identify any errors or omissions, ensuring your submission is accurate and complete. This helps avoid further issues or penalties down the road.
Specifically, a tax professional can:
- Review your previous tax returns for any unreported income or irregularities
- Calculate precisely the taxes owed based on any unreported income
- Determine eligibility for domestic or offshore voluntary disclosure programs
- Prepare amended returns and delinquent filings
- Compile required documentation for submissions
- Guide you through filling out forms properly
Having an expert prepare your voluntary disclosure is vital for fully complying with the complex reporting rules and avoiding further problems.
Navigating Complex Rules
The voluntary disclosure process has precise eligibility requirements and procedures that can be difficult to navigate. Tax professionals have extensive knowledge of the recent rule changes and intricacies involved.
They can handle complicated analysis to determine your eligibility and walk you through required steps like:
- Evaluating if you qualify under disclosure program transition rules
- Submitting a pre-clearance request to confirm eligibility
- Preparing detailed voluntary disclosure letters
- Advising on special circumstances like inherited accounts
- Ensuring strict deadlines and protocols are properly followed
A tax attorney experienced specifically with voluntary disclosures can be invaluable for successfully maneuvering through the intricate rules and processes. Their guidance maximizes your chances of qualifying and avoiding rejection.
Retaining professional help not only boosts compliance but also lends further credibility to your disclosure submission. Thorough assistance from an expert demonstrates a genuine willingness to set things right.
Historical Perspectives on Voluntary Disclosures
2009 Offshore Voluntary Disclosure Program
The 2009 Offshore Voluntary Disclosure Program was introduced by the IRS to encourage taxpayers with undisclosed offshore accounts and assets to come forward. It offered reduced penalties and no criminal prosecution for taxpayers who voluntarily disclosed their offshore accounts.
Key aspects of the 2009 program included:
- Reduced penalty rate of 20%: Participants had to pay back taxes, interest, and a 20% penalty on the highest aggregate account balance from 2003-2008. This was less than the standard penalties of up to 50%.
- Avoidance of criminal prosecution: By voluntarily disclosing previously undeclared offshore accounts, participants could avoid criminal prosecution related to non-compliance.
- Over 14,700 taxpayers participated: The 2009 program resulted in the collection of $3.4 billion in back taxes, interest and penalties from over 14,700 voluntary disclosures.
The 2009 program set an important precedent in offshore account reporting compliance. It demonstrated the IRS' willingness to incentivize taxpayers to voluntarily disclose in exchange for reduced penalties.
2011 Offshore Voluntary Disclosure Initiative
In 2011, the IRS introduced the 2011 Offshore Voluntary Disclosure Initiative following the success of the 2009 program. It was modified to include additional eligibility requirements and penalty increases.
Key differences in the 2011 initiative included:
- Increased penalty rate of 25%: The offshore penalty rate was increased from 20% to 25% of the highest aggregate account balance between 2003-2010.
- Additional eligibility requirements: Taxpayers with unreported offshore accounts had to meet more stringent requirements related to past non-compliance to qualify.
- Over 30,000 participants: Over 30,000 additional taxpayers came forward under the 2011 initiative, resulting in an additional $1.3 billion in tax revenues.
The higher penalty rate and eligibility changes reflected the IRS' effort to balance leniency with accountability in offshore reporting compliance. By introducing these modifications, continued progress was made in addressing offshore non-compliance.
2012 Offshore Voluntary Disclosure Program
In January 2012, the IRS introduced the 2012 Offshore Voluntary Disclosure Program following the end of the 2011 initiative. It remained open indefinitely to encourage ongoing offshore disclosures.
Key aspects of the 2012 program included:
- Increased penalty rates of 27.5%: Offshore penalty rates were again increased, this time rising to 27.5% of the highest aggregate account balance from 2003-2011.
- Additional program requirements: Further changes were made in terms of eligibility rules, application processes, and required timelines to qualify for the program.
- Ongoing application: Unlike the limited-time 2009 and 2011 programs, the 2012 program remained open indefinitely to apply.
The 2012 program continued the evolution of offshore reporting compliance by both encouraging disclosures and ensuring consequences for non-compliance were sufficiently stringent. By keeping the program open long-term, ongoing progress became institutionalized.
Conclusion and Key Takeaways
The Voluntary Disclosures Program can be a complex but beneficial process for taxpayers with unreported offshore assets or income. By coming forward voluntarily, applicants can often reduce their penalties and risk of criminal prosecution. However, the decision requires careful consideration of the trade-offs.
Reduced Penalties
Participants in the Voluntary Disclosures Program typically pay lower penalty rates than if the IRS discovered the non-compliance first. For example, the offshore penalty is usually 27.5% of the highest aggregate balance, compared to 50% if caught by the IRS.
Risk of Increased Scrutiny
While penalties may be reduced, voluntary disclosures often lead to several years of increased IRS scrutiny through audits to confirm all errors have been corrected. Applicants must ensure they can fully comply going forward.
Use of Tax Expert Recommended
The voluntary disclosure process has precise filing procedures and strict eligibility requirements. Consider retaining an experienced tax attorney or accountant to guide you through the process and presentation to the IRS. Their expertise can prove invaluable for this complex reporting compliance obligation.
