Submit VDP Preclearance & Transition to Streamlined
When it comes to making an IRS Offshore Voluntary Offshore Disclosure of previously unreported foreign accounts, assets, investments, and income, the two main programs offered by the Internal Revenue Service are the traditional Voluntary Disclosure Program (VDP) and the Streamlined Filing Compliance Procedures. The two programs are vastly different, due to the fact that the Streamlined Procedures are only for US taxpayers who are non-willful and the Voluntary Disclosure Program is for taxpayers who are willful — or cannot certify under penalty of perjury that they are non-willful (which is different from the prior program – OVDP). One common question we receive is whether or not a taxpayer may submit to the Voluntary Disclosure Program and then transition to the Streamlined Procedures.
VDP Is For Taxpayers Who Are Willful
Under the prior Offshore Voluntary Disclosure Program (OVDP) (which was an offshoot of the traditional voluntary disclosure program) and before the standalone Streamline Procedures were introduced, OVDP was used for both willful and non-willful taxpayers. Even after the Streamlined Procedures were introduced, many non-willful taxpayers still opted for OVDP since it provided the opportunity to get eight years’ worth of tax filing in compliance instead of three and avoided an audit unless the Taxpayer pursued an opt-out.
No Transition with New VDP to Streamlined
These days, under the New Voluntary Disclosure Program, taxpayers have to submit a pre-clearance letter on a standardized IRS Form 14457, which is a form that was not required under OVDP (OVDP had its own version of Form 14457 as well but it was for different a purpose). When a person submits to the new VDP, they are basically admitting to the IRS that they are willful. And, while the IRS has some authority to negotiate penalties, oftentimes the IRS is not amenable to negotiating VDP penalties since they take the position that by allowing you to enter VDP, you are avoiding criminal prosecution — and no further penalty reduction is warranted. (There is a miniscule chance of penalty reduction, but only saved for taxpayers with very, very sympathetic facts.)
Avoid Incorrect Advice About Reasonable Cause Penalty Waivers
We have had several inquiries from taxpayers over the past few years who had worked with some larger firms and other self-proclaimed tax experts who try to sell them on the fact that even after they submit to VDP, they can argue that under reasonable cause, penalties should be waived. This is a bad strategy because, with a willful submission, the Taxpayer is unable to claim Reasonable Cause since they have already acknowledged willfulness. Likewise, if the Taxpayer is non-willful, they should not submit to the VDP program in the first place. The IRS is aware that some Taxpayers may want to submit to VDP — because they want to submit a preclearance letter to assess whether or not they are already under investigation — and if they find out that they are not under investigation, they then want to transition to the Streamlined Program or seek a penalty waiver, but it is proven that this strategy does not work.
*If an attorney submitted you to the Voluntary Disclosure Program under the guise that they would then transition you to a reasonable cause penalty waiver, you may want to reconsider your options.
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