Comparing IRS Voluntary Tax Compliance Options
Comparing IRS Voluntary Tax Compliance Options: Over the past few years, the IRS has updated and revised the Offshore Voluntary Disclosure Programs that are available to taxpayers. As a result, in 2021, taxpayers have more limited options in terms of getting into compliance for unreported foreign accounts, assets, accounts, and investments than they did in prior years. There have also been rumblings over the past year or two that the Internal Revenue Service will be discontinuing the Streamlined Procedures –which were initially developed as a band-aid to allow taxpayers to get into compliance regarding FATCA and FBAR.
The following is a summary of the different options (so far) in 2021.
In 2014, the Internal Revenue Service developed and launched the standalone Streamlined Filing Compliance Procedure programs. The purpose of these programs was to provide non-willful taxpayers with a more “streamlined” path for getting into compliance for previously undisclosed offshore accounts, assets, investments, and income. Prior to the development of the standalone Streamlined Procedures, taxpayers would use OVDP (2009-2018).
The problem with OVDP was that for many taxpayers who were non-willful, it was overburdensome to require them to make it all the way through OVDP — only to then have to opt-out of the penalty and incur significant costs and risks to make a play for non-wilfulness penalties in lieu of willfulness.
There are two versions of the program: Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. Each program has its own set of requirements and nuances — but both programs require the taxpayer to be non-willful.
- Less tax returns needed than with VDP/OVDP
- Reduced or Waived penalty
- No closing letter
- Non-willful vs. lower willfulness (Reckless Disregard and Willful Blindness) is a gray area of tax law.
- Possible future audit (no 906 letter)
As an alternative to the Streamlined Procedures, the IRS developed the Delinquent International Information Return Submission Procedures (DIIRSP) and the Delinquent FBAR Submission Procedures (DFSP). Delinquency Procedures are not technically programs per se, but rather an alternative submission method. Primarily, these procedures were for individual taxpayers who did not have any unreported income sufficient to require any substantive changes to their tax returns.
In other words, they simply had unreported forms.
While DFSP is still available, DIIRSP was recently updated in November of 2020 and now reflects a standard Reasonable Cause statement package submission. In other words, DIIRSP now lacks the warm-and-fuzzy, black-and-white declaration from the IRS on its webpage that taxpayers would avoid penalties if they met the requirements of these delinquency procedures.
- No signed certification under penalty of perjury from taxpayer is required
- No penalty computation is required
- Penalty waiver is not guaranteed
- Penalties could be significantly higher than the Streamlined Procedures
Voluntary Disclosure Program (VDP)
The IRS Voluntary Disclosure Program (VDP) has been available to taxpayers for many years. The purpose of the program is to allow taxpayers who are noncompliant to safely get into tax compliance. VDP is used for both domestic and foreign noncompliance issues. In late 2018 and early 2019 the program was updated to reflect the closing of OVDP (see below) which was an offshoot of Voluntary Disclosure.
The Voluntary Disclosure Program in its current form is primarily used for willful taxpayers — or at least taxpayers who cannot certify under penalty of perjury that they are non-willful.
The program has different penalty structures depending on whether it is a domestic or offshore violation and whether it is an FBAR violation (usually at the 50% maximum balance or $100,000, whichever is higher and $100,000 is adjusted for inflation).
Conversely, for non-FBAR related violations (even of the international assortment), IRS agents have some more wiggle room to reduce the penalty.
- Prevent a criminal investigation
- Close out the matter on the issues
- Penalties are significantly higher than the other programs
Offshore Voluntary Disclosure Program (OVDP)
Around 2008, several foreign financial institutions in Switzerland entered into deferred prosecution agreements. At that time, the IRS was intensely seeking out information regarding undisclosed accounts and US taxpayers who may not have been compliant. This led to an offshoot of VDP which was called OVDP. The penalty increased over the 9 or 10 years OVDP was available, but the program provided taxpayers with three great benefits:
- Avoid criminal investigation
- Additional audits and investigations were nearly always avoided
- A 906 closing letter was issued, which closed the matter
OVDP was initially for both willful and non-willful taxpayers. In 2014, the standalone Streamlined Procedures were created to assist non-willful taxpayers. But, even if a person was willful, some taxpayers still preferred to enter OVDP as opposed to the Streamlined program due to the fact that the IRS would issue a closing letter when the process was complete — and nearly all taxpayers could avoid audits on issues involving the disclosure.
In 2018, the IRS ended this program. A few months later, the IRS unveiled the updated version of the Voluntary Disclosure Program, which now contains the disclosure rules and requirements for both domestic and offshore noncompliance.
Offshore Disclosure is Dynamic and Continues to Evolve
The Offshore Disclosure Program continues to evolve. While some taxpayers are understandably nervous when it comes to getting into compliance and prefer to sit on the sidelines waiting to see if a better deal comes along — the going theme in recent years has been for the IRS to make submission more difficult.
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