The (New) IRS Voluntary Disclosure Program: 2023 VDP Update

IRS Voluntary Disclosure Program Updated Practice

When a US Taxpayer is out of compliance with the Internal Revenue Service, they have different tax amnesty options available in order to voluntarily disclose their unreported money — and get into compliance. The IRS Voluntary Disclosure Program is a Federal Government program that provides Taxpayers an opportunity to disclose previously unreported offshore income, assets, investments, and accounts to the Internal Revenue Service — and resolve their foreign and US tax matters.  The Internal Revenue Service’s Voluntary Disclosure Practice (VDP) has been a continuing practice of the IRS Criminal Investigation (CI) unit for many years. The goal of the Voluntary Disclosure Progam is to facilitate Offshore and Domestic Tax compliance for Taxpayers who do not qualify as non-willful. By making a timely and complete submission to the (New) Voluntary Disclosure Program, the IRS will evaluate the Taxpayer’s facts and circumstances, determine which penalties should apply, and complete the process with a closing letter (Form 906). In exchange, the US Government will usually refrain from pursuing criminal prosecution and special agent investigations against the Taxpayer(s) — and while it does not guarantee “immunity,” Taxpayers often avoid any criminal prosecution for the prior year’s noncompliance.  The updated procedures are a great deal for non-compliant Taxpayers. The New IRS Voluntary Disclosure procedures were updated in 2019, at the close of OVDP. The IRS Voluntary Disclosure Program (VDP) allows U.S. Taxpayers to safely get into compliance and regain their peace of mind about tax filings. In recent years, the IRS has taken an aggressive position regarding foreign accounts compliance. FBAR penalties can be substantially worse if a person is under FBAR Audit instead of voluntarily disclosing under the program. The goal of IRS Voluntary Disclosure is to avoid a criminal tax investigation. If a person can qualify as non-willful, they may qualify for streamlined filing compliance as well. The tax and legal team at Golding & Golding have successfully handled offshore disclosure matters for clients located all over the world.

 IRS Voluntary Disclosure Program Basics

The IRS Voluntary Program can be a great benefit to taxpayers who may be considered “willful” by the IRS — or are simply uncomfortable with certifying under penalty of perjury that they are non-willful. In some cases, VDP will still be a preferred method to the Streamlined Procedures for non-willful taxpayers. The main requirement is that the money cannot be from Illegal Sources. 

New IRS Voluntary Disclosure Program Procedures

Under the new voluntary disclosure program, the Internal Revenue Service combined Offshore Voluntary Disclosure with Domestic Voluntary Disclosure into one program. The penalty structures have also been revised (for better, and for worse).

Our Tax Specialist team can get you into IRS Compliance for U.S & Offshore Assets & Income.

Offshore Accounts, Assets & Income

The IRS has developed several Offshore Voluntary Disclosure tax amnesty compliance programs to allow Taxpayers to report and disclose unreported offshore accounts and income.

U.S. Income Reporting

This article focuses on Offshore Voluntary Disclosure. If you are seeking to learn about the U.S., Non-Offshore Voluntary Disclosure Practice for U.S. Income, we have a separate article detailing the Domestic Voluntary Disclosure.

We want to help you bring understanding and clarity to this often confused (and highly specialized) area of tax law.

Why Must Money be from Legal Sources?

The reason the money must be from legal sources is simple: If the money was from illegal sources, then by entering the IRS Voluntary Disclosure, you would be “cleaning dirty money,” and the IRS would be serving as the launderer…

Want to use the IRS to Launder Foreign Money, think again.

When is Criminal Prosecution Recommended?

If the IRS catches you committing a tax crime, chances are they will investigate.

The IRS is not selective when it comes to enforcement. Movie Stars, Musicians, Moguls, Politicians are all fair game when it comes to IRS criminal prosecutions. The general rule is that if you are out of IRS compliance for more than two (2) years, your civil violation(s) could turn criminal.

Moreover, situations that will greatly heighten your chances of getting caught, include:

• • • A scorned spouse or lover;

    • Angry or vindictive Business Partner;

    • Third-Party who just doesn’t like you (you would be amazed...);

    • Someone who overheard something about what you did and wants to “blow the whistle”

    • Someone who is already in trouble and uses information he or she has against you to leverage a better deal

How the Updated IRS Voluntary Disclosure Program Works

The IRS is cracking down on all forms of Tax Fraud and Tax Evasion. While the IRS’ recent focus has been directed toward Offshore Disclosure (OVDP and the Streamlined Program) involving Foreign Money, Assets, and Income – U.S. Tax Crime is still a major enforcement priority.

Whether you are a U.S. Resident or business with unreported Income, or a Foreign Resident (U.S. Person) with unreported Business Income, Assets, or Earnings, it is important to remain in tax U.S. tax compliance.

How does IRS Voluntary Disclosure Help?

As provided by the IRS:

• • • “It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.

    • This voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.”

You Must Make a Full Voluntary Disclosure

Generally, once you make a full disclosure and pay all the necessary taxes, fines, penalties, and interest, the IRS is less inclined to investigate or prosecute you.

Why?

The IRS has limited resources. In other words, the IRS simply does not have the time or money to enforce tax crimes against each and every person who may have made a mistake – or worse – in prior tax years.

No Guarantee of Immunity from Prosecution

A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

Truthful and Timely

A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

• • • A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining tax liability

    • The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties.

What is at Risk if You do Not Disclose Under IRS Voluntary Disclosure?

If you do not enter the IRS Voluntary Disclosure Program, and you get caught, the IRS may pursue an Eggshell Audit, Reverse Eggshell Audit, IRS Special Agent Investigation, and/or Criminal Prosecution by either the Internal Revenue Service or the Department of Justice (depending on the extent and nature of the crimes).

*The IRS has a nearly 100% conviction rate on tax fraud and evasion cases.

**In recent years, the courts have extended jail sentences for financial crimes and coined the term “Financial Murder.”

The U.S Government is Using FATCA To Prosecute U.S. Citizens and Non-U.S. Citizens

The Dilemma – Should I Voluntarily Disclose or Not?

There are three decisions to make for a person who has committed a tax crime:

Do Nothing

Every tax professional has the duty and responsibility to tell taxpayers who are out of compliance and/or not properly filing their taxes that they should go back and make sure their taxes are correct.

But, it is up to the taxpayer to decide to voluntarily disclose; the tax attorney cannot force the taxpayer to go back and amend their tax returns – or report the person to the IRS.

*If the IRS believes it can prove that the taxpayer committed civil fraud, there is generally no time limit as to how far back the IRS can go.

Amend Prior Returns (Quiet Disclosure)

If you file amended returns without entering the program, you are putting yourself at risk.

The problem with this strategy is that if they are detected and it turns out that the person is prosecuted, the taxpayer would probably be in a worse position than if they had come forward under the voluntary disclosure program; paid the taxes, fines, and penalties, and resolved the matter.

It all boils down to a taxpayer’s risk management level — whether they want to pay the outstanding tax fraud penalties, and how bad they want to try to avoid prison, which brings us to our third option.

Voluntary Disclosure

Due to the potential criminal nature of Voluntary Disclosure, a Taxpayer should first speak with an experienced voluntary disclosure lawyer before making any representation to the IRS.

Experienced IRS Voluntary Disclosure Attorneys (Golding & Golding Represents Clients Worldwide)

IRS Voluntary Disclosure Program Steps

The first phase of making a voluntary disclosure is to submit Part I of IRS Form 14457. Once the taxpayer is accepted, then the applicant submits phase 2 of the the 14457 form.

The Submission Must be Timely

In order for an IRM Voluntary Disclosure submission to be timely, it must be:

Not Under Personal IRS Examination

The IRS has initiated a civil examination or criminal investigation of the taxpayer or has notified the taxpayer that it intends to commence such an examination or investigation.

Hopefully, Nobody Snitched on You

The IRS has received information from a third party (e.g., an informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.

No Directly Related IRS Examination

The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.

No Criminal Action Initiated

The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

Updates to Voluntary Disclosure Practice

The IRS has announced a new set of rules involving OVDP and the IRS Voluntary Disclosure practices, referred to as the Updated Voluntary Disclosure Practice.

The IRS will provide future updates, modifications, and revisions – but for now here are the key takeaways from the memorandum the IRS issued on 11/29 (memo dated 11/20).

Old OVDP

Previously, OVDP (Offshore Voluntary Disclosure Program) required that applicants had at least some offshore (aka foreign or international) income in order to apply for the program.

If a person had offshore income, they could also have domestic income as well – but could not apply to OVDP unless they had some offshore income. Otherwise, the IRM 9.5.11.9 disclosure rules would apply.

Updated Procedures

Now. with the updated voluntary disclosure procedures, IRM 9.5.11.9 will be the only disclosure program for willful applicants (or those not applying for reasonable cause/delinquency proceedings)

Preclearance Letter

The IRS has released the new preclearance letter, which is required on Form 14457.

Time Period of Disclosure

The number of years for reporting to the IRS has been reduced.

Old Filing Period

Under OVDP, the period of disclosure was 8 years.

New Filing Period

Typically, under the new procedures, the disclosures will be for 6 years (which is less than the 8 years required under OVDP). BUT, if a person wants to submit for prior years beyond the 6 years, that may be a possibility.

“With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period.

Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).”

Civil Resolution Framework

The penalty is all you really care about, right?

The penalty rules have changed (for better or worse.)

Penalties on Taxes Due

The penalties on taxes due have been modified.

Previous Penalty Structure

With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. For example, You owed $25,000 in tax for Year 1, you paid a $5,000 penalty (plus estimated interest) in addition to the taxes due. Then, for Year 2, if you owed $50,000 in tax, then you had to pay another $10,000 penalty (plus estimated interest), and so on for all eight years.

New Penalty Structure

Now, taxpayers will generally pay a 75% “fraud” penalty on the amount of tax due (for the highest year only).  If the taxpayer never filed taxes, a similar framework applies IRC 6651(f).

“Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.

In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”

*Taxpayer can try to argue for a reduced penalty under IRC 6662 (generally, 20%), but the IRS has stated that it is unlikely the reduced penalty would be granted.

Penalties on FBAR

The FBAR Penalties have been revised as well.

Previous FBAR Penalty

The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance.

For example, if you had $2,000,000 in unreported balances for the highest year in the compliance period. your penalty would be $550,000.

*This presumes no “bad banks” were involved.

New FBAR Penalty

Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.

• • • “After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

    • In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.

    • Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate

    • Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”

The examiner’s work papers must support all willful penalty determinations and document the group manager’s approval.

Failure to File Informational Returns

There is a new (sometimes more forgiving) penalty framework for non-filed information returns.

Previous Information Return Penalties

Under prior OVDP rules, informational returns did not receive preferential treatment.

New Information Return Penalties

This is a pleasant surprise. The IRS will NOT automatically issue penalties against applicants who failed to file informational returns.

Informational returns typically include:

• • • 5471 Form (Corporation that is Foreign)

    • 5472 Form (Foreign Owner of a “U.S. Corporation”)

    • Form 8865 (Partnership that is Foreign)

    • Form 3520-A (Foreign Trust)

The IRS Agent assesses the totality of the circumstances and will determine if penalties are warranted.

“Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.”

Other Penalties

Penalties relating to excise taxes, employment taxes, estate, and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.

Appeal

Taxpayers retain the right to request an appeal with the Office of Appeals.

What are Disqualifying Factors?

The IRS has listed various factors that will disqualify a person from successfully making an IRS Voluntary Disclosure. These factors include:

• • • Are you currently the subject of a criminal investigation or civil examination? (If yes, specify)

    • Has the IRS notified you that it intends to commence an examination or investigation? (If yes, specify)

    • Are you under investigation by any law enforcement agency? (If yes, specify)

    • Is the source of any of your income from illegal activity?

    • Do you have any reason to believe that the IRS has obtained information concerning your tax liability? (If yes, specify.)

*These factors do not automatically eliminate acceptance into Voluntary Disclosure.

A Few Key Tips as Provided by the IRS

1. 1. 1. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

      2. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

      3. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

      4. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

What are the Fees for Hiring an Offshore Disclosure Attorney?

Learn why experienced Offshore Disclosure Lawyers always charge flat-fee for tax and legal representation — and avoid using Kovel Letters.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and the IRS Voluntary Disclosure Program.

Contact our firm today for assistance.