The IRS to Remove VDP Willfulness Checkbox in New Form

IRS Will Remove VDP Willfulness Checkbox in Updated Form

IRS Will Remove VDP Willfulness Checkbox in Updated Form

Recently, the National Taxpayer Advocate convinced the Internal Revenue Service that it should remove the willfulness checkbox from the VDP application. In prior versions of the IRS VDP preclearance form (Form 14457), a taxpayer was not required to certify under penalty of perjury that they were willful by marking a box on the preclearance form. But, in the most recent version of the form, the checkbox was added so that taxpayers must certify under penalty of perjury that they are willful when they submit to the program — even though it is in the preclearance phase of submission. This changed the landscape of VDP because, in prior years, taxpayers could still try to mitigate penalties to reduce the harsh willfulness violation fine — but by making the admission as part of the preclearance process, it became less likely the IRS would consider penalty mitigation. It also made many taxpayers hesitant with moving forward with VDP, due to the legal ramifications (especially if the preclearance was rejected)

In the Before-Time of OVDP

Before the introduction of the willfulness check box and 2018 changes to the voluntary disclosure program, a taxpayer with offshore issues could submit to OVDP instead of streamlined to err on the side of caution — but have an opportunity to negotiate a penalty reduction.  Over time, the IRS became less inclined to offer penalty mitigation, and then with the introduction of the willfulness checkbox, the IRS became even more stringent and less inclined to even consider negotiating a penalty waiver.   *It is important to note that the IRS declined other proposed changes to the program involving the penalty structure and opportunity for appeals.

As provided by the national taxpayer advocate blog:

Reports a Win For Taxpayers – IRS Agrees to Remove Willfulness Checkbox on VDP Application Form

• • • “It is that time of year again – school is out and so are report cards. It is also time for TAS to publish its report card for the IRS. Each year, I submit the National Taxpayer Advocate Annual Report to Congress (ARC) with recommendations for administrative actions the IRS can take to resolve problems encountered by taxpayers. The IRS is statutorily required to respond to our recommendations. TAS’s recommendations, the IRS’s responses, and TAS’s comments on the responses are then incorporated into the Annual Report to Congress Report Card.

    • Of the 77 administrative recommendations I made in the 2024 ARC, the IRS has agreed to implement 42 (or 55 percent) of the recommendations in full or in part. I appreciate the IRS’s efforts to incorporate TAS’s recommendations on behalf of taxpayers to improve tax administration.

    • In the coming weeks, I will address the IRS’s responses to recommendations I made regarding specific most serious problems (MSPs) included in my 2024 ARC. This blog highlights the IRS responses to some of my Criminal Voluntary Disclosure Practice (VDP) recommendations.

IRS Criminal Voluntary Disclosure Practice

• • • The IRS’s Criminal VDP offers taxpayers with potential criminal tax exposure a critical opportunity to self-correct their compliance failures. By voluntarily coming forward, these individuals and entities can pay back taxes, penalties, and interest and avoid criminal prosecution. In return, the IRS gains revenue, closes part of the tax gap, and promotes future compliance. When effectively structured and fairly administered, the VDP serves as a powerful compliance tool that benefits both taxpayers and the government. However, starting in 2018 the IRS made significant changes to the VDP that made it more burdensome, reduced its attractiveness, and caused many practitioners to hesitate to recommend it to their clients, thus affecting participation.

    • My recommendations focus on ways for the IRS to identify and understand specific barriers preventing taxpayers from participating in the VDP and improve the program to reduce burden and increase participation. Taxpayers scored some important wins with the IRS agreeing to adopt four of my recommendations in full or in part. However, the IRS’s responses to some of my recommendations fail to make the grade.

The Good News For Taxpayers

Willfulness checkbox:

• • • One of the most controversial changes the IRS made to the VDP was adding a “willfulness checkbox” on Form 14457, Voluntary Disclosure Practice Preclearance Request and Application. Taxpayers must check this box and affirmatively admit under penalty of perjury that they were willful in their noncompliance actions. The legal implications of making this admission are concerning. By affirming willfulness, taxpayers risk incriminating themselves, especially if the IRS decides to deny them participation in the VDP or later revokes their preliminary acceptance and uses this admission against them.

    • Because of the potential consequences of this admission and the chilling effect this requirement may have on participation in the VDP, I recommended the IRS eliminate the willfulness checkbox. The IRS agreed and committed to remove the checkbox from the next revision of Form 14457. By deleting the checkbox, the IRS will lessen taxpayers’ and practitioners’ concerns regarding the legal effect of making an explicit admission of willfulness and encourage greater participation in the VDP. This is a big win for taxpayers, and TAS commends the IRS for listening. In light of this agreement, I would recommend the IRS not require any taxpayer to check the box on the current version of the form while it is updating Form 14457. This effort is a start in improving the program.

Program Review and Data Collection:

• • • Practitioners report that the VDP process is overly complex and unfairly risky, deterring taxpayers from coming forward. To make the VDP fairer and more accessible, I recommended the IRS convene a working group to comprehensively review the current VDP, provide recommendations for reforming the program, narrow the definition of illegal source income to encourage greater participation in the VDP, and clarify other terms. I also recommended that the IRS begin collecting robust program data, including the amount collected through the VDP, to measure program effectiveness.

    • The IRS agreed to my program review recommendations and stated that it is “comprehensively reviewing the VDP with input from stakeholders” and expanding the program to make allowances for illegal income derived from, or related to, the sale of marijuana. This is promising as a comprehensive review of the VDP that includes stakeholder input is key to guaranteeing the program is viable and meets its intended goal of obtaining increased compliance. Additionally, narrowing the illegal income definition should increase eligibility for the VDP and encourage more taxpayers to participate. The IRS also agreed to collect data on tax, interest, and penalties collected through the VDP. The IRS needs this information to evaluate the effectiveness of the VDP and its agreement to collect this data is a positive step to gauge the program’s success.

The Not So Good News For Taxpayers

Penalty Structure:

• • • Under the current VDP, taxpayers must submit to a six-year disclosure period and agree to assessment of the 75 percent civil fraud penalty and willful Foreign Bank and Financial Reports (FBAR) penalty, if applicable, on the highest tax liability period. The IRS’s application of this one-size-fits-all penalty structure inappropriately ignores taxpayers’ individual circumstances. And, for many taxpayers, the penalty may be too severe to make participation in the VDP attractive. I therefore recommended that the IRS review the current penalty structure to determine whether it deters participation and reconsider the 75 percent civil fraud penalty, balancing the goals of bringing noncompliant taxpayers into the program without discouraging compliant taxpayers from staying compliant. However, the IRS refused to implement this common-sense recommendation. I will still continue to advocate for reconsideration of the penalty structure.

    • Participation in the VDP is low. As of August 31, 2024, the IRS had completed only 161 criminal VDP cases since the beginning of fiscal year 2019 when the 75 percent civil penalty requirement was incorporated.

    • This fact underscores the reality that the structure and penalty framework of the VDP is not working effectively to encourage participation. As a thorough review of the VDP would necessarily include examination of all significant program terms, it is discouraging that the IRS is unwilling to review the structure and penalty requirements as part of its “comprehensive review.”

Lack of Appeal Rights and Payment Flexibility

• • • To complete the VDP, taxpayers must agree to the assessment of tax, penalties, and interest determined by the IRS regardless of whether they agree with the results of the examination. There is no avenue to dispute the IRS’s determination. Taxpayers must also either pay all tax, penalties, and interest in full at the close of the examination or secure a full-pay installment agreement. If they cannot pay, they are removed from the VDP. Thus, it is the IRS’s way or the highway and not good for future compliance.

    • To improve accessibility and ensure fairness, I recommended the IRS extend appeal rights to VDP participants who disagree with positions taken by the IRS examiner and allow taxpayers who establish they cannot pay in full to enter into alternative payment arrangements. The IRS refused to implement either recommendation, maintaining that since the VDP is voluntary taxpayers are required to accept its terms, including assessment and full payment of the tax, penalties, and interest the IRS determines are due. However, this policy ignores the facts that taxpayers still retain the right to pay no more than the correct amount of tax and IRS revenue agents are not always right. Currently, the taxpayer’s options are accepting an incorrect legal position or withdrawing from the program – a Hobson’s choice. Allowing taxpayers to go to the Independent Office of Appeals would be a start to protecting taxpayer rights within the VDP. Further, allowing flexible payment options would enable taxpayers who want to come forward and resolve their noncompliance but are unable to pay in full to participate in the program and enhance overall tax compliance. Therefore, I am not giving up on these recommendations. I will continue to advocate for the IRS to reconsider the full-pay requirement and to allow appeal rights to participants thereby eliminating the Hobson’s choice.

Conclusion

• • • I applaud the IRS for agreeing to my recommendations to eliminate the willfulness checkbox and collect data regarding amounts collected through the VDP. These signal good news for taxpayers and the program. However, while the IRS’s willingness to review the VDP is promising, its refusal to consider certain key components of the program, including penalty structure, opportunity for appeal, and payment flexibility, in its review raises concerns as to how “comprehensive” the review will be. If properly structured and executed, the VDP can potentially attract a significant number of noncompliant taxpayers and be an effective mechanism to bring them into the system. I encourage the IRS to look at all aspects of the VDP so that it can craft a fairer and more effective program and bring those taxpayers into compliance.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.