Voluntary Disclosure of Non-Disclosed Foreign Assets (5 Key Steps)

Voluntary Disclosure of Non-Disclosed Foreign Assets (5 Key Steps)

Foreign Account Disclosure Programs 

When a US Person has foreign assets that they did not properly disclose to the Internal Revenue Service and FinCEN, they are considered to be out of IRS compliance for tax and reporting purposes. Since the IRS has taken a hard line on matters involving undisclosed foreign accounts and assets, taxpayers who are out of compliance will want to consider getting into compliance by using one of the offshore tax amnesty programsbefore the IRS catches up with them first. The term ‘voluntary disclosure’ in the context of the IRS is a general term used to describe the reporting of undisclosed foreign and/or domestic assets and income that were not previously reported on a tax return or IRS international reporting form. When someone refers specifically to the IRS Voluntary Disclosure Program (VDP), they are referring to the program designed for non-compliant taxpayers who are willful — or unable to certify under penalty of perjury that they are non-willful. For taxpayers who are non-willful, there are other voluntary disclosure options beyond VDP — such as the IRS Streamlined Procedures. Let’s take a brief look at five important steps taxpayers should consider before moving forward with voluntary disclosure.

Is the Taxpayer Willful or Non-Willful?

The single most important question regarding the voluntary disclosure of undisclosed foreign assets is whether or not the taxpayer was willful or non-willful. When the taxpayer is considered to be willful, the only option they have for voluntary disclosure is the traditional Voluntary Disclosure Program (VDP) — which since September 2018 has been used for both domestic and foreign asset disclosures. Otherwise, if a taxpayer is non-willful then they have many other options available to them such as the Streamlined Procedures and Reasonable Cause.

Is it Only Delinquent FBAR or other Forms as Well?

If the only issue the Taxpayer is faced with is that they did not timely file FBAR (Foreign Financial account reporting forms a.k.a. FinCEN Form 114), they may qualify for the Delinquent FBAR Submission Procedures — which usually provides a complete waiver of international reporting penalties. This is unlike the Delinquent International Information Return Submission Procedures (DIIRSP), in which the IRS no longer automatically waives penalties.

*The IRS has been known to update its website — without much warning —  in order to modify these programs (as they did with DIIRSP in late 2020) and these changes can have a big impact on the outcome of the submission.

Is there Undisclosed Income?

If a person is considering submitting to the Delinquency Procedures and they also have undisclosed income, then it increases the chance of a penalty. That does not mean that taxpayers will necessarily be penalized if they are submitting a delinquency/reasonable cause disclosure involving both assets and income — but it is important to carefully strategize the submission accordingly.

Is the Taxpayer a Foreign Resident?

When a person qualifies as a foreign resident under the Streamlined Foreign Offshore Procedures, they may qualify for a complete penalty waiver of all FBAR, FATCA, and other international information reporting penalties. Qualifying as a foreign resident under SFOP will vary depending on whether the person is a non-resident alien who was only a US person for a certain time under the Substantial Presence Test or whether they were a permanent resident or US citizen (the two tests are different).

Thinking about a Quiet Disclosure?

Some Taxpayers may consider submitting a quiet disclosure, in which they do not tell the IRS that they are resolving prior year noncompliance — and submit previous and current year reporting without properly getting into compliance first (aka ‘quietly’). This can be dangerous because if a Taxpayer gets caught submitting a quiet disclosure, it could subject the taxpayer to willfulness penalties – and even a referral to the IRS Special Agents for a Criminal Investigation.

Current Year vs Prior Year Non-Compliance

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous years’ forms without using one of the approved IRS offshore submission procedures. Before filing prior untimely international reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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