The Voluntary Reporting of Foreign Assets, Accounts, & Income

A Primer to Voluntary Disclosure & IRS Form 14457

A Primer to Voluntary Disclosure & IRS Form 14457 

While the IRS offers many different offshore disclosure programs (such as the streamlined procedures, delinquency procedures, and reasonable cause) for non-willful people, when a person is considered willful (or simply cannot certify under penalty of perjury that they are non-willful), the IRS Voluntary Disclosure Program (VDP) is typically their only option if they are seeking to get into compliance. In recent years, the program has been modified and in 2022, it expanded to involve cryptocurrency and other related issues. In contrast to the non-willful programs, the IRS voluntary disclosure program is very comprehensive and involves several steps and requirements that the taxpayer should be aware of before they proactively submit to this program. Here is a brief introduction of key facts US taxpayers should be aware of when submitting to the voluntary disclosure program.

VDP Is for Taxpayers Who Are Willful 

For matters involving offshore reporting before 2018, there used to be a specific version of the VDP program referred to as OVDP (Offshore Voluntary Disclosure Program). For this particular program (and even after 2014 when the stand-alone Streamlined Procedures were introduced), some non-willful taxpayers who sought to avoid an audit and/or wanted to receive a 906 closing letter still preferred to submit to OVDP. But under the new version of the program, which has more rigid penalties than the prior version of the program, it is really not designed for taxpayers who are non-willful no matter how risk-averse they may be.

14457 Pre-Clearance Letter Is Required

In order to submit to the voluntary disclosure program, taxpayers must first submit a pre-clearance letter on Form 14457. This same form number was required for OVDP as well — but the Form was modified and revised for voluntary disclosure purposes.

Domestic and Offshore Disclosures are Welcome

Whether a person has either domestic or offshore disclosure issues, they can still submit to the IRS voluntary disclosure program and they use the same Form 14457 — although the penalty structure is different for Domestic vs Foreign.

Cryptocurrency Noncompliance 

In 2022, Form 14457 expanded to include cryptocurrency. In recent years, the Internal Revenue Service has made cryptocurrency enforcement a key priority — and while they are still sticking to their prior statement that the IRS was not creating a standalone cryptocurrency voluntary disclosure program, they have expanded the pre-clearance letter for the current VDP.

It May Take a While Before Receiving Notice

In years past, the IRS would update counsel within 30-days to let them know whether the pre-clearance was accepted or not, but these days it could take several months if not years to receive notice of an acceptance of the preclearance letter – which can be both good and bad for the taxpayer.

Six Years of Submission

In order to submit to the voluntary disclosure program, taxpayers must be prepared to submit six years of FBARs, international reporting forms, and tax returns.

50% Penalty and Updated Regulations

Taxpayers are generally going to get stuck with a 50% penalty of the maximum value of most of their foreign assets in the voluntary disclosure program. While there may be some small room for negotiation, the IRS is for the most part not as willing to negotiate the penalty. Recently, their position is that by entering the program, taxpayers avoid a criminal investigation and that is worth the taxpayer a 50% penalty. This is different than under OVDP in which the penalty typically topped off at 27.5% (unless a “bad bank” was involved in which the penalty jumped up to 50%).

Tax Audits Under VDP

As part of the voluntary disclosure program, taxpayers are required to submit to an audit. Depending on the facts and circumstances of each individual submission, the audit may be relatively minor — or may become very detailed. It is important that taxpayers are aware that they may become subject to audit, although, in some special situations, an in-person or telephone audit may be avoided.

International Tax Law Specialist Representation

Submitting to the voluntary disclosure program has very detailed and complex requirements. Taxpayers should speak with one or more Board-Certified Tax Law Specialists who specialize exclusively in international tax matters, in order to get a good lay of the land about what to expect and whether their situation warrants a voluntary disclosure submission in the first place.

About Our International Tax Law Firm

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

Contact our firm today for assistance.