Should You Voluntarily Disclose Foreign Accounts if You are Willful?
How IRS Voluntary Disclosure Program Practice Has Changed: At the end of 2018, the Internal Revenue Service discontinued the Offshore Voluntary Disclosure Program (OVDP). Then, at the end of 2018 and early 2019, the traditional Voluntary Disclosure Program (VDP) was updated due to the closure of the Offshore Voluntary Disclosure Program (OVDP) and other recent changes to the enforcement protocols of domestic tax compliance. A common question tax attorneys receive from potential applicants regarding Voluntary Disclosure is whether or not the program is good for taxpayers? The answer will depend on what the taxpayer is seeking to achieve from submitting to the program. Here are three common benefits to the program to consider:
Criminal Tax Liability
Typically (but not always), taxpayers seek to enter the Voluntary Disclosure Program (VDP) because they are willful and seeking to avoid criminal enforcement. The IRS only pursues a few thousand criminal tax cases each year and so, the overall likelihood that a taxpayer is going to be investigated for a tax crime is relatively small. Still, that statistic does little to calm the mind of a taxpayer who believes that they might have crossed the line from a civil tax violation to a criminal tax violation. While the new version of VDP has very specific requirements in terms of what the taxpayer must provide regarding the noncompliance, the IRS still stands by the position that if a taxpayer is honest and makes a full disclosure, then they will almost always avoid criminal enforcement. Thus, if the goal of the taxpayer is to avoid criminal enforcement, then the new VDP is still a good option.
Mitigating FBAR Penalties
For many taxpayers, the FBAR penalties are the biggest cause for concern. Under the new version of the program, the penalties nearly doubled from what they were at the tail end of the OVDP (27.5%) — presuming that there were no bad banks involved under OVDP, which automatically brought the whole penalty up to 50%. With OVDP, the penalty amount was firm, unless the taxpayer opted out and shot to reduce the penalty — which may very well result in an increased penalty amount. Under the new version of the program, the IRS goes by the code and the Internal Revenue manual as to the issuance of FBAR penalties. For the most part, taxpayers are going to get hit with a 50% penalty on the highest year’s non-compliance. But, the taxpayer has the opportunity to try to mitigate the penalties in accordance with IRS guidelines. In addition, some examiners are willing to negotiate the penalty, especially if the 50% penalty is below the $100,000 minimum penalty (adjusted for inflation).
Audit vs. Opt-Out
One drawback from the prior OVDP is that taxpayers typically have to undergo an audit as part of the VDP process. Even though the taxpayer is going to face an audit, depending on the facts and circumstances of this situation and how thorough this submission is, oftentimes the audit may be resolved by correspondence only and/or the audit is very limited in scope. The taxpayer is essentially acknowledging that they are “not non-willful” when they submit to VDP, so there is no issue of the taxpayer claiming to be non-willful when they submit to the Voluntary Disclosure Program. If a taxpayer is non-willful, then they would not submit to the Voluntary Disclosure Program (this is different than OVDP, in which many non-willful taxpayers preferred to submit to OVDP in order to receive the closing letter and avoid audit).
New Offshore VDP Is a Good Deal for Some Taxpayers
The Voluntary Disclosure Program is designed for taxpayers who cannot certify under penalty of perjury that they are non-willful. While the parameters of the program were different than they were under the prior OVDP, depending on the facts and circumstances of the taxpayer, they may find themselves in a better position than they would have fared under OVDP.
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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance. Contact our firm for assistance.