IRS’ New Offshore Voluntary Disclosure Program
When it comes to international tax amnesty and voluntarily disclosing previously unreported foreign accounts, assets, investments, and income — there are several different offshore programs available when a Taxpayer is non-willful. But, if the Taxpayer is either willful or unable to certify under penalty of perjury that they are non-willful, then the only program available would be the traditional Voluntary Disclosure Program (VDP). Prior to September 2018, there was an offshoot to the VDP program which was referred to as OVDP, but the IRS discontinued OVDP. There are many factors to consider when determining whether or not the Voluntary Disclosure Program is the right program for a Taxpayer. Here are five (5) practice tips to consider before entering the Voluntary Disclosure Program.
VDP is Designed For Willfulness
The prior version of VDP for offshore matters was not limited to Taxpayers who were willful. In fact, Before the stand-alone streamline procedures were introduced, the only offshore program option to voluntarily disclose overseas money was VDP. Thus, there are plenty of non-willful Taxpayers who submitted to the program. Even after the Streamlined Procedures or Delinquency Procedures were introduced, many Taxpayers still opted for OVDP because they would receive an actual closing letter (906) representing that the matter was complete, which is not offered under any other offshore program. OVDP was also common for non-willful Taxpayers who either did not want to risk an audit or preferred to file 8 years of tax returns instead of just 3 years of tax returns; however, the current version of the VDP is designed specifically for Taxpayers who cannot submit to one of the non-willful alternatives.
Willfulness Does not Mean Intent
The definition of the term willfulness is misleading when it is applied to voluntary disclosure. That is because it does not require the Taxpayer to have acted intentionally (or with actual knowledge) in order to be deemed willful by the IRS. Rather, if the Taxpayer merely acted with reckless disregard or willful blindness, they can also be subject to willful FBAR penalties. Moreover, the IRS has made it known that if the IRS learns that a Taxpayer was actually willful, it will take action against Taxpayers who certify under penalty of perjury that they are non-willful under Streamlined Procedures.
Full Offshore Disclosure is Required
It is important that Taxpayers are aware that in order to make a submission to the Voluntary Disclosure Program, they must make full disclosure. In other words, a Taxpayer cannot half-step into VDP and only submit the accounts or assets that they think the IRS has a better chance of discovering. Rather, all undisclosed foreign accounts, assets, investments, and income sources must be included in the VDP submission.
50% Penalty (IRM and Cases)
While there is no set penalty under the Voluntary Disclosure Program (versus under the prior OVDP), the US government takes the baseline position that the 50% penalty rule should apply (from the IRS’ standpoint, the 50% penalty is a “gimme” to avoid criminal prosecution). Based on the willful FBAR statute, updated willful FBAR regulation, and Internal Revenue Manual guidance, penalties for a willful FBAR violation are 50% or $100,000 whatever is greater, and the $100,000 adjusts for inflation.
Avoid Criminal Prosecution
While there is no absolute guarantee that a Taxpayer will avoid criminal prosecution or issues with their immigration status by entering the Voluntary Disclosure Program, it would be extremely rare for a Taxpayer to make full disclosure as part of the Voluntary Disclosure and still be pursued for criminal prosecution or deportation/removal — that would defeat the purpose and spirit of the program.
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