IRS Voluntary Disclosure Practice (VDP)
For US Person taxpayers who are out of compliance with their US tax reporting requirements and want to get into compliance, the US government has created multiple offshore and domestic tax amnesty opportunities. The majority of the programs are designed for Taxpayers who are non-willful. If a Taxpayer is considered willful (or is otherwise uncomfortable certifying under penalty of perjury that they are non-willful), then they no longer qualify for many of the programs such as the Streamlined Filing Compliance Procedures and instead will submit to the Voluntary Disclosure Program. For Taxpayers who have offshore or international tax-related issues, the program was recently updated at the same time that the Offshore Voluntary Disclosure Program (OVDP) offshoot was terminated (September 2018). Here are some of the pros and cons of the IRS Voluntary Disclosure Program.
Pros to the IRS Voluntary Disclosure Practice
Avoids Criminal Prosecution & Immigration Issues
While the Internal Revenue Service does not absolutely guarantee that the Taxpayer will avoid criminal prosecution, rarely will the Taxpayer ever be prosecuted for any information set forth in their Voluntary Disclosure Submission, as long as they made a complete and truthful disclosure. Likewise, Taxpayers are not normally referred to USCIS for any immigration-related matters related to making a voluntary disclosure.
Issues a Closing Letter
At the completion of the Voluntary Disclosure Program, the Taxpayer and the Internal Revenue Service will enter into a Closing Agreement (906 Letter). This is very helpful in bringing taxpayers peace of mind — knowing that the program has been completed and that they can move on without worrying about the IRS auditing or investigating them on these issues.
Controlling the Narrative
One additional important benefit to the Voluntary Disclosure Program that is often overlooked is that it allows Taxpayers to control the narrative in the sense that they are making the proactive representation to the IRS. Thus, they get to prepare their own narrative on Part Two of Form 14457 explaining the facts and circumstances surrounding the non-compliance. If instead, the IRS approaches the Taxpayer first, then the Taxpayer is now on the defensive — and the government has already prepared their own version of events, whether it is accurate or not.
Cons to the IRS Voluntary Disclosure Practice
Penalty Negotiation is Limited
When a person enters the Voluntary Disclosure Program for offshore-related matters, they are essentially going to have to pay a 50% penalty on the highest year’s unreported balances. The penalty has increased significantly from the good ol’ days when it used to be 20% (or even less) and then 27.5% under OVDP. While an experienced tax attorney may be able to negotiate a lower penalty (depending on the overall facts and circumstances), at the end of the day, many Taxpayers will end up paying a 50% penalty – noting, that if they were audited and hit with willful penalties, the IRS could go after them for multiple years of 50% penalty.
Acknowledgment of Willfulness
Under the prior version of the Offshore Voluntary Disclosure Program, while it was oftentimes meant for willful Taxpayers, non-willful Taxpayers entered the program as well, even after the stand-alone Streamlined Procedures were introduced. This was because, for some Taxpayers who had a smaller penalty, they wanted to receive a closing agreement (which is not available under the non-willful versions of the program) and they could get eight years into compliance (which brought additional peace of mind). Under the new version of the program, it is designed for Taxpayers who are willful, so Taxpayers have to acknowledge that they are making a willful representation to the IRS at the time they are submitting, which can be hard for some Taxpayers to swallow.
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