New IRS Voluntary Disclosure Program & OVDP Updated
The New IRS Voluntary Disclosure Practice (VDP)
For U.S. Person Taxpayers who are out of compliance with their IRS tax and reporting requirements and want to voluntarily get into compliance, the U.S. government has developed multiple offshore tax amnesty opportunities — with the majority of the programs being designed for non-willful Taxpayers. When a Taxpayer is willful (or is otherwise uncomfortable certifying under penalty of perjury that they are non-willful), they no longer qualify for the non-willful programs such as the Streamlined Filing Compliance Procedures or Delinquency Procedures. Instead, willful Taxpayers submit to the IRS Voluntary Disclosure Program. The ‘New’ IRS Voluntary Disclosure Practice is continually being updated, with the most recent version of the program being much more strict than past versions. Let’s review the basics of the IRS Voluntary Disclosure Practice.
*Golding & Golding previously published the Is the IRS Voluntary Disclosure Practice (VDP) Right for You? article back in 2022 and has since updated and expanded the list.
Timing a VDP Submission is Crucial
The Taxpayer must submit a preclearance letter before they are contacted by the IRS. If the IRS approaches the Taxpayer first, then the Taxpayer is no longer eligible to submit to the IRS Voluntary Disclosure Program.
Taxpayers Must Certify They are ‘Willful’
Under the prior version of the program (OVDP), some non-willful Taxpayers still preferred to submit to OVDP instead of the stand-alone Streamlined Procedures — and pay a higher penalty — because they wanted to receive a closing agreement (which is not available under the Streamlined Procedures). In addition, it allowed Taxpayers to bring eight years of tax returns into compliance instead of three years — which brought additional peace of mind. The new version of the program is designed for willful Taxpayers, so Taxpayers must acknowledge that they are making a willful representation to the IRS at the time they submit to VDP.
Taxpayers Must Make a Full Voluntary Disclosure
The IRS Voluntary Disclosure Program requires the Taxpayer to make a full disclosure. While this does not require the Taxpayer to atone for every tax sin they have ever made in their lifetime, the Taxpayer must make a full disclosure for the VDP compliance period — even if they think some of their foreign accounts or assets are out of reach of the IRS.
Taxpayer Will Submit to an IRS Audit/Examination
Under the new IRS Voluntary Disclosure Program procedures, all Taxpayers are subject to an examination by the Agent assigned to the case — along with the Agent’s Supervisor. The examination can go beyond issues involving voluntary disclosure, so Taxpayers should be cautious before submitting to the program.
The Unreported Income Must Be Legally Sourced Money
If the foreign accounts, assets, or income was generated through illegal means (illegal narcotics for example), then the Taxpayer is ineligible for VDP. This is because the IRS will not allow a Taxpayer to clean dirty money by washing it through the Voluntary Disclosure Program.
Penalty Negotiation is Limited
When a person enters the Voluntary Disclosure Program for offshore-related matters, they typically must 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). In addition, under the current version of the program the IRS is very reluctant to approve any reduction in the offshore penalty amount.
Taxpayers will Avoid Most Criminal Prosecution & Immigration Issues
While the Internal Revenue Service does not guarantee that the Taxpayer will avoid criminal prosecution, a Taxpayer will rarely be prosecuted as a result of a 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.
The IRS Issues a Closing Letter (906)
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.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.
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