The U.S. government has a long history of offering voluntary disclosure policies for taxpayers in exchange for leniency. In November 2018, the current Voluntary Disclosure Practice (“VDP”) was introduced to replace the previous Offshore Voluntary Disclosure Program (“OVDP”), which ended in September 2018. Under the current VDP, U.S. taxpayers can make timely, accurate, and voluntary disclosure to the federal tax authority to become in compliance. If a taxpayer decides to participate in the Voluntary Disclosure Practice, the taxpayer is required to cooperate with the IRS in determining his or her correct tax liability and make good faith arrangements with the IRS to pay the tax, and interest penalties, if any.
What is considered a timely voluntary Disclosure?
A disclosure is only timely if the IRS receives it before:
- the IRS has initiated a civil examination or criminal investigation on the taxpayer or has notified the taxpayer of its intention to do so.
- the IRS has received information from a third party such as an informant, John Doe summons, or other foreign agencies notifying the IRS of the taxpayer’s noncompliance.
- the IRS has acquired information directly related to the concerned non-compliance of the taxpayer from a criminal enforcement action, such as a search warrant.
Is VDP the best choice for you?
Voluntary Disclosure Practice is not the only program that taxpayers can participate in to correct their noncompliance. Noncompliant taxpayers that are “non-willful” are normally eligible for the Streamlined Filing Compliance Procedures, which are associated with significantly lighter penalties. In the legal world, word has meaning. The term “non-willful” is an objective standard, instead of a subjective one. Whether the taxpayer’s conduct was willful or not depends on the facts and circumstances particular to each case. Sometimes, signing schedule B can be used to establish the willfulness of the taxpayer’s compliance. (Please read our other article for more information) If you have questions about whether your conduct is willful or not, we highly recommend that you discuss with a tax professional the specific facts in detail related to the non-compliance.
What is the process for the Voluntary Disclosure Practice?
The Voluntary Disclosure Practice consists of two steps. First, the participating taxpayer must complete Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and submit it either by fax or mail. Once the IRS grants you the preclearance confirmation, the participants can move on to the second step, which is completing and submitting Part II of the Voluntary Disclosure Application. The participating taxpayer has 45 days to submit the Part II of the application. An extension is available upon timely written request.
IRS Criminal Investigation (CI) will review the Part II of Form 14457 and determine whether the taxpayer can participate in the Voluntary Disclosure Practice. Once approved, CI will provide the taxpayer with a Preliminary Acceptance Letter and CI will forward the submitted Form 14457 to a civil section of the IRS. The taxpayer can then wait for an examiner to contact him or her.
New Updates on Form 14457
As many people may be aware, the IRS announced in February 2022 that Form 14457 had been revised to provide clarification on many issues. For example, Part I of the revised Form 14457 has a small section dedicated to virtual currency disclosure.
What are the penalties under the VDP?
To make no mistake, the Voluntary Disclosure Program can help participating taxpayers lessen the risks of a criminal investigation. However, it does not provide much relief in terms of financial penalties. Generally, the participating taxpayers are required to pay:
- the tax and the interest on the past 6 years of tax deficiencies
- if applicable, a civil fraud penalty of 75% on the highest tax deficiency for one year out of the past 6 years
- if applicable, a one-time FBAR penalty for failing to file any FBARs disclosed VDP, which is normally 50% of the highest aggregate balance of the financial account during the disclosure period or $100,000.00, whichever is greater.
The participating taxpayer is recommended to stay truthful through the VDP because if the IRS uncovers false information or illegal activity, they can recommend criminal prosecution for your case.
It is important to bear in mind that although a voluntary disclosure will not automatically grant the taxpayer immunity from prosecution, it may be taken into consideration when IRS determines whether to recommend prosecution. Before the taxpayer considers VDP, the taxpayer may want to consider the Streamlined Filing Compliance Procedure since the latter offers a more favorable penalty scheme. If you are trying to assess which program is better for you, contact Thevoz & Partners to consult your particular case. Our attorneys spend the time necessary to understand your case and provide clear guidance that is suitable for your circumstances.