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Who Should Apply for the IRS Voluntary Disclosure Program?

Who Should Apply for the IRS Voluntary Disclosure Program?

Following the highly successful offshore voluntary disclosure program's closure at the end of 2018, the IRS updated its previous voluntary disclosure program. In April 2020, it released a detailed form and instructions for participating in this new iteration of the program.

Then last fall, the agency updated the voluntary disclosure section of the IRS handbook. It also launched a new website describing the new program, identifying who can participate, and describing the application procedures.

Unlike some earlier compliance programs, which were generally limited to individuals, this updated program is available to individuals, administrators, businesses, and executors.

The program provides a means to voluntarily disclose tax violations/deficiencies and those related to income tax (domestic and foreign). Additionally, the program is open to people who wish to disclose potential issues relating to gifts, employment, and property tax issues.

As comprehensive as the program may seem, it will not be a suitable option for many taxpayers. Anyone considering participating should consider the pros and cons, preferably with an experienced lawyer.


Why use a voluntary disclosure program?

For years, the Internal Revenue Service (IRS) has implemented programs that allow people to report tax offenses to reduce tax offense prosecution risk substantially.

The voluntary disclosure program, in particular, offers a high degree of predictability due to its "one size fits all" penalty structure. As part of this program, a fixed penalty was applied based on the fiscal year with the highest total balance of the non-compliant account. It replaced the normal penalties that would otherwise have been applied per the Foreign Bank Account Report and Foreign Information Return Rules.

Many taxpayers participated because of this standard penalty structure. The updated program also provides a framework for compliance with tax laws in exchange for a lower risk of prosecution.

Although a submission does not necessarily have to involve an offshore issue, the government remains focused on applying criminal taxes in an extraterritorial context, so the program may be of particular interest to taxpayers who are exposed to criminal taxes resulting from non-ownership in the USA.


How to apply

To access the program, taxpayers must complete IRS Form 14457. An administrator can make the submission on behalf of a trust, individual, partnership, corporation, and executor in some cases.

The submission can cover foreign and domestic income tax, inheritance and gift tax, and labor tax. In particular, it cannot be used to disclose income from illegal sources, including income from illegal activities for federal plans, even if those activities are permissible under state law (for example, income from the cannabis industry).

The form is divided into two parts. The first part is a pre-clearance, which determines if a taxpayer is qualified to participate and whether the Internal Revenue Service is aware of the taxpayer's obligations.

Acceptance in the program is not assured, and the taxpayer is not required to file returns for the previous year until the IRS appoints a case officer and clears the taxpayer to participate.

Once accepted into the program, the taxpayer must provide a detailed description of the implicit tax history in the second part of the form. The narrative cannot be supplemented later, so providing a full story from the outset is essential.

There is typically a six-year review period for filing unfilled or amended returns, and the IRS will implement a civil fraud penalty to the year with maximum tax liability.

Details on applying sanctions for foreign information return and the sanctions related to jobs, donations, and wealth taxes are still unclear. When non-compliance with financial and foreign bank accounts is a problem, deliberate FBAR penalties may be applied, representing a significant amount in monetary penalties.

To participate in the program, the taxpayer must cooperate with public authorities to investigate third parties who may have contributed to the non-compliance. This is in line with the Department of Justice's focus and the IRS's Criminal Investigations Unit on third-party advisors, known as professional facilitators.

Instructions for Form 14457 require cooperation with the IRS in establishing tax obligations and taxpayer reporting requirements and cooperation in IRS investigations of professional facilitators.

To this end, the taxpayer must provide detailed information about the professional advisers and facilitators who provided services to them during the period of non-compliance.


Who should apply?

Only taxpayers who have been involved in an intentional or fraudulent breach of tax obligations and who face a significant risk of legal action should consider filing a claim. These taxpayers generally fall into one of the following three categories:


Anxious Taxpayers

This category includes taxpayers who lose sleep over worrying about the criminal consequences of failing to comply with taxes. For the anxious client, the fine's uncertainty will hardly be a barrier to participation in the program, as the threat of imprisonment is very high.

Likewise, this type of client is not discouraged by disclosing his business or others' identity fully, and collaboration with the government is not an issue. The program's drawbacks and potential uncertainties are offset by the clear path it provides for dealing with taxes for these clients.


Taxpayers who are afraid of third-party disclosure

The program is likely to attract taxpayers who fear or even anticipate disclosure of tax evasion by others. Disclosure to third parties can take different forms:

  • A financial institution or service provider may provide information to the government in response to a John Doe subpoena, initiating a criminal tax investigation.

  • A taxpayer employee may initiate a whistle-blower action.

  • Details about a person's defaults may appear during the divorce process.

  • Litigation in state court involving a taxpayer's activity may reveal certain facts that could lead to a criminal investigation by the IRS.

Those considering third-party disclosure should promptly hire a lawyer to assess participation benefits and move quickly to prior authorization, if necessary. Delaying the request may disqualify the taxpayer if the government has already initiated an investigation or becomes aware of non-compliance.


Taxpayers whose compliance costs may be relatively low

Finally, taxpayers with criminal tax exposure for whom the program is economically desirable, usually in purely domestic situations where intentional FBAR fines are not an issue.

For these types of individuals or businesses, the fraud control structure can lead to a large but manageable fine. It can provide the taxpayer with a means to comply with the law without worrying about impending criminal exposure.


Who shouldn't apply?

The program may not be appropriate for all taxpayers who are not compliant. In particular, those whose tax disadvantages are not criminal, those who do not want to disclose the full extent of their behavior concerning their tax flaws, and those who do not want to cooperate with the IRS should explore alternative options after having consulted a lawyer.


Taxpayers who have not engaged in criminal behavior

A taxpayer who is highly exposed to taxes and fines but whose conduct does not result in criminal behavior should not use this program.

A typical de facto standard includes a U.S. citizen who is a resident alien who owns multiple foreign entities and accounts and who has not filed a U.S. tax return either through negligence or (mistaken) belief that he/she is not required to do so.

High exposure to taxes and fines is common in the international context; in fact, various anti-deferral regimes apply when U.S. citizens are interested in non-U.S. entities and fail to disclose such foreign entities' ownership and accounts may result in penalties.

A person may have been negligent in not engaging competent tax advisors in the United States. Still, in the absence of affirmative action to hide income or avoid paying U.S. taxes, that person is unlikely to have engaged in criminal tax behavior. This person should explore other compliance programs that specifically deal with undeclared foreign assets and income.


Taxpayers who have been involved in other criminal acts and do not want to disclose the extent of their conduct

Anyone who has participated in criminal offenses related to the tax violation but whose conduct exposes them to non-tax criminal liability and who, for this reason, does not wish to provide a full discussion of the facts relevant to the tax violation should not apply.

The taxpayer must provide a detailed account describing the facts surrounding the non-compliance with tax obligations; providing less than a complete history may result in program withdrawal and prosecution.

For some, it may be challenging to provide a full history of a tax violation without revealing other non-tax criminal behavior, such as wire fraud.

The confidentiality of information on taxpayer returns is generally protected by Section 6103 of the IRC.

Notwithstanding this general rule, the IRS may share information provided by a taxpayer under the program with certain federal agencies and state tax agencies for non-tax purposes, including the investigation of tax crimes.

Taxpayers should carefully weigh the risks of such disclosure with a lawyer's assistance to assess whether participation in the program is appropriate.


Taxpayers who do not wish to cooperate with the IRS fully.

Other taxpayers who feel comfortable disclosing their tax violation, but are unwilling to provide details of their professional advisers involved in the violation, should not apply.

The instructions for Form 14457 are clear. Program participants must disclose information about external service providers who have assisted the taxpayer in the relevant years and must cooperate with the government to investigate these "professional facilitators."

Investigating professional facilitators remains a top priority in enforcing criminal taxes, so this requirement should not be taken lightly.


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