Navigating the complexities of undisclosed foreign bank accounts can be daunting, but understanding the IRS's Voluntary Disclosure Practice (VDP) can be your first step towards compliance and peace of mind.
The Purpose and Scope of the IRS Voluntary Disclosure Practice
The IRS's Voluntary Disclosure Practice (VDP) is a program designed for U.S. taxpayers who have willfully failed to report foreign financial accounts and related income. It offers a pathway for these individuals to come into compliance, resolve their tax liabilities, and potentially avoid criminal prosecution. The VDP covers both domestic and offshore noncompliance, providing a comprehensive solution for various forms of tax noncompliance. For those dealing with non-willful conduct, you may want to explore the IRS Streamlined Offshore Program as an alternative.
Administered by IRS Criminal Investigation (CI), the VDP applies to all voluntary disclosures received after September 28, 2018. It may also apply to unresolved non-offshore disclosures received before that date, at the IRS’s discretion.
Eligibility Criteria for the Voluntary Disclosure Practice
The VDP is specifically intended for taxpayers whose noncompliance was willful. Recent changes to Form 14457 require taxpayers to explicitly acknowledge their willfulness. Failure to do so results in denial of entry into the VDP. For a deeper understanding of the concept of willfulness in tax compliance, you might find the discussion on the significance of willfulness definition in U.S. v. Saydam informative.
Only taxpayers with legal source income are eligible for the VDP. This means that income derived from activities illegal under federal law, such as cannabis businesses, is not eligible. Furthermore, the disclosure must be made before the IRS initiates a civil examination, criminal investigation, or receives information about the taxpayer’s noncompliance from another source.
Penalty Framework: What to Expect
The standard disclosure period under the VDP is the most recent six tax years for which the due date has passed. This period may be expanded if the taxpayer requests it or if the IRS determines that noncompliance extends beyond six years. If noncompliance involves fewer than six years, only those years must be corrected.
Taxpayers should expect to face a civil fraud penalty under IRC § 6663. The VDP generally requires full payment of all liabilities. If a taxpayer cannot pay in full, they must provide detailed financial information and work out an acceptable payment arrangement with the IRS.
Key Differences Between VDP and the Former OVDP
While both programs aim to bring taxpayers into compliance, the VDP and the former Offshore Voluntary Disclosure Program (OVDP) have notable differences. The OVDP, which closed in 2018, offered a more structured penalty framework and covered only offshore noncompliance.
In contrast, the VDP covers both domestic and offshore noncompliance and requires taxpayers to acknowledge willfulness explicitly. The VDP also involves a more flexible penalty framework, tailored to the specifics of each case.
Steps to Take if You Have Undisclosed Foreign Accounts
If you have undisclosed foreign accounts, the first step is to consult with a tax professional experienced in dealing with the IRS VDP. They can help assess your situation, determine your eligibility for the VDP, and guide you through the disclosure process. For those who may have non-willfully failed to report foreign accounts, exploring strategies for late FBAR filing could be beneficial.
You will need to gather all relevant financial documents and be prepared to fully cooperate with the IRS, including submitting to interviews and providing any requested information. Timeliness is crucial, as the disclosure must be made before the IRS initiates any investigations or receives information about your noncompliance from another source.
Disclaimer
This blog post is for informational purposes only and does not constitute legal or tax advice. For personalized advice, please consult a qualified tax professional or attorney. The IRS's policies and procedures may change, and it is important to stay informed about the latest regulations and requirements.