- 1 IRS Voluntary Disclosure
- 2 Krantz Attorneys, Board Certified Tax Law Specialist
- 3 IRS Voluntary Offshore Disclosure Program
- 4 Domestic Voluntary Disclosure
- 5 IRS Voluntary Disclosure Program
- 6 IRS Criminal Investigation Voluntary Disclosure Program – What is it?
- 7 Why Must Money be from Legal Sources?
- 8 Why Voluntarily Disclose?
- 9 The (IRM) IRS Voluntary Disclosure Practice is not New
- 10 When is Criminal Prosecution Recommended?
- 11 How does IRS Voluntary Disclosure Help
- 12 A Voluntary Disclosure must be a Full Disclosure
- 13 What is at Risk if You do Not Disclose?
- 14 The Dilemma – Should I Voluntarily Disclose or Not?
- 15 How to Make an IRS Voluntary disclosure?
- 16 What Must Be Included in the Letter?
- 17 The Submission Must be Timely
- 18 Updated Voluntary Disclosure Practice
- 19 Domestic Voluntary Disclosure IRS & Offshore Disclosure
- 20 Old OVDP
- 21 Preclearance Letter
- 22 Processing the Offshore Disclosure
- 23 Time Period of Disclosure
- 24 Civil Resolution Framework
- 25 Penalties on Taxes Due
- 26 Penalties on FBAR
- 27 Failure to File Informational Returns
- 28 Other Penalties
- 29 Appeal
- 30 What are Disqualifying Factors?
- 31 A Few Key Tips as Provided by the IRS
- 32 You Should Use an Attorney when Making an IRS Voluntary Disclosure
- 33 Can I Just Use a CPA?
- 34 Interested in IRS Offshore Amnesty?
IRS Voluntary Disclosure – 2019 New Program | Voluntary Disclosure
IRS Voluntary Disclosure: The IRS released new & updated procedures for IRS Voluntary Disclosure. In September of 2018, the IRS ended OVDP, and in November of 2018, the new voluntary disclosure program was introduced.
IRS Voluntary Disclosure
Under the new voluntary disclosure program, the Internal Revenue Service combined Offshore Voluntary Disclosure with Domestic Voluntary Disclosure into one program. The penalty structures have also been revised (for better, and for worse).
Our Tax Specialist team can get you into IRS Compliance for U.S & Offshore Assets & Income.
The traditional IRS Voluntary Disclosure Program updated memo is summarized below — and takes over where OVDP left off.
Krantz Attorneys, Board Certified Tax Law Specialist
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
Krantz Attorneys is the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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IRS Voluntary Offshore Disclosure Program
IRS Voluntary Disclosure is complex.
Oftentimes, the (offshore) disclosure will include issues involving FATCA, FBAR, PFIC, CFC, GILTI — as well as IRS International Reporting forms, such as
- FinCEN 114
- Form 3520 (Gifts & Inheritance)
- Form 3520-A (Trusts)
- Form 5471 (Foreign Corporation)
- Form 8621 (PFIC)
- Form 8865 (Foreign Partnership)
- Form 8938 (FATCA)
Domestic Voluntary Disclosure
*This article focuses on Offshore Voluntary Disclosure. If you are seeking to learn about the U.S., Non-Offshore Voluntary Disclosure Practice for U.S. Income, we have a separate article detailing the Domestic Voluntary Disclosure.
We want to help you bring understanding and clarity to this often confused (and highly specialized) area of tax law.
IRS Voluntary Disclosure Program
Common questions we receive about IRS Offshore Voluntary Disclosure Program:
- What is the IRS Voluntary Disclosure Program?
- Must the money be from Legal Sources?
- What is benefit of IRS Voluntary Disclosure?
- Can I avoid Criminal Prosecution?
- How does IRS Voluntary Disclosure help?
- How do I make an IRS Voluntary Disclosure?
- Examples of How IRS Voluntary Disclosure Procedures
- What kind of IRS Penalties can I be subject to?
- What won’t the IRS accept as an IRS Voluntary Disclosure?
IRS Criminal Investigation Voluntary Disclosure Program – What is it?
The IRS has developed several Offshore Voluntary Disclosure tax amnesty compliance programs to allow Taxpayers to report and disclose unreported offshore accounts and income. The traditional program for Offshore Tax Amnesty is referred to as “IRS Voluntary Disclosure.”
Since September, 2018, the specific OVDP “program” has been ended — but there are other programs still available.
The traditional IRM Internal Revenue Manual procedures will be the primary source of guidance for IRS Voluntary Disclosure. (IRM Interim Memo re: Procedures)
IRS Voluntary Disclosure Practice emphasizes voluntarily reporting previously undisclosed income and assets to the IRS.
The main requirement is that the money cannot be rom Illegal Sources.
Why Must Money be from Legal Sources?
The reason the money must be from legal sources is simple: If the money was from illegal sources, then by entering the IRS Voluntary Disclosure, you would be “cleaning dirty money,” and the IRS would be serving as the launderer…
Why Voluntarily Disclose?
The IRS is cracking down on all forms of Tax Fraud and Tax Evasion.
While the IRS’ recent focus has been directed toward Offshore Disclosure (OVDP and the Streamlined Program) involving Foreign Money, Assets and Income – U.S. Tax Crime is still a major enforcement priority.
Whether you are a U.S. Resident or business with unreported Income, or a Foreign Resident (U.S. Person) with unreported Business Income, Assets or Earnings, it is important to remain in tax U.S. tax compliance.
The (IRM) IRS Voluntary Disclosure Practice is not New
For many years, the IRS has had a non-OVDP voluntary disclosure in place. The program is designed for Taxpayers who have not reported any type of income to the U.S Government.
The program significantly reduces the potential significant fines, penalties — and worse depending — on the nature and extent of the non-compliance.
When is Criminal Prosecution Recommended?
If the IRS catches you committing a tax crime, chances are they will investigate. The IRS is not selective when it comes to enforcement.
Movie Stars, Musicians, Moguls, Politicians are all fair game when it comes to IRS criminal prosecutions.
The general rule is that if you are out of IRS compliance for more than two (2) years, your civil violation(s) could turn criminal.
Moreover, situations that will greatly heighten your chances of getting caught, include:
- A scorned spouse or lover;
- Angry or vindictive Business Partner;
- Third-Party who just doesn’t like you (you would be amazed...);
- Someone who overheard something about what you did and wants to “blow the whistle”
- Someone who is already in trouble and uses information he or she has against you to leverage a better deal
How does IRS Voluntary Disclosure Help
As provided by the IRS:
It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.
This voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.
A Voluntary Disclosure must be a Full Disclosure
Generally, once you make a full disclosure and pay all the necessary taxes, fines, penalties and interest, the IRS is less inclined to investigate or prosecute you.
The IRS has limited resources. In other words, the IRS simply does not have the time or money to enforce tax crimes against each and every person who may have made a mistake – or worse – in prior tax years.
As further provided by the IRS:
No Guarantee of Immunity from Prosecution
Voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.
Truthful and Timely
A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:
- A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining tax liability
- The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties.
What is at Risk if You do Not Disclose?
If you do not enter the IRS Voluntary Disclosure Program, and you get caught, the IRS may pursue an Eggshell Audit, Reverse Eggshell Audit, IRS Special Agent Investigation, and/or Criminal Prosecution by either the Internal Revenue Service or the Department of Justice (depending on the extent and nature of the crimes).
*The IRS has a nearly 100% conviction rate on tax fraud and evasion cases.
**In recent years, the courts have extended jail sentences for financial crimes and coined the term “Financial Murder.”
The Dilemma – Should I Voluntarily Disclose or Not?
There are three decisions to make for a person who has committed a tax crime:
Every tax professional has the duty and responsibility to tell taxpayers who are out of compliance and/or not properly filing their taxes that they should go back and make sure their taxes are correct.
But, it is up to the taxpayer to decide to voluntarily disclose; the tax attorney cannot force the taxpayer to go back and amend their tax returns – or report the person to the IRS.
*If the IRS believes it can prove that the taxpayer committed civil fraud, there is generally no time limit as to how far back the IRS can go. This will undoubtedly increase your chance of getting caught.
Amend Prior Returns (Quiet Disclosure)
If you file amended returns without entering the program, you are putting yourself at risk.
The problem with this strategy is that if they are detected and it turns out that the person is prosecuted, the taxpayer would probably be in a worse position then if they had come forward under the voluntary disclosure program; paid the taxes, fines and penalties, and resolved the matter.
It all boils down to a taxpayer’s risk management level — whether they want to pay the outstanding tax fraud penalties, and how bad they want to try to avoid prison, which brings us to our third option.
Due to the potential criminal nature of Voluntary Disclosure, a Taxpayer should first speak with an experienced voluntary disclosure lawyer before making any representation to the IRS.
How to Make an IRS Voluntary disclosure?
Unlike the offshore disclosure programs, the IRS voluntary disclosure program is a bit different.
With the IRS Voluntary Disclosure Program there is no one particular way to make a disclosure — which is why you need experienced counsel.
Let’s focus on how the non-OVDP IRS Voluntary Disclosure Practice (program) works:
What Must Be Included in the Letter?
The IRS does not tell you exactly. Instead, the IRS provides guidelines and examples.
Here are the Guidelines for voluntary disclosure provide that the IRS requires that a taxpayer include the following in their disclosure:
Willingness to Cooperate
A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability.
The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
The Submission Must be Timely
In order for an IRM Voluntary Disclosure submission to be timely, it must be:
Not Under Personal IRS Examination
The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation.
Hopefully, Nobody Snitched on You
The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.
No Directly Related IRS Examination
The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.
No Criminal Action Initiated
The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
Updated Voluntary Disclosure Practice
The IRS has announced a new set of rules involving OVDP and the IRS Voluntary Disclosure practices, referred to as the Updated Voluntary Disclosure Practice.
The IRS will provide future updates, modifications, and revisions – but for now here are the key takeaways from the memorandum the IRS issued on 11/29 (memo dated 11/20).
Domestic Voluntary Disclosure IRS & Offshore Disclosure
Under the new program, both the domestic voluntary disclosure IRS and Offshore Disclosure are “combined” into one program.
Previously, OVDP (Offshore Voluntary Disclosure Program) required that applicants had at least some offshore (aka foreign or international) income in order to apply for the program.
If a person had offshore income, they could also have domestic income as well – but could not apply to OVDP unless they had some offshore income. Otherwise, the IRM 184.108.40.206 disclosure rules would apply.
Updated Voluntary Disclosure Procedures
Now. with the updated voluntary disclosure procedures, IRM 220.127.116.11 will be the only disclosure program for willful applicants (or those not applying for reasonable cause/delinquency proceedings)
The IRS has not released the updated “preclearance letter” yet. Taxpayers will use an Form 14457 for Preclearance.
“To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. IRM 18.104.22.168 will continue to serve as the basis for determining taxpayer eligibility. Taxpayers must request preclearance from CI via fax or mail.”
Processing the Offshore Disclosure
This aspect of the disclosure is more for aligning the civil and criminal factions of the IRS in order to coordinate effective case processing, than something you really care about. Just know, the IRS is “doing their best” to make case coordination as easy as possible.
Time Period of Disclosure
Under OVDP, the period of disclosure was 8 years.
Updated Voluntary Disclosure Procedures
Typically, under the new procedures, the disclosures will be for 6 years (which is less than the 8 years required under OVDP). BUT, if a person wants to submit for prior years beyond the 6 years, that may be a possibility.
“With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period.
Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).”
Civil Resolution Framework
The penalty is all you really care about, right?
The penalty rules have changed (for better or worse.)
Penalties on Taxes Due
With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. For example: You owed $25,000 in tax for Year 1, you paid a $5,000 penalty (plus estimated interest) in addition to the taxes due. Then, for Year 2, if you owed $50,000 in tax, then you had to pay another $10,000 penalty (plus estimated interest), and so on for all eight years.
Updated Voluntary Disclosure Procedures
Now, Taxpayer will generally pay a 75% “fraud” penalty on the amount of tax due (for the highest year only). If the taxpayer never filed taxes, a similar framework applies IRC 6651(f).
“Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”
*Taxpayer can try to argue for a reduced penalty under IRC 6662 (generally, 20%), but the IRS has stated that it is unlikely the reduced penalty would be granted.
Penalties on FBAR
The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance.
For example, if you had $2,000,000 in unreported balances for the highest year in the compliance period. your penalty would be $550,000.
*This presumes no “bad banks” were involved.
Updated Voluntary Disclosure Procedures
Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.
“After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.
Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate
Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.
Failure to File Informational Returns
Under prior OVDP rules, informational returns did not receive preferential treatment.
Updated Voluntary Disclosure Procedures
This is a pleasant surprise. The IRS will NOT automatically issue penalties against applicants who failed to file informational returns.
Informational returns typically include:
- 5471 Form (Corporation that is Foreign)
- 5472 Form (Foreign Owner of a “U.S. Corporation”)
- Form 8865 (Partnership that is Foreign)
- Form 3520-A (Foreign Trust)
The IRS Agent assess the totality of the circumstances and will determine if penalties are warranted.
“Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.”
Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
Taxpayers retain the right to request an appeal with the Office of Appeals.
What are Disqualifying Factors?
The IRS has listed various factors that will disqualify a person from successfully making an IRS Voluntary Disclosure. These factors include:
- Are you currently the subject of a criminal investigation or civil examination? (If yes, specify)
- Has the IRS notified you that it intends to commence an examination or investigation? (If yes, specify)
- Are you under investigation by any law enforcement agency? (If yes, specify)
- Is the source of any of your income from illegal activity?
- Do you have any reason to believe that the IRS has obtained information concerning your tax liability? (If yes, specify.)
*These factors do not automatically eliminate acceptance into Voluntary Disclosure..
A Few Key Tips as Provided by the IRS
a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
You Should Use an Attorney when Making an IRS Voluntary Disclosure
The voluntary disclosure material provided by the IRS indicates that the attorney should make the submission. There is no attorney-client privilege with a CPA. That means the information you discuss with your CPA may not be confidential or protected by privilege.
That also means the IRS maybe able to question a CPA about the contents of the submission. This is why you will not want to utilize a CPA to make this submission but rather an attorney.
Can I Just Use a CPA?
While technically, you can use a CPA — we do not advise that you do so and it is not because we are Attorneys. It is because there is no attorney-client privilege with a CPA. And, because there is an element of willfulness with Voluntary Disclosure, it is important to use an Attorney in order to maintain the confidentiality privilege.
Interested in IRS Offshore Amnesty?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Krantz Attorneys specializes in IRS Offshore and Voluntary Disclosure. Contact our firm today for assistance with getting compliant.
Ezra holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Krantz's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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