If you think back to when you were a little kid, there may have been times when if you admitted to mistakes or revealed an error, and you were rewarded for your honesty and not punished. Though adulting isn’t as simple, there are a few ways to be forgiven for mistakes. One of these involves your taxes and the ability to make voluntary tax disclosures. Understanding the types of disclosures that are out there, which one is right for your business and situation, knowing what the process is like, and ultimately taking action – can make a significant difference between simply cleaning up a misunderstanding and possible jail time.
What are the types of Voluntary Disclosures?
The first thing you need to understand about voluntary tax disclosures is that there are different types of them and each one is a bit different. Generally speaking, there are: streamlined disclosures, delinquency procedures, and voluntary disclosures.
Streamlined disclosures are defined as a simple, paired down process that enables amending inaccurate tax returns that have mistakenly left off or failed to report important information. There are streamlined disclosure processes designed for individual taxpayers who live both in the United States and abroad. In order to qualify, there must not be any current civil examination of the tax returns or any willful misconduct. All past tax penalties must be paid and you must have a valid social security card.
Delinquency procedures are the voluntary reporting and payment made on delinquent returns that were inaccurately reported. Often in these cases, the taxpayer reported all income but failed to include an informational disclosure. These informational disclosures and reports need to be filed according to their specific instructions such as the instructions that can be found on the Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114), a certain type of reporting form that is available for reporting delinquencies.
Successfully Demonstrate Non-willful Conduct
It’s much easier for the IRS to forgive mistakes, errors, and bad behavior if it can be clearly shown that it wasn’t on purpose. How does the IRS determine willful versus non-willful conduct? Determining if your conduct is “non-wilful” is often fact intensive – so you should always contact a lawyer or tax professional for help.
Here is a shortlist of a few factors important in determining the most appropriate way to make a disclosure.
- The source of your income or funds
- How your funds are accessed
- Whether or not your funds were actively managed
- Contact and communication with foreign and domestic banks and financial institutions
- Concealing the existence of accounts from a tax professional or accountant hired to handle your taxes
- Intentionally avoiding doing the right thing, or wilful blindness
- Knowingly hiding information to avoid creditors or a spouse during divorce proceedings
Do you have questions? If you’re not sure about the gray areas or have any alarm bells or question marks about this, the best thing to do is to discuss in confidence with a tax professional. As well, for the IRS streamlined procedures there will be requirements to certify the accuracy and non-willful conduct of any information you’re now reporting correctly. Also, it is a good idea to get informed on any of the penalties that may apply to your particular situation for the time periods you’re correcting.
Is it complicated? Sure, maybe, but it’s better than quietly filing the information in what’s known as a quiet disclosure and blindly hoping for the best. This method is highly discouraged because even if your initial non-compliance was non-willful, the mistakes that can be made by making a quiet disclosure that is outside of one of the approved amnesty programs, it can cause further penalization if anything can be construed as willful misconduct.
New Alternatives to the OVDP
If you’ve heard of the OVDP program, which stood for Offshore Voluntary Disclosure Program, as of now it is no longer in existence. For those unfamiliar, the program was designed in 2009 to help people get into compliance with delinquent or inaccurate tax returns. The program closed in 2018.
So what can you do instead? Replacing the OVDP program is the current IRS Voluntary Disclosure Program (known as “VDP”).
Here is a step by step rundown of the current VDP procedures:
- Determine your eligibility for preclearance by filling out Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (PDF)
- Submit the Part I form either by fax or certified mail.
- After getting a confirmation of preclearance, fill out and submit Part II of the Voluntary Disclosure Application and send the same way you send Part I within 45 days. It is possible to request an extension.
- Prepare all necessary tax returns, forms, and disclosures.
- If you’re approved to participate in the Voluntary Disclosure Practice, you’ll get an acceptance letter. A civil section of the IRS will receive your forms and assign an examiner to contact you.
Once you’ve received pre-clearance from criminal investigation, you’ll be able to clear up all errors and mistakes within the most recent 6-year period. You will also need to write a detailed narrative about the non-compliance issues.
Let’s also not forget about the importance of cooperation throughout the entire process. There is much greater emphasis placed on taxpayer cooperation and consequences for failure to cooperate. Cooperation includes truthfully reporting the correct tax liability and taking care of all back taxes and penalties. Anything perceived to be non-cooperative could trigger a criminal investigation, so keep that in mind as you prioritize your communications and actions in the disclosure process.
Disclosure Penalties you Need to be Aware of
There are instances where the IRS will reduce or waive penalties for “reasonable cause.” Just how “reasonable cause” is defined is murky at best at the IRS. They will not reveal the precise elements that constitute reasonable cause when it comes to not filing delinquent returns. As a result, it isn’t always possible to predict what will happen in terms of penalty issuing when you’re submitting a disclosure or appealing a decision.
As we go through a few of the possible instances in which you could be penalized by the IRS in the disclosure and appeals processes, it’s important to remember that if the IRS deems it appropriate, they can do further examinations, levy further penalties, and hold you liable for criminal activity. However, if you go through the VDP program honestly and accurately, there should be no concerns. Bearing this in mind, it’s best to cooperate wherever possible.
Current penalties can be up to a 50% penalty on all undisclosed offshore financial assets and a 75% penalty on unpaid taxes. These amounts can be applied for multiple years, however the newest procedures do not automatically issue the most harsh penalties. IRS agents take your cooperation into account as well as the total number of penalties than can be applied.
In conclusion, it is possible to effectively clean up misunderstandings and mistakes with IRS returns. There are plenty of things to be aware of as you engage in the steps to complete a voluntary disclosure. Though not always necessary, it can be a huge relief to have a trustworthy and reliable accounting firm on your side to ease the burden of making accurate corrections.
At Gordon Law, we’re ready to serve the unique needs of your tax situation. Please fill out the form below with your information for a confidential consultation.
Links / References:
https://www.goldinglawyers.com/irs-quiet-disclosure-vs-streamlined-offshore-2017-2018-update/
https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
https://form1040nr.com/expats/delinquent-filing-procedures/
https://www.jdsupra.com/legalnews/how-does-the-irs-determine-if-conduct-73521/
