USA
Derek Morgan
by Derek Morgan
An examination of tax compliance and legal safeguards
The United States Internal Revenue Service (IRS) Voluntary Disclosure Program is a critical mechanism for taxpayers who have failed to report income or pay taxes due to errors or omissions. This practice provides a structured avenue for individuals and entities to voluntarily resolve their tax issues, and thereby potentially avoid severe penalties and criminal prosecution. This article discusses the IRS Voluntary Disclosure Program, outlining its obligations and exploring the benefits it offers to taxpayers.
IRS Voluntary Disclosure Program
The IRS Voluntary Disclosure Program is an initiative administered by the IRS that allows taxpayers to voluntarily disclose previously unreported income and tax liabilities. It is designed to encourage compliance with tax laws by providing a mechanism for taxpayers to correct past tax errors without facing the full extent of legal consequences.
Eligibility criteria
To qualify for the IRS Voluntary Disclosure Program, taxpayers must meet certain criteria. Firstly, the disclosure must be voluntary, meaning it must not be prompted by the IRS or any other authority. Secondly, the disclosure must be timely, meaning it should come before the IRS initiates any investigation, audit, or receives information indicating the taxpayer's non-compliance. Finally, the disclosure must be complete and truthful, providing all necessary information about the taxpayer's income, assets, and liabilities.
Types of disclosures
The Voluntary Disclosure Program encompasses various types of disclosures, including domestic and offshore disclosures. Domestic disclosures pertain to unreported income and tax liabilities within the United States, while offshore disclosures involve foreign income, assets, and accounts. Each type of disclosure has specific reporting requirements and procedures that taxpayers must follow to ensure compliance.
Procedural steps
The process of making a voluntary disclosure involves several steps. Taxpayers must first submit a preclearance request to the IRS Criminal Investigation (CI) Division, providing preliminary information about their undisclosed assets and income. If the preclearance request is approved, taxpayers must then submit a detailed disclosure, including amended tax returns and payment of back taxes, interest, and applicable penalties. The IRS will review the disclosure and determine whether to accept it under the Voluntary Disclosure Program.
Obligations of taxpayers
Participating in the Voluntary Disclosure Program entails several obligations for taxpayers. These obligations ensure that the disclosure is complete, accurate, and in compliance with IRS requirements.
Full disclosure
Taxpayers must provide full and truthful disclosures of all previously unreported income, assets, and tax liabilities. This includes submitting amended tax returns for all years in which non-compliance occurred, as well as providing detailed information about foreign accounts, trusts, and other offshore entities.
Payment of taxes and penalties
A key obligation is the payment of all taxes due, along with interest and applicable penalties. While the Voluntary Disclosure Program may mitigate some penalties, taxpayers are still responsible for settling their tax debt in full. Failure to pay the required amounts may result in the rejection of the disclosure and potential legal consequences.
Cooperation with the IRS
Taxpayers must cooperate fully with the IRS throughout the disclosure process. This includes providing any additional information or documentation requested by the IRS, attending meetings or interviews, and responding promptly to inquiries. Cooperation is essential to ensure that the disclosure is processed smoothly and favourably.
Benefits of the Voluntary Disclosure Program
The Voluntary Disclosure Program offers several significant benefits to taxpayers who choose to come forward and rectify their tax affairs. These benefits can provide substantial relief and protection from severe penalties and legal repercussions.
Mitigation of penalties
A primary benefit of the Voluntary Disclosure Program is the potential reduction or elimination of certain penalties. While taxpayers are still required to pay back taxes and interest, the IRS may waive or reduce penalties for late filing, late payment, and accuracy-related issues. This can result in significant financial savings for taxpayers.
Protection from criminal prosecution
Another critical benefit is protection from criminal prosecution. By voluntarily disclosing their tax non-compliance, taxpayers can avoid criminal charges related to tax evasion, fraud, and other offenses. This protection is contingent upon the disclosure being complete, truthful, and timely. The assurance of not facing criminal charges is a powerful incentive for many taxpayers to participate in the programme.
Opportunity to rectify tax affairs
The IRS Voluntary Disclosure Program allows taxpayers to rectify their tax affairs and come into compliance with tax laws. This opportunity to correct past mistakes and avoid future legal issues is invaluable. Once the disclosure process is complete, taxpayers can move forward with a clean slate, knowing they have fulfilled their tax obligations.
Restoration of taxpayer credibility
By participating in the Voluntary Disclosure Program, taxpayers can restore their credibility with the IRS. Voluntary compliance demonstrates a willingness to adhere to tax laws and rectify past non-compliance. This can improve the taxpayer's standing with the IRS and reduce the likelihood of future audits or investigations.
Resolution of offshore tax issues
For taxpayers with offshore accounts and assets, the Voluntary Disclosure Program provides a pathway to resolve complex international tax issues. By disclosing foreign income and assets, taxpayers can avoid the severe penalties associated with the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR) requirements. This can also help taxpayers repatriate funds and bring their financial affairs into compliance with US tax laws.
Conclusion
The IRS Voluntary Disclosure Program is an essential tool for taxpayers seeking to correct past tax non-compliance and avoid severe penalties and legal consequences. By understanding the obligations and benefits associated with the programme, taxpayers can make informed decisions about whether or not to participate. The programme offers a unique opportunity to rectify tax affairs, restore credibility, and achieve peace of mind. Ultimately, the Voluntary Disclosure Program underscores the importance of tax compliance and the IRS's commitment to encouraging voluntary adherence to tax laws.
Mowery & Schoenfeld Mowery & Schoenfeld is a US-based firm offering accounting, assurance, tax, advisory, and IT services. With over 20 partners and more than 200 employees, our wide range of services and expertise allows us to deliver customised solutions that meet the unique needs of our international clients. Mowery & Schoenfeld is committed to fostering strong partnerships with GGI members worldwide.
GGI member firm Mowery & Schoenfeld, LLCLincolnshire, Illinois, USAT: +1 847 247 8959
Auditing & Accounting, Tax
Derek Morgan is a Senior Manager in the firm’s International Tax services department. He has almost 20 years of experience working in and leading the tax practices of various companies and CPA firms. He specializes in identifying and managing the foreign tax compliance process for clients in the contracting, manufacturing, distribution, professional service, and finance industries. Derek holds a Master of Accountancy and a Bachelor of Science in Accounting from the University of Alabama. Contact Derek.
