The Internal Revenue Service’s (IRS) Voluntary Disclosures Practice (VDP) permits taxpayers with undisclosed assets and accounts located outside the United States to come forward and voluntarily disclose such assets to the U.S. government. While making a voluntary disclosure is not penalty-free, it may nevertheless be the right approach for certain taxpayers, especially those with potential criminal exposure. To better understand your legal obligations regarding disclosing offshore assets, and how the IRS’s VDP may help you, consult the tax specialists at the Ben-Cohen Law Firm. With the combined professional knowledge and expertise of both a Board-Certified tax attorney and a CPA, our Los Angeles voluntary disclosure lawyers can provide you with in-depth advice regarding how a voluntary disclosure might benefit you.Not Just for Offshore Bank Accounts
As an initial matter, it is important to understand that voluntary disclosures can apply to a wide variety of omissions or mistakes in taxes. Too many taxpayers mistakenly believe that the VDP pertains only to unreported bank accounts in distant locales like Switzerland or Israel, which is inaccurate. The VDP is a longstanding practice of IRS Criminal Investigation whereby CI takes timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS should not recommend criminal prosecution to the Department of Justice. The VDP, however, is not available to taxpayers with illegal source income. Income from an activity that is legal under state law, but is illegal under federal law is considered illegal source income for purposes of the VDP.
To utilize the VDP, the taxpayer’s disclosure must be timely. If the IRS has already launched a criminal or civil examination, it is too late. In addition, the disclosure must be truthful and complete. Once accepted into the VDP, taxpayers must:
- Cooperate with the IRS in determining their tax liability and compliance reporting requirements,
- Cooperate with the IRS in investigating any professional enablers who aided in the noncompliance,
- Submit all required returns, information returns, and reports for the disclosure period, and
- Make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
To participate in the VDP, a taxpayer must first prepare and file Form 14457, Voluntary Disclosure Practice Preclearance Request and Application , with IRS CI. There are two parts to Form 14457: (1) Preclearance Request and (2) Voluntary Disclosure. In Part 1, taxpayers must provide basic information like their name, address, and social security number, as well as information regarding entities or bank accounts involved in the noncompliance. Once their Preclearance Request is accepted, in Part 2, taxpayers will be asked to disclose the amount of any unreported income and/or the highest aggregate value of any foreign assets for each of the previous six tax years for which the due date has passed. Additionally, taxpayers will be asked to provide information on any professional advisors who facilitated the noncompliance and a narrative explaining the noncompliance from its inception to the present. Part 2 must be signed under penalties of perjury. Taxpayers who fail to submit complete narratives will not be given an opportunity to supplement their submissions. After reviewing Part 2, IRS CI will determine whether a taxpayer may participate in the VDP. Approved taxpayers will receive a Preliminary Acceptance Letter from IRS CI instructing them to file a complete voluntary disclosure package, which includes copies of originally filed tax returns, accurate amended tax returns, and foreign bank statements (if any). Our voluntary disclosure attorneys guide taxpayers skillfully in the preparation of the required forms.
In November 2018, the IRS released an interim memo addressing the new process for domestic and offshore voluntary disclosure practices. The memo stated the IRS examiner may assess a civil fraud penalty of 75% of the underpayment under 26 U.S.C. Section 6663, and a willful FBAR penalty of 50% of the maximum value of the foreign financial asset, among other penalties. Due to the potential significant penalties that may be assessed, it is important to consult a tax attorney regarding your options. Our voluntary disclosure lawyers can advise Los Angeles clients and others on whether this option may be right for them.Streamlined Filing Compliance Procedures
In 2014, the IRS announced a “streamlined” program for U.S. taxpayers residing in the U.S. and abroad who have not complied with U.S. reporting obligations. The Streamlined Foreign Offshore Procedures (SFOP) and Streamlined Domestic Offshore Procedures (SDOP) are available to taxpayers whose failures were non-willful. Non-willful failures occur due to negligence, inadvertence, mistake, or conduct that was the result of a good faith misunderstanding of the requirements of the law.
Under both the SFOP and SDOP, participants must certify under penalties of perjury that their failure was non-willful, which means a false non-willful statement may result in criminal charges. In August 2019, the Department of Justice criminally charged a taxpayer in connection with the SDOP for the first time. In the indictment, the government states Brian Nelson Booker was a CPA who had been filing FBARs that excluded his interests in bank accounts totaling over $9 million. In 2015, when Booker submitted his streamlined filing, he stated in his certification that he “learned about the FBAR filing requirements in 2008” and he “mistakenly believed that only personal financial accounts had to be reported on the FBAR.” The government alleges that in 2009, a Swiss bank had instructed Booker to withdraw his funds or provide the bank with an IRS Form W-9, which would have informed the IRS of Booker’s interest in the Swiss bank account. According to the government, Booker decided to transfer the assets to another Swiss bank held in the name of a Singaporean insurance company. The DOJ charged Booker with three counts of filing false FBARs pursuant to 31 U.S.C. Section 5322(a) and four counts of filing a false document (tax returns and SDOP certification) with the IRS pursuant to 26 U.S.C. 7601(1). The maximum prison sentence for each count is five years and three years respectively.Quiet Disclosure
Both the streamlined program and the VDP represent what are known as “noisy disclosures,” meaning the taxpayer openly and deliberately approaches the IRS and notifies the agency of the deficiency issue. Another option is what is called a “quiet disclosure,” whereby a taxpayer simply files the delinquent reports (such as FBAR or Form 8938) along with amended or original tax returns for the appropriate years and payment for the taxes owed. A voluntary disclosure attorney at our Los Angeles firm can explain this option further to you. The “quiet disclosure” hopes that the IRS simply accepts the submissions with no further action, thereby avoiding the imposition of penalties. The downside is that the IRS could instead choose to audit the taxpayer’s tax returns and may use the information provided in the amended returns in a subsequent criminal investigation of the taxpayer.
On April 3, 2020, Dusko Bruer pleaded guilty to tax evasion and willful failure to file an FBAR after making a “quiet disclosure.” The government alleged Bruer’s “quiet disclosure” involved delinquent tax returns that did not disclose all of the funds he held in various offshore bank accounts, and did not report the income he earned from his business. Bruer has agreed to pay $2.6 million in restitution to the IRS, which does not include additional taxes, penalties, interest, or the 75% civil fraud penalty that may apply. Bruer faces up to five years in prison for tax evasion under 26 U.S.C. Section 7201, and an additional five years in prison for the willful failure to file an FBAR under 31 U.S.C. Section 5322(a). Therefore, it is imperative that any “quite disclosure” is made with accurate tax returns and FBARs.
Bruer and Booker may have been able to limit civil and criminal liabilities had they sought the advice of tax professionals with extensive experience in voluntary disclosures. If you have unreported income from any source including foreign accounts or assets, you have options. Contact the tax attorneys at the Ben-Cohen Law Firm. Our Los Angeles voluntary disclosure attorneys can help provide you with the advice and assistance needed to optimize your outcomes.