Voluntary Disclosure for delinquent U.S. Personal tax returns and Foreign Bank Account Report (FBAR)

For many years, the IRS offered an Offshore Voluntary Disclosure Program (OVDP) for taxpayers with delinquent returns or FBAR to apply for penalty relief by filing three years of Form 1040 “Individual Income Tax Returns” and six years of FBAR. This program came to an end on September 28, 2018 due to a slow down in submissions to the program. However, new programs have replaced the OVDP; IRS Criminal Investigation Voluntary Disclosure Practice (VDP) for personal tax returns and Delinquent FBAR submission Procedures.

IRS Criminal Investigation Voluntary Disclosure Practice (VDP)

The new VDP provides compliance options for an individual that has committed tax or tax-related crimes and have criminal exposure due to their willful violation of the law. This program is intended for individuals who seek protection from potential criminal prosecution and will generally, cover a six-year disclosure period.

Significant differences with the old OVDP are the new program does not provide penalty relief, instead it applies a civil fraud penalty, of 75% of the underpayment of tax, to the one tax year with the highest tax liability. In addition, the taxpayer’s cooperation takes on greater significance during the examination and a lack of cooperation can have a direct bearing on the magnitude of penalties to be imposed.

Filing under this program will not be available for individuals who:

  1. Are currently the subject of a criminal investigation or civil examination
  2. Have been contacted by the IRS to notify that they intend to commence an examination or investigation
  3. Are under investigation by any law enforcement agency
  4. Have earned income from illegal activity

The steps for the new program are as follows:

  1. Complete and submit to the IRS Criminal Investigation department Part I of Form 14457, Voluntary Disclosure Practice Preclearance request and Application. This is an application to confirm eligibility into the program.
  2. Complete and submit Part II of Form 14457, Voluntary Disclosure Practice Application within 45 days of receiving confirmation of eligibility. This is an application to determine approval into the program. This form requires details regarding the taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance.
  3. Once approval is obtained an examiner will be assigned to the case and the most recent six years of delinquent tax returns will be request to be submitted for review, however, the examiner may expand the disclosure period beyond the normal six years if issues are noted in the submission or for a variety of reasons.

The new VDP has more steps and can be costlier than the old OVDP and it has increased the range of available penalties as compared to the old OVDP program. For these reasons, the new filing procedures may not be appropriate for all taxpayer situation’s, such as, when non-compliance was not willful.

Alternative to VDP

A taxpayer that did not willfully violate the law could consider alternative options for correcting past mistakes. This includes quiet disclosures, filing amended returns or filing past delinquent returns. This option is less time consuming and costly, however, it does not provide protection from potential criminal prosecution and does not guarantee that no penalties will be assessed. The penalties could be significant depending on the situation.  

Delinquent FBAR Submission Procedures and Delinquent International Return Submission Procedures

A U.S. taxpayer that is not delinquent with their personal tax filings that is, however, delinquent with their FBAR filings or other international forms have the option of filing under one of the Delinquent submission procedures. A taxpayer who has not filed one or more FBAR or international information returns, has reasonable cause for not timely filing the forms, is not under civil or criminal investigations and has not been contacted by the IRS regarding the delinquent forms will qualify for one of these two programs. A reasonable cause statement must be included with the delinquent forms, certifying that the delinquent returns were not because of tax evasion.

The IRS will not impose a penalty for the failure to file the forms if the taxpayer properly reported on their U.S. tax returns, and paid all tax on, the foreign income related to the forms.

Contact Argento CPA today if you have any questions about U.S. tax compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.