California Attorney for IRS Voluntary Disclosure Practice
The IRS conducts many audits every year. Once you have been selected for federal or California state audit and have undisclosed foreign accounts and unreported offshore income-generating assets, your options to get yourself back into compliance become extremely limited, and you could end up facing severe civil and even criminal tax penalties and or criminal tax prosecution, especially if your conduct were willful concerning any non-compliance with income tax or foreign information reporting.
You are required by law to abide by all tax regulations in the United States. Our tax system is built on the principle of "voluntary compliance." Although most taxpayers do so freely, others do not. The IRS and State Tax Authorities can penalize non-compliant taxpayers in several civil and criminal ways. You could face jail time, fines, and other sanctions if you don't voluntarily cooperate.
In light of recent changes, there's an essential update to the Voluntary Disclosure Practice. The new Department of Justice Tax Division's Voluntary Disclosure Policy encourages entities, including but not limited to partnerships, government entities, and unincorporated associations, to make voluntary disclosures to the Tax Division, even if they believe the government may already be aware of the misconduct. While full benefits of voluntary disclosure might not always be available in such cases, some benefits can still be realized, reducing potential penalties. This policy does not, however, apply to sole proprietorships.
Furthermore, the policy states that any voluntary self-disclosure related to matters arising under the internal revenue laws must be made to the Tax Division. While this might initially seem to suggest a shift from the traditional practice of making disclosures to the IRS, it's essential to understand that the policy does not explicitly exclude the IRS from the process. Other legal provisions indicate that voluntary disclosures to the IRS under its established practices will still be considered valid.
Interestingly, the policy also indicates the possibility of substantial compliance, stating that prompt self-disclosures will be considered favorably, even if they do not satisfy all the criteria for voluntary self-disclosure. This offers a significant incentive for companies to rectify their tax-related discrepancies quickly.
Should you find yourself in a situation where you've not fully complied with tax-related responsibilities, voluntarily disclosing this can be an essential step toward rectification. Proactively revealing missteps or intentional evasion before an audit or criminal tax investigation is underway offers a significant opportunity to return to compliance and avoid criminal prosecution for tax crimes. It's important to understand that even if your disclosure doesn't tick every box, your proactive and prompt action can yield positive results. Throughout this process, adhering to the advice of trusted legal professionals is paramount in effectively navigating this complex terrain.
At the Tax Law Offices of David W. Klasing, our experienced team of dual-licensed Attorneys and CPAs can expertly guide you through the complexities of the DOJ Tax Division's Corporate Voluntary Self-Disclosure Policy and the IRS Voluntary Disclosure Practice. We understand the nuances of the policy's scope, including the types of entities it covers, and can help you make informed decisions on the best course of action. Our team has decades of experience helping clients whose tax returns were false or misleading to correct these issues through the various voluntary disclosure programs offered by the IRS and the state of California.
We're committed to bringing you back into tax compliance without having the harshest fines and penalties levied against you. Moreover, we can help you leverage the benefits of voluntary disclosure, even when full benefits might not be available. We aim to help you achieve substantial compliance by promptly addressing disclosure requirements, minimizing your risk exposure, and giving you peace of mind knowing that you are in good standing with the tax authorities.
Whether you have questions about personal or business tax compliance and voluntary disclosure programs in California or at the federal level, the award-winning tax professionals at the Tax Law Office of David W. Klasing are here to provide clarity and guidance. Contact our office at (800) 681-1295 to schedule a consultation.
Types of Voluntary Disclosure Programs
- Quiet Disclosure
- Delinquent FBAR
- Offshore Voluntary Disclosure
- Streamlined Disclosure
- What to do if interested in a Program
The IRS is using its newfound technological and manpower advantages to take more action against suspected non-compliance. This is all due to a budget increase from the Biden administration, which mandates tracking down a much more significant portion of the tax debt that goes unpaid every year.
With that in mind, now is a good time for taxpayers to familiarize themselves with the IRS' voluntary disclosure programs. Through applying and participating in these programs, taxpayers with tax non-compliance in their histories can potentially avoid courtrooms, jail time, and the penalties associated with their past mistakes. It would help if you never attempted to engage with these options without thoroughly discussing your options and their benefits with a seasoned Criminal Tax Defense Lawyer.
At the Tax Law Offices of David W. Klasing, we offer our clients the unique opportunity to get creative advice from Dual Licensed Tax Attorneys and CPAs. Creating a true partner in tax preparation and handling will benefit your immediate situation and long-term goals. Call (800) 681-1295 or schedule a reduced rate initial consultation online here to learn more today.
The IRS has a voluntary disclosure program that comes with a nearly guaranteed pass on criminal tax prosecution if the terms of the program are strictly complied with by the taxpayer.
What is the IRS's voluntary disclosure practice? 1
IRS Criminal Investigation has traditionally quietly offered the Voluntary Disclosure Practice (CI). CI takes timely, accurate, and comprehensive voluntary disclosures into consideration when deciding whether or not to recommend criminal tax prosecution. Although a voluntary disclosure won't automatically grant immunity from criminal tax prosecution, if the terms of the program are met, it ordinarily means that no criminal tax prosecution will occur.
You voluntarily disclose to CI when you do so in a way that is truthful, appropriate, and comprehensive. Furthermore, you must:
- Make suitable faith arrangements with the IRS to pay the tax, interest, and any applicable penalties you owe.
- Work with the IRS to determine your accurate tax liability.
For a voluntary disclosure to be timely, it must be received before:
- The IRS has started a criminal tax investigation or civil audit
- Acquired knowledge from a third party (e.g., informant, other governmental agency, John Doe summons, etc.) notifying the IRS of your violation
- Gathered data from a criminal tax enforcement action relevant to your non-compliance (e.g., search warrant, grand jury subpoena, etc.)
Who may disclose? 2
Suppose you have broken federal tax law wilfully and thus have criminal tax exposure. In that case, the IRS Voluntary Disclosure Practice is your only relatively safe path back into tax compliance. Taxpayers benefit from potential criminal tax prosecution by participating in the Voluntary Disclosure Practice. You should discuss with tax counsel other less drastic options, such as amending previous returns if your violation of the law were not willful.
Taxpayers who get income from illegal sources do not qualify for the IRS voluntary disclosure practice. For federal Voluntary Disclosure Practice's purposes, income from actions deemed permissible under state law but illegal under federal law is an illicit income source.
What Are the Various Disclosure Programs Offered by the IRS if I Filed One or More False or Misleading Returns?
There are several different voluntary disclosure programs, and which applies best to your situation will depend on the specifics of your case. Before filing for voluntary disclosure, consult a skilled tax lawyer like those at the Tax Law Offices of David W. Klasing.
We can advise you about which program you should enter and whether you could open yourself up to further criminal liability by disclosing your disclosures. Remember that you typically must act to take advantage of these programs before an audit or criminal tax investigation begins, at which point you will become ineligible.
The following are some of the most common voluntary disclosure programs the IRS offers:
One option is a process commonly known as a quiet disclosure. This process, which is not an official IRS program, involves simply amending your returns and refiling. Aside from what you owe, you will also have to pay interest and any penalties that would have been self-assessed. However, our attorneys usually recommend that you go through one of the official programs rather than this unofficial route.
Unlike the voluntary and streamlined disclosure programs, it does not prevent or necessarily even lessen the chances of the IRS imposing heavy penalties, including criminal tax penalties, if the conduct is found to have been willful. We recommend this route only occasionally, such as if the mistakes on your return were minor and non-willful.
The taxpayer's counsel will recommend a "noisy disclosure in more sensitive cases." Examples of situations where noisy disclosure would be more appropriate might include where a considerable amount of additional tax is due; the taxpayer is concerned about some disqualifying event, or the taxpayer wants some affirmative assurance from the IRS.
As of 2022, the current IRS requirement for a noisy disclosure would be for the taxpayer to file Form 14457 or the Voluntary Disclosure Practice Preclearance Request and Application. Form 14457 comes in two parts. The first step requires the taxpayer to supply certain predicate information about the non-compliance in Part 1, titled Preclearance Request. If the preclearance request is granted, the taxpayer completes Part II, Voluntary Disclosure. This portion will require considerably more detail than what the applicant would have provided in Part I, including a narrative account that explains the non-compliance and disclosure of professional advisors assisting.
Qualifying for the Benefits of Voluntary Self-Disclosure: Key Conditions and Considerations
Eligibility for the benefits of voluntary self-disclosure hinges on specific conditions that companies need to meet. Understanding these conditions is critical for taxpayers and practitioners to make well-informed decisions and act appropriately.
Outlined in the DOJ Tax Voluntary Disclosure Policy are these detailed conditions that resemble those in the IRS voluntary disclosure practice, as stated in the Internal Revenue Manual (IRM). Meeting these conditions is a prerequisite for taxpayers to avail themselves of voluntary disclosure benefits. Hence, the following crucial criteria and related concerns must be addressed:
Voluntariness of Disclosure: Determining whether a disclosure qualifies as voluntary self-disclosure is at the sole discretion of the Tax Division, which makes a careful, case-by-case assessment. The disclosed criminal misconduct must be voluntary and not compelled by any preexisting obligation like regulation, contract, or a previous Department resolution (like a non-prosecution agreement or deferred prosecution agreement). While it's unlikely that an unsuccessful attack on the denial of voluntary self-disclosure due to abuse of discretion could be successful, taxpayers should still be aware of this discretionary aspect of the policy. They should seek professional advice when making disclosures to achieve the best possible outcome.
Timeliness of Disclosure: When the disclosure is made plays a crucial role in the Tax Division's policy for voluntary self-disclosure. To ensure the exposure is recognized as voluntary, it should be made:
- Before any imminent threat of disclosure or government investigation, as stipulated in the U.S. Sentencing Guidelines;
- Before the criminal misconduct becomes publicly known or is otherwise discovered by the government. If the transgression was previously reported to the IRS or another suitable regulatory authority, the Tax Division should be notified within 15 days of the prior disclosure unless a good reason for the delay is provided; and
- Within a reasonable time frame after the company becomes aware of the criminal misconduct. It's up to the company to demonstrate the timeliness of its disclosure.
For companies, the proactive disclosure of misconduct before a government investigation or enforcement action commences is a testament to their willingness to collaborate promptly with authorities and resolve non-compliance issues. Swift action upon discovering misconduct is crucial, as delays could potentially result in the forfeiture of the benefits provided under the policy.
The Initial Disclosure's Content and Subsequent Actions: The essence of the initial self-disclosure and related actions is crucial under the DOJ Tax Division's guidelines for it to be acknowledged as a voluntary self-disclosure. The company must include all known pertinent details about the misconduct during disclosure. The Tax Division concedes that companies disclosing soon after identifying the misconduct might not possess all the relevant information. Consequently, the company should indicate that its disclosure is based on an initial investigation or data assessment yet ensure a thorough exposure of the known pertinent details. Additional considerations include:
Document Preservation: The company is expected to swiftly secure, gather, and present relevant documents and information, showcasing its involvement in the voluntary disclosure process. This involves safeguarding and collecting essential resources for the misconduct and promptly sharing them with the relevant authorities. In addition, the company must consistently offer updates on any newfound facts or advancements unearthed during its internal investigation, thereby assuring transparency and continuous collaboration with the authorities.
Cooperation and Remedy: To secure full recognition for voluntary disclosure, the company must fully cooperate and provide timely and apt remediation. Full cooperation involves punctual disclosure of all non-privileged facts about the misconduct, active collaboration, preservation and presentation of related documents, coordinating witness interviews, and guaranteeing involved individuals' presence and truthful testimonies. This also includes reliable witness testimonies as and when required and continued cooperation in any connected criminal or civil investigation. Appropriate remediation includes demonstrating the enhancement or implementation of a robust compliance program, addressing any shortcomings in internal controls, carrying out extensive risk assessments, and offering proper employee training. The company should also show a sincere commitment to preventing future misconduct and be ready to cooperate with the government during any subsequent investigation fully.
While undertaking voluntary self-disclosure, addressing the DOJ Tax Division's and the IRS's concerns can be advantageous. By complying with the conditions for preserving documents, fully cooperating, and participating in timely and appropriate remediation, you can showcase your commitment to resolving the misconduct and averting future issues. A joint disclosure satisfying both agencies' requirements could improve the process's efficacy, streamline communication, and encourage a collaborative approach to handling the misconduct. This joint effort could contribute towards creating a culture of compliance and accountability within corporations, as both agencies would be content with the thoroughness and accuracy of the disclosure.
Disclosure of Returns and Return Information: While making a voluntary disclosure to the Tax Division, the company must offer written consent under 26 USC § 6103(c). This consent allows the IRS to share all relevant returns and return information with the Tax Division, which can be employed under § 6103(h) and its regulations. To evaluate and probe voluntary self-disclosure, the Tax Division may liaise with and request help from the IRS. To begin a voluntary self-disclosure to the Tax Division, companies must submit their request to [email protected].
While the possibility of a joint voluntary disclosure to DOJ Tax and the IRS resulting in conflicting decisions may be low, it is theoretically possible and worth considering. One could envision a scenario where the DOJ Tax accepts the voluntary disclosure but the IRS decides to reject it. Though such disagreements may be rare, their occurrence could raise several complex questions. These could range from understanding the legal and procedural challenges associated with navigating such contradictory decisions, to dealing with uncertainties regarding penalties and implications for the company.
If the DOJ Tax approves a voluntary disclosure but the IRS disagrees and recommends prosecution, it's crucial to note that the IRS's recommendation doesn't necessarily override the DOJ's decision. However, such a situation may warrant further dialogue and evaluation between the two entities. This collaborative process is aimed at determining the best course of action that addresses the perspectives and objectives of both DOJ Tax and the IRS. Despite the potential complexity of such a situation, it is generally handled in a way that ensures the integrity of the voluntary disclosure policy, and the ultimate decision remains consistent with the broader objectives of tax compliance and enforcement.
With the assistance of the Tax Law Offices of David W Klasing, you can confidently navigate the voluntary self-disclosure process, protecting your company's reputation and business relationships. Our experienced team comprehends the importance of the sole discretion exercised by the tax division, the need to fulfill disclosure obligations, and the critical role of timing in the disclosure process. We can aid clients in preparing comprehensive initial disclosures, ensuring that all relevant facts, documents, and return information are transparently and cooperatively presented.
By collaborating with our team, you can trust that we will meticulously address the unique challenges posed by joint disclosures and assist in averting any potential abuse of discretion. Our expertise and commitment to your success enable us to devise strategies that minimize legal risks while efficiently addressing compliance and remediation requirements.
Delinquent International Information Reporting Submission Procedures Program
Suppose you have dutifully reported all required foreign taxable income from your U.S. tax returns but inadvertently failed to file FBARS or other required offshore information returns. In that case, you can get back into compliance under this program without penalties if you have reasonable cause for the non-compliance.
Delinquent FBAR Submission Procedures 3
Taxpayers who do not need to file modified or late tax returns using either the streamlined filing compliance procedures or the IRS criminal investigation voluntary disclosure practice but who:
- Have not submitted the required Report of Foreign Bank and Financial Accounts (FBAR) (Form 114, formerly Form T.D. F 90-22.1), have not been contacted by the IRS on the delinquent FBARs, and are not now the subject of an IRS civil investigation or a criminal tax investigation.
Follow these steps to resolve delinquent FBARS
- Review the instructions
- Include a statement explaining why you are filing the FBARs late
- File all FBARs electronically at FinCEN
- On the cover page of the electronic form, select a reason for filing late
- If you cannot file electronically, contact FinCEN's Regulatory Help line at 800-949-2732 or 800-949-2732 (if calling from outside the United States) to determine possible alternatives to electronic filing.
If you correctly reported on your U.S. tax returns and paid all tax on the income from the foreign financial accounts registered on the delinquent FBARs, and if you haven't already been contacted about an income tax examination or a request for late returns for the years for which the delinquent FBARs are submitted, the IRS won't impose a penalty for the failure to file the delinquent FBARs.
Although FBARs won't always automatically be subject to audit, they might be under the current selection procedures for audits that are in place for all tax and information reports.
Delinquent International Information Return Submission Procedures
What do I do if I have a delinquent international return? 4
Delinquent international information returns must be filed by taxpayers who have determined they are required to do so. They are not the subject of an IRS civil examination or criminal tax investigation. They should also not have received contact from the IRS regarding the delinquent information returns.
The procedures in place may be used to determine penalties.
Other than Forms 3520 and 3520-A, all past-due foreign information returns must be filed with an amended return and attached per the requirements for the amended return.
The applicable instructions for Forms 3520 and 3520-A should be followed when filing any outstanding copies of those forms.
Each late information return filed and for which a taxpayer claims reasonable cause may have a good cause statement attached. Penalties may be applied to the overdue information return without considering the attached proper cause statement. Taxpayers can be required to reply to particular correspondence and provide or resubmit evidence of reasonable cause.
Information returns filed with amended returns will not be automatically subject to audit. Still, they may be audited through the existing audit selection processes for any tax or information returns.
Our international Tax Attorneys at the Tax Law Offices of David W. Klasing have years of experience assisting clients whose tax returns were inaccurate or deceptive in resolving these problems through the various voluntary disclosure procedures provided by the IRS and the state of California. We'll endeavor to get you back into tax compliance so you won't face the worst fines and penalties. Learn how our California & IRS Voluntary Disclosure Practice Attorneys and CPAs can assist you by reading the information below. Call our office at (800) 681-1295 immediately to arrange a consultation.
Voluntary Disclosure Programs
There has been a long-standing policy within the IRS that taxpayers who come forward and voluntarily disclose false or misleading information on their previous domestic or international tax returns and pay what they owe, plus interest and fines, will be shielded from criminal liability.
In the early 2010s, the IRS began a program known as the Offshore Voluntary Disclosure Program (OVDP). This program allowed taxpayers who failed to file the required FBAR reports in previous years, often also failing to report taxable offshore income and other required offshore information reporting, to self-disclose the information that should have been reported in exchange for limiting the potential civil penalties they could face and essentially illuminating the risk of criminal tax prosecution. This program was an enormous success but was canceled in 2018 due to declining taxpayer participation.
However, you can now make foreign and domestic disclosures through the IRS's new Voluntary Disclosure Practice (VDP). This program is available for domestic and offshore willful conduct. However, it is usually considered the program of last resort among the options mentioned in this article, as the civil penalties you will be required to pay can be steep. Aside from owing taxes and interest on the past six years of tax deficiencies, you will also have to pay a civil fraud penalty of 75% on the highest tax deficiency year out of the previous 6. Suppose you failed to file FBARS for offshore accounts. In that case, an additional penalty of 50% of the highest daily aggregate balance of the aggregate of the unreported offshore accounts throughout the six-year FBAR disclosure period, or $100,000, whichever is greater, will be assessed.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed domestic or international income tax and information returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into the tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
You must hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs, and E.A.s, our firm provides a one-stop-shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and net worth. See our Testimonials to see what our clients have to say about us!
How Do I Become Tax-Compliant?
Through voluntary disclosure, the federal government provides a method for taxpayers with an unaddressed "potentially or criminal" tax history of non-compliance in their tax filings to regain compliance without facing criminal tax prosecution. However, the taxpayer must apply for acceptance to utilize the voluntary disclosure process.
Before applying, the taxpayer and their Criminal Tax Defense Attorney should consider which method of disclosure is suitable for them. This decision will depend mainly on the nature of the taxpayer's non-compliance (namely, whether it was willful or not), the number of years or filings concerned, and the amount of unpaid taxes or unreported income.
Generally, for admission into the IRS' Voluntary Disclosure Practice, you must submit your application in two parts. Both of these parts are contained within IRS Form 14457. Part I of Form 14457 is the Voluntary Disclosure Practice Preclearance Request and Application. While submitting Part I to gain preclearance into the program is necessary, the government's acceptance of Part I does not necessarily mean that the taxpayer will be accepted into the Voluntary Disclosure Practice.
Part I must be either mailed or faxed to the IRS. The fax number is 844-253-5613, and the applicable mailing address is provided as follows:
IRS Criminal Investigation
Attn: Voluntary Disclosure Coordinator
2970 Market St.
Philadelphia, PA 19104
Upon receiving your completed Part I form, the IRS will either approve or deny your participation in the program. If approved, they will likely notify you through the mail. After you receive approval, you have 45 days to submit Part II. In some instances, request extensions may be approved, but only one per case is permitted, and these are not guaranteed.
The IRS agents will review your submission on Part II of Form 14457 and determine if you can participate in the Voluntary Disclosure Practice. If approved to participate, the government will provide you with a Preliminary Acceptance Letter, and the agent that determines preliminary approval will forward your Form 14457 to a civil investigations department within the IRS. Once your case is assigned, an examiner will contact you.
You must cooperate with the examiner in providing documents and information. Contact your Criminal Tax Defense Attorney for the most current Voluntary Disclosure procedures.
Benefits of Voluntary Disclosure: General and Policy-Specific Advantages
An adequately filed and legally sufficient Voluntary Disclosure made to the IRS can protect taxpayers against criminal charges relating to their disclosed non-compliance. In other words, the taxpayer will not be recommended for criminal prosecution. In the interests of the efficient tax system administration, the IRS has long held that taxpayers who come forward voluntarily, make a complete disclosure, and agree to pay the penalty can avoid criminal penalties, including prison. However, the type of disclosure that should be made should be dependent on the taxpayer's risk. Warning: A voluntary disclosure should never be attempted without the guidance of experienced criminal tax defense counsel and using a Kovel Accountant to protect the client's constitutional rights, attorney-client privilege, and the attorney's work product!
Consider that the U.S. tax system relies heavily, at least initially, on taxpayer self-reporting (self-assessment). If the system were not originally based on self-assessment, the current levels of IRS staffing would make the tax system unworkable. To further encourage taxpayer compliance, even after a period of purposeful compliance failures, the IRS has held a policy conferring certain benefits on individuals who voluntarily come forward, fully disclose their past acts or omissions of non-compliance, file accurate returns for the affected years still open to the criminal statue (generally five years), and who makes a full payment or enters into an approved payment plan. Provided that the disclosure is voluntary, complete, accurate, and legally sufficient, the IRS has a policy of refraining from recommending these taxpayers for criminal prosecution. Following are some of the General Benefits of Voluntary Self-Disclosure
- Demonstrating Ethical Commitment: Voluntary self-disclosure is a testament to a company's commitment to maintaining ethical standards. This act of honesty and transparency promotes integrity and builds trust among stakeholders, including employees, customers, investors, and regulators.
- Promoting a Positive Corporate Culture: When a company willingly discloses potential misconduct, it fosters a culture of accountability and openness. This commitment to ethical behavior encourages employees to act responsibly, strengthening the corporate ethos and possibly improving employee morale and productivity.
- Risk Mitigation: Voluntary self-disclosure allows companies to preemptively address potential issues, serving as an effective risk mitigation strategy. By taking control of the narrative, companies can avoid the fallout of a regulatory investigation, minimize potential damage to their reputation, and possibly reduce legal and financial penalties.
- Preserving Business Relationships: By voluntarily disclosing misconduct, a company can safeguard its relationships with clients, partners, and other stakeholders. This proactive behavior demonstrates a commitment to ethical business practices, which can enhance trust and respect in the business community.
- Showcasing Robust Compliance Programs: Voluntary self-disclosure also allows a company to demonstrate its robust compliance program. By actively addressing and disclosing misconduct, the company underlines the effectiveness of its internal controls, which can further reinforce its reputation among stakeholders.
- Enabling Proactive Management: Taking the initiative to disclose misconduct empowers a company to manage the situation proactively. It allows the organization to work on resolving the issue in a controlled manner rather than reacting to an externally initiated investigation.
- Possibility of Reduced Penalties: Regulatory authorities may look favorably upon voluntary self-disclosure, potentially leading to reduced penalties. This advantage, however, will depend on the specific circumstances and the jurisdiction's regulatory framework.
In essence, the act of voluntary self-disclosure carries numerous potential benefits that extend beyond mere compliance with regulatory requirements. Voluntary self-disclosure can be a strategic tool in a company's broader compliance program by promoting transparency, enhancing reputation, mitigating risks, and possibly reducing penalties.
DOJ's Policy-Based Advantages of Voluntary Disclosure
The Tax Division has outlined several policy-based benefits of voluntary disclosure, bringing about consistency with the voluntary disclosure policies of other Department of Justice (DOJ) components. Here are some highlights:
- DOJ Tax's Role in Penalties: The Tax Division policy assures that under specific conditions, it may choose not to seek an indictment, effectively reducing the risk of imposing a criminal penalty on a corporation. It's important to note that the decision to impose criminal penalties lies with the courts, not DOJ Tax. However, through this policy, DOJ Tax has the discretion to control the indictment proceedings based on the corporation's voluntary disclosure, cooperation, and remediation efforts.
- Fine Range Reduction: The policy also offers an opportunity for a reduction in the Guidelines' recommended acceptable ranges for corporations that meet the policy's criteria or demonstrate critical aspects such as cooperation. Although it's worth noting that acceptable ranges might not be significantly material to corporations, the potential for fine reduction still serves as an additional incentive for corporations to follow voluntary disclosure protocols.
- Absence of Sentencing Range: Unlike individuals, corporations cannot be incarcerated. Therefore, the traditional concept of a sentencing range doesn't apply to corporations. However, under this policy, corporations can still benefit from reduced criminal penalties and fines, subject to their voluntary disclosure, cooperation, and remediation efforts.
The bottom line is that this policy creates a more predictable environment for corporations considering voluntary disclosure. While the voluntary disclosure process may still seem daunting, the general and policy-based benefits provide a compelling case for taking this proactive approach to tax compliance.
While the advantages of voluntary disclosure, both general and policy-based, can provide a compelling case for taking a proactive approach to tax compliance, this doesn't eliminate the need for experienced counsel. As with any complex legal matter, corporations must approach this process under the guidance of seasoned tax defense lawyers and certified public accountants (CPAs). At the Tax Law Offices of David W. Klasing, our dual-licensed tax attorneys and CPAs, are uniquely positioned to guide corporations through this process.
We work with corporations to evaluate the potential risks and benefits of voluntary disclosure, assist in full cooperation and appropriate remediation, and ensure that all aspects of the disclosure process align with the outlined IRS policy. This dual expertise provides a comprehensive approach to tax compliance, protecting corporations from potential legal pitfalls while helping them reap the maximum benefits from voluntary disclosure. Reach out to the Tax Law Offices of David W. Klasing today and let us help you navigate the voluntary disclosure process confidently and effectively.
When Can I Make a Voluntary Disclosure?
For a Voluntary Disclosure to be adequate, it must be timely. If the taxpayer is reasonably aware of an investigation or facts and circumstances suggesting that the government has already discovered the non-compliance that is the subject of the disclosure is not timely. For Voluntary disclosures to be effective, they must be made:
- Before the start of an IRS examination or before IRS notification to the taxpayer of an impending audit or examination.
- Before a third-party whistle-blower supplying information regarding fraud or other non-compliance with the IRS.
- Before the IRS acquires information regarding non-compliance through other sources.
As such, time is of the essence when considering a Voluntary Disclosure. However, taxpayers should not be hasty in their decision to file for Voluntary Disclosure because there are certain circumstances, such as illegal source income, where such disclosures are ineffective. Further, taxpayers must carefully analyze their behaviors and events and how an IRS examiner may interpret them. Finally, taxpayers should also consider whether a "noisy" or "quiet" disclosure is more appropriate for their tax situation.
Voluntary disclosure is noisy because the criminal investigation division is contacted at the outset of the process. A quiet disclosure would involve filing five years of amended returns with the client's average service center. The advantage of this method is that the taxpayer may escape the costs and stress of submitting to an audit that ordinarily follows a loud voluntary disclosure. The disadvantage is that a quiet disclosure could be viewed as an admission of guilt without the expected pass on criminal prosecution that follows a noisy disclosure. Again, the critical decision to go loud or quiet should not be made without experienced criminal tax defense counsel.
Why Does the IRS Offer Voluntary Disclosure?
The voluntary disclosure program reflects practical and fiscal imperatives. The practical imperative is that, in tax cases, a jury will often be less likely to convict where the taxpayer has corrected the criminal conduct by voluntarily filing amended or original delinquent returns.
The fiscal imperative is that the government is more likely to see more unpaid taxes through voluntary disclosure than through rooting out every evader themselves. Voluntary disclosure is only practical when it functions like a "win-win" as far as the government's revenue stream is concerned. A voluntary disclosure policy will generate significant additional revenue for the government since the IRS would not have discovered or if discovered, would not have prosecuted most of the taxpayers who voluntarily disclose under the policy.
There are still plenty of taxpayers to prosecute who have not gotten right with the government for the government to meet its criminal tax enforcement needs, so the additional revenue generated by the voluntary disclosure policy is a "freebie" for the government. The government gives up nothing of systemic importance and gets a material amount of revenue that, but for the policy, it would never get.
The key caveat here is that the disclosure must be voluntary and complete. To avoid fact-intensive queries about what motivates the taxpayer to make a disclosure, the IRS has some rules that disqualify the taxpayer based on the "timeliness" of the disclosure. The critical timeliness condition is that disclosure after a civil or criminal investigation has started is not timely.
Can You Use Voluntary Disclosure to Deal with FBAR Violations?
Voluntary disclosure is an option for more than just federal income tax return issues. The federal government offers the Voluntary Disclosure Practice (VDP) specifically for taxpayers who made mistakes in failing to disclose their assets held overseas through a Report of Foreign Bank and Financial Accounts (FBAR).
Penalties for failing to file an FBAR when required can be substantial, especially if the government suspects the failure was willful. This is troubling, as many taxpayers who owe an FBAR may not realize they have met the threshold until it is too late. Discuss whether the VDP is an avenue you should explore with our Dual Licensed International Tax & FBAR Attorneys and CPAs.
Experienced Tax Professionals Guide You Through the Voluntary Disclosure Process
The experienced and dedicated tax attorneys and Kovel CPAs of the Tax Law Offices of David W. Klasing can help concerned taxpayers understand their options. Once we have explained the process and the potential opportunities to mitigate the situation to the taxpayer, our experienced tax attorneys can handle every step. To schedule a reduced-rate consultation with an experienced dual-licensed Tax Attorney and CPA, call us at 800-681-1295 today or contact the firm online.
In most cases, where your conduct was non-willful, a streamlined disclosure will be a better financial option for you than the VDP. However, one significant difference between the streamlined disclosure program and the VDP is that you must sign a form indicating that your conduct was non-willful for streamlined disclosure. If you falsely certify non-willfulness, you could be subject to further penalties, including criminal tax charges.
As such, those who willfully committed tax and information reporting fraud, instead of those who made honest mistakes, should apply for the VDP instead of a streamlined voluntary disclosure. Again, however, no decision about what program to utilize should be made without consulting with an experienced International Tax Attorney & CPAs like those at the Tax Law Offices of David W. Klasing.
If accepted into the streamlined voluntary disclosure program, you will be required to submit a large amount of paperwork, including three years of amended personal income tax returns that report the previously omitted offshore taxable income, six years of FBARS, and three years of any other required foreign information saying which our skilled Tax Attorneys and CPAs can help you prepare. You will be effectively shielded from criminal prosecution if your conduct is non-willful.
Furthermore, for nonresidents, you will also avoid the "offshore penalty" entirely. For U.S. tax residents, you must pay 5% on the highest aggregate amount in the undisclosed offshore accounts over the six years required under the program measured as of December 31st. You also may be required to pay certain other fines and fees to be brought back into compliance. Overall, however, the streamlined disclosure program usually offers the least expensive path back into submission if you are eligible where you have unreported offshore taxable income and undisclosed foreign financial accounts.
U.S. Taxpayers living outside the U.S. may not have to pay the 5% penalty discussed above if they qualify for a streamlined voluntary disclosure.
See our 2011 OVDI Q and A Library
See our FBAR Compliance and Disclosure Q and A Library
See our Foreign Audit Q and A Library
Purpose of the Streamlined filing compliance practice procedures 5
The streamlined filing compliance procedures ("streamlined procedures") described below are accessible to taxpayers who attest that their failure to disclose and pay all taxes owed on foreign financial assets was not the result of deliberate behavior on their Part. The accelerated processes are created to offer taxpayers a quicker process for filing modified or late returns and conditions for settling their tax and penalty obligations in certain circumstances. As shown below, the simplified procedures initially made available on September 1st, 2012, have been expanded upon and changed to better suit a more comprehensive range of U.S. taxpayers. Significant modifications to the simplified processes include:
- Abolition of the $1,500 tax threshold, expansion of eligibility to U.S. taxpayers residing in the U.S., and risk assessment process linked with the 2012-announced streamlined filing compliance procedure.
Eligibility Criteria for The Streamlined Procedures 6
The streamlined procedures have been adjusted and are solely intended for individual taxpayers and their estates. Both individual American taxpayers living abroad and individual American taxpayers residing within the United States are eligible to use the simplified processes. Below are descriptions of the exact eligibility conditions for the streamlined procedures for residents of the United States and nonresidents of the United States (the "Streamlined Foreign Offshore Procedures" and "Streamlined Domestic Offshore Procedures," respectively).
Taxpayers Must Certify That Conduct Was Not Wilful.7
The failure to report all income, pay all taxes, and submit all required offshore information returns, including FBARs (FinCEN Form 114, formerly Form T.D. F 90-22,1), was due to non-wilful conduct, taxpayers using either the streamlined foreign offshore procedures or the streamlined domestic offshore procedures must certify. The specific instructions are provided below. Non-wilful behavior is the consequence of carelessness, accident, mistake, or behavior stemming from an honest misinterpretation of the law's requirements.
Understanding Cooperation and Remediation in Voluntary Disclosure
Cooperation under the Voluntary Disclosure Policy entails a comprehensive set of actions on the company's part. The conditions primarily revolve around the timely disclosure of all relevant, non-privileged facts about the misconduct, proactive cooperation, and the preservation and disclosure of pertinent documents. The company is also expected to facilitate witness interviews and provide, as necessary, the attendance and truthful statements of individuals connected to the company or its misconduct. As noted, the various conditions underpinning this aspect underscore the necessity for expert counsel to assist in fulfilling these obligations.
On the other hand, timely and appropriate remediation involves a deep-dive analysis of the misconduct's causes and implementing an effective compliance program. The company is expected to disgorge the proceeds of the misconduct, discipline the employees involved, maintain appropriate business records, and take additional steps demonstrating a severe recognition of the wrongdoing and acceptance of responsibility. However, it's important to note that voluntary self-disclosure does not address potential or outstanding civil liability. This lack of agreement regarding civil penalties indicates the crucial role seasoned tax defense attorneys. We at the Tax Law Offices of David W Klasing are indispensable in guiding companies through the complexities of potential criminal liabilities and civil penalties.
Does Voluntary Disclosure Contain any Legally Enforceable Guarantees?
The Department of Justice's Criminal Tax Manual (or CTM) makes it clear that acceptance of any of the federal government's voluntary disclosure programs does not come with any additional rights for taxpayers. Practically, this means that courts cannot second-guess the IRS' treatment of a taxpayer that applies and is accepted for voluntary disclosure beyond whether any of their already existing rights were infringed.
The IRS has a history of inadvertently treating honest taxpayers poorly. Therefore, voluntary disclosure may not be the best option for every situation, as there isn't a statutory guarantee that you will curry the favor of the government by doing their work for them. Never apply for voluntary disclosure without having a thorough and exhaustive conversation about your options with a California Attorney for IRS Voluntary Disclosure Practice.
Does California Have a Voluntary Disclosure Program?
Like the IRS, the State of California's Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA) provide a method for non-compliant taxpayers to regain compliant status by coming forward with the details of their failure to comply with the California state tax code.
The path to voluntary disclosure to the FTB depends on whether you are an in-state or out-of-state filer.
In-State California Voluntary Disclosure Program
For in-state taxpayers, sales tax voluntary disclosure is only available for purchasers within California who are not otherwise required to hold a seller's permit. It is only used to report and pay the balance of any sales and use taxes that the applicant owes.
To qualify for the In-State Voluntary Disclosure Program, all of the following must be true:
- You reside or are located within California and have not previously registered with the CDTFA;
- You have not previously filed an Individual Use Tax Return with the CDTFA;
- You have not reported an amount for use tax on your Individual Income Tax Return filed with the Franchise Tax Board;
- You are not engaged in business in this state as a retailer, as defined in Revenue and Taxation Code section 6015;
- The CDTFA has not contacted you for failure to report the use tax imposed by section 6202 of the Revenue and Taxation Code;
- Your failure to pay the tax or file a return was due to reasonable cause and not as a result of negligence, intentional disregard of the law, or by an intent to evade taxes;
- Your purchase is not of a vehicle, vessel, or aircraft;
- You submit your application voluntarily;
Out-of-State California Voluntary Disclosure Program
The FTB's Voluntary Disclosure Program provides a method of recourse for out-of-state businesses and their operators to avoid penalties for delinquent or amended filings where honest mistakes prevented their timely compliance.
The state legislature passed expansions to the Voluntary Disclosure Program in 2017 to include out-of-state trusts with California beneficiaries and nonresident partners from out-of-state partnerships. The new additions to the program also allow the FTB to waive late filing penalties for specified returns from S corporations and partnerships.
Applications to the FTB must be submitted through form FTB 4935 via mail, coupled with the supplementary documentation necessary to explain the nature of the non-compliance. You will not qualify for the program if you have registered with the California Secretary of State, ever filed a return with the State of California, or received a notice to file a return in California.
When Should I Contact a Lawyer to Help with My Application for Voluntary Disclosure?
If you know or suspect that your prior state or federal tax filings may have errors or inconsistencies, or if you have missed a filing deadline, you should look to act as soon as possible. While you should never rush the process, the window for voluntarily disclosing past non-compliance only lasts as long as the federal or California government is unaware of the issues.
Suppose the federal or state government has already discovered that there are issues with your tax history or has initiated an audit or criminal tax investigation against you. In that case, any attempt to apply for the benefits of voluntary disclosure will likely be in vain. The government may also discover the non-compliance through their auditing, investigation, or prosecution of business associates, contracting parties, or financial service firms you have dealt with.
Further, once you determine that you wish to proceed with the voluntary disclosure application process, it may take some time to assemble the required documentation of your financials that the IRS will want to see. This is especially true if the non-compliance continues over several years.
In any case, the time to reach out to a dedicated California Attorney for IRS Voluntary Disclosure Practice is now. You do not want your opportunity to achieve a pass on criminal tax prosecution, & favorable penalty relief to expire. At the same time, you decide who should help you or whether to address these issues. You deserve to know every option that could provide critical relief to you or your small business.
IRS has initiated a civil examination 8
The taxpayer will not be qualified to employ the simplified processes if the IRS has begun a civil review of the taxpayer's returns for any taxable year, regardless of whether the examination relates to undeclared foreign financial holdings. Taxpayers who are being investigated may speak with their agent. A taxpayer subjecting to an IRS Criminal Inquiry criminal investigation can likewise not employ the accelerated processes.
Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay penalty assessments.
To comply with their U.S. tax and information reporting obligations concerning foreign financial assets, taxpayers who are qualified to use the streamlined procedures who have previously filed late or amended returns (so-called "quiet disclosures" made outside of the Offshore Voluntary Disclosure Program (OVDP) or its predecessor programs) may still do so by adhering to the guidelines provided below. However, any penalties already assessed concerning those filings will not be reduced.
Taxpayers who want to participate in the streamlined procedures need a valid taxpayer identification number
A valid Taxpayer Identification Number is required for all returns submitted via the simplified processes. The appropriate TIN is a legitimate Social Security Number for U.S. citizens, resident immigrants, and others (SSN). Your tax return won't be handled using the streamlined methods if you're not qualified for an SSN or ITIN. However, suppose a complete ITIN application is included. In that case, a submission may be made using the expedited procedures for taxpayers who are not qualified for an SSN but do not have an ITIN. There is more information available about obtaining an ITIN.
IRS criminal investigation and voluntary disclosure practice or streamlined procedures
Consider taking part in the IRS Criminal Investigation Voluntary Disclosure Practice and speak with your professional or legal advisors if you are worried that your failure to report income, pay taxes, and submit required information returns was the result of wilful behavior and want assurance that you won't face criminal liability and substantial monetary penalties.
General treatment under the streamlined procedures 9
The IRS will treat tax returns submitted using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures the same as any other return. As a result, the IRS won't acknowledge receiving the returns, and the expedited filing procedure won't result in the IRS, and you are signing a closure agreement.
The IRS will not automatically audit returns submitted through the streamlined domestic offshore procedures or the streamlined foreign offshore procedures; however, they may be chosen for audit under the current audit selection procedures that apply to any U.S. tax return, and they may also be subject to verification procedures in which the accuracy and completeness of submissions may be compared to data from banks, financial advisors, and other sources. As a result, returns filed via the expedited processes may be investigated by the IRS, subject to additional civil fines, and may carry criminal tax culpability.
Consider taking part in the IRS's Criminal Investigation Voluntary Disclosure Practice. Taxpayers concerned that their failure to report income, pay taxes, and submit required information returns resulted from wilful behavior and who seek assurances that they will not face criminal liability and substantial monetary penalties should also speak with their tax advisors or legal counsel.
After completing the accelerated processes, taxpayers must abide by U.S. law and file returns following standard filing standards.
Coordination between streamlined procedures and OVDP, which closed on September 28th, 2018, 10
A taxpayer is not permitted to participate in OVDP after submitting under the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures. The expedited processes are also ineligible for taxpayers who submit an OVDP voluntary disclosure letter following OVDP FAQ 24 on or after July 1st, 2014.
Before July 1st, 2014, a taxpayer who is qualified for treatment under the streamlined procedures and who has submitted or will submit a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures.
If a taxpayer wants this approach, they do not have to opt out of the OVDP, but they must demonstrate that their non-wilful actions led to them failing to report all of their income, pay all of their taxes, and file all of their information returns, including FBARs. The IRS will evaluate this request as Part of the OVDP procedure in light of all the relevant facts and circumstances of the taxpayer's case, and it will decide whether to include the simplified penalty conditions in the OVDP closing agreement or not.
If You Are Interested in a Voluntary Disclosure Program to Bring You Back into Tax Compliance, Call our Skilled Tax Attorneys Today
If you get ahead of the curve by disclosing your mistakes to the IRS before they come after you with an audit or criminal tax investigation, there is a good chance you will avoid the most severe penalties you could face. At the Tax Law Offices of David W. Klasing, our experienced tax attorneys can help you determine which program gives you the best chance of being brought back into tax compliance with minimal trouble. Then we can protect your rights through the process. Call our firm today at (800) 681-1295 to schedule a consultation.
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Questions and Answers about OVDP:
- What are the Eligibility Requirements for Streamlined Disclosure?
- What is the Transitional Treatment Option to 2014 OVDI Program?
- Streamlined Program 2014 Changes Regarding Foreign Accounts
- 2014 Changes to Tax Laws for Offshore Accounts and Assets
- Changes to IRS Voluntary Disclosure from 2012 and 2014 OVDP
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