Legal Income — the voluntary disclosure policy has always been available only to taxpayers who have legal source income. Thus, any undeclared accounts that hold the proceeds of criminal conduct (other than tax fraud), such as bribery or corruption, narcotics, money laundering, etc., will not be the basis for an acceptable voluntary disclosure.
Timeliness — the IRS Manual describes the specific criteria for determination of timeliness. A disclosure is timely if it occurs before:
- the IRS has initiated a civil examination or criminal investigation of the taxpayer or has notified the taxpayer that it intends to commence such an examination or investigation;
- the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
- the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
- the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
Note: The timeliness test as a whole may present a serious problem for many potential Voluntary Disclosure candidates where making a determination of whether their name has been provided to the IRS or the Justice Department as having a potentially unreported foreign account is uncertain.
Truthfulness — a voluntary disclosure must be truthful in all respects. This requirement presents some problems in the area of undeclared accounts because foreign bank information may be unobtainable or incomplete
Presumably, a taxpayer’s best estimate made in good faith and based on all available information would satisfy this requirement if precision is not possible, but a taxpayer whose return contains such estimates should plainly disclose on the face of the amended return the methods used to calculate the line items.
In a voluntary disclosure involving previously undeclared accounts, the taxpayer must of course report all income earned on the account, and must acknowledge his or her signature authority and/or financial interest in the account on Schedule B of the Form 1040.
Generally, practitioners advise that the taxpayer need report as income on the amended filings only the dividends, interest, and capital gains (or losses) earned in the account. But where an account was established with funds on which taxes have never been paid, the situation gets more complex, and in some cases, especially those involving non-grantor trusts, the client may have to report amounts withdrawn from the account as income.
Completeness — the disclosure must be complete, but that term is not defined in the Manual. The Justice Department’s Criminal Tax Manual, at §4.02(2), specifies that the taxpayer must make a full disclosure of the facts.
Cooperation — In order to take advantage of the voluntary disclosure policy, the taxpayer must cooperate with the IRS in the determination and payment of his tax liability.
No consideration will be given to a partial voluntary disclosure that is followed by a claim of the Fifth Amendment, a refusal to cooperate in an audit, or a refusal to give financial information relevant to a claim of inability to pay. This guideline provides leverage to the IRS should it audit the taxpayer’s delinquent or amended returns.
Where the IRS seeks additional information about your accounts following a voluntary disclosure, you will be unable to refuse to provide requested information. Such a refusal would jeopardize the voluntary disclosure.
Contact my office to schedule a reduced rate initial consultation to discuss your FBAR and voluntary disclosure concerns and how I can be of assistance. When you call, you will speak directly to me, not a paralegal or assistant, to get the experienced answers you need.
