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When FBAR Willful Penalties Can Kick in After Leaving the Voluntary Disclosure Program

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    The Offshore Voluntary Disclosure Program which is now a subset of the IRS’s Voluntary Disclosure Practice (VDP), was established by the Internal Revenue Service (IRS) as a method for taxpayers to come back into compliance without facing criminal tax prosecution and to face predictable civil penalties in the process where their actions are highly likely to be viewed as willful. The offshore voluntary disclosure program has undergone several updates & revisions over the year and has previously been known as the OVDP, Offshore Voluntary Disclosure Program, OVDI, Offshore Voluntary Disclosure Initiative. The offshore version of the program serves to facilitate a relatively risk-free return to U.S. tax compliance for taxpayers who willfully commit violations regarding their foreign bank and financial accounts where offshore taxable income was received and often deposited to an undeclared foreign account and was willfully unreported for U.S. income tax purposes resulting in income tax evasion and foreign information reporting crimes being committed.

    Those who submit their violations to the offshore subset of the VDP may minimize many of the civil penalties that they would have incurred if their error remained unreported and was subsequently discovered. However, as evidenced by the District Court decision in United States v. Leeds, you should always speak with a dual licensed International Tax Lawyer and CPA before making a submission to the VDP. Certain errors regarding your submission could result in the assignment of willful penalties.

    If you are concerned that you have not adequately complied with reporting requirements regarding your offshore bank & financial account, our lawyers can help. Contact our experienced Dual-Licensed International Tax Lawyers & CPAs today by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or scheduling online HERE.

    Can You Face Willful Disclosure Penalties for Leaving the Voluntary Disclosure Program?

    You should contact our attorneys before attempting to enter the Voluntary Disclosure Practice. As shown by the District Court decision in United States v. Leeds, those who enter into the program and then leave may face willful disclosure penalties and by far worse may face criminal prosecution without the amnesty protection of the VDP.

    In Leeds, the defendant maintained two foreign bank accounts in Switzerland. Between 2006 and 2012, Mr. Leeds failed to comply with FBAR reporting requirements as they pertained to his foreign bank accounts. In 2014, he applied to participate in the OVDP and was initially accepted. Afterwards, he continued to file his delinquent FBAR reports as part of the OVDP requirements.

    In 2019, Leeds was informed that he would be assigned willful FBAR penalties. He contested these penalties and requested further consideration from the IRS Independent Office of Appeals. However, the penalties were upheld. The penalties were allocated among the years from 2006-2012, when the FBAR violations were committed. No yearly penalty surpassed 50% of the defendant’s aggregate balance in their delinquent foreign accounts.

    Still, in April of 2018, Mr. Leeds opted out of the OVDP. Accordingly, an IRS examination was commenced. The IRS then proposed a willful FBAR penalty, resulting in a collection suit that was filed to enforce the penalty.

    Accordingly, Mr. Leeds created several issues for himself by entering the OVDP and then removing himself. First, filing a submission with the OVDP comes at a civil cost. It does not make sense why Mr. Leeds would enter into the program and then opt out after incurring such an expense. Furthermore, Mr. Leeds should not have opted out of the OVDP after already disclosing his tax violations in his initial submission to the program. By entering the program and then leaving, he exposed himself to willful disclosure civil penalties and potential criminal tax prosecution and criminal foreign information reporting prosecution.

    If you believe you have committed an error regarding the FBAR reporting requirements for your foreign bank account, then our attorneys can help. Our Dual-Licensed International Tax Lawyers & CPAs can review the facts of your case and determine the appropriate next steps. Attempting to resolve issues on your own could result in the assignment of unnecessary penalties.

    What is the Offshore Voluntary Disclosure Program (OVDP)?

    Previously, the Internal Revenue Service (IRS) had two programs, The Offshore Voluntary Disclosure Program (OVDP) and the Offshore Voluntary Disclosure Initiative (OVDI). However, the IRS has since discontinued those two programs and put in place a new, updated version in their stead. Many in the profession still refer to this as the OVDP. However, it is sometimes called “Son of OVDP.”

    One major difference involves the requirement of a preclearance letter for disclosures regarding offshore bank accounts. This letter is a request to determine whether an account holder is eligible to participate in the voluntary disclosure practice. Essentially, it is part of a procedure that is used to confirm an applicant’s eligibility to enter the VDP. An offshore voluntary disclosure requires 6 years of true accurate and complete amended income tax returns to be filed that accurately report the previously omitted foreign income along with any previously omitted foreign information reporting. An IRS Revenue Agent will eventually be assigned by the criminal investigation division to audit the amended returns to determine if the program terms were met or not. If the program returns were met, the taxpayer will receive a 906-closing agreement and will receive a pass on criminal tax prosecution even where they may or may not have acted willfully regarding their previous noncompliance.

    If you wish to explore making a disclosure to the VDP, you should contact our dual licensed International Tax Attorneys & CPAs right away. Our Dual-Licensed Tax Lawyers & CPAs can help ensure you take the appropriate steps toward resolving your issues.

    Who is Eligible for the Voluntary Disclosure Practice (VDP)?

    There are three main aspects of a submission to the VDP that determine eligibility. First, the undisclosed funds in question must have been legally earned. This requirement serves to prevent tax payers from using the Internal Revenue Service (IRS) to launder illegally acquired money. For example, imagine someone sold illegal narcotics in South America and kept their money in a foreign bank account. That person cannot use the IRS disclosure program to report their money because the funds at issue can be “cleaned” through the disclosure process.

    Furthermore, under the VDP, taxpayers cannot issue placeholder submissions. A placeholder submission is used to hold a spot open for a taxpayer. The VDP does not permit these types of submissions. Accordingly, those reporting to the VDP must present their submissions in full. In other words, you must make a submission that includes all foreign assets, accounts, investments and especially all unreported foreign income.

    Assessing eligibility for an VDP submission, especially whether a taxpayer’s behavior was willful or not is complex task and frankly, a task only an Attorney should undertake. If you believe you need to make such a submission, you should contact our attorneys immediately. Our Dual-Licensed Tax Lawyers & CPAs can help evaluate eligibility and ensure you comply with the multiple requirements for reporting undisclosed funds.

    If You Believe You Need to Submit a Disclosure to the OVDP, Our Lawyers Can Help

    If you are worried that you did not comply with reporting requirements regarding your offshore bank & financial accounts, especially where you have offshore taxable income generating assets that went unreported for tax purposes, seek assistance from our experienced Dual-Licensed International Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 to arrange a reduced rate initial consultation or scheduling online here.

    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

    Here is a link to our YouTube channel: click here.
    Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]
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