IRS VOLUNTARY DISCLOSURE PROGRAM

If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then most other incomes you may be required to report the account yearly to the Internal Revenue Service (IRS). The IRS has drawn a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. The IRS has set up a penalty framework that is believed to help those that voluntarily come forward. However, those that volunteer need to pay back any taxes and interest during the tax periods for years 2003 to 2008. Those that volunteer must also pay either an accuracy or delinquency penalty during the mentioned six year period. On top of those taxes, they will also pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Just to be clear, this is 20 percent of the highest asset value of an account anytime in the past six years. By incorporating the penalty framework, it gives the voluntary taxpayers a certainty and consistency in how their case will be handled by the IRS. However, if the taxpayer is currently under examination by the IRS, then the voluntary disclosure program would not apply.

Some of the advantages of voluntarily disclosing with the IRS are that you can avoid substantial civil liability and eliminate the risk of criminal prosecution. However, on the other hand, some of the disadvantages of not reporting your offshore accounts to the IRS include the risk of detection by the IRS through an audit; imposition of substantial penalties; fraud penalties; foreign information return penalties; and the possible risk of criminal prosecution.

If after making a voluntary disclosure, the taxpayer disagrees with the 20 percent offshore penalty, the taxpayer’s case will follow a standard audit process. Then the taxpayer’s case will be subjected to a complete examination. Once the examination is complete, any penalties that apply would be imposed. These penalties could be substantially greater than the 20 percent penalty. However, if the case is still disagreed, then the taxpayer will then have recourse to Appeals.

If a taxpayer is unable to make full payments of all taxes and interest for all years covered, and the Voluntary Disclosure penalty, as well as all other unpaid, previously assessed liabilities, then the taxpayer must also submit a request that includes another payment arrangement that is acceptable to the IRS. The burden will be on the taxpayer to prove his/her inability to pay.

The taxpayer must be truthfully, timely, and completely honest in their voluntary disclosure or they could be subject to greater penalties or even possible criminal prosecution. Keep in mind that there is no guarantee that there will be an extension of the September 23 deadline and there is a possibility that a new program will be initiated with more severe penalties.

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