IRS Voluntary Disclosure Program

May 04, 2020

The IRS Voluntary Disclosure Program (VDP) gives taxpayers a chance to avoid criminal tax charges by submitting their late or corrected tax returns and agreeing to pay the penalties. 

Read on to learn how the VDP works and whether it’s the right option for you.

Voluntary Disclosure Program is the new OVDP

You may have heard of the Offshore Voluntary Disclosure Program (OVDP), which specifically allowed taxpayers to disclose offshore accounts. That program stopped taking applications in 2018 and was replaced by the VDP, which covers more types of tax deficiencies. The new VDP is not limited to funds or assets held overseas.

Why use the Voluntary Disclosure Program?

The Voluntary Disclosure Program, or VDP, allows you to start a clean slate with the IRS and regain peace of mind.

We’ve had countless clients come to us saying they can’t sleep at night for fear of what the IRS might do to them. The VDP allows you to close the book on past tax delinquency and start fresh.

At the end of the Voluntary Disclosure Program, you’ll receive a closing letter from the IRS. This comes as close as possible to a guarantee that you won’t be further audited or criminally prosecuted for the tax years you disclosed through the VDP.

While the IRS Voluntary Disclosure Program does include hefty financial penalties, many clients would rather go this route than continue to risk criminal prosecution.

Who can enter the IRS Voluntary Disclosure Program?

IRS voluntary disclosure can provide relief for US taxpayers who…

  • Have neglected to file past tax returns
  • Have failed to accurately report foreign bank accounts, foreign assets, or cryptocurrency transactions
  • Have filed inaccurate tax returns in the past for other reasons

You cannot use the VDP if you’re currently under an IRS investigation. Also, if the IRS has requested information from a third party (such as a foreign bank or a cryptocurrency platform), and your name appears in the released records, you will not be eligible for the VDP. 

In short, you have to use the Voluntary Disclosure Program to come forward proactively, before you appear on the IRS’s radar.

The VDP isn’t an option if the money you’re disclosing comes from illegal sources. If this is the case, contact our tax attorneys now for a confidential consultation.

How does IRS voluntary disclosure work?

The voluntary disclosure process begins with a 2-part pre-clearance letter. You’ll have to disclose your past tax deficiencies, including any previously undisclosed funds and their initial sources, and write a story explaining your situation to the IRS.

If your pre-clearance letters are accepted, the IRS will assign an examiner to your case for an audit. You’ll submit the correct version of your last 6 tax returns, along with all supporting documents. The examiner may require an interview, as well. You must also come into compliance with any FBAR or foreign trust reporting requirements over the last 6 years.

If you successfully complete the Voluntary Disclosure Program, you’ll receive a closing letter detailing which parts of your records have changed and the penalties you agree to pay. 

How much will I have to pay?

Using the VDP, you will owe tax and interest on the past 6 years of tax deficiencies. The IRS will also assert a civil fraud penalty of 75% on the highest tax deficiency year out of the past 6.

The IRS will also assert a one-time willful penalty on the failure to file any FBARs that are disclosed through the VDP. The penalty is typically 50% of the highest aggregate balance for the period you’re disclosing, or $100,000, whichever is greater.

For example, say you have offshore securities that you’re reporting through the  VDP. A year ago, your accounts reached their peak value at $3 million. Today, they’re worth $2.5 million. The penalty would be 50% of $3 million.

If you cannot pay the deficiency after completing the VDP, a payment plan can be established.

The tradeoff is peace of mind. Unless the IRS uncovers false information or illegal activity in your VDP process, they are unlikely to recommend criminal prosecution for your case once you complete the program.

What are my other options?

The Voluntary Disclosure Program is not the only way to correct your tax situation. In fact, most taxpayers consider it a last resort because of the steep penalties involved. Some of the other options include:

  • Streamlined Foreign Offshore Procedure: This is often the best option for those who qualify. With the Streamlined Foreign Offshore Procedure, you will only have to pay the balance of the taxes you owe and interest, with no additional penalties.    
  • Streamlined Domestic Offshore Procedure: If you don’t qualify for the Streamlined Foreign Offshore Procedure, this may be a good program for you. Upon completing the procedure, you’ll have to pay a standard penalty in addition to the balance of what you owe and interest. 
  • Quiet Disclosure: We can help you amend your past tax returns and refile them without going through an official IRS program. We don’t typically recommend this course since it can carry heavy penalties. The IRS tends to be more forgiving when you go through an official disclosure process.
  • Ignore Past Issues: Although we recommend disclosure, at the end of the day, it’s your decision. Some people choose to do nothing and hope the IRS won’t uncover their tax delinquency. However, we strongly recommend not taking this route, as it carries the highest risk of penalties and criminal charges from the IRS. At any rate, we certainly advise filing your taxes correctly going forward.

Want to see if you’re eligible for streamlined disclosures? Click here to download our free Streamlined Disclosure eligibility checklist.

Can I use the VDP for unreported cryptocurrency?

Most of this article talks about “willful” tax delinquency, or purposefully hiding information from the IRS. But if you’re a cryptocurrency trader and haven’t reported your virtual coin holdings because you didn’t know it was required, you can still use the IRS Voluntary Disclosure Program.

The cryptocurrency tax penalties under the VDP, unfortunately, remain the same even if you were non-willful. There are no streamlined disclosure options for crypto in most cases.

How to start the IRS Voluntary Disclosure Program

Because the VDP is typically reserved for willful tax delinquency (which could carry criminal implications), we strongly suggest speaking to a tax attorney before you begin any contact with the IRS. Call our experienced attorneys today to schedule your confidential consultation.

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