IRS Voluntary Disclosure Guide
2023 IRS Voluntary Disclosure Program
“Ultimate Guide” to IRS Voluntary Disclosures
Published by Boston Tax Lawyers, Former IRS Attorneys: Thousands of Cases Worked, Billions of Dollars Saved!
A Rare Look Inside the 2023 IRS Voluntary Disclosure Program!
Managing Partner Kevin E. Thorn of the Thorn Law Group is regarded as the “preeminent expert’ in the United States on IRS Voluntary Disclosures and the analyzation of foreign financial assets. He and his highly sought after law firm, Thorn Law Group (TLG) have worked on thousands of IRS Voluntary Disclosure Program (OVDP) cases over the past 25-plus years. He has successfully resolved cases before the IRS, the IRS Appeals, the IRS Criminal Division (CI), the United States Tax Court, and the United States Department of Justice’s Civil and Criminal Divisions, and in most Federal courts throughout the United States on behalf of his clients.
Mr. Thorn and his law firm have represented clients from almost every state in the United States and from almost every country around the world in every IRS Voluntary Disclosure Program that the IRS has released. The firm is especially well-known for favorably resolving complicated civil and criminal tax matters for small to medium sized businesses, CEO’s, financial executives, high-net-worth individuals, government executives, professional attorneys, CPA’s, professional athletes, actors, banks, trusts, foreign foundations, insurance companies, cryptocurrency holders, foreign companies, and other high-profile individuals and entities. The firm’s 2023 IRS Voluntary Disclosure matters have included: representation of individuals, foreign and US based banks, insurance companies, trusts, money managers, and investment funds with the disclosure of offshore bank accounts, insurance policies, hedge funds, stocks, cryptocurrency, gold, silver, safety deposit boxes, and other offshore physical and financial assets.
What Exactly is the 2023 IRS Voluntary Disclosure Program (OVDP) and How a Boston Tax Attorney Can Help?
The 2023 IRS Offshore Voluntary Disclosure Program (VDP) is a program that allows eligible U.S. taxpayers, to come into compliance with the U.S. tax laws and avoid facing an IRS severe civil audit or IRS criminal tax investigation. Under U.S. law, taxpayers who own foreign (or “offshore”) bank accounts or other foreign financial assets have an obligation to disclose these accounts or assets to the IRS. Failure to do so can lead to severe civil or criminal penalties if the IRS discovers the failure during an IRS tax audit or an IRS offshore bank investigation or an IRS offshore bank account audit.
The 2023 IRS Voluntary Disclosure Program allows U.S. taxpayers who have previously failed to disclose their offshore bank accounts or other foreign financial assets to do so without triggering an IRS tax audit or an IRS criminal investigation. Taxpayers who utilize the Voluntary Disclosure Program cannot avoid penalties entirely, but they can substantially mitigate their financial liability, and they can avoid the possibility of a criminal prosecution by hiring an experienced Boston tax lawyer and former IRS tax lawyer such as Kevin E Thorn of the Thorn Law Group.
Many of the changes that were made to the IRS Voluntary Disclosure Program in 2018 live on in the current version of the 2023 IRS Voluntary Disclosure Program that exists under the IRS Criminal Investigation Division of the IRS. The IRS has also adopted the 2014 Streamlined Filing Compliance Procedures that U.S. taxpayers can use to get up to date on their foreign account disclosures in many cases. However, given the complexity and nuances of the 2023 IRS Voluntary Disclosure Program and the past Voluntary Disclosure Programs (OVDP, VDP, IRS Streamlined Procedures, etc.) it is best to consult with an experienced former IRS tax attorney and Boston tax attorney who has handled cases in all of the above-mentioned IRS disclosure programs.
In this “Ultimate Guide to the IRS Voluntary Disclosure Program of 2023, everything is covered in great detail that U.S. citizens, foreign U.S. taxpayers, and green card holders need to know about the OVDP, VDP, the Streamlined filing procedures, and all other nuances in the various programs.
If you have questions or concerns about your personal offshore account disclosure obligations, we encourage you to contact us promptly for a confidential consultation. Our attorneys at Thorn Law Group have handled thousands of IRS Voluntary Disclosures in almost every state in the United States and have saved US and non-US taxpayers billions of dollars in taxes, penalties and interest.
What is the History of the IRS Offshore Voluntary Disclosure Program (OVDP)?
The IRS established the most recent versions of what is now known as the IRS Offshore Voluntary Disclosure Program in 2009, and the OVDP went through several iterations before its expiration in 2018. As noted above (and discussed in greater detail below), subsequent to the OVDP’s official expiration, the IRS has afforded U.S. taxpayers the ability to voluntarily disclose their previously undisclosed foreign accounts, and financial instruments through other means with an experienced IRS tax attorney. Currently, it is important to note, that the failure to disclose an offshore bank account or foreign financial instrument on your tax return and/or not a Foreign Bank Account Reporting Form (FBAR) is a felony that carries very stiff fines and possible incarceration. That is why it is important to hire an experienced Boston IRS tax attorney to make sure that the attorney-client privilege is in place at all times and that your legal rights are protected.
The History of the IRS Voluntary Disclosure Programs:
IRS Voluntary Disclosure Program, 2009
The original IRS OVDP ran from March 2009 to October 2009. During this eight-month period, the IRS received over 15,000 voluntary disclosures from United States taxpayers, and the government received billions of dollars in lost taxes, penalties, and interest. Taxpayers who participated in this program were able to avoid further scrutiny of their disclosure history (or lack thereof) if they paid (i) all back taxes and interest owed, (ii) an accuracy-related penalty, and (iii) an additional “miscellaneous” penalty that was calculated as high as 20 percent of the highest aggregate balance of their undisclosed offshore accounts over the previous six years. The penalties were draconian to say the least, given the fact that most taxpayers had just made mistakes in their reporting of offshore assets on their tax returns and had failed to file an FBAR (or Foreign Bank Account Reporting Form).
Prior to the launch of this disclosure program, the FBAR form as it is known, was part of a law that was very little if ever enforced. In fact, most tax return preparers had never heard of an FBAR before 2009. The law concerning FBARs was originally passed to stop terrorist actions and drug traffickers. It was primarily used to protect the United States from foreign attacks and to provide authorities with the ability to track and charge those committing more serious felonies throughout the world. Over the years, the complexity of the law created a use by the US government to track those individuals and businesses that were not reporting their foreign accounts or foreign income.
The sheer volume of the participants in the 2009 IRS Voluntary Disclosure Program, and the complexity of the program, required the expertise of highly intelligent and experienced Massachusetts tax litigation attorneys to help clients navigate the disclosure program. As stated above, violators of this law who had not properly disclosed their accounts to the IRS under the IRS Disclosure Program faced severe civil penalties and possible incarceration. It took multiple years for experienced tax attorneys, like the Boston tax attorneys at the Thorn Law Group, to resolve most of these cases favorably with the lowest penalties possible with very few clients out of thousands being incarcerated.
IRS Voluntary Disclosure Program, 2011
The IRS re-launched the OVDP in 2011 with a few minor changes, calling it the Offshore Voluntary Disclosure Initiative (OVDI). The terms of this IRS Voluntary Disclosure Program were similar to those of the original OVDP, except that the “miscellaneous” penalty was increased to 25 percent for taxpayers whose aggregate foreign account value exceeded $75,000, and reduced to 12.5 percent for taxpayers whose aggregate foreign account value fell below this threshold. In addition, a variety of other slight changes were also created within the new IRS Voluntary Disclosure Program during these years.
Unfortunately, these slight changes in the Voluntary Disclosure Program made the IRS’ and the IRS tax attorneys working the cases jobs even more difficult because of the added complexity of the cases. The value changes and the reduced percentage split more hairs and added to the criteria that made resolving IRS Voluntary Disclosure cases more difficult to work even with experienced Boston tax attorneys. More specifically, the Disclosures of the foreign bank accounts, and the settlements of the cases, were taking multiple years to resolve even with experienced tax attorneys working on the disclosures.
Other offshoots of the IRS 2011 IRS Voluntary Disclosure program included changes, creating additional IRS audits, more fighting over IRS penalties, and even more difficulty for IRS tax attorneys to resolve cases in their client's favor or to resolve cases at all. Note to mention, the increased FBAR or miscellaneous penalty became even more draconian with the extra 5% increase (from 20% to 25%) of the aggregate high balance. Which in turn resulted in cases being backed up within the IRS for years without resolution or payment of penalties. Overall, the 2011 IRS Voluntary Disclosure Program created a huge backlog of cases with very little funds collected, and the funds that were collected by the IRS were extremely small in comparison to those collected in the 2009 disclosure program.
IRS Voluntary Disclosure Program, 2012
After much debate within the IRS tax community (IRS tax attorneys, private Boston tax attorneys, and IRS executives), when the OVDI expired, the IRS reverted to the old OVDP IRS Voluntary Disclosure procedures from 2009. But this time, the IRS Voluntary Disclosure Program in 2012, was “open-ended” as tens of thousands of taxpayers entered into the IRS Voluntary Program year after year. By this time, Boston and Massachusetts tax attorneys had become very accustomed to the IRS Voluntary Disclosure Programs and how the IRS was handling the cases. The private tax attorneys in New England, Massachusetts, and Boston were now able to help their clients make better IRS Voluntary Disclosure legal decisions on, how to disclose the accounts, what exactly to disclose in regards to the accounts, when to disclose the foreign financial information, when not to disclose the foreign financial information, when to pay a penalty, how much the penalty would be, and when to litigate the disclosure of their client’s foreign financial assets.
As a result of the experiences and frustrations on both sides, the OVDP which began in 2012 and ran through 2018, was a much smoother run disclosure program where IRS Voluntary Disclosure cases were being worked in a timelier manner and the government was collecting reasonable taxes, penalties, and interest. However the IRS made some notable changes to the 2012 IRS Voluntary Disclosure Program along the way, which created some new impediments to resolving cases. More specifically, the 2012 version of the OVDP was largely similar to the 2011 OVDI, except the IRS increased the maximum “miscellaneous” penalty to 27.5 percent. This notable penalty change made the IRS attorney tax community very upset, and ultimately, hurt the IRS’s ability to bring in more IRS bank account disclosures for a year or so. When the IRS made further changes to the disclosure program to mitigate the penalty issue in the coming years (reduce the percentage amount), the amount of IRS voluntary disclosures began to increase over the years.
After years of disagreements between the private sector IRS tax attorneys and the IRS, the 2014 IRS Voluntary Disclosure Program brought into focus a new era of voluntary disclosures and basically a new type of IRS disclosure. More specifically in 2014, the IRS made some major changes to the OVDP and created the IRS Streamlined Program that would allow taxpayers to pay only a five (5) % penalty if they qualified. Basically, there was a reduction in the amount of tax returns to be amended (3) but still six years of FBARs needed to be filed by the taxpayers. This new IRS Streamlined Filing Procedure was a separate program from the traditional IRS Voluntary Disclosure Program, with new enticements for taxpayers to disclose their foreign bank accounts and offered the IRS defense tax attorneys based in Massachusetts and the Boston area a legitimate alternative for their clients.
Disclosure Program and Streamlined Program, 2014
This new option or IRS Streamlined Program as it was called, had a substantially reduced penalty, that was the result of years of negotiations between tax attorneys (and the tax bar) and the executives in the IRS that oversaw many of the prior IRS Voluntary Disclosure Programs. The “new” five (5) % penalty was a far cry from the 27.5% penalty of the past IRS Voluntary Disclosure Program but of course, there was a catch. The IRS Streamlined Program did not offer an “IRS Form 906 Closing Agreement” like the former IRS Voluntary Disclosure Programs; so even though the penalty was substantially reduced if a taxpayer entered the IRS Streamlined Program, the IRS could open a severe civil audit and/or open a criminal investigation into the taxpayer in the future. The IRS could open an investigation, if the government found the information provided by the taxpayer was found to be inaccurate or questionable or for no reason at all. The bottom line, the new IRS Streamlined Program offered no protection and no guarantees for the taxpayers going forward, and the taxpayers would enter into this new IRS Streamlined Program by signing a document under penalties of perjury.
Basically, with the addition of the IRS Streamlined Program, the IRS increased the eligibility criteria for taxpayers to disclose their offshore accounts. Tax attorneys were elated with this new IRS Streamlined Program, and the IRS was rewarded with a severe uptick in IRS Voluntary Disclosures again. New disclosures under the IRS Streamlined Program came into the government by the tens of thousands in 2014 and going forward. Taxpayers were basically willing to risk an audit or being contacted by the IRS later to save over 20% in additional penalties. Of course, most taxpayers waited for the new IRS Streamlined Program to be launched in 2014 and had held off on making an IRS Voluntary Disclosure until this new program was released by the government. The 2014 IRS Streamlined Program is still the predominant program in 2023, that more than ninety-nine percent of taxpayers use for the disclosure of their undisclosed offshore foreign financial assets.
The traditional IRS Voluntary Program was technically still in place, and from 2014 onward, taxpayers could face about a 50 % penalty and could receive a Form 906 Closing agreement, which protected them from a severe civil audit and/or criminal prosecution. All taxpayers had to do to receive this protection was, file six years of amended returns, if necessary, pay the additional tax for six years if required, and pay the 50% penalty Further if the foreign financial institution that held taxpayer accounts had been publicly identified as either being under investigation by the IRS or cooperating with an IRS investigation into foreign account disclosure violations, the taxpayers were not eligible for the IRS Streamlined Program and they would have to enter into the full IRS Voluntary Disclosure Program.
Obviously, there are many more nuances and qualifications that need to be examined regarding all of these IRS Voluntary Disclosure Programs. That is why it is so important to contact an experienced IRS disclosure tax attorney that has direct experience with all the IRS Voluntary Disclosure Programs, to examine your options, and how to save the most amount of tax, penalties, and interest. Basically, every taxpayer’s situation is factually different and there is no article on the internet that applies to everyone. As an example, taxpayers with residences outside the US in certain circumstances may be able to avoid penalties altogether but certain factual scenarios must exist for this to take place.
IRS Voluntary Disclosure Program, 2018
The IRS officially closed what was known as the OVDP in 2018 due to a lack of participation by taxpayers, green card holders, and resident aliens. Whereas the OVDP received as many as 18,000 filings in 2011, by 2017, the number of filings dropped to just over 600 IRS Voluntary Disclosures nationwide. Fortunately, however, this was not the end of the road for IRS Voluntary Disclosures of offshore accounts or the reporting of foreign financial assets. Every week, the IRS still receives countless IRS Voluntary Disclosures through the many different options or disclosure programs that still exist for the disclosure of previously undisclosed bank accounts and other foreign financial assets.
For example, the IRS’s Streamlined Filing Compliance Procedures are still currently in place, and the IRS Criminal Investigation’s Voluntary Disclosure Practice that succeeded the OVDP is still in active (although this program has substantial penalties over 50% and is mostly used in potential criminal cases), and the national IRS Voluntary Disclosure procedures are still in place for not filing tax returns and for not paying taxes for US taxpayers that have just fallen behind and want to come back into tax compliance.
In 2018 and beyond, Massachusetts and Boston tax attorneys continue to place taxpayers into the various IRS Voluntary Disclosure Programs run by the criminal division of the IRS, the IRS Streamlined Program run by the IRS, and the other disclosure programs for certain IRS forms for individuals, companies, trusts, and trust distributions. In fact, during these years, the IRS Streamlined Program gained steam and became in most cases, the go to resource for tax attorneys to bring their clients back into tax compliance for undisclosed bank accounts and other foreign financial assets.
In addition, with the passage of FATCA in 2014, many foreign banks around the globe helped keep the disclosure of offshore bank accounts for US taxpayers “in vogue” by demanding proof of the disclosure of bank accounts to the IRS with the help of their compliance departments. Although, many foreign banks now refuse to take United States taxpayers as clients given the increased scrutiny and increased cost of maintaining compliance departments to address the needs of United States taxpayers. Still, a good volume of IRS Voluntary Disclosures or IRS Streamlined filings are still taking place, and US taxpayers are coming back into compliance every day.
IRS Voluntary Disclosure Program, 2023
While the 2018 OVDP has now technically expired for five years, U.S. taxpayers who own offshore financial accounts or have undisclosed offshore financial assets still have options for coming into voluntary compliance by filing either an IRS Streamlined Filing or by filing an IRS Voluntary Disclosure through the criminal division of the IRS. The IRS’s Streamlined Filing Compliance Procedures are designed specifically for U.S. taxpayers who own foreign financial accounts or assets where the taxpayers are non-willful, while IRS Criminal Investigation’s IRS Voluntary Disclosure Program is a general program for U.S. taxpayers who need to remedy willful tax law violations. Both programs currently serve a purpose to help taxpayers to come back into compliance and are extremely effective.
As stated earlier, it is important to consult with an experienced IRS Voluntary Disclosure tax attorney before a taxpayer makes any kind of disclosure. US citizens, resident aliens, and green card holders all have options when deciding how to come back into tax compliance. In the case of green card holders, they must be in tax compliance if they hope to obtain US citizenship someday. Whereas taxpayers with large dollar amounts in undisclosed offshore bank accounts that are executives, attorneys, bankers, CEOs, or those taxpayers with high visibility must act with extreme caution when filing an IRS Voluntary Disclosure so they do not become a target or example for IRS deterrence.
What is The IRS Offshore Voluntary Disclosure Program, 2023 (OVDP)?
Although the Offshore Voluntary Disclosure Program for 2018 has expired, the OVDP nomenclature is still commonly used. As a result, in 2023, “OVDP” may refer to the IRS’s Streamlined Filing Compliance Procedures, IRS Criminal Investigation’s Voluntary Disclosure Practice (VDP), or both.
However, while the IRS’s Streamlined Filing Compliance Procedures and the VDP frequently get lumped together as a result of the fact that both afford options to U.S. taxpayers who have failed to disclose their offshore accounts, it is important to understand that these are two very different programs. Each program has its own unique eligibility criteria, and each has its own potential consequences in terms of unsuccessfully attempting to file. Most importantly, each program has very specific penalties and very specific conditions. As a result, a taxpayer with an undisclosed foreign financial asset requires the services of an experienced Boston IRS Criminal tax Voluntary Disclosure attorney to help walk them through the legal analysis of their facts so that the proper outcome for their unique situation can be attained.
What Are the IRS Voluntary Disclosure Streamlined Filing Compliance Procedures?
The IRS’s Streamlined Filing Compliance Procedures have been the primary substitute for the IRS OVDP. As the IRS explains, “[t]he streamlined filing compliance procedures . . . are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” The Streamlined Filing Compliance Procedures have been available since 2012, which partially explains the significant drop in OVDP filings from 2011 to 2023.
The Streamlined Filing Compliance Procedures (“Streamlined Procedures”) are only available to individual taxpayers and estates of individual taxpayers. Both domestic U.S. taxpayers and those living abroad can utilize the Streamlined Procedures, although the filing requirements are different for taxpayers who reside overseas. Regardless of where a taxpayer resides, however, the basic eligibility criteria are the same. These include:
- The taxpayer must certify under penalties of perjury that his or her offshore financial account disclosure violation was non-willful.
- The taxpayer must not currently be the subject of an IRS audit or civil examination (whether related or unrelated to the taxpayer’s offshore accounts).
- The taxpayer must have a valid Social Security Number (SSN) or other valid Tax Identification Number (TIN).
What is the Difference Between the IRS Voluntary Disclosure Program (OVDP) and the IRS Streamlined Filing Compliance Procedures?
There are several important differences between the former OVDP program and the IRS’s current Streamlined Filing Compliance Procedures. This includes differences that make the Streamlined Procedures both more desirable and less desirable in different respects.
The main differences between the IRS OVDP and the IRS Streamlined Filing Compliance Procedures are as follows:
- The IRS Streamlined Procedures are Only an Option for Correcting Non-Willful Violations – While the IRS OVDP allowed taxpayers to correct both willful and non-willful offshore account disclosure violations, the IRS’s Streamlined Procedures are only an option for those who have inadvertently failed to report their foreign financial accounts to the IRS. Taxpayers who utilize the IRS Streamlined Procedures must certify that their disclosure violations were non-willful, and then the IRS reviews their certifications in order to confirm (or deny) their eligibility.
- The IRS Streamlined Procedures is Only an Option for Individual Taxpayers and Estates – The IRS OVDP was an option for corporations, partnerships, and trusts as well as individual taxpayers and their estates. However, the IRS Streamlined Procedures are available to individual taxpayers and the estates of individual taxpayers only.
- The IRS Streamlined Procedures Impose Less-Severe Penalties – Under the Streamlined Procedures, the maximum penalty is five percent of the value of the previously undisclosed offshore account or accounts. This is significantly less than the 50-percent maximum penalty imposed under the final iteration of the IRS OVDP. Importantly, however, taxpayers who utilize the Streamlined Procedures can still face additional civil penalties for failing to report income held in offshore accounts.
- The IRS Streamlined Procedures Do Not Provide Protection from Criminal Prosecution – U.S. taxpayers who participated in the OVDP were able to secure protection from criminal prosecution. However, making a streamlined filing does not offer the same protection. If a taxpayer’s failure to disclose an offshore account is deemed willful (despite the taxpayer’s certification to the contrary), then the taxpayer can face criminal prosecution for federal tax fraud. Remember, the failure to disclose an offshore account is a felony and does require the expertise of an IRS Criminal Tax Attorney and not a CPA, Enrolled Agent, or bookkeeper. The failure to adhere to this recommendation of professionals could result in the non-lawyer professional having his or her records subpoenaed and could be the main witness against the taxpayer in a criminal court of law.
What Exactly is Willful vs. Non-Willful Conduct in the IRS Voluntary Disclosure Program?
A key aspect of the IRS’s Streamlined Filing Compliance Procedures is the aspect of “willfulness.” U.S. taxpayers who have committed non-willful disclosure violations can utilize the IRS Streamlined Procedures, while those who have committed willful violations cannot.
Under federal law, an offshore account disclosure violation is considered willful if a taxpayer is aware of the obligation to disclose offshore accounts and yet still fails to do so. “Willful” essentially has the same meaning as “intentional” for purposes of eligibility to take advantage of the IRS Streamlined Procedures. The program is intended as a form of relief for U.S. taxpayers who make honest mistakes. If a taxpayer knows of the obligation to disclose offshore accounts, or if a taxpayer has reason to know of the obligation to disclose offshore accounts, then the taxpayer is not eligible to make an IRS streamlined filing.
U.S. taxpayers who have willfully failed to disclose their offshore accounts are limited to seeking relief under IRS Criminal Investigation’s Voluntary Disclosure Practice. The potential penalties under the IRS VDP are substantially greater (more than 50% of the high balance) than those under the IRS Streamlined Procedures (normally 5% of the high balance), but making an IRS Voluntary Disclosure can still significantly mitigate the consequences of a willful violation in the eyes of the IRS.
What Exactly is Considered an Offshore Bank Account in the IRS Voluntary Disclosure Practice and the IRS Streamlined Filing Compliance Procedures?
Thus far, we have discussed the options that are available to U.S. taxpayers who have failed to disclose their offshore accounts to the IRS, but we have not specifically addressed what types of financial accounts are subject to disclosure under either IRS program.
The obligation to disclose offshore accounts to the IRS exists under the Foreign Account Tax Compliance Act (FATCA). Under FATCA, U.S. taxpayers have an obligation to disclose all accounts held by foreign financial institutions that exceed certain aggregate value thresholds. Foreign financial institutions include:
- Mutual Funds
- Private Pensions
- Hedge funds and private equity funds
- Certain types of insurance companies that offer cash-value products or annuities
Importantly, the IRS’s definition of foreign financial institutions excludes both (i) foreign branches of U.S. banks, and (ii) branches of foreign banks located in the United States.
If a U.S. taxpayer residing in the United States has an account (or multiple accounts) with one or more foreign financial institutions, then the taxpayer has an obligation to disclose the account (or accounts) to the IRS if either of the following thresholds are satisfied:
- For Individual Taxpayers – The taxpayer’s offshore accounts exceed $50,000 in aggregate value at the end of the tax year or exceed $75,000 at any time during the tax year.
- For Married Taxpayers – The taxpayer’s offshore accounts exceed $100,000 in aggregate value at the end of the tax year or exceed $150,000 at any time during the tax year.
The reporting thresholds are higher for U.S. taxpayers living abroad ($200,000 aggregate value at the end of the tax year or $300,000 aggregate value at any point during the year for single filers, and double these thresholds for married taxpayers filing jointly).
If any of a taxpayer’s offshore accounts meet one of the FATCA disclosure thresholds, then all of the taxpayer’s offshore accounts need to be disclosed. For example, if a taxpayer owns three offshore accounts with respective values of $40,000, $10,000, and $5,000 at the end of a tax year, the taxpayer must disclose all three accounts even though the $5,000 account does not contribute to exceeding the $50,000 aggregate disclosure threshold.
What is Considered Tax Compliance Under the Current IRS Voluntary Disclosure Programs in 2021?
To be considered in compliance with FATCA, U.S. taxpayers must timely disclose their qualifying offshore accounts on an annual basis. U.S. taxpayers must also correct any past disclosure violations—either through the IRS’s Streamlined Filing Compliance Procedures or through the IRS Criminal Investigation’s Voluntary Disclosure Program.
Another important aspect of offshore disclosure compliance is FBAR compliance. In addition to having an obligation to comply with FATCA, many U.S. taxpayers have an obligation to comply with the Financial Crimes Enforcement Network’s (FinCEN) Report of Foreign Bank and Financial Accounts (FBAR) filing requirement as well. While the same reporting requirements and thresholds apply to all types of taxpayers, the FBAR filing requirement is slightly broader in scope than those imposed under FATCA.
IRS Tax Compliance for Individual Tax Payers: FATCA vs. FBAR
The obligation to disclose offshore accounts under FATCA applies to “specified individuals.” This includes taxpayers whose offshore accounts exceed the aggregate value thresholds discussed above. The FBAR filing requirement applies to all U.S. citizens and resident aliens whose foreign financial accounts exceed $10,000 in aggregate value at any time during the calendar year.
IRS Tax Compliance for Businesses
FATCA also applies to “specified domestic entities” that have an interest in foreign financial accounts that meet the reporting threshold. This includes business entities of all types. The reporting thresholds for businesses are the same as those for individual taxpayers (i.e. $50,000 aggregate value at the end of the tax year or $75,000 aggregate value at any point during the tax year). The FBAR filing requirement applies to domestic entities that have foreign financial accounts that exceed $10,000 in aggregate value at any time during the calendar year.
IRS Tax Compliance for Trusts
Trusts are also considered “specified domestic entities” for purposes of FATCA compliance, and trusts have the same FBAR filing obligations as businesses as well. When performing an analysis of a trust, regarding both FATCA and the filing of FBARs, it is very important to hire an experienced IRS Criminal Boston Tax attorney who understands the nuances of these government disclosure and compliance requirements.
IRS Tax Compliance for Foundations
Similar to trusts, foundations are considered “specified domestic entities” and must meet the filing requirements for businesses with respect to both the FATCA, and the FBAR filing requirements. Again, both FATCA and FBAR government compliance and disclosure requirements are extremely complicated and require the assistance of an experienced Boston tax attorney.
What Types of Information Need to be Disclosed Under the IRS Voluntary Disclosure Programs?
IRS Streamlined Filing Procedures
Submitting a voluntary disclosure under the IRS’s Streamlined Filing Compliance Procedures (the successor to the OVDP for non-willful violations) is not an easy process. Taxpayers must submit several different forms, and they must accurately report the necessary information for each type of asset they are required to disclose. This basic list includes (as applicable):
- Bank Accounts (Checking and Savings)
- Insurance Policies
- Foreign Mutual Funds
- Stocks, Bonds and Investments in Hedge Funds
Domestic IRS Streamlined Filing Procedures
For U.S. taxpayers residing domestically, the forms, the information, and payment required when making an IRS voluntary disclosure pursuant to the IRS Streamlined Procedures include:
- IRS Form 1040X, Amended U.S. Individual Income Tax Return;
- Any required information returns (i.e. IRS Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621);
- “Streamlined Domestic Offshore” is written in red at the top of the first page of each return;
- IRS Form 14654, Certification by U.S. Person Residing in the U.S.
- Payment of all taxes due; and,
- Payment of the “miscellaneous offshore penalty.”
International IRS Streamlined Filing Procedures
U.S. taxpayers living abroad must submit the same basic information (and pay any amounts owed), but they must do so using a different set of IRS Voluntary Disclosure forms.
IRS Voluntary Disclosure Program (VDP)
For U.S. taxpayers who need to remedy willful IRS disclosure violations, the disclosure process is very different. The process itself is longer, more detailed, and requires substantially more information about the taxpayer, the assets, and the accounts themselves. In most situations, the IRS disclosure in this program requires multiple years of FBARs, tax returns, and multiple years of payments of taxes if owed.
The process of disclosure begins with filling out Part I of IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application. An agent at IRS Criminal Investigation will review your application; and, if you receive preclearance to participate in the Voluntary Disclosure Practice, you will be required to complete and submit Part II of the IRS Voluntary Disclosure Application within 45 days.
After initiating the process, taxpayers must be prepared to cooperate and provide any additional documents or information requested—and they must also be prepared for the possibility that their application will be rejected by the IRS Criminal Division. Due to the risks involved with filing an application under the VDP, it is extremely important for taxpayers who are seeking protection to rely on the advice and representation of an experienced IRS Voluntary Disclosure Boston tax lawyer.
What Are the IRS Voluntary Disclosure Penalties (OVDP)?
U.S. taxpayers (individuals, estates, and entities) who fail to disclose their foreign financial assets as required by FATCA can face substantial penalties. These penalties start at $10,000 for each unfiled return and can add an additional $10,000 “for each 30 days of non-filing after IRS notice of a failure to disclose,” up to a maximum of $60,000 per violation per year. In the case of failing to file an FBAR to disclose offshore bank accounts, the penalties start at $10,000 per unfiled form and can reach up to 50 percent of the highest balance in the undisclosed accounts. Penalties are assessed for every year the taxpayer does not disclose his foreign interests.
By participating in the IRS Streamlined Filing Compliance Procedures, a taxpayer can make a voluntary disclosure to correct his filing mistakes for a significantly reduced penalty of 5 percent of the total account balances applied to one year only. In some cases, the taxpayer can make a voluntary disclosure for no penalty at all.
As we mentioned above, however, failure to disclose offshore accounts can also lead to criminal penalties—and making a voluntary disclosure under the IRS’s Streamlined Filing Compliance Procedures does not necessarily provide insulation from criminal liability. If charged with criminal tax fraud, U.S. taxpayers can face additional fines and the possibility of federal incarceration.
What is Passive Foreign Investment Company (PFIC) Under the IRS Voluntary Disclosure Program (OVDP), and Does it Need to be Disclosed?
The term, “passive foreign investment company” or “PFIC” refers to any type of entity that holds a U.S. taxpayer’s offshore accounts or other foreign financial assets. Essentially, PFIC serves as a layer of protection between the taxpayer and the taxpayer’s foreign financial assets, helping to mitigate the risk of these assets being used to satisfy a judgment or other liability.
But, while PFICs can provide protections from certain types of liability, they cannot protect against liability arising out of IRS offshore disclosure violations. Taxpayers must disclose their PFICs to the IRS using Form 8621, and failure to do so can lead to substantial financial penalties.
U.S. taxpayers who have failed to disclose their PFICs can remedy their past disclosure violations using the IRS’s Streamlined Filing Compliance Procedures (if the past violations were non-willful) or the OVDP. In order to determine whether a streamlined filing is appropriate, U.S. taxpayers who own PFICs (or who own interests in PFICs) should consult with an experienced offshore tax compliance lawyer before voluntarily disclosing any information to the IRS.
When is an IRS Voluntary Disclosure (OVDP) Not Appropriate, and Are There Alternatives?
Use of the IRS’s Offshore Voluntary Disclosure Program is not appropriate in all circumstances. Here are some key considerations for U.S. taxpayers who need to decide whether to make an IRS Voluntary Disclosure:
- The Streamlined Procedures Only Apply to Foreign Financial Assets – The IRS’s Streamlined Filing Compliance Procedures are only available to U.S. taxpayers who have failed to disclose foreign financial assets as required by FATCA. If you are delinquent on other federal tax obligations, the Streamlined Procedures are not an option for an IRS Voluntary Disclosure.
- The Streamlined Procedures are Only Available for Non-Willful Violations – The IRS Streamlined Filing Procedures are also only available to U.S. taxpayers who have committed non-willful violations. This means that the taxpayer’s failure to disclose must be the result of inadvertence, negligence, mistake, or a good-faith misinterpretation of the law.
- An IRS Voluntary Disclosure is Only Available for Willful Violations – In contrast to the IRS streamlined filing procedures, the IRS Voluntary Disclosure Practice (VDP) is an option for U.S. taxpayers who in most circumstances have committed willful (or intentional) tax law violations. If a taxpayer knew he or she was supposed to report (or a business’s) offshore financial accounts and still failed to do so, then the taxpayer must weigh the pros and cons of utilizing the VDP instead of making an IRS streamlined filing.
- Voluntary Disclosure Does Not Provide Complete Protection from IRS Enforcement – Regardless of whether your FBAR violation was willful or non-willful, making an IRS voluntary disclosure will not necessarily provide complete protection from IRS enforcement action. IRS agents will carefully review your voluntary disclosure and past filings, and they will make a judgment as to whether further enforcement action or an IRS criminal investigation is warranted.
For all the reasons listed above and because of the complexity of the different IRS Disclosure Programs available to taxpayers, it is important that all taxpayers retain the services of an experienced Boston IRS disclosure tax attorney to help them evaluate the various programs.
Is the IRS Voluntary Disclosure Program an Option for Businesses?
Yes, an IRS voluntary disclosure is an option for businesses that have undisclosed offshore accounts or other foreign financial assets. The IRS Streamlined Filing Compliance Procedures are available to domestic corporations, partnerships, trusts, and foundations. Business entities can also seek protection through the IRS Criminal Investigation’s IRS Voluntary Disclosure Procedures.
Businesses are subject to the same foreign account disclosure obligations as individual U.S. taxpayers; and, to make a proper IRS voluntary disclosure, businesses must satisfy the same requirements as individuals. If a business fails to meet the relevant filing requirements, or if a business does not meet the requirements of the process, then the business’s IRS voluntary disclosure could trigger an IRS audit or an IRS criminal investigation.
What Exactly Has the IRS Done to Date With Regard to Foreign Bank Account Compliance?
Over the past several decades, the IRS, the U.S. Treasury Department, and Congress have taken several steps to crack down on the non-reporting of foreign financial assets held by U.S. taxpayers in foreign banks, insurance companies, trusts, and foundations. The first significant development in regard to recording such assets was the enactment of the Bank Secrecy Act (BSA) in 1970.
The Bank Secrecy Act established reporting requirements for foreign banks. While the enactment of the BSA was primarily intended to combat money laundering through offshore accounts, its broad scope allowed the U.S. Treasury Department to gather information about foreign banks and U.S. taxpayers with offshore accounts that were not involved whatsoever in money laundering activities. In addition to establishing reporting requirements for foreign banks, the BSA established reporting requirements for U.S. taxpayers as well, and the BSA is the primary source of the FBAR filing requirement that still exists today.
More recently, the enactment of FATCA has provided the IRS with additional authority to monitor U.S. taxpayers’ offshore holdings and enforce U.S. taxpayers’ disclosure obligations of foreign financial assets. It is not a coincidence that the enactment of FATCA and the launch of the IRS’s original Offshore Voluntary Disclosure Program (OVDP) closely coincided in time. Both FATCA and the initial IRS Voluntary Disclosure Program were established to track the movements of financial assets around the world to combat terrorism and drug trafficking.
FATCA also allows the IRS to gather information about U.S. taxpayers’ offshore holdings from foreign banks, and foreign banks that do not comply can face steep penalties and could be prevented from conducting business in New York or other U.S. financial markets. As a result, foreign banks have a strong incentive to report U.S. taxpayers’ undisclosed offshore accounts to the IRS—and this allows the IRS to identify taxpayers who fail to meet FATCA’s offshore account disclosure requirements.
Does the U.S. Department of Justice (DOJ) Have Open Investigations Into Foreign Banks?
Yes, the U.S. Department of Justice (DOJ) routinely conducts investigations into foreign banks—both related and unrelated to U.S. taxpayers’ offshore account disclosures. The DOJ conducts these investigations independently and in conjunction with the IRS and FinCEN.
If the DOJ is investigating your foreign bank, what does this mean for you? Ultimately, the answer depends on whether you are current on your offshore account disclosure obligations. If you have fully disclosed your offshore accounts to the IRS as required by FATCA and filed all requisite FBARs with FinCEN, then you should not be at risk. If anything, the government investigation should simply confirm that you have timely disclosed your offshore accounts on an annual basis.
On the other hand, if you are not current on your offshore account disclosure obligations, the consequences of the DOJ investigating your foreign bank could be substantial. Once it is made public that your foreign bank is under investigation, this can eliminate the “voluntary” nature of an IRS streamlined disclosure or any other type of disclosure. The specific impact on you (if any) will depend on the specific facts and circumstances involved; and, again, the best thing you can do to protect yourself is to consult with an experienced IRS Boston offshore tax attorney.
What IRS Forms Should Companies Be Filing as Part of an IRS Voluntary Disclosure Program?
The specific forms that a company needs to file to utilize the IRS’s Streamlined Filing Compliance Procedures or VDP for an IRS voluntary offshore disclosure depend on both (i) the nature of the business, and (ii) the specific foreign financial asset(s) that are subject to disclosure. Under varying circumstances, the forms that a company may need to file include:
- IRS Form 1040X (for sole proprietorships and pass-through entities)
- IRS Form 1120-X (for corporate entities)
- IRS Forms 3520, 3520-A, 5471, 5472, 8938, 926, and/or 8621 (for varying types of foreign financial assets)
- IRS Form 14654
To participate in IRS Criminal Investigation’s Voluntary Disclosure Practice or VDP, companies must fill out Part I of IRS Form 14457. If a company receives preclearance to participate in the VDP, the company must then complete Part II of IRS Form 14457 and submit any additional requested documentation.
What is an IRS Form 906 Closing Agreement in the IRS Voluntary Disclosure Program (VDP)?
“A closing agreement is a binding agreement between the IRS and a taxpayer that, if properly executed, finally and conclusively settles a tax issue between the IRS and a taxpayer.” As the IRS explains, IRS Form 906 is used to resolve specific matters not related to a taxpayer’s general income tax liability—including satisfaction of taxpayers’ offshore disclosure compliance obligations. The IRS’s explanation continues:
“A voluntary closing agreement is a taxpayer-initiated closing agreement that generally occurs outside of the audit and examination process for issues where a taxpayer has inadvertently failed to meet a requirement of the Internal Revenue Code. A voluntary closing agreement allows taxpayers to voluntarily come forward to the IRS with self-identified violations or deficiencies and work with the IRS towards a mutual resolution to correct the violations or deficiencies.”
The IRS also makes clear that entering into a closing agreement is a matter of agency discretion. In other words, submitting an IRS voluntary disclosure will not necessarily result in the execution of a closing agreement. Hiring an experienced Boston tax compliance attorney to handle your IRS voluntary disclosure can increase your chances of securing a closing agreement while making mistakes along the way can lead to a severe IRS tax audit or possibly even an IRS criminal investigation.
How Can Your IRS Voluntary Disclosure Become Criminal?
An effort to make an IRS voluntary disclosure can lead to criminal prosecution if the IRS finds evidence to suggest that the taxpayer has willfully avoided disclosing offshore accounts or other foreign financial assets.
Remember, the IRS’s Streamlined Filing Compliance Procedures are only available to U.S. taxpayers who have committed non-willful disclosure violations. To make a streamlined filing, the taxpayer must certify that each violation at issue was non-willful. However, even once the taxpayer makes a certification of non-willfulness, the IRS will still examine the facts at hand and make its own independent determination as to whether the taxpayer is eligible to make an IRS streamlined filing.
When a taxpayer makes a streamlined filing, the IRS is free to use the information that is provided in any manner it chooses. As a result, if the IRS determines that a taxpayer’s violation was willful, it can use the information provided to initiate an IRS criminal investigation. The same goes for applications submitted under IRS Criminal Investigation’s Voluntary Disclosure Practice, if IRS agents determine that a taxpayer is not eligible for preclearance, they can take the information contained in the application and use it to pursue criminal charges.
What Should You Do if the IRS Contacts You Before You Make a Voluntary Disclosure?
If the IRS contacts the taxpayer before an IRS voluntary disclosure has taken place, the taxpayer needs to engage experienced Boston tax defense counsel immediately. At this point, the taxpayer is no longer eligible to make an IRS voluntary disclosure (under the Streamlined Procedures or the VDP), and the taxpayer is at risk for the full range of civil and criminal penalties that can be imposed under FATCA, the BSA and the various other federal statutes that may apply.
Taxpayers will need to carefully assess their options with the help of an experienced IRS tax attorney, and they will need to rely on their attorney’s advice to make an informed decision about how best to move forward when disclosing any sort of foreign financial assets.
What Factors Contribute to an IRS Voluntary Disclosure Becoming a Criminal Case?
The main factor that contributes to an attempted voluntary disclosure under the IRS’s Streamlined Filing Compliance Procedures becoming a criminal case is willfulness. The Streamlined Procedures provide protection for non-willful violations only. If the revenue agent who reviews your streamlined filing determines that your certification of non-willfulness is invalid, then your filing can be rejected, and you can face criminal prosecution for federal tax fraud.
Cases involving the IRS Voluntary Disclosure Practice (VDP) are different. In order to file under the VDP, you must be seeking to remedy a willful tax law violation or have some concerns in regard to the facts of the situation. As the IRS Criminal Investigation Division makes clear, however, submitting an application under the VDP does not guarantee protection against facing criminal charges:
“IRS Criminal Investigation . . . takes timely, accurate, and complete voluntary disclosures under consideration when determining whether to recommend criminal prosecution. A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”
In addition, the IRS Criminal Investigation Division considers the following factors when deciding whether an application under the VDP qualifies as “voluntary”:
- Whether you are currently the subject of a civil examination or criminal investigation,
- Whether the IRS has received information from a third party regarding your offshore disclosure violation; and,
- Whether the IRS has already received information regarding your offshore disclosure violation through other means (i.e. a search warrant or subpoena).
If the taxpayer's filing is not voluntary due to any of the above factors, then you are not eligible to receive the benefits of the VDP, and the IRS can use the information you provided in your application to pursue criminal charges against you.
What Constitutes Tax Fraud Under the IRS Voluntary Disclosure Program (OVDP)?
Regarding the disclosure of foreign financial accounts, any failure to comply with the requirements of FATCA or the Bank Secrecy Act can lead to prosecution for federal tax fraud. Many people assume that they are only at risk of facing penalties if they underpay what they owe the IRS. However, this is not the case. Reporting violations can lead to tax fraud charges regardless of whether they are accompanied by underpayment of federal tax liability. A tax fraud investigation is particularly common in cases involving taxpayers’ failure to disclose offshore accounts and other foreign financial assets.
Are There IRS Audits in the Offshore Voluntary Disclosure Program (OVDP)?
When you submit a voluntary disclosure using the IRS’s Streamlined Filing Compliance Procedures or IRS Criminal Investigation’s Voluntary Disclosure Practice (VDP), IRS agents will review your filing to determine the extent of your past offshore disclosure failures and whether any type of enforcement action is warranted. Depending on what the agents decide, this could lead to an IRS audit or an IRS criminal tax fraud investigation.
It is extremely important to make an informed decision about whether, how, and when to make a voluntary disclosure of an offshore financial asset. Is it in the taxpayers’ best interests to make a voluntary disclosure? Is the taxpayer’s voluntary disclosure likely to trigger an audit or investigation? If so, what other options are available to the taxpayers? These are all critical questions that an experienced IRS offshore voluntary disclosure tax attorney can help a taxpayer answer.
What is a "Quiet" IRS Voluntary Disclosure?
A “quiet” IRS voluntary disclosure involves simply amending your past returns without utilizing the Streamlined Filing Compliance Procedures or the VDP. This approach is not recommended for a variety of different reasons and has not been supported by the Commissioner of the IRS in many public statements.
While some taxpayers hope to fly under the IRS’s radar by making a quiet disclosure, the likelihood of this happening is extremely low. The IRS is aware of this tactic, and IRS revenue agents carefully examine filings that contain “amended” information regarding foreign financial accounts.
So, not only is a quiet disclosure likely to get flagged, but it also eliminates the possibility of obtaining reduced penalties or avoiding criminal prosecution through the Streamlined Filing Compliance Procedures or the VDP. Often, the IRS opens audits into taxpayers that make quiet disclosures, and, in many cases, opens criminal investigations into those taxpayers that make such disclosures. It is therefore recommended that any taxpayer thinking about filing a quiet disclosure, contact an experienced IRS tax attorney before deciding to make such a disclosure.
What Exactly is an FBAR?
We touched on FBARs above, but it is worth clarifying their role in this discussion. In many cases, U.S. taxpayers who own foreign financial accounts will have two separate filing requirements: (i) the obligation to file IRS Form 8938 under FATCA, and (ii) the obligation to file an FBAR under the BSA.
Why are there two requirements that cover the same information? First, IRS Form 8938 and the FBAR go to different agencies—FBARs get filed with FinCEN. Second, from the government’s perspective, the FATCA and FBAR filing requirements serve two different purposes. Third, while there is some overlap between the FATCA and FBAR filing requirements, not everyone who has to file an FBAR will need to file IRS Form 8938 (and vice versa). As a result, to ensure that they comply with FATCA, U.S. taxpayers who own offshore accounts must ensure that they comply with the FBAR filing requirements as well.
How Does an FBAR Relate to an IRS Voluntary Disclosure
In many cases, a U.S. taxpayer who needs to make an IRS voluntary disclosure will also need to submit an FBAR (or multiple FBARs) to FinCEN. Taxpayers who are behind on their FBAR filing requirements must make all required filings with FinCEN at the same time they submit their streamlined filings to the IRS.
Does a Cryptocurrency Account Have to be Disclosed on an FBAR and in the IRS Voluntary Disclosure Program?
Currently, cryptocurrency accounts are not subject to disclosure under the Bank Secrecy Act. This means that U.S. taxpayers do not need to file FBARs to report these accounts if they only hold cryptocurrency. However, if a foreign financial account contains cryptocurrency and other assets, then an FBAR filing may still be necessary.
Since FATCA applies not only to foreign financial accounts but to a broader set of foreign financial assets, cryptocurrency investors may need to report their offshore holdings to the IRS in certain situations and the law surrounding this law is constantly evolving.
Taxpayers who fail to report accounts with co-mingled foreign financial assets will need to consider whether making an IRS voluntary disclosure is their best option—or whether a different option may be more suitable given the circumstances at hand. Either way, given the complexity of these assets and the constant changing of the laws, it is strongly recommended that a taxpayer contact an experienced Boston IRS tax attorney when evaluating any type of IRS Voluntary Disclosure to the IRS.
Which Banks are Considered the "Bad Banks" in the IRS Voluntary Disclosure Program?
Foreign financial institutions that do not meet their reporting obligations under FATCA may be classified as “bad banks” by the IRS, DOJ, and other government agencies. This designation for any bank is significant, as it increases the penalties that taxpayers can face for failing to disclose their foreign financial assets. The IRS currently maintains an updated list of what it considers the “bad banks” which is constantly updated.
What is "Next" for the IRS Voluntary Disclosure Program (OVDP)?
Now that the OVDP has been replaced by the IRS’s Streamlined Filing Compliance Procedures and IRS Criminal Investigation’s Voluntary Disclosure Practice (or VDP), what is next for U.S. taxpayers who own offshore accounts and other foreign financial assets? The key message that should resonate with all taxpayers is that the IRS takes the disclosure of foreign financial assets seriously, and the obligation to comply with FATCA and the Bank Secrecy Act is not going to go away any time soon.
If anything, the IRS (along with FinCEN and the DOJ) is likely to become more active in its efforts to combat offshore account disclosure violations. With the recent surge in the popularity of cryptocurrency, accounts containing Bitcoin and other virtual currencies are likely to receive particular attention in 2023 and going forward. However, all offshore accounts and foreign financial assets present enforcement risks, and taxpayers must do what is required in order to avoid facing severe civil or criminal investigations.
If you have questions or concerns about FATCA compliance, FBAR compliance, or IRS voluntary disclosures, it is important that you hire an experienced former IRS tax Attorney like Kevin E. Thorn, Managing Partner of Thorn Law Group. Mr. Thorn has handled thousands of IRS Voluntary Disclosure Program cases since the original OVDP’s launch in 2009, helping his clients avoid unnecessary penalties, steer clear of IRS audits, and in most cases avoid crimi
Mr. Thorn's office is in the heart of the financial district in Boston, at 10 Post Office Square, 8 th floor, Boston, MA 02109. He has connections with the leadership of all the major government entities in Boston and in Washington, DC involved in the IRS voluntary disclosure programs, including at the Internal Revenue Service, the U.S. Department of Justice, FinCen, and at the U.S. Tax Court. He has saved his clients billions of dollars in taxes, penalties, interest, serious government investigations, and has protected many from incarceration.