The IRS’ Voluntary Disclosure Practice (VDP) is an administrative program established by the IRS which offers resolution of civil (monetary) and criminal penalties that apply to willful tax and/or FBAR noncompliance by a US person.
As distinct from the Streamlined Filing Compliance Procedures (in particular, the Streamlined Domestic Offshore Procedures), the VDP is appropriate for those who intentionally failed to meet their known tax and/or FBAR obligations or were reckless in their failure to meet those same obligations: in other words, taxpayers who were willful in their noncompliance.
While the VDP offers implicit guarantee that such noncompliance will be resolved purely via monetary penalties and that US persons disclosing under its terms will not be referred to the US Department of Justice for possible prosecution, there is no absolute guarantee of such immunity and the penalty costs to achieve this non-guaranteed outcome are massive. The primary (but not only) penalty of the IRS’ Voluntary Disclosure Practice is equal to 50% of the value of noncompliant assets held by the individual at the highest valuation point in the last six years.
Who Should Participate in the Voluntary Disclosure Practice?
Given the potentially extreme expense to disclose under this program’s protective terms, we think it is only appropriate for individuals who cannot credibly certify that their errors were either non-willful in nature (the IRS Streamlined Procedures options above address such a situation) nor credibly argue that they had no possible reasonable means of learning of their obligations (the IRS Delinquent Procedures addresses such a situation).
In our view, this program is most obviously appropriate in two scenarios:
- A US person who – for wealth, reputational, health, or other reasons – cannot accept any risk of IRS examination or rejection from the Streamlined Domestic Offshore Procedures and are willing to pay the enormous penalties of the Voluntary Disclosure Practice to avoid such a risk of rejection. This is most commonly seen in the case of (a) exceptionally wealthy individuals (particularly in relation to the value of the unreported foreign account), (b) individuals of wealth with a need to guarantee protection from prosecution, such as politicians, licensed professionals, business executives and other individuals with reputations requiring protection and maintenance, and (c) individuals with medical issues, particular mental health concerns like anxiety, where uncertainty threatens harms of greater importance than paying large fines.
- A US person with extreme negative factual histories (also called ‘bad facts’) such that the person’s noncompliance is most readily explained as intentional rather than accidental or unintentional (‘negligent’). We would also most typically recommend VDP where the evidence of intentional noncompliance is readily obtainable by the US authorities.
For all other noncompliant US taxpayers, the two preceding IRS disclosure options (Streamlined or Delinquent Procedures) are likely more appropriate.
The Terms of the Voluntary Disclosure Practice
As noted, the VDP extracts a heavy practice in (implicit) return for avoiding referral for criminal prosecution and for avoiding multiple FBAR willfulness penalties.
- Delinquently file or amend the last six years of tax returns (for which the due date has passed), and,
- Pay a penalty equal to 50% of the highest ‘FBAR value’ reached in one of those last six tax years (‘FBAR value’ being the sum of the intra-year maximum values of each foreign account as should have been reported on the FBAR, but was not, and measured on the ‘violation date’), and,
- Pay all tax due as calculated on those six delinquent or amended tax returns, and,
- Pay all statutory interest due on the tax-due balances calculated on those six delinquent or amended tax returns, and,
- Pay a civil fraud penalty equal to 75% of the unpaid tax for the tax year (among the six amended or filed as instructed above) with the highest tax due, and,
- Potentially pay that same 75% civil fraud penalty for additional years among the last six “based on facts and circumstances of the case,” and,
- Potentially pay international information return penalties of $10,000 per year for each Form that was not filed at all or not complete or correct.
Note that there is significant complexity in applying all the VDP rules recited above, and in particular, in defining the 50% willfulness ‘penalty base.’ For this reason, consultation with a FBAR tax attorney is in our view absolutely necessary.
The Voluntary Disclosure Practice As a Means of Avoiding Criminal Referral
While on its face, the primary justification for the VDP is accepting and self-assessing enormous amounts of financial penalties in return for protection from criminal prosecution, a close review of the Voluntary Disclosure Practice rules reveals that there is less than absolute guarantees of much of anything.
Instead, the IRS Voluntary Disclosure Practice terms are filled with provisions that give the IRS ‘wiggle room’ to impose more, and harsher, penalties. A VDP participant who willingly discloses his noncompliance to the IRS and pays exorbitant financial penalties does not actually receive guaranteed protection – only vague commitments of a fair outcome.
Who is Eligible for the VDP?
The VDP is available to a wide range of taxpayers, including:
- Individuals: U.S. citizens, resident aliens, and non-resident aliens with U.S. tax filing obligations.
- Businesses: Corporations, partnerships, trusts, and estates.
However, the following taxpayers are generally not eligible for the VDP:
- Taxpayers under audit or investigation: If the IRS has already initiated an audit or criminal investigation, you are generally not eligible for the VDP.
- Taxpayers with illegal source income: If your tax non-compliance involves illegal source income, such as income from drug trafficking or other criminal activities, you are not eligible for the VDP.
Important Considerations for the VDP
- Timeliness: You must seek and be granted ‘pre-clearance’ for your disclosure via VDP before your name is known to the IRS as potentially noncompliant in terms of tax and/or informational filings (the most obvious example of this being under audit or criminal investigation).
- Completeness and Accuracy: Provide complete and accurate information in your disclosure to avoid potential complications or delays.
- Seek Professional Guidance: The VDP involves complex tax laws and procedures, making it crucial to seek guidance from a qualified tax professional.
Call IRS Voluntary Disclosure Practice attorney Andrew L. Jones now at (415) 745-1924 for a free, fully confidential consultation to determine if you are eligible to solve your foreign account problems through the Voluntary Disclosure Practice, Streamlined Filing Compliance Procedures or the Delinquent International Information Return Submission Procedures!
Every foreign account or asset disclosure is unique and you will get personalized service directly with Andrew, with access evenings and weekends to meet your schedule.
Call now – (415) 745-1924!
