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Voluntary Disclosure

Voluntary Disclosure

Voluntary Disclosure is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures from taxpayers who have failed to report or underreported their tax liability. The IRS states that it will take a Voluntary Disclosure into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.


It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This Voluntary Disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.


What is a Voluntary Disclosure?

A Voluntary Disclosure is acceptable when the communication is truthful, timely, and complete. It requires that taxpayers file 8 years of previous tax returns to reflect previously unreported foreign income. Additionally, the taxpayer must show a willingness to cooperate with the IRS in determining his or her correct tax liability; and, the taxpayer must make a good faith arrangement with the IRS to pay in full the tax, interest, and any penalties determined by the IRS to be applicable.


The IRS agrees not to charge the taxpayer criminally and to forego some of the penalties for fraud and failure to file.


The IRS Objective

The IRS stated objective for the Voluntary Disclosure Practice to bring taxpayers who have avoided or evaded paying their taxes into compliance with United States tax laws.


FBAR and Voluntary Disclosure

The Foreign Bank and Financial Accounts (FBAR) is required for taxpayers who have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account. Many taxpayers have failed to file an FBAR to report their foreign account, believing that the IRS had no way to discover the foreign-held assets. Recently, however, the IRS has made great strides to discover these accounts and pursue taxpayers who have failed to report.


Recent IRS Efforts to Identify Tax Evaders and Foreign Accounts

According to IRS Commissioner Doug Shulman, IRS agents are poring over information contained in the over 14,700 voluntary disclosures and are seeking to identify individuals who have not disclosed their offshore accounts as well as financial institutions, attorneys, CPAs, investment advisors and others who promoted or otherwise facilitated U.S. persons hiding assets and income offshore.


The IRS has announced plans to increase audits and investigation of U.S. individuals and business taxpayers with foreign-sourced income, foreign accounts, and foreign trusts. In order to carry-out their announced plans, the IRS has hired as many as 800 new employees to focus solely on compliance issues.


The IRS has also obtained (through the UBS case and the Offshore Settlement Initiative) information on banks in 70 countries that may have assisted U.S. taxpayers in hiding assets and income.


Additionally, Liechtenstein and Switzerland have reversed decades of resistance and have agreed to enter into Tax Information Exchange Agreements in line with the model agreement developed by the Organization for Economic Cooperation and Development (OECD). Both countries have already initiated such agreements with the United States and other countries.


Civil Penalties Associated With The FBAR Program

The civil liabilities for not filing an FBAR potentially include:

  • Up to $10,000 for each Negligent Failure to File;
  • $50,000 for a Pattern of Negligent Activity;
  • The greater of $100,000 or 50% of the amount in the account at the time of violation for each Willful Failure to File;
  • Penalties for Willful Failure to keep records of the account;
  • 75% of the tax due for Civil Fraud Penalty for Willful Failure to Report income;
  • 20% of the tax due for Accuracy Related Penalty for Negligent Failure to Report;
  • Penalties for failure to file a Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
    • 35% of amount transferred or received for a transfer to or from a foreign trust;
    • 5% - 25% of the value of a gift received from a foreign person, estate, corporation, or partnership;
  • Penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner - 5% of gross trust assets for ownership of a foreign trust under the grantor trust rules;
  • Penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations - $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return;
  • 10% of the value of property transferred to a foreign corporation up to $100,000 per return;
  • $10,000 - $50,000 for failure to file foreign corporation information returns;
  • Interest.


Criminal Penalties Associated With The FBAR Program

Possible criminal charges related to tax returns include:

  • 5 years of prison and fine up to $250,000 for Tax Evasion (26 U.S.C. § 7201);
  • 3 years of prison and fine up to $250,000 for filing a false return (26 U.S.C. § 7206(1);
  • 1 years of prison and fine up to $100,000 for failure to file an income tax return (26 U.S.C. § 7203);
  • 10 years of prison and fine up to $500,000 for failure to file an FBAR or the filing of a false FBAR (31 U.S.C. § 5322).


Penalty Reduction with the 2011 Offshore Voluntary Disclosure Initiative

The benefit of doing a Voluntary Disclosure is the reduction in penalties. The IRS agrees not to pursue any of the above-mentioned criminal penalties. The following civil penalties will apply:

  • All taxes and interest for the past 6 tax years;
  • 20% accuracy-related penalty under IRC§6662(a) on the full amount of underpayments of tax for all years;;
  • An additional penalty in lieu of the other penalties discussed above of 25% of the highest aggregate balance in the account during the preceding 6 years.
    • 12.5% for smaller offshore accounts where assets did not surpass $75,000 in any calendar year covered by the 2011 initiative (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income);
    • In some circumstances, this penalty may be reduced to 5%;
      • Taxpayers who are foreign residents and who were unaware they were U.S. citizens, or;
      • Taxpayers who meet all four of the following conditions:
        1. did not open or cause the account to be opened
        2. have exercised minimal, infrequent contact with the account,
        3. have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and
        4. can establish that all applicable U.S. taxes have been paid on funds deposited to the account;
  • Failure to file penalties under IRC§ 6651(a)(1), if applicable;
  • failure to pay penalties under IRC§ 6651(a)(2), if applicable;


False Reports of Foreign Bank and Financial Accounts (FBAR) can result in severe penalties!

In 2003, officials of the Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN) signed an agreement under which FinCEN delegated its enforcement authority for reports of Foreign Bank and Financial Accounts (FBAR) reporting to the IRS. That agreement marked the latest step in the IRS effort to seek out people with undisclosed accounts overseas.


For a number of years, U.S. persons who had a financial interest in, or signature authority over, a foreign bank, securities or other financial account had been obligated to report that interest to the Treasury Department annually. However, with both homeland security needing closer involvement into possible illegal activities overseas and taxpayers failure for reports of foreign bank and financial accounts there has been added pressure for voluntary disclosure. Taxpayers should take the reports of foreign bank and financial accounts (FBAR) obligation seriously because Congress recently imposed severe penalties for failure to make reports of foreign bank and financial account (FBAR), even if the failure is not willful.


The IRS takes reports of foreign bank and financial accounts reporting extremely seriously. So, if you are currently going through a tax audit of your international concerns or know of one upcoming, the earlier you can get an experienced professional on your side the better. At TaxLawFirm.net, we'll ensure your audit of International accounts is handled properly and that your rights are protected!


FBAR has become a Priority

In recent testimony by Treasury Department officials, it was made clear that addressing the lack of disclosure of reports of foreign bank and financial accounts (FBAR) had become a priority. The IRS had recently developed an Offshore Voluntary Compliance Initiative (OVCI) that allowed partial amnesty of FBAR.


Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the United States must file a report with the U.S. Treasury if he or she has a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by noting the account on their tax return and by filing Form 90-22.1, the Foreign Bank and Financial Account Report (FBAR). Willfully failing to file an FBAR report can be punished under both civil and criminal law. The FBAR penalty will be waived for taxpayers who participate in OVCI.


At TaxLawFirm.net, we can assist you with understanding FBAR, filing out the appropriate paperwork, and meeting other disclosure requirements of any foreign activities such as ownership interests in foreign corporations, foreign trusts, and foreign partnerships.


Get Overseas Tax Assistance With Voluntary Disclosure Here.

If you have international concerns and want to report them properly to the IRS, the lawyers at TaxLawFirm.net can help. All of our attorneys are highly skilled and specialized in international tax law.


When it comes to reports of foreign bank and financial account matters, don't risk undertaking it alone. Instead get the guidance and experience of our team.


We can help you:

  • Structure your offshore trust accounts properly.
  • Updated your offshore trusts to stay current with both US and foreign tax law.
  • Protect your foreign assets
  • Determine if offshore trusts are for you
  • Much more


Have an Expert Guide You Through Any Voluntary Disclosure And FBAR Procedures

Given the enormity of the civil and criminal penalties for those who do not file a Voluntary Disclosure, and the effort the IRS is devoting to find those who have not reported, the Voluntary Disclosure Practice is an appealing option. However, it is critical that a taxpayer who wishes to investigate the possible implications of utilizing the Voluntary Disclosure practice seek the expertise of a knowledgeable tax attorney to consult and guide them through the process of making a voluntary disclosure that will meet the IRS requirements and be in the taxpayer's best interest.


We can help you:

  • Structure your offshore trust accounts properly.
  • Updated your offshore trusts to stay current with both US and foreign tax law.
  • Protect your foreign assets
  • Determine if offshore trusts are for you
  • Much more   

FBAR Reporting Requirements