LEGAL GUIDE
Written by attorney Sebastian Gibson | May 22, 2010

How to Use Voluntary Disclosure Today in the U.S. to Avoid IRS Penalties and Fraud Prosecution

An asset protection lawyer can advise a client with a foreign bank account or assets overseas what reporting requirements they have to report their assets to the IRS. When there have been past failures to report, a voluntary disclosure lawyer can advise a client what it will take to become tax compliant.

Voluntary Disclosure Today

Today, the 2009 Voluntary Disclosure Program deadline has passed. Over 14,700 taxpayers took advantage of the program. But that's only the tip of the iceberg. So where does that leave the taxpayer who failed to take advantage of the program? In need of legal advice as soon as the taxpayer is able to face their problems.

Not all is lost. But the future isn't rosy either. The long established practice of voluntary disclosure still exists. What has changed is that the deal offered under the 2009 Voluntary Disclosure/Amnesty Program is no longer available. And it is anyone's guess, what penalties a taxpayer will face today if he or she voluntarily discloses past wrongs with the IRS.

Following the program's expiration, the IRS vowed to reevaluate the framework and decide whether or how to continue the practice going forward. However, most practitioners today feel that the IRS has painted itself into a corner and will be unable to allow taxpayers to voluntarily disclose their prior wrongs going forward without paying stiffer penalties than those offered under the 2009 program.

In the interim, the IRS continues its efforts to learn of taxpayers who have failed to disclose offshore accounts amid bank secrecy coming to an end. For those who have forgotten the rules or pushed them out of their mind, U.S. citizens and resident aliens are taxable on their entire worldwide income, including their interest and dividends from foreign investments and must report foreign offshore accounts yearly in which they have an interest or signature authority and in which the value exceeds $10,000.

Penalties just for failing to file the FBAR, Report of Foreign Bank and Financial Accounts by June 30th each year, can be the greater of 50% of the total balance of the foreign account or $100,000.00, and there is no cap on the amount that can be penalized. An account with one million dollars in assets can thus incur penalties for the taxpayer who fails to report it for six years of three million dollars.

As it turns out, the civil statute of limitations for failing to file the FBAR yearly, is six years. And if that isn't enough to keep a taxpayer up at night, the statute of limitations for criminal prosecution for failing to file FBARs is five years. The criminal penalties for failure to file an FBAR are up to $250,000 and five years imprisonment and $500,000 and ten years imprisonment if in tandem with violation of any other U.S. law.

Worse yet, the statute of limitations on prosecution for tax evasion with respect to income from an offshore account is six years, starting from the date the tax return is due, or if later, the last affirmative act of evasion by the taxpayer. In the event the Criminal Investigation Division makes a referral to the U.S. Department of Justice for a felony indictment of a taxpayer, the taxpayer can face five years in prison and fines of up to $250,000. Penalties and fines vary.

To enjoy the likelihood of avoiding criminal prosecution today for failing to report income and/or offshore accounts, a voluntary disclosure must be completely truthful, the taxpayer must be fully cooperative, and must make a good faith agreement to either pay the IRS in full, including any taxes owed, interest and whatever penalties the IRS should determine to be applicable, or make arrangements to pay such amounts over time. The criteria for what constitutes a voluntary disclosure are numerous and restrictive, and there are no guarantees that even with voluntary disclosure, a taxpayer will avoid criminal prosecution.

In addition, voluntary disclosure is only available as to income derived from legal sources. A voluntary disclosure must also take place before the IRS has begun a civil examination of the taxpayer or a criminal investigation, or notified the taxpayer it is in the process of such or intends to proceed in this manner. It must also commence before the IRS receives information regarding the taxpayer from a third party, such as a whistle blower, or as a result of a civil examination or criminal investigation specifically related to the taxpayer.

A taxpayer who makes a voluntary disclosure is not required to make an immediate full payment of the taxes, interest and penalties he or she owes if the taxpayer does not have the ability to do so. However, the taxpayer will have to make other arrangements.

Over the years, examples have been provided by the IRS as to what constitutes and what does not constitute a voluntary disclosure.

Voluntary disclosures may not be made anonymously. Should the information provided be less than truthful or the amended tax returns not be completely accurate, a taxpayer can find themselves in additional trouble. This is not the time to push the envelope in claiming deductions. If the amended tax returns are not accurate, the taxpayer's problems may be compounded.

Whereas at the start of the 2000s it was believed that the IRS had its focus more on the promoters of tax avoidance schemes than individual taxpayers, today with the government facing larger and larger deficits, and the IRS today having already broken down the doors of such promoters and enablers, it is the opinion of this writer that the IRS has the wind at its back and will now be focusing its efforts on the prosecution and collection from individual taxpayers. For every one that is prosecuted, it's likely that the reverberations will cause a hundred to step forward out of the shadows and voluntarily disclose their wrongdoing.

Indeed, as evidence of the new focus of the IRS, when the Commissioner of the Internal Revenue Service testified before the Senate Finance Committee in March of 2009, he testified as to the unprecedented focus the IRS has now placed on detecting and bringing to justice taxpayers who have been hiding their assets overseas in order to avoid paying their U.S. taxes.

In order to find those taxpayers who have been concealing taxable income, the IRS has been turning the screws on financial institutions to cough up the identities of customers concealing their income from U.S. authorities.

During the 2009 Voluntary Disclosure initiative, at first the IRS refused to pre-clear taxpayers and check its databases and the IRS information on a specific taxpayer in order to determine whether it had any information that would make a taxpayer ineligible for a voluntary disclosure. The IRS then began to pre-clear taxpayers however, it was believed by some practitioners that the IRS offices were not pre-clearing by using the same methods or databases.

The trouble with attempting to pre-clear a taxpayer is that disclosure does not occur until the taxpayer's identity is revealed along with the promise to pay the tax, interest and penalties by the taxpayer, thus creating a situation where by the time disclosure occurs, the IRS might very well already have gained such information from other sources.

When the 2009 Voluntary Disclosure program went into effect, the IRS guidance recommended submitting a letter to the Special Agent in charge of the local IRS Criminal Investigation Division (CID) Office. It was recommended that the letter provide the taxpayer's name and identifying information, a brief explanation of the taxpayer's problems with previously filed returns, and if ready, the amended returns. This procedure was recommended even if the taxpayer had tried to accomplish a "quiet disclosure" previously by submitting amended returns without payment of any penalties or an accompanying letter fessing up.

Today, the IRS is continuing to step up its investigative and enforcement efforts, it continues to use John Doe summonses and it continues to receive information from offshore banks and whistleblowers and other taxpayers making voluntary disclosures.

In compliance with IRS requirements, we must advise you that any Voluntary Disclosure Advice or U.S. federal tax advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.

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