Friday, October 2, 2009

What is the Voluntary Disclosure Program?

Many taxpayers are coming forward to disclose foreign financial accounts in an effort to avoid the harsh penalties associated with failing to file the FBAR tax form. The IRS is applying a reduced penalty structure to those that make a "Voluntary Disclosure" of these foreign financial accounts by October 15, 2009.

But what exactly is a Voluntary Disclosure? The IRS has provided a number of Q & A's that answer many of the questions that people and business owners may have about the program. Concerning the nature of the program, the IRS says:

Q4. What is the IRS’s Voluntary Disclosure Practice?

A4. The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures 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. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

[Note: the IRS description focuses on the avoidance of criminal penalties for failing to comply with the tax law. In the context of foreign financial accounts, the Voluntary Disclosure Program also offers a reduced penalty structure.]

What is not made clear in this answer is what it means for a disclosure to be made "truthfully, timely, and completely." Its easy to understand what truthful and complete mean, but what about "timely." When we think about filing a tax return, "timely" means filing by the due date. That is not the case here though. A Voluntary Disclosure is not considered timely just because it is made before the October 15, 2009 deadline.

According to the Internal Revenue Manual Section, a disclosure is timely if it is received before:

a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

So, basically, if a person or business owner is already under the IRS microscope, that person will not be able to make a Voluntary Disclosure because their disclosure will not be considered "timely." As a result, the will not be able to reduce their exposure to penalties for having failed to file an FBAR form.

No comments: