What is the Voluntary Disclosure Practice?
The Voluntary Disclosure Practice (VDP) as described in Internal Revenue Manual (IRM) Section 126.96.36.199, is an option for taxpayers whose failure to report foreign financial assets and pay underlying taxes exposes them to criminal liability. This is a longstanding practice of IRS Criminal Investigation (CI), which takes timely, accurate, and complete voluntary disclosures (VD) under consideration when determining whether to recommend criminal prosecution. Although VD does not automatically guarantee immunity from criminal prosecution, it may result in criminal prosecution not being recommended, which may be a great deal.
VDP occurs when a taxpayer provides a truthful, timely, and complete disclosure to CI through their standard procedures, which require the taxpayer to (a) show a willingness to cooperate with CI in determining taxpayer’s accurate tax liability and (b) make good-faith arrangements to pay the taxes and applicable interest and penalties.
A disclosure is timely if the IRS receives it before it (a) commences a civil examination or criminal investigation, or has informed taxpayer that it intends to do so, (b) receives information from a third party such as (i) an informant, (ii) other governmental agency, (iii) John Doe summons, etc., alerting the IRS to taxpayer’s noncompliance, (c) acquires information directly related to taxpayer’s specific noncompliance from a criminal enforcement action like (i) search warrant, (ii) grand jury subpoena, etc.
VDP participants are examined by the IRS for the most recent six tax years, and the IRS determines their applicable taxes, interest, and penalties. Generally, the civil penalty for fraud or fraudulent failure to file tax returns applies to the year with the highest tax liability. However, based on the facts and circumstances, the IRS may apply these penalties for more than one year, or may even apply these beyond the six-year period if the taxpayer fails to cooperate with the IRS. Willful FBAR penalties are assessed according to the IRM Section 188.8.131.52. While taxpayers are not precluded from requesting the imposition of accuracy-related penalties instead of civil fraud penalties or non-willful FBAR penalties, the granting of requests for lesser penalties is exceptional. Penalties for the failure to file information returns are not automatically imposed.
Who may disclose?
VDP is a compliance option if a taxpayer has committed tax or tax-related crimes and has criminal exposure due to his or her willful violation of the law. Taxpayers who participate in VDP intend to seek protection from potential criminal prosecution. This option does not apply to taxpayers with illegal sources of income. For this purpose, income from activities determined to be legal under state.
If the taxpayer’s violation was non willful, she or he should consider other options including correcting past mistakes by filing amended or past due returns and enter of the following programs: (a) Streamlined Foreign Offshore Procedures, (b) Streamlined Domestic Offshore Procedures, (c) Delinquent FBAR Submission Procedures, or (d) Delinquent International Information Returns Submission Procedures
How to disclose?
To apply for VDP, taxpayers must:
I- Fill out Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (PDF) to request pre-clearance. Pre-clearance determines your eligibility for the practice but does not guarantee preliminary acceptance into the practice and submit Part I by either:
(a) Fax: 267-466-1115; or
(b) Mail to:
IRS Criminal Investigation
Attn: Voluntary Disclosure Coordinator
2970 Market St.
Philadelphia, PA 19104
II- Upon receipt of CI pre-clearance confirmation, taxpayers must submit Part II of the Voluntary Disclosure Application within 45 days or make a written request for additional time. Extension requests will be approved on a case-by-case basis. No more than one 45-day extension will be permitted. CI will review the taxpayer’s submission on Part II of Form 14457 and determine if she or he can participate in VDP. If approved, CI will provide taxpayers with a Preliminary Acceptance Letter, and CI forwards the Form 14457 to a civil section of the IRS. Once the case is assigned, an IRS examiner will contact the taxpayer.
Zaher Fallahi, Tax Attorney, CPA, represents taxpayers nationwide with their Voluntary Disclosure Practice (VDP), Streamlined Filing Compliance Procedures, Delinquent FBAR Filing, Delinquent International Information Return Filing, and foreign gifts.
(877) 687-7558, Nationwide Toll Free
(310) 719-1040, Los Angeles
(714) 546-4272, Orange County