If you have prior years of tax returns that contain large and intentional errors that open you up for potential criminal investigation, the IRS provides an outlet to come into compliance. By using voluntary disclosure for offshore accounts in Washington DC, you could alleviate this risk. A skilled offshore accounts attorney can help you through this sensitive process.
If a taxpayer had errors in prior tax filings, they have the opportunity to correct those errors by making a voluntary disclosure. The IRS has a long-standing practice of taking voluntary disclosures under consideration when determining whether to recommend a criminal prosecution.
A voluntary disclosure for offshore accounts will not automatically grant a Washington DC taxpayer immunity from prosecution but it may play a part in a prosecution not being recommended. In order to make a voluntary disclosure, it has to be truthful, timely, and complete through the Criminal Investigation Division of the IRS. It also requires an ongoing responsibility of the taxpayer to cooperate with the IRS to correct the tax liability, as well as make good faith arrangements to pay the required tax, interest, penalties.
A voluntary disclosure helps the taxpayer by bringing them into compliance with the protection that there will not be a criminal investigation. Anyone with risk of criminal investigation for unreported legal sources of income is eligible for voluntary disclosure. If they have an income source that truly was illegal, however, they cannot get this protection.
The disclosure has to be timely, meaning before the IRS has begun a civil exam or a criminal investigation; or before they have received information from a third party alerting them to the non-compliance. A third-party could be an informant, a government agency, or even a John Doe Summons.
A disclosure is not timely if the IRS already acquired information directly related to the taxpayer’s non-compliance from a criminal enforcement action such as a search warrant or a grant subpoena.
The IRS has a variety of penalties that are associated with foreign accounts and foreign income, and on November 20, 2018, they issued a memo with updated voluntary disclosure procedures. The IRS will assert a willful FBAR penalty in accordance with existing penalty guidelines under the Internal Revenue Manual, but they will not automatically impose penalties for failing to file information returns.
The civil fraud penalty of 75% of the unpaid tax will be imposed upon any Washington DC taxpayer who engages in voluntary disclosure of their offshore accounts. A taxpayer can request the lesser 20% accuracy-related penalty instead of the civil fraud penalty. However, in these procedures the civil fraud penalty will only be waived in exceptional circumstances, which will be difficult to do, even with the aid of a lawyer.
The objective of voluntary disclosure is not to disclose mistakes made on prior filings, rather it is to simply correct large and intentional errors that put a taxpayer at risk for a criminal investigation. The disclosure must recalculate the taxes in order to be accurate. When using the voluntary disclosure option, a taxpayer will have to cover the prior six years of returns on a Form 14457, which is a voluntary disclosure practice request and application. If the IRS reviews a disclosure and disagrees as to the proper amount due, the examiner could request managerial approval to look back even further than six years, which may result in the maximum penalties being assessed against the taxpayer.
If the non-compliant taxpayer has under six years at issue, the disclosure must correct all the periods. With the IRS review and consent, cooperative taxpayers may be able to expand the disclosure period and there may be certain situations where the taxpayer wants to do more than is required based upon their individual situation.
The IRS puts forth various disclosure programs in order to bring as many taxpayers into compliance as possible. When considering a voluntary disclosure for offshore accounts in Washington DC, call a lawyer first to ensure that you are following all of the steps correctly.