Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
The following article is a summary of the IRS Voluntary Disclosure and Amnesty program, specifically the new internal guidance procedure targeting those with foreign and offshore accounts. While the majority of this article’s information has been culled from the IRS webpage entitled, Voluntary Disclosure: Questions and Answers, it has been significantly condensed and summarized for easier understanding. Anyone with additional questions about how the Voluntary Disclosure and Amnesty program works and/or who is eligible under this program should contact the Internal Revenue Service directly. However it is always wise to first seek some professional advice before contacting the IRS. Please call me at 250-661-9417 before making any attempt to contact the IRS.
What Is the Voluntary Disclosure and Amnesty Program?
The Voluntary Disclosure and Amnesty program, which targets those with unreported offshore income and unpaid taxes, began in March of 2009, with a deadline date of September 23, 2009. The deadline date for participating in this program was later extended to October 15, 2009.
In essence, the IRS Voluntary Disclosure and Amnesty program is a vehicle through which noncompliant taxpayers, who have used foreign accounts or other entities to evade paying taxes in the United States, can come forward and settle their tax obligations at only 20% of the legal penalty and without the risk of being prosecuted.
This program not only helps to bring delinquent taxpayers into compliance, it also help the IRS understand the various methods being used by foreign entities to encourage American taxpayers to take part in tax-avoidance behavior.
Although the IRS has had a voluntary disclosure practice in its criminal manual for years, many people, especially those with off-shore accounts, were hesitant to take advantage of the practice due to the uncertainty surrounding the amount of penalty they would face. The Voluntary Disclosure and Amnesty program serves as a way to attract those individuals who wish to disclose offshore income by providing a type of penalty-rubric that helps define the amount of money that will actually be owed.
Who Can Use the Voluntary Disclosure and Amnesty Program?
The Voluntary Disclosure and Amnesty program is for those individuals who have failed to report income (or pay taxes) from foreign accounts and foreign entities. This includes those individuals with unreported income from a foreign merchant account. People who participated in the Voluntary Disclosure practice prior to this internal guidance which began in March, 2009, are still eligible.
Who Cannot Use the Voluntary Disclosure and Amnesty Program?
Taxpayers who have reported their income from foreign accounts and paid the requisite taxes, but have failed to file the appropriate Report of Foreign Bank and Financial Account, or FBAR reports should not come in under voluntary disclosure. Details on how to proceed with the filing of FBAR reports can be found on the IRS website.
Also, taxpayers who have filed amended returns, also known as “quiet disclosures” and have already paid the tax owed on offshore income need not file under the Voluntary Disclosure program.
Individuals already under examination by the IRS are not eligible to come forward using the Voluntary Disclosure and Amnesty program.
What Does the Penalty Structure Look Like?
To give you an accurate depiction of just what the penalty structure looks like under voluntary disclosure, let’s look at the example provided on the IRS website:
If we assume that a taxpayer has had the following amounts in a foreign account for 6 years, and the amount of money was NOT unreported in 2003, the penalty structure looks like this:
|Year||Amount on Deposit||Interest Income||Account Balance|
Under voluntary disclosure, the following amounts in a foreign account would amount to a total payment to the IRS of $386,000. This includes:
- Back-owed tax of $105,000 (six years @$17,500 plus interest)
- Accuracy-related penalty of $21,000 ($105,000 x 20%)
- Additional penalties of $260,000 ($1,300,000 x 20%)
Involuntary disclosure, on the other hand, could result in tax and penalties totaling close to $2, 300,000 and a very real possibility of criminal prosecution.
What Criminal Charges Could I Face If I Chose Not to Participate in Voluntary Disclosure?
There are four potential criminal charges which can be levied on those “guilty persons” failing to take part in the Voluntary Disclosure and Amnesty Program. Each charge and its maximum penalty are listed below:
- Tax Evasion. Prison term of up to 5 years and a maximum fine of $250,000.
- Filing a False Return. Prison term of up to 3 years and a fine of $250,000.
- Failure to File an Income Tax Return. Prison term up to 1 year and fine up to $100,000.
- Failure to file FBAR or filing a False FBAR. Prison term up to 10 years in prison and penalties up to $500,000.
What Civil Penalties Could I Face for Failing to Take Part in the Voluntary Disclosure and Amnesty Program?
All totaled there are more than 10 civil penalties which may be imposed on those individuals who neglect to take part in voluntary disclosure. Each of these penalties has the potential to fine violators $10,000 or more for each offense.
What Forms Must Be Filed?
To take part in the voluntary disclosure program, the following forms must be filed:
- Copies of original and amended federal income tax returns for the tax periods being covered by the voluntary disclosure.
- Accurate amended federal income tax returns of the taxpayer for all tax years covered by the voluntary disclosure.
- Written explanation of previously unreported income or incorrectly claimed deductions relating to the foreign account or entity.
- Amended information returns for all tax years covered by the voluntary disclosure. (Forms are explained in more detail on the IRS website)
- Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts for all foreign accounts maintained during the years covered by the voluntary disclosure.
Where and How Should I Make My Voluntary Disclosure?
Voluntary disclosures should be made following the procedures outlined in I.R.M 188.8.131.52, which can be found on the IRS website. Those with questions regarding the IRS Voluntary Disclosure and Amnesty program can call the Voluntary Disclosure Hotline at (215) 516-4777, or visit www.irs.gov.
If you’d rather submit your intentions to make a voluntary disclosure in writing, you may provide a letter completely outlining your situation and include your amended or delinquent returns if you have already completed them. If represented by a third party, be sure to include Form 2848 and provide a daytime phone number where you can be reached.
If you have more specific questions not answered by this brief description of the IRS Voluntary Disclosure and Amnesty program please call me at 250-661-9417 or email at email@example.com.