February 17, 2020

Failure to file returns and disclosures with the IRS on time can result in substantial penalties. This can include civil fines and, in some cases, criminal prosecution. The IRS has several ways for taxpayers to file documents or amend filings late without incurring the full penalty. The Voluntary Disclosure Program (VDP) allows taxpayers who could be subject to criminal penalties to bring themselves into compliance. The agency began offering VDP for offshore filing requirements in 2009. It discontinued that program in 2018, in favor of a single set of guidelines for domestic and offshore tax disclosures. Our Los Angeles tax advisors can help taxpayers understand these guidelines.

Overseas/Offshore Disclosure Requirements

Federal tax law requires taxpayers to report certain transactions with foreign businesses, holdings in foreign banks and financial accounts (FBARs), and other international financial matters. Penalties for failure to file required disclosure forms can be severe.

Form 5472, for example, is used to report information on domestic corporations with foreign ownership and foreign corporations doing business in the U.S., as required by, respectively, Internal Revenue Code (IRC) §§ 6038A and 6038C. Failure to file this form can lead to a $25,000 penalty for each deficient year.

Taxpayers must use Form 3520 to report certain transactions with foreign trusts, ownership of foreign trusts, and receipts of large gifts from foreign persons. The penalty for failure to file disclosures about foreign trusts is the greater of $10,000 or thirty-five percent of the transaction amount (§ 6677 of the IRC). Failure to disclose foreign gifts or bequests in excess of $10,000 can result in a penalty of five percent of the total amount per month until the disclosure is filed, up to a maximum of twenty-five percent (§ 6039F).

Voluntary Disclosure Program

The IRS’s focus has been on offshore disclosures in recent years. A taxpayer may use VDP if they have failed to disclose offshore assets, income, or transactions, or have failed to file disclosures or returns for domestic taxes. Voluntary disclosure must include all required information, and payment of all outstanding taxes, interest, and penalties.

Under its revised procedures, the IRS will look at the prior six years and apply a penalty of seventy-five percent of the tax owed during the year with the largest tax bill. Voluntary disclosure does not guarantee that the IRS will not pursue criminal charges, but it is a major factor in the taxpayer’s favor.

Voluntary disclosure must also be timely, meaning that the taxpayer must do it before the IRS has notified them of the deficiency, begun investigating them for the deficiency, or opened a criminal case against them. In short, the taxpayer has to make the first move.

Alternatives to Voluntary Disclosure

Not every failure to disclose information will subject a taxpayer to the risk of criminal prosecution. Before turning to VDP, taxpayers should review if they are eligible for any of the following:
Streamlined Filing Compliance Procedures, available to individual taxpayers whose deficient filings were not willful;
Delinquent FBAR submission procedures, available to taxpayers who failed to file an FBAR reporting form and are not under civil or criminal investigation; or
Delinquent international information return submission procedures, for taxpayers who have “reasonable cause” for missing a deadline for an international information return, and who have not been investigated or contacted by the IRS about the deficiency.

If you have questions about how to minimize penalties for potential tax violations, please contact the tax advisors at the Enterprise Consultants Group online or at (800) 575-9284 to schedule a consultation to discuss your case with a member of our team.