Eligibility Requirements for Most Voluntary Disclosure Programs
The IRS Voluntary Disclosure Program is a federal government program that provides taxpayers with opportunities to disclose income, assets, investments, and accounts that they have previously failed to report on their tax returns. While a voluntary disclosure agreement (VDA) doesn’t automatically shield a taxpayer from prosecution, it’s likely that prosecution will not be recommended when this avenue is utilized. An even bigger benefit of taking advantage of a VDA while the option is still available is that the IRS or state taxing body will likely limit your look-back period for the tax liability. In order for voluntary disclosure to be valid, a taxpayer must:
- Truthfully and completely disclose information in accordance with program requirements.
- Cooperate to determine accurate tax liability.
- Cooperate with good-faith arrangements to pay taxes in full with any interest or penalties applied.
Voluntary disclosure is open to a taxpayer who has willfully committed tax crimes. If a potential tax crime was not willful, it’s possible that ordinary means of correcting tax issues that can include filing and amending past returns would be recommended. Lastly, voluntary disclosure protection only applies to legal sources of income.
The Difference Between Voluntary Disclosure and Mandatory Disclosure
Voluntary disclosure offers an opportunity to “get ahead” of unpaid taxes. By contrast, mandatory disclosure occurs when the IRS requests information when acting on a taxpayer’s suspected noncompliance. The voluntary disclosure must be done before the IRS has initiated a civil or criminal investigation, received information from a third party regarding noncompliance, notified a taxpayer of an investigation or examination, or acquired information via a criminal enforcement action.
The program allows taxpayers to negotiate settlements for potential tax liability in multiple states. For taxpayers with potential tax exposure in more than one state, this program creates a way to settle outstanding tax debts faster, more efficiently, and for less money through a coordinated agreement with the National Nexus Program and Multistate Tax Commission. There is no charge to enter into this program.
The IRS closed its OVDP (Offshore Voluntary Disclosure Program) in 2018. Taxpayers seeking to disclose information related to offshore foreign accounts must now make a pre-clearance request directly to the IRS’s Criminal Investigation Division (CID). A detailed report providing all of the facts and circumstances related to the assets involved must be submitted. Taxpayers should also know that they are required to report certain foreign financial accounts annually by completing a Report of Foreign Bank and Financial Accounts (FBAR) filing. Willfully failing to file an FBAR can result in an FBAR penalty totaling either $100,000 or 50% of the account balance. Criminal prosecution is also possible.
Sales Tax VDA
A sales tax VDA is a contractual agreement between a company and the state taxing authority that allows a company to come forward to voluntarily pay its unpaid tax obligations concerning dealings in any state where it has a sales tax nexus. It applies to all sales tax that was collected without being remitted. In exchange, the state will potentially reduce penalties while also placing limitations on the look-back period for unpaid taxes. This is for businesses that are not already under investigation.
What Is the Application Like for Voluntary Disclosure?
There are several different processes involved when applying for voluntary disclosure. In the case of seeking disclosure benefits for federal taxes, the standard practice is for an individual to initiate the voluntary disclosure by contacting their nearest IRS Criminal Investigation (CI) office. Generally, individuals seeking to utilize voluntary disclosure will have tax professionals make these requests on their behalf to ensure that they can protect their rights.
When seeking to initiate voluntary disclosure at the state level, it’s necessary to submit an application through the state’s designated tax portal. While submitting an application online is the most common method, sending a letter to request a disclosure consideration is often possible. A request for a disclosure application for state taxes typically requires the following pieces of information:
- The type of tax involved.
- A description of the taxpayer’s tax activities in the state.
- A start date for tax activities.
- The reason for the taxpayer’s noncompliance with state tax laws.
- The total amount of tax liability.
Taxpayers can make requests for voluntary tax disclosure applications anonymously. However, the option to maintain anonymity is removed after the discovery period. Once it has been determined that you qualify for a voluntary disclosure agreement, you will be sent an agreement that must be signed and returned. While deadlines for returning your application can vary by state, taxpayers usually have 30 days to complete their applications in order to avoid penalties from becoming active. Next, a taxpayer receives instructions for registering for the VDA program. For businesses, this can include completing a business license application, submitting information related to gross income, completing a business activities questionnaire, and submitting a tax authorization form. The state tax department may also request additional information related to income and business activities.
Finally, taxpayers must fulfill their tax obligations for unreported income that prompted the VDA in order to stay in compliance. An invoice that requires full payment will be submitted to the taxpayer with a deadline attached. Additional interest and penalties will begin accruing if the tax bill is not paid in full.
What Can Be Done If You Owe Undisclosed Taxes?
Individuals and taxpayers have what should be considered a very generous opportunity to correct tax mistakes before serious consequences and penalties become realities. Someone who owes any amount of unpaid taxes stemming from undisclosed income sources should act quickly to investigate their eligibility for VDA before the IRS or state taxing body catches wind of the impropriety. This is one of the rare tax relief options where “forgiveness” is applied when a taxpayer willfully neglects tax duties. If you’re seeking tax audit representation, reach out to an expert tax attorney to explore your options for using a VDA to avoid investigation, harsh penalties, and the potential for criminal charges.