Understanding Voluntary Disclosure
Copyright (c) 2012 Lindsey Fontana
Voluntary Disclosure is the process of reporting previously unpaid or underpaid tax liabilities. The IRS Criminal Investigation will take timely, accurate, and complete voluntary disclosures into account when determining whether taxpayers should be recommended to the Department of Justice for criminal prosecution.
Voluntary Disclosure allows for the IRS to bring previously noncompliant taxpayers into compliance with United States tax law, and for taxpayers to minimize their chances of being criminally prosecuted. A Voluntary Disclosure does not apply when a taxpayer's source of income is illegal. A voluntary disclosure must be received by the IRS before it begins an investigation on the taxpayer or receives information from a third party regarding the taxpayer's noncompliance.
What constitutes a Voluntary Disclosure?
- Communication must be truthful, timely, and complete
- Taxpayers are required to file 8 years of previous tax returns
- Taxpayers must be willing to cooperate with the IRS to determine accurate tax liability
- Taxpayers must make a good faith arrangement to pay the IRS in full the tax, interest, and penalties deemed necessary
What is the benefit to the taxpayer?
- The taxpayer is not charged criminally by the IRS
- Some penalties for tax fraud may be reduced
- The IRS is becoming stricter in their efforts to find those who have not filed taxes or have unreported offshore accounts
- Taxpayers become compliant with United States tax law
What is the FBAR and how does it affect me?
The IRS requires taxpayers who have financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account to annually file a Report of Foreign Bank and Financial Accounts (FBAR). The IRS has been pursuing and prosecuting taxpayers who have failed to report foreign-held assets. The IRS is increasing offshore and international tax audits and investigations in order to find individuals with hidden foreign assets.
Civil Penalties
The civil liabilities for not filing an FBAR potentially include:
- Up to $10,000 for each Negligent Failure to File
- $50,000 for a Pattern of Negligent Activity
- The greater of $100,000 or 50% of the amount in the account at the time of violation for each Willful Failure to File
- Penalties for Willful Failure to keep records of the account
- 75% of the tax due for Civil Fraud Penalty for Willful Failure to Report income
- 20% of the tax due for Accuracy Related Penalty for Negligent Failure to Report
- Penalties for failure to file a Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
35% of amount transferred or received for a transfer to or from a foreign trust
5% - 25% of the value of a gift received from a foreign person, estate, corporation, or partnership
- Penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner - 5% of gross trust assets for ownership of a foreign trust under the grantor trust rules
- Penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations - $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return
- 10% of the value of property transferred to a foreign corporation up to $100,000 per return
- $10,000 - $50,000 for failure to file foreign corporation information returns
Criminal Penalties
Possible criminal charges related to tax returns include:
- 5 years of prison and fine up to $250,000 for Tax Evasion (26 U.S.C. § 7201)
- 3 years of prison and fine up to $250,000 for filing a false return (26 U.S.C. § 7206(1)
- 1 years of prison and fine up to $100,000 for failure to file an income tax return (26 U.S.C. § 7203)
- 10 years of prison and fine up to $500,000 for failure to file an FBAR or the filing of a false FBAR (31 U.S.C. § 5322)
If you find yourself in a position where Voluntary Disclosure is the best option, it is critical to consult a certified tax attorney or criminal tax attorney to guide you through the process of making a Voluntary Disclosure that will benefit the taxpayer and satisfy the requirements of the IRS.
About the Author
http://www.TaxLawFirm.net has Certified Tax Law Specialists and tax attorney specializing in IRS tax problems who represent clients throughout Southern California. Eachtax lawyer at TaxLawFirm.net helps to level the playing field when it comes to tax issues. If you need help with complex financial issues, contact William D. Hartsock, Esq. today.
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