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IRS Voluntary Disclosure

Tax professionals, the IRS, and FinCEN have independently and together worked to find ways of bringing taxpayers back into compliance through the IRS Voluntary Disclosure program. Currently there are many ways to come clean with the IRS and FinCEN. Each method will be discussed in detail later. This section will provide an overview. A method previously advised by accountants is doing nothing and hope for the best.[1] With the growing number of countries and foreign financial institutions becoming complainant under FATCA, this no longer is a sensible option. If you hold a non-disclosed offshore account, it will eventually be discovered. Now is the time to act. To decide what option is best for your situation, you should retain legal counsel whose practice concentrates in taxation. Your conversations with your accountant are not protected by attorney/client privilege. You should engage legal counsel to assist you in deciding what the best course of action is.

  1. A delinquent taxpayer can provide what has become known as “quiet disclosure.” This is accomplished by the taxpayer going back as far as the statute of limitations (generally three or six years) and filing amended income tax returns and the corresponding FBARs.
  2. A second method is to provide a “new disclosure.” Taxpayers employing this tactic make the disclosure for the first time on their current return and hope that the failure to disclose on previous years is never discovered.
  3. A taxpayer who has not been previously discovered can apply for permission to enter into the IRS Voluntary Disclosure Program. It the client is cleared for entrance he must then amend the last eight years of income tax returns to include the unreported income, pay the tax due, interest and a penalty of 27.5% of the highest account value. In exchange, the potential for criminal prosecution is removed.
  4. A non-resident whose failure to file was not willful can use the original Streamlined Filing Compliance Procedures set up through IRS Voluntary Disclosure. By filing the delinquent returns and FBARs a taxpayer who complies will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
  5. After the success of the non-resident Streamlined Filing Compliance Procedure, a similar program was added to the IRS Voluntary Disclosure program for U.S. Residents whose failure to file was not willful.
  6. If a taxpayer is otherwise in good standing with the IRS, and has not been contacted by the IRS or FinCEN regarding the missing form 114 (FBAR), there is the opportunity to cure the problem through IRS Voluntary Disclosure. The key is to file the report as explained in the next section before the IRS and FinCEN realize it is missing.

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[1] “What to do When a Client has an Undisclosed Foreign Account” Novak, Scott. Journal of Accountancy (December 2013)

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