What Is the IRS Voluntary Disclosure Program?

Getting away without paying your taxes may not be as easy as it used to be—and the penalties could be steep. 

We’ve written about the IRS’s new budget and how the Service has pledged to use part of those funds to increase its enforcement efforts, particularly with regard to partnerships, corporations, and individuals making over $400,000 a year. It is reasonable to assume as scrutiny increases, more taxpayers will face audits and even prosecution for failing to disclose income and assets.

It’s also reasonable to assume that the number of taxpayers applying for the Voluntary Disclosure Program will go up. In today’s post, we’ll have a look at the IRS’s Voluntary Disclosure Program and how it can help delinquent taxpayers avoid higher penalties and possible prosecution. 

What Is the IRS Voluntary Disclosure Program? 

The IRS Voluntary Disclosure Program was designed for taxpayers who want to come forward to voluntarily report previously undisclosed income or assets to the Internal Revenue Service (IRS). The program is part of the IRS’s broader effort to encourage compliance with tax laws and regulations, and it offers a way for taxpayers to correct past mistakes or omissions in their tax filings before the IRS discovers the issue through its enforcement actions. 

While the IRS makes it clear that a voluntary disclosure does not guarantee immunity from prosecution, it does make prosecution less likely. Taxpayers can potentially avoid criminal charges related to tax evasion provided they follow the program’s guidelines, fully cooperate with the IRS in determining their correct tax liability, and pay their liability in full, along with any penalties and interest. 

The program is designed for individuals and entities that have engaged in conduct considered willful in nature, meaning there was an intentional effort to evade tax laws. It does not protect taxpayers whose income is derived from illegal activities. 

Background 

Voluntary Disclosure Program has a long history and has evolved over time to address changes in the tax environment and the needs of taxpayers. The IRS realized early on that encouraging taxpayers to voluntarily correct their past non-compliance was more efficient and cost-effective than finding non-compliance through audits and investigations. In 1952, the IRS announced a formal disclosure program designed to encourage taxpayers to come forward and report income that had not previously been disclosed, with the understanding that doing so could help them avoid criminal prosecution for tax evasion. 

With the turn of the 21st century, the IRS began to place particular emphasis on offshore accounts and income in an effort to increase financial transparency and combat tax evasion. In 2009, it created the Offshore Voluntary Disclosure Program (OVDP), a major initiative that ran in several iterations until it officially ended in September 2018 and was folded into the regular Voluntary Disclosure Program. 

Since then, the IRS has continued its Voluntary Disclosure Program for both offshore and domestic tax issues. The current Voluntary Disclosure Program is designed to be more comprehensive, covering a wide range of tax non-compliance issues. 

Terms of the Voluntary Disclosure Program 

The IRS Voluntary Disclosure Program has several key points that taxpayers should be aware of if they are considering coming forward to disclose previously unreported income or financial assets. These include: 

Eligibility 

The Program is generally aimed at taxpayers who are at risk of criminal prosecution for tax evasion or fraud. Taxpayers must not already be under a civil examination or criminal investigation by the IRS, and the IRS must not have already obtained information about their specific non-compliance. 

Disclosure Requirements 

Taxpayers must provide a complete and truthful disclosure of all previously unreported income and financial assets for a specific period, typically the most recent six tax years. 

Cooperation 

Participants must fully cooperate with the IRS to determine their correct tax liability and make a good faith arrangement to pay in full the tax, interest, and any penalties determined by the IRS. 

Penalties 

While taxpayers who use the program can often avoid criminal prosecution, they must agree to pay the amount owed or make arrangements to pay it, as a condition of the program. This includes back taxes, interest, and penalties. However, the penalties may be lower than they would be if the IRS discovered the non-compliance on its own. 

Professional Representation 

Given the complexity and potential legal implications of making a voluntary disclosure, taxpayers can and should seek the guidance of a tax professional or attorney experienced in dealing with such matters. 

Ongoing Compliance 

Participants are expected to remain in compliance with all tax laws and filing requirements after making a voluntary disclosure. 

Procedure 

The process involves submitting initial information to the IRS, followed by a more detailed submission including amended or delinquent returns, and culminates in the negotiation of a closing agreement with the IRS. 

Confidentiality 

Information provided to the IRS through the Voluntary Disclosure Program is generally protected from disclosure under tax privacy laws, but there are exceptions, especially if criminal prosecution becomes relevant. 

The specific terms and conditions of the Voluntary Disclosure Program, including eligibility criteria, required documentation, and the process for making a disclosure, can vary over time and may be updated by the IRS. We strongly advise that taxpayers considering this option seek professional advice to ensure they have the most current information. 

How Tonneson Can Help 

The stakes are high. Tonneson strongly encourages taxpayers who are considering making a voluntary disclosure to get in touch. Our professionals can help you understand the implications of making a disclosure and the process involved, and guide you in making informed decisions about how to proceed. Contact us today.