The Internal Revenue Service’s Voluntary Disclosure Practice (“VDP”) is a truly draconian voluntary disclosure procedure. Under it, the taxpayer must—
- Make a preclearance submission under which the IRS will examine its files and determine whether it has received any notice of the taxpayer’s noncompliance. If the IRS has received notice, it will disqualify the taxpayer from the VDP.
- File six years of FinCEN Forms 114, Report of Foreign Bank and Financial Accounts (“FBARs”)
- File six years of U.S. income tax returns of amended income tax returns
- Incur income tax on the six years on income tax returns or amended income tax returns, and interest on the tax
- Incur a fraud penalty equal to 75 percent of the tax due for the year of the preceding six with the highest balance of tax due.
- Pay or arrange to pay the tax, interest, and penalty due.
Fortunately, the VDP is rarely appropriate. The VDP applies only where the taxpayer’s noncompliance has been willful, i.e., where the taxpayer knew and understood the law, and deliberately failed to follow it. In our experience, very few taxpayers are willful. Most taxpayers do not understand their reporting obligations under the law concerning foreign income, accounts, trusts, and entities, and, therefore, fail to perform those obligations.
The government has a very heavy burden in proving willfulness. We would never concede that our client was willful.
A taxpayer whose noncompliance was non-willful should become compliant by means of the Internal Revenue Service’s Delinquent FBAR Filing Procedure, its Delinquent International Information Return Procedure, or its Streamlined Procedures, for residents or nonresidents of the United States.