What are the IRS revisions to the Voluntary Disclosure Program for 2024? The foundation of the current IRS Voluntary Disclosure Program (VDP) goes as far back as 2009 when the agency worked to provide U.S. taxpayers with a way to come into compliance with unreported or under-reported offshore income and assets. The “Offshore Voluntary Disclosure Program” was subsequently updated in 2011 and 2014 and ultimately retired in late 2018, leaving the existing VDP.
It is not possible for any taxpayer who is under investigation or audit by the IRS to apply for the Voluntary Disclosure Program. However, for those the agency has not yet identified, there may be an opportunity to finally come into compliance and disclose previous errors and omissions, as well as hidden or under-reported assets and income at home and abroad.
There have been several recent IRS revisions to the Voluntary Disclosure Program for 2024. The agency released many modifications this summer (2024) without publication or attention that substantially changed the nature of the VDP.
Most U.S. taxpayers who elect to participate in the VDP must complete “Part I” of the “Voluntary Disclosure Practice Preclearance Request and Application,” IRS Form 14457. Part I of Form 14457 is a preliminary disclosure of the taxpayer’s identification, the type of disclosure requested, as well as information about the financial accounts and any entities associated with past noncompliance the taxpayer wishes to address. The taxpayer would also be required to provide the IRS with specific information (the “narrative”) about their noncompliance. The IRS reviews this application, and if accepted, the taxpayer receives “preclearance” to proceed with Part II of Form 14457.
It is important to note that the agency may have already discovered the noncompliance through recent improvements in technology and the implementation of artificial intelligence (AI) to scan troves of information that has flowed into the agency in recent years. If so, the request for preclearance will be found to be “untimely,” which tells the U.S. taxpayer to prepare for additional investigation and, in most cases, an audit.
In more precise terms, the taxpayer will know where they stand with the IRS after the preclearance request is accepted or found to be untimely. Many U.S. taxpayers are not aware of the insight the IRS already has into their activities. While a denial of the request to enter the VDP is not welcome news, it does provide the taxpayer with an opportunity to consult with a tax attorney and prepare for deeper interactions with the IRS.
Preclearance requires the taxpayer to continue to Part II of Form 14457. Part II generally represents a disclosure of the noncompliance, estimates of the undisclosed or under-reported income and assets, and resulting taxes, fines, penalties, and interest. This submission is reviewed by the IRS Criminal Investigation Unit (known as the IRS-CI). If the submissions in Part II are met with a “preliminary acceptance” to the VDP by the IRS-CI, your case will be assigned to an auditor.
The final step for the taxpayer in this process is to provide the original returns as well as amended returns and FBARs to the auditor. If the auditor accepts the amended returns, the parties enter into a “closing agreement,” and the taxpayer must pay any back taxes and interest, as well as a “fraud penalty,” which can represent up to 75% of the highest amount of tax due for the year(s) associated with the VDP. The closing agreement releases the taxpayer from further exposure to civil and criminal penalties that otherwise might have applied to their case. If the taxpayer was unable to pay the full amount due, it used to be possible to request an installment payment program.
There are many IRS revisions to the Voluntary Disclosure Program for 2024 that change the nature of this process.
Previously, the submission of Parts I and II of the IRS Form 14457 were required to be submitted to the IRS by fax or through the U.S. mail. The recent changes now allow this information to be submitted through email. If this election is taken, the taxpayer and their tax attorney (or other representative) will provide their email address(es) to the agency.
The recent changes also updated Form 14457 to expand the “narrative” to include all parties, Foreign Financial Institutions (FFIs), banks, investment houses, or other financial institutions associated with unreported or under-reported income and assets. The taxpayer must also disclose interactions with any “advisors” and the advice they received from these professionals, details regarding the taxpayer’s actions surrounding noncompliance, and any additional “pertinent facts.”
The new IRS Form 14457 now includes a “willful conduct” check box, where the taxpayer must affirm they acted in a willful manner. The failure to check this box results in an immediate rejection of the VDP application and exclusion from any “appeal or reinstatement” to the program in the future.
In addition, once preliminary acceptance is granted, there is an additional check box in Part II that requires the U.S. taxpayer(s) to affirm they have “prepared and will hold all required documents to provide to the examiner upon initial contact, including but not limited to, delinquent and/or amended returns, bank statements, and financial statements.” This is a substantial departure from the previous process, where the U.S. taxpayer would await contact by the auditor before taking further steps.
Instead, this Part II checkbox goes on to require requesting taxpayer(s) to “have their documents prepared, packaged and ready to provide to the examiner at initial contact.”
In addition, the updated IRS Form 14457 has been updated to refer to virtual currency, cryptocurrency or Non-Fungible Tokens (NFTs) as “digital assets.” The taxpayer will be required to answer questions regarding the digital assets they hold anywhere in the world, information regarding the associated acquisitions and transactions, and detailed information regarding the associated exchanges or institutions.
These IRS revisions to the Voluntary Disclosure Program for 2024 change the nature of the process and the steps a U.S. taxpayer must take in order to participate in the program. It is more important than ever for those U.S. taxpayers with unreported or under-reported domestic or international income and assets to seek the advice and counsel of our tax attorney, Janathan Allen. As a tax attorney, Ms. Allen is able to provide specific protections under the “attorney-client privilege” that are unavailable through a CPA or other tax advisor.
This privilege will not extend to criminal activity but protects both written and verbal communications between you and your tax attorney (email, phone conversations, mail correspondence, texts) from disclosure to outside parties (including the IRS) so that you can have an open, comprehensive and candid discussion about noncompliance with Ms. Allen, and receive accurate, expert advice on available options.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.