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Voluntary Disclosure Program After the Deadline. What is Next? Can You Still Disclose?

Igor S. Drabkin, J.D., Former IRS Attorney

Igor S. Drabkin, J.D., Former IRS Attorney

IRS Calls Offshore Voluntary Disclosure Program a Success.  What if You Did Not Participate in the Program?

Last week, IRS Commissioner Douglas Shulman announced that about 14,700 taxpayers participated in the agency’s voluntary disclosure program revealing undisclosed accounts and assets in more than 70 countries. Under the IRS amnesty program initiated in March of 2009, taxpayers with hidden foreign financial accounts had until October 15, 2009 to come forward.  As the incentive for coming forward, the taxpayers avoided criminal prosecution and faced reduced penalties.

According to Shulman, participation in the IRS’s amnesty program was “unprecedented” and the final number was nearly double the agency’s estimate in October.  The Commissioner promised to closely monitor the voluntary disclosures in order to learn more about advisors and institutions that facilitated evasion.  Shulman also emphasized that the Service’s investigation into global tax evasion is not limited to UBS or Switzerland.  The Commissioner stated that the IRS will be looking at other foreign banks with a large number of U.S. clients.  The IRS is still in the early stages of a multiyear-effort to put a “serious dent in offshore tax evasion,” Shulman added.

Taxpayers who made a disclosure under the IRS offshore amnesty program, which expired on October 15th, continue to work their way through the program, clearing the IRS Criminal Investigations unit, and moving towards the determination of their tax liabilities and penalties with the IRS civil examination function.  But what should be done by those who did not come forward before the October 15th deadline?

In light of the IRS Commissioner’s statements, Service’s overall aggressive position on offshore accounts, and overall tax climate, it is likely that the IRS will continue its enforcement in this area.  Those taxpayers who missed the October 15th deadline, but still want to protect themselves from potential criminal prosecution, still can use IRS Voluntary Disclosure Practice.  Internal Revenue Manual 9.5.11.9 states that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  Although a voluntary disclosure will not automatically guarantee immunity from prosecution, however, as a matter of practice, a voluntary disclosure may result in prosecution not being recommended.

A taxpayer who wants to make a disclosure, must do so before the IRS initiates its own audit or investigation, or obtains information about the taxpayer’s non-compliance.  A voluntary disclosure occurs when it is truthful, timely, complete, and when the taxpayer cooperates with the IRS in determining his or her correct tax liability; and the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. We note that voluntary disclosure practice does not apply to taxpayers with illegal source income.  A disclosure is usually initiated by a taxpayer or taxpayer’s representative contacting the IRS Criminal Investigations unit.

Even if you missed the October 15th deadline for the IRS offshore amnesty program, making a disclosure now may still achieve the same major goal – prevent criminal prosecution.  Although making a disclosure through the general voluntary disclosure practice outlined in IRM 9.5.11.9 does not provide the same guarantees on the civil penalties, it is still possible to negotiate the penalties with the IRS examiners based on the applicable facts and argue what penalties are applicable to a specific situation.

If you have questions about the voluntary disclosure practice or foreign bank accounts, please contact us at (310) 550-6200.  Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

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