The IRS Voluntary Disclosure Practice: A Pathway for Willful Offshore Noncompliance

Overview

U.S. taxpayers with undisclosed offshore accounts or assets who acted willfully face the most severe IRS penalties—including the risk of criminal prosecution. The IRS Voluntary Disclosure Practice (VDP) offers a formal process for such taxpayers to come forward, resolve their tax liabilities, and potentially avoid criminal charges. This article explains the key features, eligibility requirements, procedures, and important considerations of the VDP.

What Is the IRS Voluntary Disclosure Practice?

The VDP is designed for taxpayers who have willfully failed to comply with tax or tax-related filing obligations, including the reporting of offshore accounts and assets. Unlike programs for non-willful noncompliance, the VDP is intended for those who face potential criminal exposure due to their actions. While the program does not guarantee immunity from prosecution, a timely, truthful, and complete disclosure may result in the IRS not recommending prosecution.

Eligibility Requirements

  • The taxpayer must have committed willful violations of tax law and have criminal exposure as a result.

  • The disclosure must be timely—made before the IRS initiates a civil examination or criminal investigation, receives information from a third party, or otherwise discovers the noncompliance.

  • The taxpayer must admit willfulness as part of the application process.

  • The VDP is only available for noncompliance involving legal source income; it is not available for income illegal under federal law.

Key Features

  • No Amnesty: The VDP is not an amnesty program. It does not guarantee immunity from prosecution, but a proper disclosure may result in prosecution not being recommended.

  • Full Cooperation Required: Taxpayers must provide all required returns, information, and documentation, and make good faith arrangements to pay all tax, interest, and penalties.

  • Higher Penalties: Participants are subject to civil fraud penalties (typically 75% of the highest tax year’s underpayment), FBAR penalties, and other applicable penalties. These are generally higher than those under non-willful programs.

  • Legal Source Income Only: The program is not available for taxpayers with income from illegal sources.

Procedures: How the VDP Works

1. Preclearance Request:

The process begins with submitting Part I of Form 14457 (Preclearance Request) to IRS Criminal Investigation (CI). This step provides basic identifying information and confirms eligibility.

2. Voluntary Disclosure Application:

If preclearance is granted, the taxpayer must submit Part II of Form 14457 within 45 days (one 45-day extension may be requested). This includes a detailed narrative of the noncompliance, all required returns, and supporting documentation.

3. Review and Civil Processing:

CI reviews the application and, if preliminarily accepted, forwards it to the IRS civil division for examination and determination of tax, penalties, and interest.

4. Cooperation and Payment:

The taxpayer must fully cooperate during the examination and make arrangements to pay all determined liabilities.

Important Considerations

  • The VDP is not available to taxpayers who have already been contacted by the IRS regarding the noncompliance or whose noncompliance is already known to the IRS.

  • The VDP is distinct from the Streamlined Filing Compliance Procedures, which are intended for non-willful violations and have different requirements and penalty structures.

  • Participation in the VDP does not guarantee a specific outcome, but it is often the only way for willful violators to avoid criminal prosecution and resolve their tax liabilities.

Conclusion

The IRS Voluntary Disclosure Practice is a critical option for taxpayers with willful offshore noncompliance and potential criminal exposure. While the process is rigorous and the penalties are significant, it offers a structured path to compliance and the possibility of avoiding criminal prosecution. Taxpayers considering this program should act promptly, as eligibility depends on making a timely disclosure before the IRS discovers the noncompliance.

For more details on how to apply these mechanisms to your situation, check the IRS guidelines or click Contact to schedule a call with one our tax specialists.