If you’re like many Americans, you dread tax time — particularly if you owe taxes. Doing your taxes can be challenging, requiring you to comply with a web of arcane rules. If you make a mistake on your taxes, whether intentionally or accidentally, you may be concerned about the possibility of being prosecuted for tax fraud.
In these situations, voluntary disclosure to the Internal Revenue Service (IRS) may be an option for you to resolve your outstanding tax issues. If you meet certain criteria, then you can inform the IRS about a prior violation of tax law (including a failure to report foreign bank accounts). Doing so may protect you from criminal prosecution.
Of course, voluntarily disclosing to the IRS that you may have committed a crime is a tricky thing. Before making a decision about how to handle a violation of U.S. tax law, schedule a consultation with a New Jersey tax attorney to review your options.
What Is a Voluntary Disclosure?
United States tax law is incredibly complex, yet American taxpayers are required to fully comply with these laws. Voluntary compliance is the basis of the U.S. tax system. If you fail to follow tax laws, such as by purposefully underreporting your income to avoid paying taxes (tax evasion), you could be subject to a range of consequences, including imprisonment, fines, and penalties.
If you have violated U.S. tax law, such as by engaging in tax fraud, you may be able to resolve the matter and limit your exposure to criminal prosecution through voluntary disclosure. The IRS’ Criminal Investigation Division (CID) will take a voluntary disclosure into consideration when deciding whether to recommend criminal prosecution to the Department of Justice (DOJ).
A voluntary disclosure involves providing a truthful, timely, and complete disclosure to the CID through a process specified by the IRS. Disclosures are considered timely if they are made before a civil examination or criminal investigation by the IRS has begun, a third party has informed the IRS of your alleged tax fraud, or before the IRS is alerted to potential tax fraud related to an unrelated criminal investigation. As part of a voluntary disclosure, you must agree to cooperate with the IRS in determining your correct tax liability and make a good faith arrangement to pay the tax, interest, and any penalties that you owe, in full.
Voluntary disclosure is an option for people who have committed tax or tax-related crimes, and who may be criminally prosecuted as a result. Participating in voluntary disclosure is a way to avoid criminal prosecution. If your violation of tax law was not willful, then you may choose to pursue other options to resolve your tax issues, such as filing an amended or past due tax returns.
To submit a voluntary disclosure, you must first fill out Part I of IRS Form 14457 and submit it to the IRS. Once the IRS confirms that you have been pre-cleared for a voluntary disclosure, you must then submit Part II of Form 14457. After this is filed, you will be subject to an examination.
The primary benefit of filing a voluntary disclosure is the potential to avoid criminal prosecution. In some cases, tax amnesty may be available through voluntary disclosure. This means that — in exchange for paying a certain amount of back taxes to the IRS — certain tax liabilities, penalties and interest may be forgiven. Making an amnesty disclosure can be complicated, as the rules surrounding amnesty may vary by state and from year to year.
Before making any decision about how to resolve a tax issue, it is important to consult with an experienced New Jersey tax attorney. There are advantages and disadvantages to filing amended returns and to submitting a voluntary disclosure. Given the possibility of steep fines and penalties as well as jail time, you should seek advice from a lawyer.
Foreign Bank Issues
If you have foreign (offshore) bank accounts, certain issues may arise when it comes to reporting this asset. In 2009, the IRS developed the Offshore Voluntary Disclosure Program (OVDP); this program was closed in 2018. Instead, U.S. taxpayers can now use the traditional voluntary disclosure practice for foreign bank accounts.
For taxpayers with offshore accounts, voluntary disclosure can be used if they willfully failed to report foreign assets or to pay taxes on those assets. This includes a failure to file a Report of Foreign Bank and Financial Accounts (FBAR), which is required for United States persons who hold a financial interest in or authority over at least one financial account located outside of the U.S. if the aggregate value of those accounts exceeded $10,000 at any time during the calendar year reported.
When voluntarily disclosing offshore bank accounts after 2018, taxpayers must follow a specific procedure. Importantly, under this program, protection from criminal liability or significant civil penalties is not automatic (as it was under the OVDP). Instead, the IRS has wide discretion to impose penalties based on the taxpayer’s level of cooperation.
The process for voluntary disclosure of offshore accounts is the same as for other types of voluntary disclosure. However, there are some rules that apply to reporting foreign accounts, including a standard 6 year disclosure period and the potential imposition of penalties for a willful failure to file an FBAR. For non-willful conduct by individuals, there is a streamlined compliance procedure that may be used.
As with voluntary disclosure for domestic taxes, you should consult with an experienced New Jersey tax attorney before making a voluntary disclosure about foreign assets, including issues related to delinquent FBARs. While tax amnesty may be possible, there are many issues that should be taken into account when making a decision to voluntarily disclose a violation of offshore bank account reporting laws.
Considering a Voluntary Disclosure? Reach Out Today.
If you believe that you have committed a violation of U.S. tax law, willfully or inadvertently, there are steps that you can take to minimize the likelihood of being criminally prosecuted for the offense. Voluntary disclosure may be a good option for you, depending on your specific situation. At Paladini Law, we can evaluate your case and offer you advice on how to proceed.
Attorney Brad Paladini has dedicated his legal practice to helping clients throughout New Jersey with their state and federal tax matters. His goal is to resolve tax issues efficiently and in a way that protects his clients’ interests. To learn more or to schedule a phone, Skype or in-person consultation at our Morristown or Bergen County offices, contact us at 201-381-4472 or reach out online.
