In February, the Internal Revenue Service announced it would extend its popular (and lucrative to the government) voluntary disclosure initiative program to help taxpayers with undisclosed income in foreign banks or hidden offshore accounts to resolve the issue with the IRS.
“As I’ve said all along, the goal is to get people back into the U.S. tax system,” IRS Commissioner Doug Shulman explained when the program that began in 2008 was extended.
“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled.”
The extension gave taxpayers until Aug. 31 to enter the voluntary disclosure program, but the IRS extended it by 90 days last week. The IRS also expanded the information available to those interested in the program on its website, www.irs.gov. The IRS provides scenarios on the site for those wondering if they should be in the program.
“We’re all consulting the IRS website and the Q&A,” said Thomas P. Chiavetta, CPA and tax director in the Rochester office of Freed Maxick & Battaglia PC. “Even simple [offshore account disclosures] are complex and take some analysis, but the website Q&A is a good place to start.
“One thing I’ve been impressed with is they’ve tried to get information to the public,” he said.
An important component of the extended program is the fact that taxpayers can now opt out of the voluntary disclosure program and elect to have their case audited instead. Under that scenario, taxpayers can roll the dice and possibly avoid high IRS penalties.
“We’ve had several cases where the penalty has been substantially less by opting out of the program,” Chiavetta said. “But we can’t guarantee you you’ll get more favorable results. Everybody is looking at this program in a much different light than the previous program.”
Scenarios range from simply failing to file a foreign bank and financial account report, or FBAR, on an account disclosed to the IRS, to the more complicated scenarios of not reporting the account or the income. Even those with signatory authority in a foreign account have to file a FBAR and could benefit from the IRS’ voluntary disclosure program.
But even in the simplest situation, it’s highly recommended that taxpayers in a non-compliance situation have a tax attorney guide them through the process.
“It’s a difficult process and those who are thinking about it are going to want a tax attorney,” said Edward F. Adams, CPA with Mengel, Metzger, Barr & Co. LLP.
“They just released a 90-day extension but you have to be entered into the program by Aug. 31,” he said. “It’s attracting a lot of attention. They’ve already collected hundreds of millions of dollars so they had plenty of incentive to extend this.”
New York state also has a voluntary disclosure program that carries no penalties if the taxpayer can successfully prove among other things, a non-willful failure to file or reasonable cause for not filing such as reliance on an attorney’s advice. Those criteria may also result in reduced penalties for those who opt out of the federal disclosure program and elect the audit.
Chiavetta said that while the IRS was overwhelmed when it first started the program back in 2008 and took up to a year to handle cases, there are more agents to handle the volume now.
“They’ve beefed up enforcement and the agents assigned to voluntary compliance cases are doing a fairly thorough job of identifying the issues and not blindly accepting a tax return that includes unreported interest,” he said.