How has the IRS changed the voluntary disclosure program?

Massachusetts residents who have financial assets in countries outside the United States that have not been disclosed to the IRS may be able to participate in the new form of voluntary disclosure program to avoid some penalties.

It is reasonable for people who live in Massachusetts to make careful choices about how and where to invest their money. Among the many factors to be taken into consideration is the tax implication of a given investment. In some cases, people may hold assets or accounts in countries other than the United States and find this approach to benefit them from a tax perspective.

The use of offshore accounts may be tricky, however. Assets may still be required to be reported to the Internal Revenue Service.

The previous disclosure program

In 2009, the IRS launched what it called the Offshore Voluntary Disclosure Program as a means to encourage taxpayers with undisclosed assets to come forward with their assets. According to CNBC, at least 56,000 people participated in the program through 2018 when it was shut down. Over that time, more than $11 billion in back taxes, penalties and interest was paid to the IRS.

The new streamlined program

While the IRS no longer offers the OVDP, it does allow some people to utilize its streamlined filing compliance procedures. Not every taxpayer with undisclosed assets may benefit from this program. For example, if a person's lack of disclosure was not willful, they may want to consider filing amended tax returns instead of participating in the new disclosure program. Also, any taxpayer with undisclosed assets received via any illegal means would not be eligible for the program.

A person who is accepted into the streamlined disclosure program should not assume they will be automatically free from any type of criminal or civil prosecution, although that may be possible.

As explained by Forbes, the new program starts with requesting a preclearance to participate. This step confirms or denies a person's eligibility for the program but does not automatically accept them. If preclearance is granted, a second step is required prior to acceptance.

Once enrolled in the program, an IRS field agent manages and investigates the case. With the old disclosure program, the penalties and parameters for assessing penalties were relatively standardized. That is not the case with the new procedure. Field agents have a greater level of discretion when it comes to assessing any penalties on taxpayers. This results in less certainty of an outcome for participants.

Another difference between the two programs is that the new process requires the submission of only six, instead of eight, years' worth of information. In addition, it is possible that penalties may apply to only one of those six years instead of all six.

Legal consultation is important

Before choosing how to best disclose any previously undisclosed assets to the Internal Revenue Service, a person should consult with an attorney who is experienced in these matters. The tax laws change frequently and it is imperative to have the most current and accurate information possible with which to make any choices.