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IRS Issues Updated FAQs on the Voluntary Disclosure Practice (VDP)

April 9, 2024


The Voluntary Disclosure Practice (VDP) provides an avenue for high-income and high-net-worth taxpayers to resolve significant federal tax controversies without facing criminal prosecution. Administered by IRS Criminal Investigation (IRS CI), the VDP is a long-standing program that allows eligible taxpayers to mitigate their exposure and settle with the IRS—provided that they come forward before the IRS initiates an audit or IRS CI launches an investigation. However, submitting a voluntary disclosure also entails risk, so it is imperative that taxpayers who are thinking about utilizing the VDP consult with an experienced Texas IRS dispute lawyer before making any decisions.

The VDP is subject to strict rules and requirements, and taxpayers who fail to comply with these rules and requirements can lose the benefits of coming forward voluntarily. To assist taxpayers with VDP compliance, the IRS recently issued a set of updated FAQs on the VDP. Here, Texas IRS dispute lawyer Lawrence Brown summarizes what high-income and high-net-worth taxpayers need to know about voluntarily disclosing tax evasion, tax fraud or other federal tax law violations to IRS CI:

How Do I Know if I Was Willful in Not Complying with the Tax Laws?

One of the IRS’s first updated VDP FAQs focuses on the issue of willfulness. To qualify for participation in the VDP, a taxpayer must be prepared to disclose a “willful” violation of the Internal Revenue Code (IRC), Bank Secrecy Act (BSA), Foreign Account Tax Compliance Act (FATCA) or other federal law. As the IRS explains:

“Willfulness is not simply making a mistake. It is the intentional, purposeful, deliberate act to hide income or assets and therefore evade filing requirements or payment of tax.”

As the IRS goes on to explain, if you inadvertently violated the law, “[t]his program is not for you.” However, it will still almost certainly be in your best interests to resolve the issue before facing scrutiny from the IRS. In this scenario, there are other options available, and you will need to consult with legal counsel to choose the best option in light of the specific issue (or issues) involved and the other circumstances at hand.

What if I Don’t Have All Required Documents?

Submitting a voluntary disclosure under the VDP is a multi-step process. The first step is to complete Part I of IRS Form 14457 to request preclearance to participate in the program. When submitting Part I, taxpayers must “[h]ave ready all required documentation as outlined in the Form 14457 instructions;” and, the IRS’s updated VDP FAQs state:

“If you don’t have all required documents for the VDP, please do not apply for Part I. Not having all required documents will delay your application and may result in your removal from the program. . . .”

What documentation is required when making a VDP submission? The short answer is, “It depends.” Generally speaking, taxpayers seeking to utilize the VDP must collect documents such as account statements, corporate records, and other documents that support their statements on IRS Form 14457. However, the specific records that are required ultimately depend on the specific circumstances surrounding a taxpayer’s voluntary disclosure.

I Asked for an Extension But Still Don’t Have All the Documents Required. What Do I Do?

Since the “voluntary” aspect of the VDP requires disclosure before the IRS initiates an audit or IRS CI launches an investigation, timing is a critical factor for taxpayers considering a voluntary disclosure. Recognizing that this is the case—and recognizing that collecting all required documentation may take time—the IRS allows taxpayers to request an extension for collecting all required documentation during the initial stages of the process.

The IRS’s updated VDP FAQs make clear that this is a one-time extension: “Only one extension is granted. You should voluntarily withdraw from the program if you cannot meet the extended due date for your application.” Since making a voluntary submission does not guarantee immunity from prosecution, and since IRS CI can use taxpayers’ voluntary submissions to pursue investigations (and charges), it is imperative that high-income and high-net-worth taxpayers work with experienced counsel to ensure that they will not need to withdraw from the VDP due to insufficient documentation.

If I’m Filing an Application for an Estate, Do I Qualify for the VDP?

In some cases, family members and other personal representatives will uncover evidence of willful tax law violations during the estate administration process. When this happens, those involved must make informed decisions about how best to proceed.

Does this mean submitting a voluntary disclosure under the VDP? Here, too, it depends. In its updated VDP FAQs, the IRS advises: “You may submit an application and [IRS CI] will determine the estate’s eligibility for the program.” However, this approach can be risky, and we strongly advise consulting with an experienced Texas IRS dispute lawyer before voluntarily submitting any information to IRS CI.

If I Forgot About an Offshore Account on One of My Returns, Can I Enter Into the VDP?

Offshore account disclosure violations are among the most common issues leading to participation in the VDP for high-income and high-net-worth taxpayers. However, if you simply forgot about one of your offshore accounts when preparing an FBAR or filing IRS Form 8938, then you do not qualify to participate in the VDP (because your violation was not willful). While the IRS’s updated VDP FAQs suggest that “filing an amended return may be your best option,” in this scenario, the best approach may actually be to use the IRS’s Streamlined Filing Compliance Procedures. Once again, an experienced Texas IRS dispute lawyer can help you decide how best to move forward.

Request a Confidential Consultation with Texas IRS Dispute Lawyer Lawrence Brown

If you would like to know more about IRS CI’s Voluntary Disclosure Practice or the alternatives to voluntary disclosure, we encourage you to get in touch. We represent high-income and high-net-worth taxpayers nationwide. To request a confidential consultation with Texas IRS dispute lawyer Lawrence Brown, please call 888-870-0025 or contact us online today.