VDP vs. Streamlined Filing Compliance: What U.S. Taxpayers with Offshore Assets Need to Know

The IRS’s Voluntary Disclosure Practice (VDP) and its Streamlined Filing Compliance Procedures both provide ways for high-income and high-net-worth taxpayers to proactively resolve issues related to the disclosure (or non-disclosure) of their offshore assets. But, the VPD and Streamlined Filing Compliance Procedures are very different—each being subject to its own set of eligibility criteria and each presenting its own unique set of risks and benefits. So, if you need to resolve an offshore disclosure violation, which option should you choose? Here are some insights from Texas tax controversy lawyer Lawrence Brown:

When Using the IRS’ VDP or Streamlined Filing Compliance Procedures May Be Necessary

First, we need to talk about when using the IRS’ VDP or Streamlined Filing Compliance procedures may be necessary. Under the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers are required to disclose their offshore accounts and other offshore assets to the federal government annually. While there are various exceptions, high-income and high-net-worth taxpayers with offshore assets will generally need to make annual BSA and FATCA disclosures, and if a single covered offshore asset exceeds the value threshold for disclosure, then disclosure of all covered offshore assets is required.

Complying with the BSA involves filing a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN) while complying with FATCA involves filing Form 8938 with the IRS. However, the IRS is responsible for enforcing both the BSA and FATCA, so issues related to both FBAR and Form 8938 filings can trigger IRS audits or criminal tax fraud investigations.

For taxpayers who are at risk of facing an audit or investigation related to BSA or FATCA compliance (or both), submitting a voluntary disclosure provides an opportunity to secure a resolution that avoids IRS scrutiny. But, in order to take advantage of the VDP or the Streamlined Filing Compliance Procedures, taxpayers must take action before their BSA or FATCA violations trigger an audit or investigation.

Key Differences Between the VDP and Streamlined Filing Compliance Procedures

While the VDP and Streamlined Filing Compliance Procedures both provide ways for high-income and high-net-worth taxpayers to proactively resolve offshore disclosure violations, there are several key differences between these programs. As a result, taxpayers must carefully choose which program to pursue, and those contemplating a voluntary disclosure should consult with an experienced Texas tax controversy lawyer promptly.

Here is a look at some of the key differences between the VDP and the Streamlined Filing Compliance Procedures:

IRS vs. IRS CI

Using the Streamlined Filing Compliance Procedures involves submitting an amended return to the IRS (if you need to file a delinquent FBAR, you will file this with FinCEN as well). Revenue agents at the IRS will review your amended return, and they will determine if your amended filing is sufficiently compliant. When you submit your amended return, you must also file IRS Form 14654 to certify that your violation was non-willful, and you must pay all applicable taxes and penalties to the IRS. If you meet these requirements, then submitting a streamlined filing should protect you against facing an audit related to your offshore disclosure violation.

When you submit a voluntary disclosure under the VDP, you make your submission to IRS Criminal Investigation (IRS CI). As its name suggests, IRS CI is responsible for investigating criminal tax law violations. Criminal violations present serious risks (including the risk of both substantial fines and federal prison time). As a result, submitting a voluntary disclosure to IRS CI is not a matter to be taken lightly, and taxpayers should consult with an experienced Texas tax controversy lawyer before initiating the VDP process.

Non-Willful vs. Willful

The Streamlined Filing Compliance Procedures provide an opportunity for high-income and high-net-worth taxpayers to resolve non-willful offshore disclosure violations. This means that you can submit a streamlined filing if you weren’t aware of your obligation to file an FBAR or Form 8938, or if you inadvertently omitted an offshore account or other offshore asset from an annual disclosure.

In contrast, the VDP is available to taxpayers that need to disclose willful violations of the BSA or FATCA. Willfulness is the differentiating factor between civil and criminal culpability. If you willfully failed to file an FBAR or Form 8938, or if you willfully omitted information from one of your offshore disclosure filings, promptly submitting a voluntary disclosure under the VDP could be critical for avoiding unnecessary consequences.

Form 1040X vs. Form 14457

The procedures for submitting a streamlined filing and making a voluntary disclosure under the VDP differ as well. Submitting a streamlined filing generally involves filing Form 1040X (Amended U.S. Individual Income Tax Return) along with Form 8938 and any other requisite forms or documentation. Submitting a voluntary disclosure under the VDP starts with completing Part I of Form 14457—and then completing Part II once IRS CI provides “preclearance” to participate in the program.

When Should You Disclose an Offshore Disclosure Violation to the IRS (or IRS CI)?

With all of this in mind, when should high-income and high-net-worth taxpayers consider submitting a streamlined filing or voluntary disclosure under the VDP? It may be in your best interests to pursue one of these options if:

• You failed to properly disclose your offshore assets on an FBAR or IRS Form 8938,
• You are not currently facing an IRS audit or IRS CI investigation and,
• Submitting a delinquent FBAR or amended return is not your best option.

An experienced Texas tax controversy lawyer can help you decide what to do; and, if you have concerns about offshore disclosure compliance, speaking with a lawyer should be your next step.

Request an Appointment with Texas Tax Controversy Lawyer Lawrence Brown

Texas tax controversy lawyer Lawrence Brown has extensive experience representing high-income and high-net-worth taxpayers in offshore disclosure matters. If you have questions about submitting a streamlined filing or a voluntary disclosure under the VDP, you can call 888-870-0025 or contact us online to request a confidential initial consultation.