Integrating the U.S. tax system through Voluntary Disclosure


How can the American citizen who has not been filing with the IRS correct the situation? Fortunately, the IRS has a program called Voluntary Disclosure which facilitates integration into the U.S. tax system. Caplin & Drysdale, Attorneys, held a conference in Switzerland on November 26, 2008, entitled “Declaring Swiss Bank Accounts: A U.S. Perspective”. H. David Rosenbloom & Scott D. Michel of Caplin & Drysdal note the following about the Voluntary Disclosure Policy in documentation distributed at the conference."

• Because the IRS has limited investigative resources and cannot hope to detect and pursue more than a small percentage of non-filers or tax evaders, it is obviously in the government’s interest to encourage taxpayers who owe additional tax to file amended and delinquent returns.
• Recognizing that fact, and the fact that a true voluntary disclosure makes conviction unlikely, the IRS for many years has followed a policy under which voluntary disclosure is, technically, deemed a factor to be considered in the decision whether to initiate a criminal investigation or recommend prosecution. The IRS takes great pains to argue that the policy does not provide an “amnesty.” However, as a practical matter and in our many years of experience in dealing with cases involving undeclared accounts, it is inconceivable that the IRS would recommend criminal prosecution as to a voluntary disclosure that meets all elements of the policy.
• The current version of the IRS policy is found in the Tax Crimes section of the International Revenue Manual.
• The IRS Manual makes it clear that the voluntary disclosure “policy” provides no legal or formal guarantee. It states: “It is currently the practice that a voluntary disclosure will be considered with all the other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice. A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”
• There are two approaches to voluntary disclosures – quiet disclosures and noisy disclosures. The traditional procedure for making a voluntary disclosure is the “quiet disclosure” – to mail the delinquent return with payment for tax and interest. According to Rosenbloom and Michel, such returns are rarely selected for audit and civil penalties may be avoided altogether. “Noisy disclosures”, on the other hand, involve contacting the Criminal Investigation Division in the appropriate district to see if the person is eligible for a voluntary disclosure, i.e. not under investigation by the IRS. However, this procedure raises flags at the IRS. A revenue agent may be assigned to examine the returns and there is a heightened risk of civil penalties.
  
  The Voluntary Disclosure program does allow people to integrate fairly smoothly into the U.S. tax system. If you want to take part, you should consult your tax advisor or a tax preparer for specific counsel. It may be sufficient to file prior year returns along with a letter of explanation, with your current year return or as a separate mailing before the current year return is due. Depending on your situation, the number of prior years to file may be up to 6 years; it may be less. You must also have a U.S. Social Security number for your tax returns to be accepted by the IRS. If you don’t have a U.S. Social Security number, you need to apply for one through the American consulate or from the Social Security office, and beware that it may take up to 6 months to receive it.This brief article highlights the growing danger for Americans overseas of not filing with the IRS and provides basic information concerning the IRS Voluntary Disclosure policy allowing non-filers to integrate into the system. ACA is in no way whatsoever qualified to provide specific professional tax advice or counsel. Any person interested in pursuing the Voluntary Disclosure policy should contact a professional for advice and for assistance in preparing the tax returns – the current one as well as those for prior years.