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Benefits of making a voluntary disclosure to the IRS

On Behalf of | Nov 22, 2022 | Audits, Tax Mistakes |

President Joseph Biden recently signed the Inflation Reduction Act into law, which, along with many other changes, led to an influx of funding for the Internal Revenue Service (IRS). Treasury Secretary Janet Yellen states that the agency is set to get almost $80 billion over the next six months to help increase enforcement efforts, particularly for high net-worth individuals and large corporations. This will include use of funds to update the agency’s technology systems and hire more agents.

The change may serve as a catalyst for taxpayers to review their filings and double check for compliance. Those who are concerned or believe that their filings are not in compliance have options.

One is the voluntary disclosure program.

What is voluntary disclosure?

Voluntary disclosure is a process where a taxpayer makes complete disclosure of their tax failed tax obligations to the IRS. This can happen quietly or noisily depending upon the nature of the disclosure. In some cases the disclosure starts directly with a contact to IRS Criminal Investigation (CI) and makes good faith arrangements to pay, in full, their outstanding tax bill as well as interest and any applicable penalties.

What are some key benefits to participation in the voluntary disclosure program for foreign income?

There are benefits to a voluntary disclosure, particularly for those who owe hundreds of thousands in tax debt. This allows the taxpayer to get ahead of an eventual audit and leads to more control over the process. Additional benefits can include:

  • Repatriation of funds. Voluntary disclosure provides the time to repatriate money to the U.S. Doing so without a disclosure can draw the attention of the IRS and trigger official action on the tax debt.
  • Reduce the risk of liquidity issues. Repatriation of funds can help to reduce the risk of issues connected to covering the cost of large expenses, like tuition or real estate, while settling tax obligations with the IRS.
  • Ease stress. There is a certain amount of stress that comes with the knowledge that the IRS could conduct a crippling audit at any moment. Taking control of the matter can reduce this stress and help the applicant to sleep well at night.

This stress is well-founded as the threat of financial penalties as well as potential imprisonment are serious. It is important to note that the CI generally only reviews timely disclosures. The agency defines timely as those that are submitted prior to any civil examination, criminal investigation, or an alert of noncompliance from a third party or a criminal enforcement action.

Those who are considering participation in the voluntary disclosure program often have additional questions, like how much is enough — is complete disclosure necessary? We dove into this question in more detail in a previous post, available here.