IRS' Proposed Voluntary Disclosure Rule Could Be Dissuasive

Tax attorney Andrea Darling de Cortes was featured in a Law360 article about the IRS' proposed updates to its Voluntary Disclosure Practice (VDP), most notably the elimination of the 75 percent civil fraud penalty and introduction of a 90-day deadline to comply with payment and filing requirements. Under the current VDP, delinquent taxpayers face a 75 percent civil fraud penalty along with a penalty for Foreign Bank and Financial Accounts (FBAR) violations. Practitioners have asked the IRS for clarity on the FBAR penalty, noting the current framework deters participation.

"The proposed revisions suggest that the IRS recognizes this problem and is attempting to recalibrate the program to encourage participation," Ms. Darling de Cortes said. "In my opinion, without a meaningful reduction in FBAR exposure, many taxpayers are unlikely to view the VDP as offering sufficient benefit to justify participation."

She also commented on the proposed three-month payment and filing period, which starts tolling when the IRS issues a conditional approval for VDP participation. Some professionals have raised concerns about the feasibility of this window, given the potentially lengthy process of gathering the necessary information to file amended or delinquent income tax returns as well as the possibility that some taxpayers may lack funds to make full payment including penalties. On the other hand, Ms. Darling de Cortes told Law360 taxpayers who engage legal counsel begin remediation and document-gathering long before the IRS conditionally approves, making the timeline more manageable.

"Assuming the three-month clock does not start until the conditional approval letter is issued, by the time the deadline applies, much of the return preparation may already be complete," she commented. "If the penalties are meaningfully reduced, taxpayers would be better able to make full or substantial payment within the required time frame."

READ: IRS' Proposed Voluntary Disclosure Rule Could Be Dissuasive

Ms. Darling de Cortes also published a Holland & Knight alert on this topic.