Voluntary disclosure means intentionally acknowledging that you broke the rules. In the financial world, voluntary disclosure often refers to an Internal Revenue Service (IRS) program aimed at those with valuable foreign assets.
Essentially, the IRS has asked those who have failed to disclose international assets to admit to their previous misconduct in return for more lenient treatment. For decades, international assets and foreign bank accounts provided an opportunity for wealthy individuals to minimize their personal tax liabilities. However, financial transparency rules have changed how well international assets serve as a tool to avoid tax liability.
Why would anyone want to tell the IRS that they intentionally avoided their tax obligations?
Voluntary disclosure can result in less disciplinary action
With more international financial transparency comes greater risk that eventually the IRS will find out about an asset or account that you have failed to report and pay tax on in previous years. The greater the value of the asset and the more time that has passed, the more you will likely end up paying in taxes and penalties if you get caught.
When someone makes a voluntary disclosure of previous financial misconduct, they demonstrate a willingness to work with the IRS and take responsibility for their actions. In turn, the IRS becomes more open to compromise and avoiding actual criminal prosecution for the situation.
Especially if you do not have the resources to pay immediately for the taxes you have previously avoided, voluntary disclosure could be the difference between facing jail time and simply owing a debt.
A careful approach is necessary for voluntary disclosure to work
The risk is always there for someone to make a mistake while communicating with the IRS about a tax issue that hurts their legal situation. Especially in a complex matter, like offshore assets causing tax controversies, individuals may require professional guidance to make the right decisions. They may also want to defer to a trusted professional to manage their communication with the Internal Revenue Service so that they don’t make a statement that hurts their case or implicates them in another matter.
Making a voluntary disclosure about foreign assets to the IRS could protect you, but it requires a careful and well-planned approach.