Voluntary Disclosure Practice
Taxpayers that are seriously non-compliant may feel like they can do nothing but wait and see whether the federal government pulls their proverbial file. However, this fatalistic thinking is counter productive and fails to consider one important avenue for getting right with Uncle Sam: Voluntary Disclosure Practice. For serious offenders, those facing criminal exposure rather than just civil penalties, it may be time to consider voluntary disclosure. For some taxpayers, voluntary disclosure might be the only way to avoid jail time and criminal prosecution. The voluntary disclosure program starts with IRS Criminal Investigation (CI). CI will vet the disclosure and consider whether to allow the taxpayer to proceed with getting compliant and paying the prescribed civil penalty. Depending on the circumstances, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns, will apply to the year with the highest deficiency. In effect, this is a one-time penalty of 75% on the highest deficiency tax year.
Voluntary disclosure does not automatically guarantee immunity from prosecution, but it makes it highly likely that prosecution will not be recommended. That is why it is important that only taxpayers that are facing serious criminal exposure utilize this program. It is not for everyone and it is not a decision that should be taken lightly. Taxpayers whose compliance was non-willful should use other compliance alternatives. But for those that are in the unenviable position of facing possible criminal prosecution and jail time voluntary disclosure is an important option to consider.
Taxpayers should be proactive when attempting to avail themselves of voluntary disclosure. It is not a get out of jail free card and as such it is only available if the IRS has not: 1) commenced a civil examination or criminal investigation; 2) received information from a third party regarding noncompliance; or 3) acquired information directly related to noncompliance from a criminal enforcement action. Waiting too long to come clean can mean that this door is shut forever.
The first step in voluntary disclosure is filling out Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application to request preclearance from CI. This first step requires a review of the taxpayer’s eligibility. Once a taxpayer receives preclearance then they have 45 days to submit Part II of the Form 14457. Completing Part II requires a narrative of the taxpayers personal and professional background. The narrative will include all the relevant facts surrounding the noncompliance and should list and advisors that rendered services for the taxpayer from the inception of the non-compliance. The taxpayer must sign the narrative under the penalties of perjury. There is no opportunity to supplement the narrative.
If CI accepts, the taxpayer will receive a Preliminary Acceptance Letter. From there the case will be referred to the civil section of the IRS. Failure to comply with the civil examination may lead the examiner to refer the case back to CI. If the examiner discovers material omissions in the narrative and disclosure that may lead to a revocation and, again, referral back to CI. In general, there is a six-year period of disclosures, but the examiner may extend that period. In addition, a taxpayer may be required to file corrected returns for the most recent six-year period. Taxpayers may exercise their Appeal rights but doing so risks them being considered non-cooperative and expose themselves to additional penalties.
It should be clear that voluntary disclosure is no walk in the park. But for some taxpayers this is the best option that they have left. By overlooking voluntary disclosure it could mean a stint behind bars. For taxpayers that are concerned about criminal tax exposure, they should consult with a tax attorney that can help them weigh their options and if necessary, help them through this process.