Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Voluntary disclosure and the avoidance of criminal prosecution (MS Word)
Voluntary disclosure and the avoidance of criminal prosecution (.pdf)
Voluntary disclosure and the avoidance of criminal prosecution
Dear Reader:
You recently asked what a taxpayer can do to reduce the possibility
of criminal prosecution if he has had substantial return compliance
problems in the past. Fortunately, IRS has a voluntary disclosure
program under which the likelihood of prosecution for people who
failed to meet filing requirements in the past is reduced if they
disclose their problems voluntarily.
Under its voluntary disclosure program, IRS will consider voluntary
disclosure along with all other factors in an investigation in
determining whether criminal prosecution will be recommended. But,
this practice creates no substantive or procedural rights for
taxpayers, and taxpayers can't rely on the fact that other similarly
situated taxpayers may not have been recommended for criminal
prosecution. A voluntary disclosure will not automatically guarantee
immunity from prosecution, but may result in prosecution not being
recommended. These voluntary disclosure rules do not apply to
taxpayers with illegal source income.
To qualify under IRS's voluntary disclosure program, a taxpayer's
communication must be truthful, timely, and complete. The taxpayer
must also show a willingness to cooperate (and actually cooperate)
with IRS in determining his correct tax liability, and must make
good faith arrangements with IRS to pay in full, the tax, interest
on the tax, and any penalties that IRS determines to be applicable.
A disclosure is timely if it is received before IRS has:
(1) initiated a civil examination or criminal investigation of the
taxpayer, or notified the taxpayer that it intends to begin such an
examination or investigation;
(2) received information from a third party (e.g., informant, other
governmental agency, or the media) alerting IRS to the specific
taxpayer's noncompliance;
(3) initiated a civil examination or criminal investigation which is
directly related to the specific liability of the taxpayer; or
(4) acquired information directly related to the specific liability
of the taxpayer from a criminal enforcement action (e.g., search
warrant, grand jury subpoena).
A disclosure by an individual who failed to file tax returns
qualifies as voluntary under the disclosure rules, even if it is
made after the individual receives a notice stating that IRS has no
record of receiving a return for a particular year and inquiring
into whether the taxpayer filed a return for that year. If the
individual files complete and accurate returns and makes
arrangements with IRS to pay the tax, interest, and any penalties
determined by IRS to be applicable in full, this is a voluntary
disclosure because IRS has not yet commenced an examination or
investigation of the taxpayer or notified the taxpayer of its intent
to do so and because all other requirements above are met.
However, the voluntary disclosure program is not without defects
from the taxpayer's point of view. Disclosure of the taxpayer's
identity is a requirement for the program, and, as indicated above,
there are no guarantees of immunity from prosecution. Although the
rules governing IRS's current voluntary disclosure policy are fairly
objective by historical standards, there is some uncertainty about
some aspects of the program, such as what constitutes a good faith
arrangement to pay the taxes.
IRS has a special program for offshore voluntary disclosures that
offers a uniform penalty structure for taxpayers who voluntarily
came forward. Under the program, which began on March 23, 2009 and
that won't apply in its present form after September 23, 2009,
taxpayers with undisclosed foreign accounts or entities can make a
voluntary disclosure that enables them to become compliant, avoid
substantial civil penalties, generally eliminate the risk of
criminal prosecution and calculate, with a reasonable degree of
certainty, the total cost of resolving all offshore tax issues.
Participating taxpayers must pay back-taxes and interest for six
years and either an accuracy related or delinquency penalty. But, in
lieu of all other penalties that may apply, including FBAR and
information return penalties, IRS will assess a penalty equal to 20%
of the amount in foreign bank accounts or entities in the year with
the highest aggregate account or asset value.
The Tax Division of the Justice Department also has a voluntary
disclosure policy with less specific standards for determining what
is a voluntary disclosure that qualifies for relief. Under this
policy, there are two elements to a voluntary disclosure: (1) it
must be made timely, and (2) the taxpayer must thereafter fully
cooperate with the government. A disclosure is not timely if IRS has
already initiated an inquiry that is likely to lead to the taxpayer
and the taxpayer is reasonably thought to be aware of that activity,
or if some event occurred before the disclosure which the taxpayer
probably knew about and which would be likely to cause an audit into
the taxpayer's liabilities. Until the IRS and Justice Department
standards are brought into conformity, there may be some opportunity
to convince the Justice Department that a voluntary disclosure that
didn't meet IRS's standard was nevertheless sufficient under the
Justice Department standard.
If you would like to know more about participating in this program
or about other issues relating to your tax status, please give me a
call.