Our tax system is based on the expectation that taxpayers pay their tax bills. A failure to voluntarily comply with tax obligations can result in fines, penalties, and even potential imprisonment. Those who have failed to comply in the past and want to come into compliance have options. One option is to partake in the voluntary disclosure program with the Internal Revenue Service (IRS).
Why would I partake in a voluntary disclosure program?
The IRS Criminal Investigation (CI) unit takes participation in a voluntary compliance program into account when determining whether to proceed with criminal prosecution. Those who chose to provide information in an accurate and timely manner may reduce the risk of criminal tax charges. This is important as criminal tax charges come with serious penalties of incarceration and monetary fines.
Is there a difference between foreign and domestic disclosure?
Yes. Making foreign disclosures is possible through formal IRS programs. Domestic disclosures have no equivalent IRS program, but they can still be beneficial. It is best to speak with an experienced tax attorney to determine your legal exposure when making a domestic disclosure.
When is a disclosure timely?
The IRS is particular about the timing of involvement in the program. It states that disclosure is timely if the agency receives it before a civil examination, criminal investigation, alert of noncompliance from a third party like an informant, or before they have received information as the result of an action directly related to compliance like a warrant or grand jury subpoena.
How does the disclosure process work?
Depending upon the one you choose. For foreign disclosures, one has the option of formal disclosures with include the Delinquent International Information Return Submission, a Streamlined Disclosure, and a Voluntary Disclosure. As to the latter, the process generally involves two parts. First, the taxpayer fills out Form 14457, Voluntary Disclosure Practice Preclearance Request and Application Part I. This will help the agency determine if you are eligible for participation in the program.
Next, you submit Part II. Unless you make a written request for additional time, you must submit this portion within 45 days. After your case is assigned, an IRS examiner will reach out.
How much is enough? Do I really have to disclose everything?
Participation in the voluntary disclosure program can help you get into the good graces of the IRS when you have failed to report your foreign income and/or file necessary foreign returns. The IRS is likely to view participation as a “positive footfall” that works towards building goodwill and allows flexibility when you work towards negotiating down any potential criminal charges as well as what you may owe.
But it can be a negative as well whether this be domestic or foreign disclosure and happens when you fail to make full disclosure. The IRS would view this as a “negative footfall” and may decide to move forward with aggressive action making future negotiations very difficult.
It is important for those in this situation to keep in mind that the IRS does not view things in isolation. It looks at the intent and context behind your actions when making its determination. As such, it is important to always report 100% when partaking in a voluntary disclosure program.