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What Are the Concerns for Taxpayers Considering a Voluntary Disclosure?

August 17, 2023


For U.S. taxpayers who are behind on their federal reporting and payment obligations, voluntary disclosure provides an opportunity to resolve their issues with the IRS. However, submitting a voluntary disclosure isn’t an option in all scenarios, and when it is an option, it is not without risks.

As a result, taxpayers who are considering a voluntary disclosure must ensure that they are also giving due consideration to all pertinent concerns. Submitting a voluntary disclosure without adequate preparation (or when it doesn’t make sense to do so) can have the opposite of its intended effect, and it is a mistake that at-risk taxpayers must be careful to avoid.

Important Considerations Before Submitting a Voluntary Disclosure to IRS CI

What are the concerns involved with submitting a voluntary disclosure? Here is an overview of what U.S. taxpayers need to know:

1. Understanding the Nature of a Voluntary Disclosure

First, it is important to understand the nature of a voluntary disclosure. While other options (such as submitting a streamlined filing) involve dealing with revenue agents at the Internal Revenue Service (IRS), submitting a voluntary disclosure involves dealing with IRS Criminal Investigation (IRS CI).

As its name suggests, IRS CI is the agency’s criminal enforcement division. IRS CI investigates serious tax crimes, and it works with the U.S. Department of Justice (DOJ) to pursue charges for tax fraud, tax evasion and other criminal offenses. These offenses carry substantial fines and prison time—in addition to liability for back taxes and interest.

As IRS CI explains, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” This means that at-risk taxpayers must be very careful—as voluntarily informing the IRS CI of a criminal tax law violation can trigger an investigation (and subsequent prosecution) in some cases.

2. Voluntary Disclosure is an Option for Addressing “Willful” Violations

The criminal nature of the voluntary disclosure process has another important implication: Submitting a voluntary disclosure is only an option for taxpayers who have willfully violated U.S. tax laws. Thus, as IRS CI also explains, voluntary disclosure only makes sense for taxpayers who “intend to seek protection from potential criminal prosecution.” As IRS CI continues, “[i]f your violation of the law was not willful, you should consider other options.”

When a taxpayer submits a voluntary disclosure, the taxpayer must acknowledge willfully violating the law. This is not an acknowledgment that taxpayers should make unnecessarily. On the same token, other options (such as submitting a streamlined filing) require a certification of non-willfulness, and falsely certifying non-willfulness has its own set of serious consequences.

3. A Voluntary Disclosure Must Be “Timely”

To qualify as “voluntary,” a disclosure to IRS CI must be “timely.” A voluntary disclosure will only be considered timely if it is submitted before all of the following:

  • Commencement of a civil examination or criminal investigation;
  • IRS CI’s receipt of relevant information through another criminal enforcement action; and,
  • IRS CI’s receipt of relevant information from another government agency or a third party (i.e., a whistleblower).

Once the IRS or IRS CI initiates an inquiry (or has the information it needs to initiate an inquiry), then any taxpayer submissions will no longer qualify as voluntary disclosures. IRS CI can use the submitted information in furtherance of its investigative efforts without any benefits to the taxpayer.

Of course, as a taxpayer, you won’t necessarily know if you have been implicated in a pending criminal enforcement action or a third party has submitted evidence of alleged tax crimes to IRS CI. This is one of several areas in which an experienced federal tax defense lawyer can help. Your lawyer can communicate with IRS CI on your behalf prior to submitting a voluntary disclosure, and then your lawyer can help you make an informed decision about how best to move forward.

4. A Voluntary Disclosure Must Be “Complete”

Another key aspect of IRS CI’s Voluntary Disclosure Practice is that it requires “complete” disclosure. In other words, taxpayers cannot selectively choose what they are willing to disclose. When deciding whether to settle tax controversies and recommend against prosecution, IRS CI considers taxpayers’ cooperation and compliance, and if a taxpayer is not fully forthcoming during the voluntary disclosure process, this can trigger additional scrutiny. This additional scrutiny is likely to uncover any information the taxpayer has withheld—and the fact that IRS CI discovered this information independently means that voluntary disclosure protections will not be available.

5. A Voluntary Disclosure Requires Use of “Designated Procedures”

Finally, submitting a voluntary disclosure requires the use of IRS CI’s “designated procedures.” There are rules taxpayers need to follow, and simply submitting an amended return or addressing past issues in a newly-filed return (referred to as a “quiet disclosure”) does not trigger voluntary disclosure protections.

Taxpayers who submit voluntary disclosures may need to sit for interviews with IRS CI agents, and they may need to provide access to “related party witnesses.” Taxpayers may be required to provide documents in response to summonses and other requests as well. Those who aren’t prepared to meet these requirements will need to consider other options, and those who are will need to work with their tax counsel to ensure that they are prepared to do everything that is necessary to minimize their liability exposure.

Ultimately, deciding whether it makes sense to utilize IRS CI’s Voluntary Disclosure Practice requires careful assessment of numerous factors, and taxpayers must assess these factors in light of both: (i) their specific risks and (ii) the other options they have available. If you have questions about submitting a voluntary disclosure, you should speak with an experienced lawyer promptly.

Need to Know More? Request a Confidential Consultation at Brown Tax, P.C.

Our lawyers represent high-income and high-net-worth taxpayers in significant federal tax controversies. To learn more about our practice and how we help U.S. taxpayers who are considering voluntary disclosures, please call 888-870-0025 or request a confidential consultation online today.