What to Know About IRS CI’s Voluntary Disclosure Practice
June 23, 2023
U.S. taxpayers that have failed to meet their filing and payment obligations have various options for resolving these “tax controversies” with the Internal Revenue Service (IRS). However, the specific options that are available in any particular case depend on the circumstances involved. For example, while IRS Criminal Investigation’s (IRS CI) Voluntary Disclosure Practice affords an opportunity to resolve certain tax controversies without litigation, taxpayers must be extremely careful about choosing voluntary disclosure as their path forward.
IRS CI’s Voluntary Disclosure Practice: An Overview
As IRS CI explains, “‘[v]oluntary compliance’ is the cornerstone of our tax system.” As IRS CI goes on to explain, “We have a wide variety of civil and criminal sanctions that we may impose on non-compliant taxpayers. . . . [and f]ailure to voluntarily comply may result in imprisonment, fines, and penalties.”
For taxpayers that have failed to timely comply with their federal tax obligations, IRS CI’s Voluntary Disclosure Practice provides a means of resolving these failures. However, submitting a voluntary disclosure is only an option in limited circumstances. Specifically, to submit a voluntary disclosure, a taxpayer must be prepared to acknowledge that it has “willfully failed to comply with tax or tax-related obligations.”
In other words, submitting a voluntary disclosure is a means of mitigating a taxpayer’s risk of facing a criminal investigation for tax fraud or tax evasion. Note that we said it is a means of “mitigating”—submitting a voluntary disclosure does not guarantee that IRS CI will decline to investigate. IRS CI makes this clear, stating:
“A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”
Thus, submitting a voluntary disclosure carries a certain amount of inherent risk. However, mistakes and poor judgment can exacerbate the risks involved. Along with acknowledgment of a willful tax law violation, utilization of IRS CI’s Voluntary Disclosure Practice is subject to various other conditions as well. These conditions include (but are not limited to):
- Timeliness – To qualify as “voluntary,” a disclosure must be made before IRS initiates an audit or IRS CI initiates a criminal investigation. The taxpayer must also be the first individual or entity to share the disclosed information with the government.
- Cooperation – Along with submitting a voluntary disclosure, taxpayers seeking immunity from criminal prosecution must also cooperate with IRS CI in determining their “correct tax liability.”
- Good–Faith Arrangements to Pay – When submitting a voluntary disclosure, taxpayers must be prepared to pay what they owe “in full.” This includes not only their outstanding tax liability but also their liability for interest and any applicable penalties.
Even so, in some circumstances submitting a voluntary disclosure will be taxpayers’ best option. Before submitting a voluntary disclosure, it is imperative to ensure that you qualify, and you will want to work closely with experienced legal counsel to ensure that you are able to obtain maximum protection through the process while minimizing your risk of triggering an IRS CI investigation.
Submitting a Voluntary Disclosure to IRS CI
When seeking protection from prosecution under IRS CI’s Voluntary Disclosure Practice, taxpayers must strictly follow the procedural guidelines that IRS CI has put in place. Among other things, this means that taxpayers must:
- Complete and File Form 14457 – Submitting a voluntary disclosure starts with completing and filing Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application). As IRS CI explains, “Preclearance determines your eligibility for the practice but does not guarantee preliminary acceptance into the practice.”
- Submit Part II of the Voluntary Disclosure Application – Once a taxpayer receives preclearance from IRS CI, the next step is to submit Part II of the Voluntary Disclosure Application. The taxpayer must submit Part II within 45 days of receiving preclearance (or within 90 days if IRS CI approves a one-time extension).
- Cooperate with IRS CI – After submitting Part II of the Voluntary Disclosure Application, the taxpayer must then go through the process of cooperating with IRS CI. Among other things, this means providing all documents and information requested and working with IRS CI to determine the taxpayer’s “correct tax liability” as noted above.
Although cooperation is key, it is important to keep in mind that IRS CI can use the information it obtains through the Voluntary Disclosure Practice to launch an investigation—unless and until otherwise agreed. While a successful voluntary disclosure can eliminate the risk of facing criminal prosecution for a previous willful tax law violation, an unsuccessful voluntary disclosure has the potential to expose facts that substantiate serious criminal charges.
What if Your Tax Violation Wasn’t Willful?
Admitting to a federal tax crime is a big deal, and while submitting a successful voluntary disclosure can mitigate the consequences of a willful violation, there are still consequences involved. As a result, in cases involving non-willful violations, taxpayers should work with their legal counsel to evaluate the other options they have available. Generally speaking, the consequences of non-willful tax law violations are much less severe, and addressing these violations proactively involves dealing with the IRS rather than IRS CI.
Determining the options a taxpayer has available to deal with a non-willful violation requires a case-specific analysis. With this in mind, some examples of potential alternatives to submitting a voluntary disclosure include:
- Filing an amended or delinquent tax return
- Submitting an offer in compromise
- Negotiating an installment agreement with the IRS
- Seeking non-collectible status
- Utilizing the IRS’s Streamlined Filing Compliance Procedures
An experienced federal tax lawyer will be able to help you choose the best path forward, and whichever option you choose, it will be important to work with experienced counsel throughout the process. If you need to resolve an issue with the IRS, we invite you to contact us to learn more.
Speak with a Federal Tax Lawyer at Brown Tax, P.C.
Our practice is focused on representing high-income and high-net-worth taxpayers in complex federal tax controversies. If you are at risk and would like to speak with a lawyer in confidence, please call 817-870-0025 or send us a message online to request a confidential initial consultation.