5 Key Insights for High-Income Taxpayers Considering Voluntary Disclosures

The IRS’ Voluntary Disclosure Practice is one of a handful of options available to high-income taxpayers that need to proactively resolve high-stakes federal tax controversies. If successful, submitting a voluntary disclosure can substantially mitigate a high-income taxpayer’s liability while also eliminating the risk of facing an audit or investigation related to the matter at issue. However, submitting an unsuccessful voluntary disclosure can have the opposite of its intended effect. As a result, an informed and strategic approach is critical. Keep reading to learn some key insights from Texas criminal tax lawyer Lawrence Brown.

When Should High-Income Taxpayers Consider a Voluntary Disclosure?

Submitting a voluntary disclosure is not a decision to take lightly. While submitting a voluntary disclosure can be extremely beneficial under the right circumstances, it can also be risky. Success is not guaranteed, and recklessly disclosing a violation of the Internal Revenue Code to the IRS can potentially lead to consequences that could—and should—have been avoided.

With this in mind, here are some important considerations for high-income taxpayers who are considering voluntary disclosures:

1. Voluntary Disclosure is an Option for Disclosing Willful Violations of Federal Law

One of the most important aspects of the IRS’ Voluntary Disclosure Practice is that it is an option for resolving willful violations of federal law. As the IRS makes clear, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.”

Willfully violating the Internal Revenue Code (and other federal laws) can trigger exposure to substantial penalties—especially in cases involving substantial outstanding tax liability. As a result, it is critical that high-income taxpayers who have committed willful violations work with experienced tax counsel to proactively target a favorable resolution.

2. Voluntary Disclosure is Not an Option for Resolving Non-Willful Violations

To clarify, submitting a voluntary disclosure is exclusively an option for resolving willful violations. If you have recently discovered an inadvertent filing error, you are not eligible to submit a voluntary disclosure—and you should not do so.

Instead, you will need to consider the options that are available for proactively resolving non-willful tax law violations. High-income taxpayers have a variety of options for coming into compliance without triggering an audit or investigation—provided that they take action in time. Additionally, once a taxpayer discovers a filing error, failing to remedy the error promptly can potentially transform the situation from one involving inadvertent noncompliance to one involving willful tax evasion.

3. The Purpose of a Voluntary Disclosure is to Mitigate the Consequences of a Willful Violation

As another point of clarification, the purpose of submitting a voluntary disclosure is not to seek to avoid liability entirely. Instead, when submitting a voluntary disclosure, high-income taxpayers should be prepared to work with the IRS to target a mutually satisfactory resolution. The IRS makes this clear as well, stating that the requirements for submitting a successful voluntary disclosure include:

• “Cooperat[ing] with the IRS in determining your correct tax liability,” and
• “Pay[ing] in full or secur[ing] a full-pay installment agreement for the tax, interest and any applicable penalties you owe.”

Once you engage experienced tax counsel, your tax counsel will be able to assist with assessing your eligibility to submit a voluntary disclosure and determining what you can reasonably expect from the IRS based on the circumstances at hand. Then, based on these insights, you will be able to make an informed decision about whether submitting a voluntary disclosure is the best option under the circumstances at hand.

4. Voluntary Disclosure is No Longer an Option Once the IRS Opens an Audit or Investigation

While it is important to make an informed decision about whether to submit a voluntary disclosure, it is also important to make a decision promptly. In order for your disclosure to qualify as “voluntary,” you must make your disclosure before the IRS opens an audit or investigation.

Of course, you might not know whether the IRS is looking into your tax history, and this can potentially complicate the decision-making process. If it looks like submitting a voluntary disclosure might be your best option, your tax counsel should be able to engage with the IRS on your behalf to determine whether you are still eligible to file.

5. Submitting a Voluntary Disclosure Does Not Guarantee Immunity

Although submitting a voluntary disclosure can be the first step toward achieving a resolution that avoids criminal prosecution for a willful violation, it does not guarantee immunity. In the words of the IRS, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”

Generally, if successful, a voluntary disclosure will result in a settlement with the IRS that resolves the willful violation(s) at issue and provides certainty with respect to the taxpayer’s liability stemming from these issues going forward. If negotiations break down, however, criminal prosecution could still be a possibility.

Making an Informed and Strategic Decision Requires a Comprehensive Assessment of All Pertinent Risks

In light of these considerations, when should high-income taxpayers consider leveraging the IRS’ Voluntary Disclosure Practice? There is no single “right” answer. Instead, deciding whether to submit a voluntary disclosure requires a comprehensive assessment of all pertinent risks—including the risk of facing criminal prosecution both with and without a voluntary filing.

Regardless of whether submitting a voluntary disclosure is the best option under the circumstances at hand, when facing the potential for significant federal liability, time is of the essence. Once the IRS initiates an audit or investigation, several options for targeting a favorable resolution (including the option of submitting a voluntary disclosure) go off the table.

Request a Confidential Call with a Texas Criminal Tax Lawyer at Brown Tax, P.C.

Our firm represents high-income U.S. taxpayers in significant federal tax controversies. If you need to know more about your options for proactively resolving a high-stakes issue with the IRS, we encourage you to contact us promptly. Please call 888-870-0025 or contact us online to request a confidential call with an experienced Texas criminal tax lawyer at Brown Tax, P.C.