Taxpayers, who may have violated the tax laws, whether related to a failure to pay over proper taxes or a failure to properly report reportable transactions, may wish to avail themselves of the potential benefits of a “Voluntary Disclosure”. A voluntary disclosure will be considered along with all other factors in determining whether criminal prosecution will be recommended for a disclosed violation. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. Finally, and of greatest concern in making the decision to disclose, is the fact that the statements made by the taxpayer in the disclosure are treated as admissions that may be used against the taxpayer in other civil or criminal proceedings. However, although a voluntary disclosure will not automatically guarantee immunity from prosecution it may result in a decision not to prosecute the taxpayer who properly disclosed. Taxpayers with illegal source income cannot obtain the benefits of a voluntary disclosure.

Although there is no commitment or guarantee that making a true and complete voluntary disclosure will preclude prosecution, in general practice it is a major factor in deterring criminal prosecution for the disclosed offenses. Regardless of a decision not to prosecute the disclosed violation, any tax, civil penalty, and interest would still be due and collectible.

A voluntary disclosure occurs when the communication to the IRS seeking the disclosure is truthful, timely, complete, and when:

  • the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and
  • the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

A disclosure is timely if it is received before:

  • the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
  • the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
  • the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
  • the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

In order to make a voluntary disclosure, a taxpayer must disclose to the Criminal Division (“CI”) of the IRS for evaluation of the disclosure. They will determine whether or not the disclosure is compliant, and whether you are entitled to relief.

The Internal Revenue Manual states that “if a taxpayer expresses an interest in making a voluntary disclosure, he/she must be asked the following questions to determine if potential disqualifying factors exist:

  1. Are you currently the subject of a criminal investigation or civil examination?
  2. Has the IRS notified you that it intends to commence an examination or investigation? (If yes, specify)
  3. Are you under investigation by any law enforcement agency?
  4. Is the source of any of your income from illegal activity?
  5. Do you have any reason to believe that the IRS has obtained information concerning your tax liability?

An answer of “yes” to any of the above questions will illicit a request for more information and details and is likely to constitute a disqualifying factor for the disclosure. A reasonable taxpayer, therefore, would not commence a voluntary disclosure unless they first determined that all of the questions would be answered in the negative, unless an extraordinary circumstance still mitigated in favor of the disclosure despite its likely rejection.

Taxpayers sometimes attempt to bypass CI by making a quiet disclosure. In a quiet disclosure, a taxpayer amends and/or files any reports or tax returns and pays any tax that is due, but does not do a voluntary disclosure through CI. The IRS has specifically advised taxpayers of increased scrutiny and dangers of a “quiet disclosure”, since they do not give even the limited protection afforded by an accepted formal voluntary disclosure. While there may be some potential benefits in a quiet disclosure, they should carefully be weighed against the IRS specific distaste for its use to bypass formal voluntary disclosure coupled with the fact that the admissions voluntarily disclosed would still be available as admissions in a later prosecution or litigation without formal voluntary disclosure legitimacy.

This article is general and informational in nature and you should read the terms of our legal disclaimer regarding its use.