IRS Voluntary Disclosure and Other Domestic Tax Compliance Failures

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For years you paid your taxes and satisfied all disclosure or reporting obligations – or so you thought. Or perhaps you have been deliberately understating your tax filings. The US Tax Code is complex and cannot be fully understood without careful study and consideration. However, the complexity of the code itself is merely a starting point. A complete and thorough understanding of all obligations can only be understood after carefully reading case law, IRS policies and guidance, and other secondary sources. As such, many taxpayers rely on tax professionals’ advice and guidance. However, despite the taxpayer’s reliance, the taxpayer remains responsible for civil and criminal liability for any willful misstatement or omission that may appear in their tax filing history.

Note: There is no statute of limitations on tax fraud, and a current action, such as lying to a federal agent regarding a prior tax return, can re-open a new six-year statute of limitations. Furthermore, consider that tax returns are filed under the penalty of perjury. 

In light of the recent updates to the Department of Justice (DOJ.) Tax Division’s Corporate Voluntary Self-Disclosure Policy as of April 14, 2023, taxpayers and practitioners must stay informed and adapt to these changes. The updated policy applies to various business organizations, including government entities, partnerships, and unincorporated associations, but explicitly excludes sole proprietorships. This exclusion of sole proprietorships is mainly because the DOJ policy is designed to address corporate entities that could face criminal liability under federal tax laws.

Since sole proprietors operate as individuals rather than separate entities, they do not fall within the purview of this particular policy. Despite this exclusion, sole proprietors still have options for voluntarily disclosing tax compliance issues. The IRS Voluntary Disclosure Practice is an alternative for individuals, including sole proprietors, who must rectify their tax compliance status. This practice encourages voluntary disclosure by offering a potential means to reduce or avoid criminal penalties, applying to all individuals regardless of their business structure.

Although the updated policy suggests that voluntary self-disclosures related to internal revenue laws should be made to the Tax Division, it’s crucial to note that disclosures through the IRS under its practices will still be considered. It enables DOJ Tax and IRS to decide which agency will ensure compliance. The policy does not explicitly require exclusivity to the DOJ Tax in making these disclosures. The DOJ CTM provision implies that voluntary disclosure to the IRS under its practices remains valid, suggesting this aspect of DOJ Tax policy will continue. Taxpayers may consider disclosing voluntarily to DOJ Tax and IRS to cover all bases, allowing them to determine the lead agency in confirming compliance. This “belt and suspenders” approach ensures that all critical aspects are addressed when dealing with voluntary self-disclosures.

The updated policy encourages companies to disclose any misconduct, even if they believe the government may already know about the issue. While full benefits of voluntary self-disclosure might not be available in such cases, companies can still gain some advantages. These include obtaining reduced penalties, avoiding criminal prosecution, and minimizing reputational harm. While these benefits may not be as significant as those offered under the complete voluntary self-disclosure program, it is still advantageous for companies to come forward and cooperate with the government to address any potential non-compliance with tax laws.

Furthermore, the policy highlights the potential for substantial compliance, as timely self-disclosures will be viewed positively, even if they don’t meet all the criteria outlined for voluntary self-disclosure. This shift in policy emphasizes the importance of transparency and cooperation in addressing tax non-compliance. It allows companies to take responsibility and correct errors or omissions in their tax filings.

When a taxpayer finally discovers that they have failed to meet certain obligations, they may face years of non-compliance resulting in significant penalties, interest, fines, and – depending on conduct – the potential for a criminal tax investigation and criminal tax penalties. Exposure to criminal penalties can lead to overwhelming fear, anxiety, and sleepless nights. However, taxpayers facing seemingly tricky or impossible tax situations have options provided they act proactively and do not wait until the IRS is knocking at their door. By utilizing an attorney to, in essence, “admit” to previous undiscovered tax fraud (or non-compliance that might be misunderstood as tax fraud), a deal can be struck with the IRS where the past fraudulent or non-compliant filings receive a pass on criminal prosecution in exchange for the taxpayer voluntarily reporting and correcting five years of past returns.

At the Tax Law Offices of David W. Klasing, our experienced team of tax professionals can expertly guide you through the complexities of the DOJ Tax Division’s Corporate Voluntary Self-Disclosure Policy and the IRS Voluntary Disclosure Practice. We understand the nuances of the policy’s scope, including the types of entities it covers, and can help you make informed decisions on the best course of action. Our team is well-versed in navigating the IRS Voluntary Disclosure Practice, and we can help you leverage the benefits it offers, even when full benefits might not be available. We are committed to helping you achieve substantial compliance by promptly addressing disclosure requirements that minimize your risk exposure and give you peace of mind knowing that you are in good standing with the tax authorities. If you have any questions about California or IRS tax compliance and voluntary disclosure programs, whether regarding personal or business matters, the award-winning tax professionals at the Tax Law Office of David W. Klasing are here to provide clarity and guidance.

Conditions for Voluntary Self-Disclosure

There are specific conditions that a company must meet to qualify for the benefits associated with voluntary self-disclosure. Taxpayers and practitioners must know these conditions to make informed decisions and act appropriately. The DOJ Tax Voluntary Disclosure Policy sets forth detailed conditions for voluntary self-disclosure, similar to the IRS voluntary disclosure practice in the Internal Revenue Manual (IRM). These conditions must be met for a taxpayer to qualify for voluntary disclosure benefits. The following essential criteria, along with potential concerns related to the policy, must be satisfied:

Voluntary: The Tax Division, at its sole discretion, will determine whether a disclosure meets the criteria for voluntary self-disclosure by conducting a careful, case-by-case assessment. The disclosure of criminal misconduct must be voluntary and not due to any preexisting obligation such as regulation, contract, or a prior Department resolution (e.g., non-prosecution agreement or deferred prosecution agreement).

Given that the policy allows the Tax Division to exercise its sole discretion in determining whether a disclosure is voluntary, one might question whether there could be an attack on the denial of voluntary self-disclosure based on abuse of discretion. While it seems unlikely that such an attack would be successful, a taxpayer faced with the actual rejection of voluntary self-disclosure might consider exploring this option. It is crucial for taxpayers to be aware of the discretionary nature of the policy and to seek professional advice when making disclosures to ensure the best possible outcome.

Timing of the Disclosure: The timing of the disclosure is a critical aspect of the voluntary self-disclosure process under the Tax Division’s policy. To ensure that the disclosure is deemed voluntary, it must be made to the Tax Division:

• Before an imminent threat of disclosure or government investigation, as mentioned in the US Sentencing Guidelines;
• Before the criminal misconduct becomes publicly disclosed or otherwise known to the government. However, if the misconduct was previously disclosed to the IRS or another appropriate regulatory authority, the disclosure to the Tax Division must be made within 15 days of the prior disclosure unless good cause is shown; and
• Within a reasonably prompt time after the company becomes aware of the criminal misconduct. The burden is on the company to demonstrate timeliness.

Companies must disclose misconduct before initiating government investigation, inquiry, or enforcement action. This proactive approach demonstrates the company’s willingness to promptly cooperate with the authorities and address non-compliance issues. Companies should act swiftly upon discovering misconduct, as delays may lead to the loss of the benefits provided under the policy.

The substance of the Initial Disclosure and Accompanying Actions: The significance of the initial disclosure and accompanying actions are essential for a disclosure to be considered a voluntary self-disclosure under the DOJ Tax Division’s policy. The disclosure must include all relevant facts concerning the misconduct that the company is aware of. The Tax Division acknowledges that companies disclosing shortly after discovering misconduct may not know all relevant facts. In such cases, a company should clarify that its disclosure is based on a preliminary investigation or assessment of information while still providing a comprehensive disclosure of the known relevant facts. The following factors must also be taken into account:

• Preservation of Documents: The company must promptly preserve, collect, and produce relevant documents and information to demonstrate their cooperation in the voluntary disclosure process. It includes safeguarding and gathering pertinent materials related to the misconduct and sharing them with the appropriate authorities on time. Additionally, the company must provide regular updates on any new factual findings or developments uncovered during its internal investigation, ensuring transparency and ongoing cooperation with the authorities.
• Cooperation and Remediation: To receive full credit for voluntary disclosure, the company must provide full cooperation and timely and appropriate remediation. Full cooperation entails timely disclosure of all non-privileged facts relevant to the misconduct, proactive collaboration, preservation and disclosure of relevant documents, de-confliction of witness interviews, securing attendance, and truthful statements of individuals involved. It includes competent witness testimony as needed and continuing cooperation in any related criminal or civil investigation.

Appropriate remediation involves demonstrating the implementation or enhancement of an effective compliance program, addressing any deficiencies in internal controls, conducting comprehensive risk assessments, and providing proper employee training. The company should also show genuine commitment to preventing future misconduct and be prepared to cooperate fully with the government during any subsequent investigation.

When a company embarks on voluntary self-disclosure, addressing the DOJ Tax Division’s and the IRS’s concerns is beneficial. By adhering to the criteria for preserving documents, cooperating fully, and engaging in timely and appropriate remediation, you can demonstrate a commitment to resolving the misconduct and preventing future issues. A joint disclosure that satisfies both agencies’ requirements would enhance the process’s effectiveness, streamline communication, and promote a collaborative approach to addressing the misconduct. This collaborative approach would contribute to fostering a culture of compliance and accountability within the corporate landscape, as both agencies would be satisfied with the completeness and accuracy of the disclosure.

Disclosure of Returns and Return Information: When making a voluntary disclosure to the Tax Division, a company must provide written consent under 26 USC § 6103(c). This consent permits the IRS to disclose all relevant returns and return information to the Tax Division, which can be utilized under § 6103(h) and its accompanying regulations. To evaluate and investigate voluntary self-disclosure, the Tax Division may collaborate with and seek assistance from the IRS. To initiate a voluntary self-disclosure to the Tax Division, companies should submit their request to [email protected].

There is a concern regarding potential conflicts between DOJ Tax and the IRS in the case of a joint disclosure. It is indeed a possibility that DOJ Tax could deny the voluntary disclosure while the IRS grants it, or vice versa. Although such conflicts between the two entities may be rare, if they were to occur, it would raise questions about the implications of these different decisions, including:

• Legal and procedural challenges in navigating the conflicting decisions;
• Uncertainty regarding penalties and consequences for the company;
• Confusion over compliance and remediation requirements;
• Potential impact on the company’s reputation and business relationships; and
• Implications for interagency cooperation and consistency in voluntary disclosure cases.

If the DOJ Tax approves a voluntary disclosure, but the IRS disagrees and recommends prosecution, the IRS’s recommendation would not necessarily override the DOJ’s decision. However, this situation may lead to further discussions and evaluations between the two agencies to determine the most appropriate action, ensuring that both entities’ concerns and objectives are adequately addressed.

With the Tax Law Offices of David W Klasing by your side, you can confidently navigate the voluntary self-disclosure process and safeguard your company’s reputation and business relationships. Our experienced team understands the importance of sole discretion exercised by the tax division, meeting disclosure obligations, and the critical role of timing in making a disclosure. We can assist clients in preparing comprehensive initial disclosures, ensuring that all relevant facts, documents, and return information are presented transparently and cooperatively. By partnering with our team, you can trust that we will carefully address the unique challenges posed by joint disclosures and help prevent any potential abuse of discretion. Our expertise and commitment to your success enable us to develop tailored strategies that minimize legal risks while effectively addressing compliance and remediation requirements.

If the IRS Hasn’t Noticed My Tax Non-compliance in Years Past, Why Would They Notice It Now? 

There are various changing circumstances and other reasons to explain why tax compliance failures, including non-disclosure of accounts, assets, and sources of income, may quickly become a pressing concern even where you are confident you “got away with it.” Consider the following scenarios: 

A formerly happily married husband and wife decide to divorce. One of the ex-spouses hires a forensic accountant for the divorce proceedings. The forensic accountant discovers tax fraud by the other spouse. With this information, the former husband or wife threatens to disclose this information to the IRS and trigger a criminal investigation to extort a hefty divorce settlement. 

The owner of a rapidly growing business discloses a second set of books to a potential buyer. The potential buyer threatens to reveal the second set of books to the IRS and relevant state agencies to leverage a lower acquisition price. 

The owner of a company is selected for an audit by state regulators. The owner fears that federal acts of fraud or other wrongdoing will be uncovered. 

The above represents only a handful of the possible scenarios through which a taxpayer’s wrongdoing may be uncovered and lead to a criminal investigation and charges. In addition to these scenarios, several other factors and developments may increase the likelihood of the IRS noticing tax non-compliance, even if they haven’t done so. Some of these factors include: 

• Increased data sharing and international cooperation: The United States has signed numerous agreements with other countries and jurisdictions to share tax-related information. Initiatives such as the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) have significantly enhanced the IRS’s ability to detect offshore tax evasion and other forms of non-compliance. This increased international cooperation makes it more likely that previously unnoticed disobedience may come to light. 
• Technological advancements: The IRS continuously invests in advanced data analytics tools and technology to identify non-compliance patterns and potential tax evasion more effectively. As a result, the agency is becoming more efficient in detecting discrepancies and inconsistencies in tax filings, increasing the chances of discovering non-compliant behavior. 
• Whistleblower programs: The IRS whistleblower program encourages individuals with information about tax non-compliance to report to the agency. In some cases, whistleblowers may be eligible for a monetary reward if their information leads to the recovery of unpaid taxes. This incentive can motivate individuals, such as disgruntled employees or business partners, to report tax non-compliance that may have gone unnoticed in the past. 
• DOJ’s Updated Tax Division’s Corporate Voluntary Self-Disclosure Policy: The recent update to the DOJ’s policy may encourage more companies to voluntarily disclose tax-related misconduct, which could increase the chances of detecting non-compliance among businesses have not yet come forward. 

Considering these factors, taxpayers must recognize that the risk of being discovered for tax non-compliance is continuously increasing. To mitigate this risk and potential consequences, taxpayers should consider proactively addressing tax compliance issues and seek professional advice when necessary. 

A Voluntary Disclosure Can Provide a Degree of Insulation Against Criminal Penalties 

An adequately filed and legally sufficient Voluntary Disclosure to the IRS can protect taxpayers against criminal charges relating to their disclosed non-compliance. In other words, the taxpayer will not be recommended for criminal prosecution. In the interests of the efficient tax system administration, the IRS has long held that taxpayers who come forward voluntarily, make a complete disclosure, and agree to pay the penalty can avoid criminal penalties, including prison. However, the type of disclosure that should be made should be dependent on the taxpayer’s risk.

Warning: A voluntary disclosure should never be attempted without the guidance of experienced criminal tax defense counsel and using a Kovel Accountant to protect the client’s constitutional rights, attorney-client privilege, and the attorney’s work product! 

Consider that the US tax system relies heavily, at least initially, on taxpayer self-reporting (self-assessment). If the system were not originally based on self-assessment, the current levels of IRS staffing would make the tax system unworkable. To further encourage taxpayer compliance, even after a period of purposeful compliance failures, the IRS has held a policy conferring certain benefits on individuals who voluntarily come forward, fully disclose their past acts or omissions of non-compliance, file accurate returns for the affected years still open to a criminal statue (generally five years), and who make a full payment or enter into an approved payment plan. Provided that the disclosure is voluntary, complete, accurate, and legally sufficient, the IRS has a policy of refraining from recommending these taxpayers for criminal prosecution. 

The Updated DOJ Tax Division’s Corporate Voluntary Self-Disclosure Policy introduces new benefits consistent with other DOJ component voluntary disclosure policies. Per the policy, the Tax Division may choose not to seek an indictment, opting not to impose a criminal penalty. Companies disclosing their misconduct voluntarily may be more protected against criminal prosecution. This disclosure demonstrates a company’s commitment to transparency, cooperation, and remediation, which may lead to more lenient treatment by authorities, including reduced fines or penalties and potential avoidance of criminal charges

Furthermore, the policy offers the possibility of reducing the guidelines’ recommended fine ranges based on meeting the policy’s key aspects, including cooperation. Although the acceptable ranges might not be as material to corporations, the possibility of reduced financial penalties is still an attractive incentive for companies to comply with the updated policy. It is important to note that there is no agreement regarding the sentencing range in this policy, as corporations are not incarcerated. Nevertheless, the updated policy’s benefits make voluntary self-disclosure a valuable option for companies looking to mitigate the risks associated with tax-related misconduct and potentially reduce their exposure to criminal and financial penalties. 

When Can I Make a Voluntary Disclosure?

For a Voluntary Disclosure to be adequate, it must be timely. If the taxpayer is reasonably aware of an investigation or facts and circumstances suggesting that the government has already discovered the non-compliance that is the subject of the disclosure is not timely. Voluntary disclosures are timely when they are made:

• Before the start of an IRS examination or before IRS notification to the taxpayer of an impending audit or examination;
• Before a third-party whistleblower supplying information regarding fraud or other non-compliance with the IRS;
• Prior to the IRS’ acquisition of information regarding non-compliance through other sources.

As such, time is of the essence when considering a Voluntary Disclosure. However, taxpayers should not be hasty in their decision to file for Voluntary Disclosure because there are certain circumstances, such as illegal source income, where such disclosures are ineffective. Further, taxpayers must carefully analyze their behaviors and circumstances and how an IRS examiner may interpret them. Finally, taxpayers should also consider whether a “noisy” or “quiet” disclosure is more appropriate for their tax situation.

Voluntary disclosure is noisy because the criminal investigation division is contacted at the outset of the process. A quiet disclosure would involve filing five years of amended returns with the client’s average service center. The advantage of this method is that the taxpayer may escape the costs and stress of submitting to an audit that ordinarily follows a loud voluntary disclosure. The disadvantage is that a quiet disclosure could be viewed as an admission of guilt without the expected pass on criminal prosecution that follows a noisy disclosure. Again, the critical decision to go loud or quiet should not be made without experienced criminal tax defense counsel.

Experienced Tax Professionals Guide You Through the Voluntary Disclosure Process

Proactively disclosing your tax mistakes to the IRS before facing an audit or criminal tax investigation dramatically increases your chances of avoiding the most severe penalties. The experienced and dedicated tax attorneys and Kovel CPAs of the Tax Law Offices of David W. Klasing can help concerned taxpayers understand their options. Once we have explained the process and the potential opportunities to mitigate the situation to the taxpayer, our experienced tax attorneys can handle every step. To schedule a reduced-rate consultation with an experienced tax lawyer, call us at 800-681-1295 today or contact the firm online.

Please note: If you have privacy concerns regarding our initial or subsequent communications and cannot easily travel to our main office in Irvine, consider scheduling a secure GoToMeeting. This platform offers end-to-end encryption, robust passwords, and top-rated reliability to ensure the safety of your meeting. To schedule a reduced-rate initial consultation via GoToMeeting, follow this link or call our office for existing clients.

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