What is a Quiet Voluntary Disclosure?
Over the past couple of years, we have heavily reported on the crackdown of U.S. taxpayers that have stashed away money in secret overseas bank accounts. The IRS and Department of Justice have heavily advertised the Offshore Voluntary Disclosure Program that can help a taxpayer avoid criminal prosecution in exchange for the payment of any back-taxes and any penalties or fines associated with the activity. When looking at OVDP, we are asked often the differences between quiet vs. loud voluntary disclosure. Interestingly, the ability to avoid a federal prison sentence is not exclusively reserved for those who have committed tax fraud through hidden foreign financial activity.
There are two principal ways that a taxpayer can come forward and clean up any tax messes that have been made in the past whether simply through negligence or through blatantly fraudulent behavior: a quiet or a loud disclosure. A quiet disclosure involves a taxpayer amending past tax returns to show the correct amount of income for the particular tax year at issue. A taxpayer that hadn’t filed taxes in the past can also use a quiet disclosure to file their back tax returns. In either case, the taxpayer typically will cut a check to the IRS for the amount of the additional tax owed, any interest, and penalties (ordinarily a 20% negligence penalty for sure). When this method is appropriate, the quiet disclosure and subsequent payment are the only steps needed to make a potential future tax investigation go away but this method carries the risk that the disclosure does not meet the requirements to obtain an amnesty for any tax crimes committed because the government may challenge whether the disclosure meets the terms of the IRS’s voluntary disclosure practice of being timely, complete and voluntary.
What is a “Loud” or Domestic Voluntary Disclosure?
The second method of going about disclosing a taxpayer’s prior tax mistakes is a loud disclosure, also known as a domestic voluntary disclosure. The IRS has a long-standing policy of allowing taxpayers that have potentially committed tax crimes such as tax fraud or evasion to come forward and avoid the harshest consequence associated with such violations: prison. In a domestic voluntary disclosure, the taxpayer or their counsel openly notifies the Criminal Investigation Division of the IRS that they have may have committed tax wrongs in the past and are willing to pay back taxes, interest, and penalties (including a potential 75% fraud penalty) in order to avoid criminal prosecution. The wonderful reality about domestic voluntary disclosures is: almost any criminal tax behavior can be cured through a voluntary disclosure if the terms of the IRS’s voluntary disclosure practice are met.
There are several differences between a quiet and loud disclosure and neither of them are superior to the other when viewed without other facts. The decision to make a disclosure and its type must be made when looking at all of the facts and circumstances of the taxpayer’s situation. In cases where the risk of prosecution is low, it may be advantageous to not call undue attention to the taxpayer by making a quiet disclosure. Though, if the risk of prosecution are high because of blatant acts by the taxpayer to intentionally lie or mislead the IRS, a loud domestic voluntary disclosure may be more advantageous but carries with it increased risk of a 75% fraud penalty.
How could a domestic voluntary disclosure be helpful?
The ability for a taxpayer to avoid a criminal prosecution through a domestic voluntary disclosure can be a very powerful tool for taxpayers. Imagine a scenario where a husband and wife are divorcing and an accusation of tax fraud is made in open court. In many cases, the family court judge will notify the taxing authorities of the allegations which can spark a criminal investigation. In such an event, the accused spouse could make a quick domestic voluntary disclosure and effectively beat the judge to the IRS. This move could save the accused spouse time and money, but most importantly, it could secure his physical freedom by avoiding a potential prison sentence for tax fraud. This can be especially important where a criminal conviction can invalidate a professional license where the client is an Attorney or a Doctor for example.
A family dispute isn’t the only place that a domestic voluntary disclosure could be particularly useful. When selling a business, a taxpayer may be asked to present their books for inspection by a potential buyer. Even though such inspections usually come with non-disclosure agreements, any prior tax fraud or wrongdoing may give the potential purchaser leverage in the transaction. A domestic voluntary disclosure can level the playing field and remove the leverage by correcting any past tax misbehavior, allowing the seller to get what he or she truly deserves for his or her business. Additionally, if the business is subject to sales taxes, the California Board of Equalization routinely conducts a sales tax audit and freezes any sales proceeds in escrow while the audit is underway. Any tax fraud that may have been committed can bubble to the surface in the audit. If $100,000 or more of unreported sales is determined to have occurred a referral can go out to the FTB and IRS which can spark a criminal investigation.
Domestic Voluntary Disclosures Aren’t Just Federal
Although the State of California does not presently have any published guidance on domestic voluntary disclosures, our extensive experience of representing California taxpayers has shown that the Board of Equalization and the Franchise Tax Board both welcome such disclosures. The taxing authorities in California are known to be more ruthless than the IRS and the ability to proactively resolve your potential criminal liability is not something to balk at.
An Experienced Criminal Tax Attorney Can Help You Determine What Your Course of Action Should Be
Although domestic voluntary disclosures are an extremely powerful tool for taxpayers to avoid a criminal prosecution, they aren’t for everyone. Only an experienced criminal tax defense attorney can give you an informed and well-reasoned legal opinion on whether a domestic voluntary disclosure is right for a particular taxpayer and their unique situation. It is in each taxpayer’s best interest to consult with an experienced tax attorney before making any type of disclosure.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have years of experience representing taxpayers with a myriad of tax issues that can lead to criminal tax exposure and can answer your questions about quiet vs. loud voluntary disclosure . From tax examinations, to civil and criminal investigations, to full-blown tax litigation, the Tax Law Offices of David W. Klasing have zealously advocated on behalf of our clients and their interests. Don’t go up against federal or state tax authorities alone. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
