Every year American taxpayers either fail to file their taxes or underreport their income. For some, this is an accident, but for others it is not. In either case, you have several options for rectifying the situation and reporting your accurate income for tax purposes. You can file amended tax returns with more accurate information, which could be viewed as a criminal admission, or make a domestic or offshore voluntary disclosure where you wish to receive a nearly guaranteed pass on criminal tax prosecution where you originally fudged the numbers. While both choices will help you fix your incorrect tax information, they come with different levels or risk and potential civil and criminal tax consequences.
A domestic or offshore voluntary disclosure is the safer option depending on your facts and circumstances. Depending on how much money you owe because of amending your tax returns, you could be looking at serious criminal tax exposure. If, after amending, you owe $30,000 or more in back taxes, $30,000 of tax loss is akin to one year in jail under the federal sentencing guidelines. This fact makes the federal government much more likely to prosecute if the government believes you committed tax fraud with the original tax returns as they will be getting the headlines, they seek to create a deterrent effect on similarly situated taxpayers when they publicize the prosecution. However, entering into a domestic or offshore voluntary disclosure will help you avoid the risk of criminal prosecution altogether especially where your experienced and highly trained dual licensed Criminal Tax Defense Attorney and CPA ensures that you strictly comply with the terms of the program.
If you will likely owe $30,000 or more to the federal government via amending income tax returns, you should contact our dual licensed California Tax Fraud Defense Attorneys & CPAs for guidance. We can help you straighten out your tax situation and avoid any criminal tax consequences. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 for a legal consultation with our experienced team or book online Here.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.
Benefits of Voluntary Disclosures of Unreported Income
The Voluntary Disclosure Practice of the IRS, found under § 9.5.11.9 of the Internal Revenue Manual, allows taxpayers who may be exposed to criminal liability because of a history of cheating on their taxes to come into compliance and avoid criminal tax prosecution. Whether or not making a voluntary disclosure is the best choice will depend on several factors, including the amount of unreported money and your original intent in filing the returns that are the be amended. Our California dual licensed Tax Fraud Defense Attorneys & CPAs can help you assess your situation so you can make the best possible decision.
It is crucial that you understand that a voluntary disclosure does not offer an absolute guarantee or protection against criminal tax prosecution and related consequences. However, if you judge the IRS by their actions and not their words, there are only a handful of documented cases where a taxpayer made a voluntary disclosure and eventually went to jail anyways. In all those cases the taxpayer was caught cheating in the process of trying to wash their hands clean with the IRS. For an example, one taxpayer that made an offshore voluntary disclosure was aware that their Swiss bank, UBS, was under criminal tax investigation so they made an offshore voluntary disclosure to voluntarily report it. However, they failed to report the other numerous offshore accounts they had elsewhere in the world. During the guaranteed audit that follows a voluntary disclosure to determine if the program terms were met the additional undisclosed accounts were discovered and this client predictably went to jail for getting caught cheating in the process of trying to get clean.
According to the written terms of the program, a taxpayer’s voluntary disclosure is considered along with all the other facts and details of their case when determining if criminal prosecution will ultimately be recommended. Factors that are considered along with a voluntary disclosure include but are not limited to timeliness, completeness, truthfulness, and any rejections or revocation decisions. The IRS’s unilateral decision on whether you receive a pass on criminal tax prosecution or not, is not open to judicial review or appeal.
Elements of a Voluntary Disclosure
Making a voluntary disclosure is not as simple as it sounds. There are multiple critical steps involved in the process, and it requires a lot more than just casually informing the IRS about your history of tax filing mistakes. The process is complicated for laypeople, unfamiliar with tax law, to comprehend. Our California dual licensed Tax Fraud Defense Lawyers and CPAs have decades of combined experience and specialized training to draw on in guiding you through the process.
A voluntary disclosure must be honest, complete, and timely. A taxpayer making a voluntary disclosure must cooperate with the IRS when determining their true tax liability, investigating any third-party professionals who may have enabled the tax fraud, submitting all required amended returns and related substantiation, and making a good faith effort to pay the resulting additional tax, penalties and interest in full. If you can only partially pay the resulting tax penalties and interest, you can still utilize the program, but you are expected to pay in full if you have the financial wherewithal to do so. You must include a collection information statement if you are unable to full pay any resulting balance stemming from the domestic or offshore voluntary disclosure.
Voluntary disclosures must be timely. However, there is no hard deadline. Rather than making your disclosure before a specific date, you must do so before the IRS finds out about your tax mistake from someone else or has opened an audit or criminal tax investigation against you. Essentially, the IRS needs to hear about your mistake from you before they hear it from someone else or figure it out on their own. It is essential that you act quickly when making a voluntary disclosure because there is no telling when the IRS could get the information from someone else or discover the noncompliance on their own.
Why a Bad Fix Can Make Things Worse
Discovering that a previously filed tax return omitted income, overstated deductions, claimed improper credits, or relied on fraudulent return information can be unnerving, stressful, and downright frightening. Many taxpayers immediately assume they should “just amend” before the IRS, FTB, or another taxing authority notices the issue. That instinct can be dangerous. The IRS allows taxpayers to file an amended return when a correction changes filing status, income, deductions, credits, dependents, or tax liability, and Form 1040-X remains the ordinary federal amendment tool for individual income tax returns. But a taxpayer facing potential willfulness, false documents, cash skimming, intentionally unreported income, overstated deductions, cooked books, cryptocurrency omissions, or false business expenses should not treat an amended return as a simple accounting clean-up.
A truthful, complete, and strategically timed amended tax return can sometimes help correct a non-willful mistake. A false amended return, however, can make things worse by creating a new false filing, supplying federal taxing authorities with potential criminal tax admissions, or giving the IRS’s Criminal Investigation Division a clearer roadmap to the original misconduct. The U.S. Supreme Court has made clear that a taxpayer who files a fraudulent return does not purge the fraud by later voluntary disclosure; the fraud is complete when the original return is prepared and filed. That rule matters because an amended return may help correct tax liability, but it does not magically erase the criminal tax exposure created by a knowingly false original return. Additionally, an amended return can potentially be viewed as a criminal tax admission.
When Amending is Appropriate and When IRS Voluntary Disclosure Belongs on the Table
The key distinction is willfulness. If a taxpayer made a genuine non-willful mistake, such as receiving a late Form 1099, misclassifying an item in good faith, or discovering a bookkeeping error that did not involve concealment, an amended return may be the proper compliance vehicle. The IRS itself distinguishes between taxpayers who made errors or mistakes and those who willfully failed to comply with tax or tax-related obligations. Where the issue involves willful noncompliance, tax-related crimes, or criminal tax exposure, the IRS Criminal Investigation Voluntary Disclosure Practice may become relevant.
The IRS describes a voluntary disclosure as a truthful, timely, and complete disclosure of willful noncompliance through designated procedures. The disclosure generally must reach IRS Criminal Investigation before the IRS starts a civil examination or criminal tax investigation, receives third-party information alerting it to the noncompliance, or obtains information from a criminal tax enforcement action directly related to the taxpayer’s noncompliance. IRS-CI considers timely, accurate, and complete voluntary disclosures when deciding whether to recommend criminal tax prosecution, but such disclosures do not automatically guarantee immunity. This is why a taxpayer with criminal tax exposure should not rush into an amended return without first having civil and criminal tax defense counsel evaluate whether the facts support a non-willful correction, a voluntary disclosure, or a different damage-control strategy.
Consequences of Filing Amended Tax Returns
The potential consequences of filing mended tax returns should be considered carefully by a taxpayer before deciding to file. An amended tax return is basically filing your taxes over again, but this time with the necessary corrections to properly report all your income. The downside to amended tax returns is that, in certain circumstances, they can be construed by the IRS as a criminal admission of guilt or wrongdoing. Filing amended tax returns without making a voluntary disclosure could open you up to criminal tax prosecution.
Amended tax returns are not a good idea for taxpayers who willfully or intentionally did not report income or otherwise failed to file their taxes. A mistake or oversight on your taxes that was not deliberate may not result in any criminal tax prosecution. However, if your mistake was an intentional act to avoid paying taxes, you may want to consider making a voluntary disclosure to avoid criminal tax penalties.
As mentioned above, the nature of your criminal prosecution will depend on many factors, including the amount of unreported income and whether you intended to avoid paying taxes or you are only guilty of an oversight. The sooner you file an amended tax return, the better. If you wait too long, the government may question you about why you waited, and they may become overly suspicious. As soon as you realize a mistake has been made, you should contact our dual licensed California Tax Fraud Defense Attorneys & CPAs for help.
Criminal Tax Statutes That Can Apply to a Bad Amended Return
A false amended return can implicate several criminal tax statutes. Under 26 U.S.C. § 7206(1), a person can commit a criminal tax offense by willfully making and signing a return, statement, or other document under penalties of perjury that the person does not believe to be true and correct as to every material matter. Section 7206(2) also reaches a person who willfully aids, assists, procures, counsels, or advises the preparation or presentation, in connection with the internal revenue laws, of a return, affidavit, claim, or other document that is fraudulent or false as to any material matter. A false and fraudulent return can also expose a taxpayer to both tax evasion and false-statement charges where the government can prove the required elements. A taxpayer who “fixes” a false return with another false amended return can therefore add new civil and criminal tax exposure rather than reduce it.
More severe cases can trigger 26 U.S.C. § 7201, the felony tax evasion statute. Section 7201 applies when a person willfully attempts, in any manner, to evade or defeat tax or its payment, and it carries a potential imprisonment of up to 5 years, substantial fines, and prosecution costs. DOJ criminal tax materials describe tax evasion as requiring a tax due and owing, an affirmative attempt to evade or defeat tax, and willfulness. Filing false and fraudulent returns can serve as the affirmative act in an evasion case. In practical terms, an amended return that conceals the real source of omitted income, fabricates a basis, invents deductions, disguises nominee activity, or gives a misleading explanation can become another exhibit in a criminal tax prosecution rather than proof of good-faith compliance.
A taxpayer also should not overlook 26 U.S.C. § 7207. Section 7207 prohibits willfully delivering or disclosing to the IRS any list, return, account, statement, or other document known to be fraudulent or false as to any material matter. Unlike § 7206(1), § 7207 does not require a document signed under penalties of perjury. That means the danger does not stop with the amended return itself. False schedules, fabricated receipts, backdated invoices, altered books, misleading written explanations, and incomplete supporting statements can all create additional problems if the government views them as materially false.
California FTB Exposure and Why the Original Preparer Should Not Handle the Fix
California state taxpayers must also account for state exposure. The Franchise Tax Board (FTB) instructs taxpayers to amend California returns when changes or corrections require it, including changes to income, deductions, credits, filing status, or federal income tax adjustments. For tax year 2017 forward, individuals generally use California Schedule X with a corrected California resident or nonresident return and supporting documents. If the federal correction changes California tax liability, a taxpayer should not assume the state issue will remain isolated from the federal issue.
California state criminal tax law is also highly relevant. Revenue and Taxation Code § 19705 makes it a felony for a person to willfully make and subscribe any return, statement, or other document that contains or is verified by a written declaration made under penalty of perjury, and that the person does not believe to be true and correct as to every material matter. It also reaches a person who willfully aids, assists, procures, counsels, or advises the preparation or presentation, in connection with any matter arising under California’s Personal Income Tax Law or Corporation Tax Law, of a return, affidavit, claim, or other document that is fraudulent or false as to any material matter. In a dual federal and California exposure case, a false amended return strategy can therefore create danger before both the IRS and the FTB.
Do not let your original preparer handle your tax audit, amended return, or potential criminal tax investigation when the original return may contain fraudulent return information. The original preparer may have an incentive to protect their own license, reputation, and livelihood, especially if they prepared the original filing, ignored red flags, or participated in creating the problem. Non-attorney tax practitioner confidentiality has serious limits; the federal tax practitioner privilege under 26 U.S.C. § 7525 applies only in noncriminal tax matters before the IRS and noncriminal federal tax proceedings brought by or against the United States. Once criminal tax exposure is suspected, the taxpayer needs legal protection, advocacy, and damage control, not merely accounting accuracy.
Willfully Versus Unwillingly Underreporting Income
When deciding between making a voluntary disclosure or merely filing amended tax returns, one key issue is whether you willfully failed to report income on the original returns. Filing your taxes can be a highly complex process, especially for people whose income comes from multiple sources or is otherwise unconventional. According to § 7203 of the Internal Revenue Code, a willful failure to file your taxes or provide information may result in criminal tax charges that include fines and possible incarceration.
Unreported Income from Cryptocurrency
Cryptocurrency is a digital currency involved in online trades and transactions. Records and verifications of cryptocurrency transactions are usually maintained and monitored by decentralized systems rather than a central entity. As such, cryptocurrency transactions can be difficult to track. Many taxpayers who earn income from cryptocurrency are unsure how to report that income or if they are required to report it at all.
In November of 2016, the District Court for the Northern District of California allowed the IRS to serve a summons on a cryptocurrency exchange called Coinbase. The IRS was suspicious that of Coinbase’s 6 million customers, only 900 of them reported virtual currency transactions on their taxes.
In March of 2021, the IRS requested similar information related to Payward Ventures, Inc, also called Kraken.com. If you invested in cryptocurrency through Kraken and did not report this currency on your taxes, you might be in trouble.
Filing amended tax returns to account for the previously unreported cryptocurrency gains and losses may potentially resolve your compliance issues but amended tax returns can also be used against you in subsequent criminal tax proceedings. Even if IRS correspondence flagging unreported cryptocurrency transactions seems to indicate that the IRS merely wishes for cryptocurrency traders to update their tax information by amending their returns, there is no way to ensure they will not eventually pursue criminal tax charges, outside of making a voluntary disclosure. Therefore, it behooves you to speak with our dual licensed California Tax Fraud Defense Lawyers about making a voluntary disclosure regarding any previously unreported cryptocurrency investments or transactions especially where your amended returns generate $30,000 or more of additional tax liability.
Contact the Tax Law Offices of David W. Klasing if You Need to Correct a False or High-Risk Amended Return
At the Tax Law Offices of David W. Klasing, our dual-licensed Civil and Criminal Tax Attorneys & CPAs handle high-risk civil and criminal federal tax controversies where a proposed amended return could affect criminal tax exposure. If your original return involved intentionally unreported income, overstated deductions, fraudulent credits, false Schedule C expenses, cryptocurrency omissions, offshore reporting failures, cash skimming, or intentionally non-compliant federal accounting practices, you should not file an amended return, speak with the IRS or FTB, or return to the original preparer without experienced criminal tax defense counsel first evaluating the risk. A bad fix can create a high-risk audit, potentially becoming an eggshell or reverse-eggshell audit, or, worse, an IRS criminal tax probe.
At the Tax Law Offices of David W. Klasing, our CPAs are employees working under attorney supervision as part of the legal team, allowing us to combine tax accuracy, forensic review, and legal advocacy while preserving attorney-client privilege and work-product protections where applicable. Accountants focus on accuracy, but civil and criminal tax defense counsel focus on advocacy, damage control, and preventing a civil correction from progressing toward criminal tax prosecution. We can evaluate the original return, proposed amendment, payment history, records, preparer communications, badges of fraud, California exposure, and whether the facts support an amended return, voluntary disclosure, or another controlled corrective strategy.
If you have already filed a questionable amended return, received an IRS or FTB notice, discovered false return information, or suspect that the government may view your correction as evidence of willfulness, swift action is essential. The government can use taxpayer statements, amended filings, supporting documents, third-party records, and preparer testimony to develop criminal tax violations. Call the Tax Law Offices of David W. Klasing at 800-681-1295 or use our online contact options HERE to request a confidential, reduced-rate initial consultation before you make another filing, submit another document, or speak with a taxing authority without counsel.
