If you can no longer live with the potential criminal tax exposure that results from filing one or more fraudulent tax returns, you have a few options to correct your taxes, pay the tax you should have paid in the first place and attempt to get back into compliance without facing criminal tax prosecution. The two major options to address this issue are filing one or more Federal and State amended tax returns or making a domestic or offshore voluntary disclosure. The problem with simply amending your fraudulent tax returns is that the amended returns themselves can be viewed under the law and by the tax authorities as an admission of guilt rather than a good-faith correction of a past error. If you want to secure a nearly guaranteed pass on criminal tax prosecution as you get back into tax compliance, a voluntary disclosure is the only available option.
There are some major differences in what an amended tax return does compared to a voluntary disclosure. It is important to understand the differences between these two options and when they might be used before you can understand what you should do in your case.
An amended tax return is exactly what it sounds like: when you file an amended tax return, you go back and edit a previous tax return to make corrections or changes. For Federal purposes, this primarily refers to Form 1040-X, and for California purposes 540-X.
Typically, amended tax returns are used to correct mistakes or change amounts on a previously filed tax return. If your amended return says you owe more in taxes than your original return reported, you immediately obligate yourself to pay the additional tax, potential penalties, and interest right away.
Amended tax returns are often helpful if you made errors on the original returns that resulted in you paying too much. Getting the money, the IRS or California owes you, is often the main reason to file an amended tax return, but it can also be a necessary and important step in correcting past mistakes and making sure that your tax record is updated and correct. Filing an amended return may set things straight if you are later audited, as your amended return will correct any holes or errors in your tax record. Filing an amended return could also trigger an audit if the IRS sees evidence of suspicious practices or repeating patterns of underpayment followed by correction.
You can only receive a refund from a federal amended return if it is filed within three years of your original return (or, if it comes later, within 2 years of the time you paid those original taxes).
The big danger with filing amended returns is that they can be viewed as criminal admissions and will restart the three year statute of limitations from which the IRS has to audit the amended return. Attempting to correct your prior willful acts leading to exposure for income tax evasion will not prevent criminal tax charges related to the original or the amended returns. As the IRS sees it, you shouldn't have cheated to begin with. For this reason, you should contact a seasoned dually licensed Criminal Tax Defense Attorney & CPA prior to filing amended returns to discuss the best manner to correct any pattern of intentional misrepresentations you've made in the past in a manner that is nearly guaranteed to avoid criminal tax prosecution if you follow your seasoned counsels advice to the letter– via a voluntary disclosure.
The duty to file taxes in the U.S. is grounded in the concept of voluntary compliance enforced with a big stick for those caught cheating. The taxpayer voluntarily reports to the IRS what they, or their preparer, calculate they owe in taxes, and the IRS usually takes their word for it. There is a HUGE difference between making an honest mistake out of a misunderstanding or negligence resulting in your inadvertent underpayment of your income taxes, versus intentionally underreporting income, overstating deductions or claiming credits that you are not legally entitled too, which results in various tax crimes being committed.
The IRS may audit or criminally instigate you and double-check and compare your original or amended return positions. If you are found to be, at worst, negligent in the positions you took on the original or amended returns, you are potentially facing a 20% negligence penalty on any additional tax you self-assessed, and interest back to the original filing date of the returns. If you are found to have acted criminally because of the apparent badges of fraud found in your fact pattern, at best you are looking at a 75% civil fraud penalty on any additional tax assessed, and at worst, criminal tax prosecution, incarceration, and restitution for your willful tax crimes. If you are present in the U.S. on a green card, you face deportation after being released from prison. Moreover, if you have professional licensing, you may lose it as result of the criminal convictions.
When we discuss “voluntary disclosures” in the context of federal income tax underpayment, we’re talking about entering you into a program ran by the criminal investigation division of the IRS that specifically puts them on notice of noncompliance that the IRS could potentially view as intentional tax fraud you’ve committed in the past. This program is formally entered into utilizing Form 14457 (Parts I and II).
We routinely utilize the offshore and domestic voluntary disclosure programs to enable taxpayers to fully cooperate with the IRS and show them that they are making a good-faith effort to fix their prior mistakes. The program is powerful enough that taxpayers can flat out admit to their prior intentionally fraudulent conduct, and the disclose the overly aggressive advisors that led them down the golden path, if any, and still receive a pass on criminal tax prosecution.
In the thousands of domestic and offshore voluntary disclosures we have advised on, or entered clients into, over the past 12 years since the inception of our largely criminal tax defense practice, we have never had a client criminally prosecuted upon making a domestic or offshore voluntary disclosure. For that matter, there are very few known cases of the IRS criminally prosecuting those that have made voluntary disclosures in the organization’s history. Where they have occurred, it was largely for the same reason, the taxpayer’s attempting voluntary disclosure get caught cheating in the process of attempting to wash their hands clean.
For example, a taxpayer knew that the IRS Criminal Investigation Division had discovered their Swiss UBS account under a John Doe summons because of communication they received from UBS. They rightfully entered an offshore voluntary disclosure to attempt to remove the risk of criminal tax and foreign information reporting prosecution. However, they failed to come back into compliance over other undeclared foreign accounts they held elsewhere that they did not believe the IRS would discover.
A voluntary disclosure comes with an implied promise to pay back the additional tax, program-based penalties, and interest you voluntarily report as owed if you have the funds available. If you do not have all the funds available, you are instructed to provide a collection information statement as part of your voluntary disclosure package.
We routinely, and successfully, use voluntary disclosures to head off potential criminal tax exposure with the IRS by essentially admitting our client’s prior mistakes and offering to fix them, and that has always been enough to avoid criminal sanctions and limit the penalties the IRS could assess outside of the program to the program penalty terms.
If the IRS has already started an audit or criminal tax investigation, been alerted to your errors by a third party, or filed a subpoena for noncompliance, it may be too late to file a voluntary disclosure. In that case, you should absolutely contact our dually licensed Criminal Tax Defense Lawyers & CPAs, who will take immediate action to assess, then correct, your tax compliance record, negotiate / cooperate with the IRS, and attempt to mitigate your criminal tax exposure in dealing with a Standard Civil Audit, Eggshell Audit, Reverse Eggshell Audit or Criminal Tax Investigation. (See hyperlinks at bottom of this article for more information on these topics)
According to the IRS’ official website and documentation, the purpose of the voluntary disclosure program is to give people the opportunity to avoid criminal tax prosecution by admitting their mistakes and paying what they owe. An amended tax return, in contrast, is often viewed by the IRS as an attempt to fix intentional compliance problems with the original returns while attempting to fly under the IRS’ civil and criminal enforcement radar. The crux of the issue is that informing the IRS about your prior intentional compliance errors through an amended return can be the legal equivalent of making a criminal tax admission rather than receiving a virtually guaranteed pass on criminal tax prosecution where the domestic of offshore voluntary disclosure program terms are strictly complied with. Moreover, attempting to document the correction of a series of intentional errors utilizing amended returns in terms of negligent behavior or mistake can also be viewed as making false statements – which is a felony.
When you file amended returns that show substantial increases in the taxes you subsequently report you now owe, or produce large & suspicious refunds, the IRS is likely to flag you for an audit or criminal tax investigation. Especially if you’ve filed multiple amended returns or have a history of making “mistakes,” that were found under previous audits or often undetected criminal tax investigations. The IRS may closely examine / investigate your amended returns, leading to, at best, additional tax, penalties, and interest, and at worst, criminal tax prosecution and restitution.
When you properly enter a voluntary disclosure, you are protected against any potential criminal tax prosecution – assuming you meet the program requirements and enter the voluntary disclosure program before an audit, criminal tax investigation or incriminating information has been gathered from third parties or whistleblowers, against you. However, a voluntary disclosure will ordinarily result in a mandatory civil audit to determine if the program terms were met and thus you will, or will not, receive a pass on criminal tax prosecution.
A rule of thumb that we use is in advising between filing amended returns versus entering a client into a voluntary disclosure is, if a taxpayer will owe less than $30,000 in additional tax because of a series of amended returns, amended returns are an option as $30,000 of tax loss equates to one year in jail under the federal sentencing guidelines. The rational for this is that, even if a federal prosecutor believes a taxpayer committed tax crimes, they are not likely to prosecute unless the case will draw the publicity, they are seeking for the deterrent effect it is seen on having on taxpayers and preparers. Convicted taxpayers with cumulative tax losses of less than $30,000 can potentially serve their time under house arrest which does not have the perceived punch as a deterrent in comparison to one year or more of federal incarceration.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or California tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or California tax compliance without facing criminal prosecution.
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.
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