A taxpayer who suspects a criminal investigation might be under way, but who has not as of yet been contacted by the IRS, can possibly avoid prosecution by making a voluntary disclosure to the Criminal Investigation Division of the IRS. Taxpayers who fear a criminal investigation may be underway but who have not been contacted by the IRS may also be tempted to file delinquent or amended income tax returns or otherwise discuss with IRS representatives and in the process reveal the reason for their apprehension. Making an inadvertent disclosure to IRS personnel out of fear of an ongoing criminal investigation is a terrible way to attempt to avoid criminal investigation. A valid voluntary disclosure, requires at a minimum, that the taxpayer must not have reason to suspect that an investigation was about to begin when the disclosure was made, the disclosure is full and accurate, and the taxpayer must commit to cooperate with the IRS in determining the correct amount of taxes owed subsequent to making the voluntary disclosure.
The IRS has established policy surrounding voluntary disclosures that if properly complied with ensure that the vast majority of taxpayers who make a proper voluntary disclosure need not fear criminal prosecution. However, the IRS voluntary disclosure policy does not guarantee a grant of amnesty or immunity from prosecution. The IRS states that a voluntary disclosure occurs when a taxpayer makes a truthful, timely, and complete disclosure, and the taxpayer cooperates with the IRS and makes a good faith arrangement with the IRS to pay all determined deficiencies, including interest and penalties.
A Voluntary Disclosure is timely if it is received before:
an IRS examination has begun, or before the IRS notifies the taxpayer that an examination is about to begin;
a third-party whistleblower has supplied information to the IRS concerning the taxpayer’s noncompliance; or
the IRS has acquired information concerning the taxpayer’s noncompliance through a criminal investigation or any other source.
Case law has shown that a taxpayer who merely makes an unsupported offer to pay taxes, rather than a taxpayer who makes valid arrangements to pay taxes, is not entitled to the protection of the voluntary disclosure policies. A valid arrangement to pay requires that a specific plan is accepted by the IRS to satisfy the outstanding tax liability. Case law has made it clear that the IRS must accept any reasonable payment arrangement and cannot withhold its assent to a voluntary disclosure capriciously or in bad faith. The IRS must afford taxpayers who act in reliance upon the published voluntary disclosure policy a reasonable opportunity to satisfy all of the conditions of the policy, including payment terms. However, if the IRS and the disclosing taxpayer cannot agree to a payment plan within a reasonable time, the IRS does not have to follow their voluntary disclosure policy.
Occasionally making a voluntary disclosure can be used tactically where Defense Counsel believes his client is likely to be criminally prosecuted. While making a voluntary disclosure in this circumstance is at best a gamble in light of the delineated requirements to making a valid voluntary disclosure listed above, the voluntary disclosure may possibly form a basis for mitigating a possible criminal sentence downward.
To qualify as a true voluntary disclosure, the disclosure must be made before the disclosing individual(s) is (are) aware of events that indicate the government is likely to discover the crime being disclosed. Thus, a disclosure is not voluntary if the IRS has already begun an inquiry that is likely to lead to the taxpayer and the taxpayer is reasonably thought to be aware of that activity. Moreover, a disclosure is not considered voluntary if the taxpayer has other reasons to believe that an examination of tax liabilities is likely to occur. For example, a voluntary disclosure would not be considered voluntary where the disclosing individual had reason to believe that an ex-spouse or dissatisfied business partner is going to inform to the IRS.
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