A voluntary disclosure is a process whereby the client’s tax attorney approaches the IRS Criminal Investigation Division and acknowledges that their client has cheated in some way on their taxes and wants to remedy the situation. This is achieved by amending the previously filed fraudulent return and making payments of taxes and penalties owed in exchange for the IRS passing on criminal prosecution. Historically, between 1934 and 1952, the IRS had a written policy of refraining from prosecuting taxpayers who made a voluntary disclosure. Today, that written policy has changed so that a taxpayer’s voluntary disclosure is a factor that is heavily weighted in a facts-and-circumstances evaluation of whether or not to prosecute, but the actual of practice of the IRS is quite similar to its past written policy. Voluntary disclosures typically occur in two situations:

  • The taxpayer’s wrongdoing is disclosed to his attorney or accountant because he wants to set matters straight, or
  • The taxpayer discloses his wrongdoing to an attorney or accountant after the IRS has personally contacted him.

The actual language of the IRS’s Voluntary Disclosure practice states: A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

  • The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
  • The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
  • The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
  • The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

A disclosure is timely if it is received before:

  • The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
  • The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
  • The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
  • The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

Examples of voluntary disclosures include: A letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.

A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met.

There are two methods of making a voluntary disclosure, loud or quiet. Quiet disclosures are achieved by sending in delinquent original or amended prior tax returns, with a check(s) in full payment through normal channels and gambling that the returns get processed without the taxpayer every hearing from the Criminal Investigation Division of the IRS because of the sheer volume of returns the taxing authority processes. However, loud disclosures should be preferred because if a taxing authority has begun an investigation prior to receipt of the “quiet” submission the “quite” disclosure will not be deemed to be voluntary and thus will not comply with its Voluntary Disclosure Practice.

To make matters exponentially worse, the amended return could potentially be viewed as a criminal admission of the amount by which the tax liability was understated on the original return. This renders the taxpayer’s effort to mitigate criminal exposure futile because the IRS can use the amended return to meet its burden of proof as to willfulness (which is by far the hardest element of its case to prove) if it decides to prosecute. Additionally there is some support for a growing government position stemming from the 2009 and 2011 Offshore Voluntary Disclosure Initiatives that a quiet disclosure does not comply with the terms of its Voluntary Disclosure Practice because a quite disclosure bypasses the required communication with the Criminal Investigation Division of the IRS and only the Criminal Investigation Division of the IRS can recommend that the taxpayer not be referred to the Justice Department for Criminal Investigation.

The most common way the government establishes the element of willfulness is to subpoena the original tax preparer, or subsequent non-attorney tax adviser, to testify regarding the client’s conversations. Many taxpayers mistakenly believe that the communication privilege they enjoy surrounding communications with their CPAs and enrolled agents can be asserted in a criminal matter. Once an attorney has been engaged, the attorney can engage an accountant to assist him in the calculation of the correct tax under a “Kovel letter” in order to bring the client’s communications with the accountant within the umbrella of the attorney client privilege.

Once a tax attorney has been consulted he or she can determine whether the client is eligible for a voluntary disclosure. The attorney will contact the IRS with the client’s information and do a “pre-check” to see if the client can enter the program. If the client is accepted in the pre-check stage the voluntary disclosure can begin. If the client is not accepted, it may mean that a criminal investigation has already begun. Upon entering the program the attorney can use the services of the CPA to amend all previous false returns and submit these with the extra income, and the penalty calculations associated with the disclosure can been submitted to the IRS.