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IRS Prosecution After Voluntary Disclosure of Tax Fraud

Voluntary Disclosures Program & Swiss Accounts
March 27, 2014
Hiding Assets Overseas? Good News and Bad News
March 27, 2014

IRS Prosecution After Voluntary Disclosure of Tax Fraud

Date: 02/15/12

Topic: Foreign Accounts

There’s a lot of confusion out there whether the IRS will prosecute someone after making a voluntary disclosure of his/her tax fraud. I’ll try to set the record straight in this post. For more on this topic, see: Tax Evasion Fraud Representation

In addition, our FAQ section contains answers to questions related to criminal tax, more generally: Criminal Tax Representation FAQ

The short answer is that, technically, the official language of the Internal Revenue Manual provides that the IRS retains the right to prosecute a taxpayer who has engaged in tax fraud, even if she made a voluntary disclosure to the IRS. IRM § (12-02-2009)( ). BUT! the IRS’s actual practice has, for the most part, not been to exercise this right. In other words, the practice of the IRS has not been to pursue prosecution after a taxpayer makes a voluntary disclosure — which is fantastic news to the taxpayer wanting to come clean.

A number of tax experts concur with this conclusion: “[T]he practice of the IRS has been that it will not prosecute taxpayers who satisfy all of the requirements of the voluntary disclosure program because, if it did initiate such prosecutions, no taxpayers ever would be willing to make a voluntary disclosure in the future.” New York University Annual Institute on Federal Taxation § 27.06 (2010).

I’m often asked, why would IRS not be willing to put in writing its “unofficial” practice of refraining from prosecuting taxpayer’s that make timely accurate and complete voluntary disclosures? I think the one motivation for not doing so is that the IRS does not want to enable taxpayers to cheat on their income taxes during hard economic times taxes knowing there is a sure fire way to correct the behavior later on when its more convenient to pay income taxes. The IRS cannot put in writing, as part of its official policy that it will not pursue criminal prosecution because it would tempt people too much to cheat on taxes and repent later. The IRS wants to avoid this sort of “cheap grace” solution. But, on the other hand, the IRS wants to encourage people to make voluntary disclosures, and to better achieve that they have decided not to exact criminal prosecution on most taxpayers making voluntary disclosures. It’s a very understandable strategy, since it attempts to strike a balance between governmental “sticks” and “carrots.”

Generally speaking, a taxpayer will be able to avail him or herself of the benefits of the IRS’s practice of non-prosecution only if she is completely truthful, discloses all previous non-compliance with federal tax law, and only if his or her disclosure is timely (made before the IRS discovers the fraud on its own).

Special rules apply for voluntary disclosures where a foreign account is involved. See here for more on that: FBAR Compliance and Disclosure FAQ

Our office has successfully represented many clients wanting to make a voluntary disclosure. If you find yourself in a similar situation, our office can help.