Los Angeles California Tax Attorney Blog
Internal Revenue Service IRS TAX has set a deadline for reporting offshore bank accounts and other offshore income activities through its voluntary disclosure program. Voluntary disclosure may eliminate risk of IRS criminal prosecution and reduce or eliminate assessment of tax penalties.
Even taxpayers who do not have offshore activities but have unreported income, fraud, unpaid taxes or unfiled tax returns will benefit from the IRS Voluntary Disclosure program.
Internal Revenue Manual Section 9.5.11.9 Voluntary Disclosure Practice:
IRS Voluntary Disclosure is the truthful, timely and complete communication from a taxpayer to the IRS, regarding the accuracy of the taxpayer’s federal income tax returns. The IRS considers voluntary disclosure along with other factors in the investigation of fraudulent tax reporting practices when determining whether criminal prosecution would be recommended. Voluntary disclosure is simply the procedural practice of the IRS, and does not provide the taxpayer with any rights.
As each case if different, taxpayers should not rely on a similar taxpayer’s situation where criminal prosecution was not recommended. It is important to note that this practice doesn’t apply to taxpayers with illegal source income.
For a IRSvoluntary disclosure to occur, the communication must be truthful, timely, complete, and meet the following requirements:
The taxpayer must express willingness to cooperate with the IRS in determining his/her correct tax liability, and the taxpayer does actually cooperate.
The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties owed to the IRS, and to be determined by the IRS.
A disclosure is considered 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 initiate such an examination or investigation.
The IRS received from a third party (e.g., informant, other governmental agency, or the media) information regarding the taxpayer’s noncompliance.
The IRS has already begun a civil examination or criminal investigation that is directly in connection with the specific liability of the taxpayer.
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).
Below please find a few examples of what constitute a voluntary disclosure:
An attorney writes a letter to the IRS enclosing amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns). The letter states that the taxpayer will pay the tax, interest, and any penalties determined by the IRS to be applicable in full. The correspondence meets the timeliness standard set forth above.
The IRS sends a notice stating that it has no record of a tax return filed for a certain year and inquires whether the taxpayer has filed a return for that year. The taxpayer has not filed that year’s tax return and makes a disclosure after receiving such a letter. The individual files complete and accurate returns and makes arrangements with the IRS to pay, in full, the tax, interest, and any penalties determined by the IRS to be applicable . Because the IRS hasn’t started investigation or notified the taxpayer of its intent to investigate, this is considered a voluntary disclosure.
Examples of what are not voluntary disclosures include:
A correspondence from an attorney requesting to resolve his/her client’s tax liability, and that his/her client wants to remain anonymous. This does not meet the requirements of voluntary disclosure and in addition, the identity of the taxpayer is not disclosed.
If a taxpayer discloses its IRS tax liability, while already under grand jury investigation. The end result would be the same whether or not the taxpayer knew about the grand jury investigation.
A taxpayer who is in a partnership, is not currently under investigation and makes a disclosure. However, the partner in the partnership is under investigation. The disclosure in this case is not considered a voluntary disclosure because the investigation of the specific liability is already under investigation, whether or not the taxpayer knew about the investigation.
A taxpayer’s employee notifies the IRS regarding a double set of books. Thereafter, the taxpayer discloses to the IRS. Since the IRS has already been informed by the third party of the specific taxpayer’s noncompliance, this is not a voluntary disclosure, whether or not the taxpayer knew of the about the third party’s contact with the IRS.
Internal Revenue Manual Section 9.5.11.9.1 Voluntary Disclosure Protocols
All voluntary disclosures must meet the requirements contained in subsection 9.5.11.9 above. There is not particular format that the voluntary disclosure must abide by when making the voluntary disclosure communication. In addition, the communication by the taxpayer or their representative can be either verbally or in writing. Determining whether or not a communication is a IRS Voluntary Disclosure can only be done by examining the facts and circumstances of each situation and investigation.