What can I do if I made a willful mistake and willfully failed to comply with my tax obligations?

Voluntary compliance is the foundation of the US tax system. Although the majority of US Taxpayers voluntarily comply with their obligations, some fail to do so (willful mistake).

Submitting a voluntary disclosure via the Voluntary Disclosure Practice may resolve a Taxpayer’s non-compliance and limit exposure to criminal prosecution

The Voluntary Disclosure Practice (VDP) is managed by the IRS Criminal Investigation Unit (IRS-CI). A voluntary disclosure takes place with IRS-CI when a Taxpayer:

• Provides a truthful, timely, and complete disclosure through designated procedures.
• Cooperates in determining their correct tax liability.
• Makes good faith arrangements to pay in full the tax, interest and any applicable penalties owed.

Timely, accurate, and complete voluntary disclosures are taken under consideration by IRS-CI when determining whether to recommend criminal prosecution.   While a voluntary disclosure will not automatically guarantee immunity from prosecution, it historically results no prosecution.

IRS-CI defines a disclosure “timely” if it receives a disclosure before:

• Commencing a civil examination or criminal investigation.
• Receiving information from a third party (informant, another governmental agency, John Doe summons, etc.) alerting them to a Taxpayer’s noncompliance.
• Acquiring information directly related to a Taxpayer’s specific noncompliance from a criminal enforcement action (search warrant, grand jury subpoena).

Who can submit a voluntary disclosure?

• Individuals (U.S. citizens, Green Card holders, Non-Resident Aliens, Expatriates)
• Trusts
• Partnerships
• Executors
• Corporations (LLCs)

Typical Voluntary Disclosures Features

• Domestic issues
• Offshore issues
• Estate & Gift issues
• Employment Tax issues
• Virtual Currency issues

A Voluntary Disclosure is a 2 STEP process

To apply for the VDP, a Taxpayer must first:

• Fill out Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application PDF to request preclearance. Preclearance determines a Taxpayer’s eligibility for the program but does not guarantee preliminary acceptance into it.  Part I can be faxed or emailed to IRS-CI.  Part I is the Preclearance request and it is mandatory by IRS-CI.
• Submit Part II of the Voluntary Disclosure Application within 45 days or make a written request for additional time once the Taxpayer has received preclearance confirmation.  Extension requests are approved on a case-by-case basis. No more than one, 45-day, extension is permitted.  Part II is the actual voluntary disclosure and must include a narrative statement of facts detailing the Taxpayer’s willful conduct. 

IRS-CI reviews Part II of Form 14457 and determines if the Taxpayer can participate in the VDP. If approved to participate, CI will provide the Taxpayer with a Preliminary Acceptance Letter and forward the Taxpayer’s Form 14457 to a civil section of the IRS. Once a Taxpayer’s case is assigned, an examiner contacts the taxpayer.  Full Taxpayer’s cooperation with the examiner in providing documents and information is expected.

The determination of whether a Taxpayers behavior is willful more complicated than it seems at first blush

Under the U.S. tax code, a “Willful mistake” on a US Tax return can be the difference between only money consequences and a prison sentence. So yes, there a consequential difference between an “innocent mistake” and a “willful mistake”.

According to the Internal Revenue Manual (Manual), Willfulness is shown through a Taxpayer’s knowledge of the Internal Revenue Code reporting requirements and the person’s conscious choice to not comply with those requirements.   

The distinction between a willful mistake and an innocent one is further muddied by the fact that the current U.S. Tax Code including accompanying regulations is around 4,000 pages of words that are virtually incomprehensible for all but a tiny number of income tax professionals.

Hire a US licensed CPA with an international tax practice who will recommend a US licensed tax attorney so that all information and work done can be protected under attorney-client privilege until a VDP is made

Submitting a VDP and IRS Form 14457 is a challenging task that should be done in consultation with an income tax controversy attorney and with the CPA who you hire.  Voluntary disclosures cover a six-year period and are intended to be for Taxpayers that want to come into compliance and avoid potential criminal prosecution.

Do not wait until the IRS finds you first.

Get started with coming into compliance!

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