June 2024 Foodman Website and JD Supra
IRS Voluntary Disclosure Practice Práctica IRS Divulgación Voluntaria

Taxpayers that have willfully failed to comply with tax or tax-related obligations may be able to resolve their non-compliance and limit their exposure to criminal prosecution by filing an application to the IRS Voluntary Disclosure Practice.  The IRS Voluntary Disclosure Practice is a compliance option only available to taxpayers that have willfully failed to comply with tax or tax related obligations or committed tax or tax-related crimes and therefore have criminal exposure due to the willful violation of the law. The IRS  can impose civil and criminal sanctions on non-compliant taxpayers and failure to voluntarily comply may result in imprisonment, fines, and penalties. Taxpayers who participate in the IRS Voluntary Disclosure Practice are seeking protection from potential criminal prosecution.

The IRS Voluntary Practice belongs to IRS Criminal Investigation (CI). “CI accepts timely, accurate, and complete voluntary disclosures under consideration when determining whether to recommend criminal prosecution. A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”  Given the complexities of the application process, taxpayers that seek to file an application are recommended to do so with the assistance and guidance  of an experienced tax professional.

IRS Voluntary Disclosure Practice is not for math errors or other mistakes

The IRS Voluntary Disclosure Practice only looks at “Willfulness” which the IRS defines as: “the intentional, purposeful, deliberate act to hide income or assets and therefore evade filing requirements or payment of tax.”  Taxpayers have to state that they were willful in their actions when filing an application. Taxpayers that have illegal sources of income cannot file an application. Income from activities determined to be legal under state law but illegal under federal laws is considered illegal source income.

How does a Voluntary Disclosure Occur? Via IRS Form 14457 – Voluntary Disclosure Practice Preclearance Request and Application

  • When a Taxpayer provides a truthful, timely, and complete disclosure of their willful noncompliance through designated procedures. It also requires the taxpayer to: Timely submit all required documentation including a Form 2848 for each taxpayer and entity entering the program. A voluntary disclosure is “timely” if IRS receives it before they have: commenced a civil examination or criminal investigation, received information from a third party (e.g., informant, other governmental agency, John Doe summons, etc.) alerting IRS to the taxpayer’s noncompliance, and acquired information directly related to the taxpayer’s specific noncompliance from a criminal enforcement action (e.g., search warrant, grand jury subpoena, etc.).
  • Taxpayer cooperates with the IRS in determining their correct tax liability
  • Taxpayer pays in full or secures a full-pay installment agreement for the tax, interest, and any applicable penalties that the taxpayer owes.

 IRS Voluntary Disclosure is a Two Part Electronic Application Process

Form 14457 Part I is a preclearance to determine the Taxpayer’s eligibility for the program and Part II is a determination of the Taxpayer’s preliminary acceptance.

To apply, a Taxpayer must first:

  • Have ready all required documentation as outlined in the Form 14457 instructions.
  • If the Voluntary Disclosure is being presented through a power of attorney, a Form 2848, Power of Attorney and Declaration of Representative must be submitted for each individual taxpayer and entity entering the program.
  • Fill out Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application to request preclearance.
  • Fax the application to 844-253-5613.
  • Once CI receives the Taxpayer’s Part I, the IRS will determine if the Taxpayer is pre-cleared to enter the Practice.
  • Preclearance determines the taxpayer’s eligibility for the practice but does not guarantee preliminary acceptance into the practice.
  • Once the taxpayer receives a preclearance letter, the taxpayer must electronically submit Part II of the Voluntary Disclosure Application within 45 days. CI will review the taxpayer’s submission on Part II of Form 14457 to determine pre-acceptance in the program.
  • If approved to participate, CI will provide the taxpayer with a Preliminary Acceptance Letter, and the taxpayer’s Form 14457 will be forwarded to a civil section of the IRS.
  • Once the taxpayer’s case is assigned to a civil examiner, the taxpayer will be contacted. Taxpayer must cooperate with the examiner in providing requested documents and information and will be required to provide a statement acknowledging their willful failure to comply with tax or tax related obligations.
  • If the taxpayer is unable to submit Part II of the voluntary disclosure application within 45 days of the preclearance letter, the taxpayer may voluntarily withdraw from the program or make a written request for an extension. Extension requests will be approved on a case-by-case basis and no more than one 45-day extension will be permitted.

IRS Form 14457 (February 2022) is a nineteen page application. Here are a few extracts of Form 14457 that provide insight to the type of information and documentation that the taxpayer needs to provide to IRS CI:

  • Disclosure special features (check all that apply) are: Domestic Issues, Offshore Issues, Estate & Gift Issues Employment Tax Issues, Virtual Currency Issues and Other Issues.
  • List ALL entities (corporations, partnerships, etc.) in any way related to the noncompliance during the disclosure period.
  • List ALL entities you owned or controlled or were the beneficial owner of, either directly or indirectly.
  • Do you believe that the IRS has obtained information concerning your tax liability? If “Yes,” specify.
  • Disclose if you, your spouse, or any related entities have received a notice of deficiency from the Internal Revenue Service (“IRS”) for any year in the anticipated disclosure period. If so, submit a copy of the notice of deficiency along with your preclearance request.
  • Disclose if you, your spouse, or any related entities are currently under audit or criminal investigation by the IRS or any other law enforcement authority and if any income is sourced from an illegal activity
  • List ALL domestic and foreign noncompliant financial accounts you owned or controlled or were the beneficial owner of, either directly or indirectly.
  • List ALL domestic and foreign noncompliant virtual currency you owned or controlled or were the beneficial owner of, either directly or indirectly.
  • Provide estimated total annual unreported income during the disclosure period.
  • Provide estimated annual range of the highest aggregate value of your offshore holdings.
  • Has anyone, including a foreign government or a foreign financial institution, advised you that your offshore account records, which are the subject of this voluntary disclosure, were susceptible to being turned over to the U.S. Government pursuant to an official request.
  • Identify all individuals who aided in your willful noncompliance.
  • By signing this document, I certify that I am willing to continue to cooperate with the IRS, including in assessing my income tax liabilities and making good faith arrangements to pay all taxes, interest, and penalties associated with this voluntary disclosure.
  • Under penalties of perjury, I declare that I have examined this document and accompanying schedules and statements and to the best of my knowledge and belief, they are true, correct, and complete.

Know this

  • 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 prior to submitting amended income tax returns can be protected under attorney-client privilege until a Voluntary Disclosure is made.
  • It is evident that the IRS is cracking down on tax evasion including virtual currency. Have all of your records up to date and organized in order to identify cost basis, taxable transactions and potential capital gains, losses, and income.
  • If the IRS finds the Taxpayer first, the Taxpayer will not qualify for the IRS Voluntary Disclosure Practice Program.

Who is your Professional Tax Expert?