July 2017 JD Supra
jd supra logo

DVD (Domestic Voluntary Disclosure) can be an option for a Taxpayer without foreign financial accounts or foreign financial issues.   It is a choice for Taxpayers that are out of domestic compliance, want to come into compliance and inoculate as much as possible against criminal prosecution.

Per the Internal Revenue Code: “examples of conduct that may imply “the attempt to evade or defeat any tax”” are:

  1. keeping a double set of books
  2. making false entries, alterations, invoices, or documents
  3. destroying books or records
  4. concealing assets or covering up sources of income
  5. handling one’s affairs to avoid making records usual in transactions of the kind
  6. any conduct, the likely effect of which would be to mislead or to conceal

The Code also provides “examples of actions that might constitute the attempted evasion of the payment of tax”:

  • concealing assets
  • reporting income through others
  • misappropriating, converting, and diverting corporate assets
  • filing late returns
  • failing to withhold taxes as required by law
  • filing false declarations of estimated taxes
  • filing false tentative corporate returns

A Domestic Voluntary Disclosure has to be truthful, timely, and complete.  The Code requires the Taxpayer to:

  1. “Show a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability, and
  2. Make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable”.

Timing is critical in a DVD.  Here is what the Code states:  “A disclosure is timely if it is received before:

  1. 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.
  2. 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.
  3. The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.
  4. 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)”.

Although a Taxpayer discloses voluntarily, the Taxpayer has no guarantee that criminal prosecution will not be recommended.  In a DVD, the voluntary disclosure by the Taxpayer is considered along with all other related factors.  Just like the fine print in Mutual Funds:  “past performance is not an indicator of future results”.  In sum, a voluntary disclosure does not automatically guarantee immunity from prosecution.  But it can decrease the likelihood of prosecution being recommended. All bets are off if the Taxpayer has illegal source income.

Don’t be a victim of your own making.  If you are a Taxpayer that has engaged in willful conduct, you are at risk for criminal prosecution.  Consult your tax specialist.