For decades the IRS Criminal Investigation (IRS-CI) division has provided an opportunity for taxpayers with previously undisclosed income or other tax issues to voluntarily contact the IRS, disclose the problem, and resolve any issues with a civil settlement. As long as a voluntary disclosure is timely and truthful (and does not involve income derived from illegal activity), successfully completing an IRS voluntary disclosure effectively provides a taxpayer with immunity from criminal investigation and prosecution.
(It should be noted that for a number of years taxpayers with undisclosed foreign bank accounts were offered a separate program—the OVDP—to resolve offshore reporting issues. The OVDP closed in 2018. Therefore, taxpayers with unreported foreign accounts may now also avail themselves of the “traditional” IRS-CI voluntary disclosure procedures.)
Earlier this week IRS updated its voluntary disclosure procedures and instructions and announced some significant revisions to Form 14457, the “Voluntary Disclosure Practice Preclearance Request and Application.”
One the more practical, but important, updates is the method of initiating a voluntary disclosure. Previously, taxpayers were required to snail-mail Part II of Form 14457 with original “wet” signatures to IRS. Now, IRS-CI will accept photocopied, scanned, or faxed signatures. Also, IRS-CI now encourages taxpayers to submit Form 14457 via fax to a dedicated efax line ((844)-253-5613).
The voluntary disclosure lookback period remains six years. However, the period now runs from the date Part II of Form 14457 is received by IRS-CI, not (as it was before), when the period ran from the date Part II was submitted by the taxpayer. Another significant change requires that taxpayers disclose all domestic and foreign noncompliant virtual currency on Part I of the revised Form 14457, suggesting that IRS-CI envisions new cryptocurrency enforcement efforts that may drive taxpayers into the voluntary disclosure program before IRS catches up to them.
There is no change to the standard “one-time” 75% fraud penalty typically imposed in voluntary disclosure cases on the highest income year during the six-year lookback period (instead of the myriad of other civil penalties that might otherwise be in play). However, the revised application sets out some additional guidance in some specific tax situations: cases involving fraud by both a business entity and a related individual are subject to the 75% fraud penalty at both the entity and individual levels; in payroll tax cases the 75% penalty will be assessed on the tax quarter reflecting the highest employment tax liability; there is a reduced penalty of 50% if a voluntary disclosure involves estate taxes; cases involving gift and generation-skipping transfer tax penalties will require that taxpayers submit all required Forms 709 (even if they fall beyond the six-year lookback period); the 75% penalty will be assessed on the highest tax year (unless the case involves just one year, which will instead be subject to a reduced 50% penalty).
Lastly, the new voluntary disclosure practice now requires taxpayers applying for the program to disclose any notices of deficiency that the taxpayer received and/or any tax litigation related to the tax issues and tax years encompassed by the taxpayer's voluntary disclosure. The revised instructions indicate that deficiency notices or litigation that pre-exists the voluntary disclosure application may result in a determination by IRS-CI that the disclosure is untimely.