What do you do if you have committed a serious tax crime but the IRS has not yet discovered it? Tax amnesty has been a longstanding practice of the IRS Criminal Investigation division whereby taxpayers are allowed to make timely, accurate, and complete voluntary disclosures to avoid criminal prosecution.
Taxpayers are given tax amnesty for “coming clean” regarding their tax crimes under the Domestic Voluntary Disclosure Program (not to be confused with streamlined domestic offshore procedures which is a completely unrelated program)
- 1 Domestic Voluntary Disclosure
- 2 Steps for Making a Voluntary Disclosure Under the Revised Guidelines
- 3 Disclosure Periods and Examination Process
- 4 Penalty Calculation
- 5 Who Needs to Use the Voluntary Disclosure Practice?
- 6 Requirements for Tax Amnesty
Domestic Voluntary Disclosure
The IRS issued a memorandum on November 29, 2018 that updates the process for domestic and offshore voluntary disclosures after the 2014 offshore voluntary disclosure program ended on September 28, 2018.
The OVDP program began in 2014 as a modified version of the 2012 OVDP program, which itself followed voluntary disclosure programs offered in 2011 and 2009.
Steps for Making a Voluntary Disclosure Under the Revised Guidelines
1. Make a pre-clearance request
Criminal Investigation (CI) will screen all voluntary disclosure requests whether domestic, offshore, or other to determine if a taxpayer is eligible to make a voluntary disclosure.
To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request.
2. Submit required voluntary disclosure documents
3. Go through an examination
Disclosure Periods and Examination Process
Like the OVDP, the updated voluntary disclosure practice has a civil resolution framework with a discrete disclosure period.
- In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management
- In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved
- With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).
Taxpayers must submit all required returns and reports for the disclosure period
Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
- The civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
- A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties.
- Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
- Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
- Taxpayers retain the right to request an appeal with the Office of Appeals.
Who Needs to Use the Voluntary Disclosure Practice?
Taxpayers who have many years of delinquent tax returns can be subject to criminal prosecution.
It is important to note that most cases (probably >99%) involving delinquent returns do not require a voluntary disclosure. Taxpayers should simply file up to 6 years of previously unfiled tax returns. 6 years (and not further) is recommended because the IRS’ Policy Statement 5-133 requires the filing of returns for the last 6 years, with prior managerial approval required to pick up more or less than six years of returns. The IRS recognizes that records tend to become unavailable or unreliable further back than 6 years.
When taxpayers have knowingly omitted income on their tax returns, they have committed tax evasion. Whether the IRS will discover the tax evasion and will refer it for prosecution is another matter. A large number of taxpayers probably under-report some income, accidentally or knowingly. Those that have significantly omitted income and do not have a valid reason for the under-reporting should consider entering into the domestic voluntary disclosure program.
How much is significant? It depends on various factors as well as the local criminal investigations group. Usually each local group has a threshold for deciding whether to commence a primary investigation.
For cases where the unreported amount is not as significant, the tax returns may simply be amended for a period of 3 or 6 years, depending on the situation.
Requirements for Tax Amnesty
In order to qualify for tax amnesty under the voluntary disclosure programs, the disclosure must be truthful, timely, and complete.
- Truthful and complete: The taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability. The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
- Timely: A disclosure is 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 commence such an examination or investigation.
- 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.
- The IRS has initiated a civil examination or criminal investigation which is directly related to 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).
Note that a voluntary disclosure will not automatically guarantee immunity from prosecution. However, it has been IRS’s practice to not refer voluntary disclosure cases for prosecution except where the income comes from illegal sources.
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