An Overview of IRS CI’s Voluntary Disclosure Practice

For high-income and high-net-worth U.S. taxpayers who are at risk of facing criminal prosecution due to willful tax law violations, making a voluntary disclosure to IRS Criminal Investigation (IRS CI) can facilitate a favorable resolution that avoids formal charges. But, making a voluntary disclosure presents its own risks—and it isn’t an option in all cases. In this article, Texas criminal tax lawyer Lawrence Brown discusses the eligibility criteria and highlights some other key considerations for leveraging IRS CI’s Voluntary Disclosure Practice.

IRS CI’s Voluntary Disclosure Practice: A Means to Resolve Willful Tax Law Violations

Willfully underreporting or underpaying a U.S. taxpayer’s federal tax liability can lead to criminal prosecution under various provisions of the Internal Revenue Code. IRS CI targets all types of willful tax law violations, and it works with the U.S. Department of Justice (DOJ) to pursue criminal charges when warranted. Facing criminal charges in federal district court presents substantial risks—and these are risks that high-income and high-net-worth taxpayers should seek to avoid whenever possible.

One way to avoid the risk of criminal prosecution is by leveraging IRS CI’s Voluntary Disclosure Practice (VDP).

The Voluntary Disclosure Practice provides a means to resolve willful tax law violations before taxpayers face scrutiny from the federal government. Once the IRS initiates an audit or IRS CI opens an investigation, any disclosures are no longer considered “voluntary.” To qualify for the benefits of making a voluntary disclosure to IRS CI, taxpayers must also:

• Submit all required documentation to IRS CI (including, but not limited to, Part I of IRS Form 14457);
• Cooperate with the IRS in determining their tax liability; and,
• Pay their tax liability in full (plus applicable interest and penalties), unless otherwise agreed.

Taxpayers cannot simply choose to participate in the Voluntary Disclosure Practice. Instead, they must initiate the process by submitting an initial filing to IRS CI. Upon reviewing this initial filing, IRS CI will determine if a taxpayer is “pre-cleared” to participate in the VDP. As IRS CI makes clear, “[p]reclearance determines your eligibility for the practice but does not guarantee preliminary acceptance into the practice.”

As IRS CI also makes clear, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” This is another key aspect of the Voluntary Disclosure Practice. Even when a taxpayer meets the basic eligibility criteria for submitting a voluntary disclosure, a favorable outcome that avoids prosecution is not a sure thing—and this makes it critical to work with an experienced Texas criminal tax lawyer from the outset of the process.

When is a Tax Law Violation Considered “Willful” (and What If It Isn’t)?

Making a voluntary disclosure to IRS CI is an option—and is only an option—for resolving willful tax law violations. So, when is a violation considered “willful”?

IRS CI considers a violation of the Internal Revenue Code to be willful if it involves an “intentional, purposeful, deliberate act to hide income or assets and therefore evade filing requirements or payment of tax.” Essentially, if you knew you were underreporting or underpaying your federal tax liability, your conduct was willful, and it potentially exposed you to criminal prosecution. Making a voluntary disclosure involves acknowledging the willfulness of your actions—and without a guarantee of immunity, this can be an extremely high-risk thing to do.

By working closely with experienced tax counsel, however, you can be confident that you are making smart decisions, and you can substantially reduce your risk of federal criminal charges. The key is to take an informed and proactive approach that focuses on working with the IRS to achieve a resolution that is satisfactory to both parties. If you engage an experienced Texas criminal tax lawyer to prepare your voluntary disclosure and work with the IRS on your behalf, you can ensure that the process is as efficient and favorable as possible, and you can avoid miscues that have the potential to lead to unnecessary adverse outcomes.

What if you recently discovered an inadvertent filing mistake?

If you inadvertently underreported or underpaid your federal tax liability, you may owe the IRS, but you should not be at risk for criminal prosecution. In this scenario, you don’t have the option of making a voluntary disclosure—but there are other options available to you. If leveraging the VDP isn’t your best option, your lawyer can determine what is, and then your lawyer can guide you through the process of resolving your tax controversy with the IRS.

Who Should Consider Making a Voluntary Disclosure to IRS CI?

With all of this in mind, when should high-income and high-net-worth taxpayers consider making a voluntary disclosure to IRS CI? Taxpayers can use the VDP to resolve all types of willful tax law violations—including (but not limited to):

• Income tax evasion and tax fraud (including the use of abusive tax shelters)
• Employment tax fraud
• Employee retention credit (ERC) and paycheck protection program (PPP) fraud
• Offshore bank account disclosure violations
• Cryptocurrency-related tax law violations

Remember, a key aspect of the VDP is that a taxpayer’s disclosure must be voluntary—and a disclosure is no longer voluntary once an audit or investigation is underway. With this in mind, before contemplating the possibility of a voluntary disclosure, it is imperative that taxpayers work with their counsel to confirm that they remain eligible. If you attempt to submit a voluntary disclosure when you aren’t eligible, the IRS (and the DOJ) can use your disclosure against you.

Request a Confidential Consultation with Texas Criminal Tax Lawyer Lawrence Brown

Do you need to know more about IRS CI’s Voluntary Disclosure Practice? With offices in Fort Worth, we represent high-income and high-net-worth taxpayers throughout Texas and nationwide. If you would like to speak with one of our lawyers in confidence, we invite you to get in touch. Call 888-870-0025 or contact us confidentially online to request an appointment with a Texas criminal tax lawyer at Brown Tax, P.C.