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Tax Compliance, IRS Voluntary Disclosure and Other Domestic Failures

Tax Compliance, IRS Voluntary Disclosure and Other Domestic Failures

You diligently paid your taxes for years, satisfying all the IRS’ disclosure or reporting obligations – or so you thought. Or maybe you were actually deliberately understating your tax filings. In truth, the U.S. Tax Code is complex and impossible to fully understand without careful study and consideration. That said, the complexity of the code itself is merely the starting point of the possible troubles. A full and thorough understanding of all obligations can only be achieved after a meticulous review of case law, IRS polies and guidance, and other secondary sources. Because of this, numerous taxpayers come to depend upon the advice and guidance of tax professionals.

Nevertheless, in spite of the taxpayer’s reliance on a professional, it is still the taxpayer who is responsible or held civilly and criminally liable for any willful misstatement or omission that may appear in his or her tax filing history. Moreover, consider that tax returns get filed under the penalty of perjury. By the time a taxpayer finally discovers that he or she has failed to meet certain obligations, he or she might already be in peril of years of non-compliance that can result in significant penalties, interest, fines, and – depending on conduct – the possibility of a criminal tax investigation and criminal tax penalties.

If the IRS Hasn’t Noticed My Tax Non-Compliance Over Past Years, Why Would They Notice it Now?

A range of changing circumstances and other reasons that explain why tax compliance failures including non-disclosure of accounts, assets, and sources of income can quickly become a pressing concern even in cases where you have reason to believe that you “got away with it”. Consider the following scenarios:

  1. In the wake of the breakup of a marriage, one of the ex-spouses hires a forensic accountant for the divorce proceedings. The forensic accountant finds tax fraud by the other spouse. With this information, in hand, the ex threatens to disclose this information to the IRS and trigger a criminal investigation in an attempt to extort a bigger divorce settlement.
  2. Someone who owns a rapidly growing business discloses a second set of books to a potential buyer. Unexpectedly, the potential buyer threatens that he or she will disclose this to the IRS and relevant state agencies in order to leverage a lower acquisition price.
  3. The owner of a company is targeted for an audit by state regulators. The owner is concerned that the federal acts of fraud or other wrong-doing will be discovered in the audit.

Voluntary Disclosure Could Provide a Degree of Insulation Against any Criminal Penalties

A well filed and legally sufficient Voluntary Disclosures given to the IRS can furnish a taxpayer with a level of protection against criminal charges relating to his or her disclosed non-compliance. Simply put, the taxpayer will not be recommended for criminal prosecution. For efficient administration of the tax system, the IRS has long held that taxpayers who step forward voluntarily, make a full and complete disclosure, and agree to remit a penalty can avoid criminal penalties, including prison. However, the kind of disclosure that should be made should be reliant upon the taxpayer’s risk.

Be warned: A voluntary disclosure should never be done without the guidance of experience criminal tax defense counsel and the use of a Kovel Accountant to protect the taxpayer’s constitutional rights, attorney client privilege and the attorney’s work product!

Actually, the U.S. tax system depends heavily, at least initially, on self-reporting by taxpayers (self-assessment). If the tax system was not initially based on self-assessment, the present levels of IRS staff would make the tax system unworkable. To further encourage taxpayer compliance, even after a period of purposeful compliance failures, the IRS has held a policy that confers certain benefits on individuals who voluntarily disclose their past acts or omissions of non-compliance, file accurate returns for the affected years still open to criminal statue (generally 5 years), and who remits a full payment or goes into an approved payment plan. As long as the disclosure is voluntary, accurate, complete, and legally sufficient, the IRS has a policy of holding back from recommending these taxpayers for criminal prosecution.

When Am I Able to Make a Voluntary Disclosure?

A Voluntary Disclosure must be timely to be effective. Should the taxpayer be reasonably aware of an investigation or facts and circumstances suggesting that the government has already uncovered the non-compliance that is the subject of the disclosure is not timely. Voluntary disclosures are considered to be timely when they are made:

  1. Before the commencement of an IRS examination or prior to IRS notification to the taxpayer of an upcoming audit or examination.
  2. Before any third-party whistle-blower supplies information regarding fraud or other noncompliance to the IRS.
  3. Before the IRS acquires information regarding noncompliance from other sources.

As such, it is important to be timely when considering a Voluntary Disclosure. Nevertheless, taxpayers must not be hasty in their decision to file for Voluntary Disclosure since there are certain scenarios, such as illegal source income, where such a disclosure would be ineffective. Furthermore, taxpayers need to engage in a careful analysis of their behaviors and circumstances and in what ways they may be interpreted by an IRS examiner. Taxpayers should also consider whether a “noisy” or “quiet” disclosure is more appropriate for their unique tax situation.

What is the Difference between Noisy Disclosure and a Quiet Disclosure?

A voluntary disclosure is considered a noisy one because the criminal investigation division is contacted at the beginning of the process. A quiet disclosure would simply involve filing 5 years of amended returns at the client’s normal service center. The advantage of this latter method is that the taxpayer could be sheltered from the costs and stress of submitting to an audit that ordinarily comes on the heels of a loud voluntary disclosure. The disadvantage of a quiet disclosure is that it could be viewed as an admission of guilt without the expected pass on criminal prosecution that follows a loud disclosure. The critical decision to do a loud or quiet disclosure should not be made without experienced criminal tax defense attorneys.

Our Experienced Tax Professionals Will Guide You Through the Voluntary Disclosure Process

The seasoned, hard working tax attorneys and Kovel CPAs at our law firm can help concerned taxpayers understand what their options are. As soon as we have explained the process and the potential opportunities to mitigate the circumstances to the taxpayer, our experienced tax attorneys can take care of every step of the process. To schedule a consultation with a tax lawyer call us today!


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