Obeying U.S tax laws is a legal obligation every citizen needs to uphold. In fact, the nation’s tax system is grounded on “voluntary compliance.” While numerous taxpayers adhere to their Internal Revenue Service (IRS) obligations, not everyone complies. For this reason, the IRS institutes several civil and criminal sanctions against non-compliant taxpayers. The sanctions could end in penalties, fines, or even imprisonment.
Sometimes, individuals are a target of non-compliance, even with voluntary compliance of tax or tax-related obligations. An experienced tax attorney well versed in IRS issues can help resolve these types of issues. However, there are other things taxpayers can do early on to prevent these problems. One solution is submitting a voluntary disclosure, which makes individuals less likely to face criminal prosecution.
What is the voluntary disclosure practice?
The voluntary disclosure practice is a long-established IRS custom executed by the agency’s Criminal Investigation (CI) wing. Before recommending criminal prosecution, the CI considers voluntary disclosure that has been submitted on time and accurately.
It is important to note that voluntary disclosure does not offer immunity to prosecution. However, it can result in the CI withdrawing a recommendation for criminal prosecution. The voluntary disclosure also requires individuals to:
- Cooperate with the IRS to determine the total amount owed to the government
- Establish payment arrangements for the total taxes owed, as well as interest and any applicable penalties
The disclosure is considered timely if the IRS gets it before:
- The commencement of a criminal investigation or civil examination
- Notification of non-compliance is received from a third party
- Conducting a criminal enforcement action and acquires information related to the specific area of non-compliance
Who may disclose?
Voluntary disclosure is for individuals who have committed tax or tax-related crimes or are criminally exposed after violating the law willingly. The act of disclosure makes them eligible for protection from criminal prosecution.
If an individual has violated the law unwillingly, the voluntary disclosure practice does not apply. In these cases, other options are available, such as correcting past violations by filing amended or past due returns.
How to disclose
Participating in the voluntary disclosure scheme is a process that involves two key steps. First, individuals will need to seek preclearance by completing the first part of Form 14457, Voluntary Disclosure Practice Pre-clearance Request and Application. Preclearance is not an indication of initial integration into the program, but it does determine eligibility. This form may be sent to the IRS via fax or mail.
The second step is submitting the second part of the application for voluntary disclosure. This next step occurs after receiving preclearance confirmation and should be finalized within 45 days or later with a request for an extension in writing.
The CI will determine eligibility in the disclosure practice after reviewing the second portion of form 14457. Once approved, a preliminary acceptance letter will be sent. The CI will then forward form 14457 to the IRS’s civil section. The case will be assigned, and an examiner will get in touch.
While the eligibility of the voluntary disclosure practice will not apply to everyone, it is a highly recommended option for those who wish to rectify tax-related violations without persecution from the Criminal Investigation department of the IRS.