Dallas Bar Association

Avoiding Criminal Tax Problems: Voluntary Disclosure

By Joel N. Crouch

The federal tax system is a voluntary system that relies on taxpayers to completely and accurately report their income and deductions and pay their taxes. Taxpayers who intentionally underreport their income or over report their deductions risk significant criminal penalties. For taxpayers who have a guilty conscience or second thoughts, the Internal Revenue Manual has a voluntary disclosure practice that allows taxpayers to come forward to reduce the chance of a criminal investigation and prosecution.

Although an IRS voluntary disclosure does not automatically guarantee immunity from prosecution, historically the IRS has not pursued criminal charges against taxpayers who meet the requirements of the voluntary disclosure practice. A voluntary disclosure occurs when a taxpayer truthfully, timely and completely notifies the IRS of issues on tax returns or other documents filed with the IRS. In addition, a taxpayer must agree to cooperate with the IRS in determining his or her correct tax liability and make good faith arrangements with the IRS to pay in full any tax, interest and penalties determined by the IRS to be applicable.

Timeliness is the most important for a voluntary disclosure. A disclosure is timely if it is made before the IRS has initiated a civil examination or criminal investigation of the taxpayer, or before the IRS has notified the taxpayer that it intends to commence a civil examination or criminal investigation. A disclosure is not timely if it is made after the IRS receives information from either a third party alerting the IRS to the taxpayer’s noncompliance or a criminal enforcement action, such as a search warrant or grand jury subpoena.

A taxpayer who is concerned that a third party, such as a former spouse, disgruntled employee or former business partner, may provide information to the IRS should consider making a voluntary disclosure before the third party contacts to the IRS. In these situations, establishing the day, and even the time, a disclosure was made to the IRS can be critical. 

The IRS has publicly announced that it does not consider a “quiet disclosure” to be a voluntary disclosure as defined by the Internal Revenue Manual. A “quiet disclosure” is when a taxpayer files amended returns and does not notify the IRS or agree to cooperate and pay any resulting tax, penalty and interest in full. As a result, a taxpayer making a quiet disclosure risks exposure to a criminal investigation and possible prosecution.

In 2009, the IRS introduced a special variation of its voluntary disclosure practice, known as the Offshore Voluntary Disclosure Initiative (OVDI). The 2009 OVDI allowed taxpayers who had failed to disclose to the IRS offshore activities, such as offshore bank accounts and interests in foreign entities, to disclose this information to the IRS and thereby avoid potential criminal penalties and reduce potential civil penalties. Although the 2009 OVDI was available to all taxpayers, the genesis of the initiative was the agreement between the U.S. and Switzerland releasing 4450 names of U.S. persons with accounts at the Swiss bank, UBS.

Approximately 15,000 taxpayers, with bank accounts in more than 60 countries, came forward to participate in the 2009 OVDI, agreeing to pay additional tax for the years 2003 through 2008, a 20 percent penalty and interest on the additional tax due, and a penalty equal to 20 percent of the highest account balance during the years 2003 through 2008. Since the 2009 OVDI concluded on October 15, 2009, approximately 3,000 additional taxpayers have come forward to disclose their foreign activities to the IRS. The IRS has collected millions of dollars of taxes, penalties and interest from taxpayers who participated in the 2009 OVDI, making it, by far, the most successful IRS voluntary disclosure program.

In the wake of the focus on foreign activity, the IRS has investigated and prosecuted more than 30 cases and has obtained indictments and guilty pleas from taxpayers who did not participate in the 2009 OVDI and the professionals who advised the taxpayers. In addition, the IRS has continued its efforts to obtain information from foreign banks, including banks in Hong Kong, Israel and other jurisdictions beyond Switzerland. Hoping to duplicate the success of the 2009 OVDI, on February 8, 2011, the IRS announced the 2011 OVDI. The 2011 OVDI is similar to the 2009 OVDI, but with more restrictive terms and higher civil penalties. The deadline for participating in the 2011 OVDI and submitting all necessary information, including all amended tax returns, is August 31, 2011.

Joel Crouch, a partner at Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. is Board Certified in Tax Law and handles civil and criminal tax controversies. He can be reached at jcrouch@meadowscollier.com.

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