Voluntary Disclosures take two forms, Offshore and Domestic. There has been a great deal of attention paid to Offshore Voluntary Disclosure Programs, but little attention has been paid to the Domestic program.
The Internal Revenue Manual provides U.S. taxpayers with the opportunity to come forward and possibly avoid prosecution if the following criteria are met:
“A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:
a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and
b. 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.
A disclosure is timely if it is received before:
a. 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;
b. 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;
c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
d. 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).”
Taxpayers should consider making a Domestic Voluntary Disclosure in circumstances when they had unreported legal source income which they intentionally under reported or expenses which were overstated. Under reporting of income is often found in “cash” businesses and over stating or mischaracterization of expenses is often found when labor is undocumented or improperly claimed as independent contractors.
Whether to use the voluntary disclosure method or simply amend returns requires careful analysis. The consequences of guessing wrong can be prosecutions or imposition of civil tax fraud penalties. Skilled legal advice is needed in determining which method to employ. Use of an attorney establishes the attorney client privilege for communications between the taxpayer and the attorney whereas there is no similar accountant taxpayer privilege. We, at MillarLaw, are experienced in both Offshore and Domestic Voluntary Disclosures and other approaches to help you or your clients achieve peace of mind at the lowest possible risk and cost.