IRS Criminal Investigation Voluntary Disclosure Practice and Form 14457

If you suspect you may be investigated for a criminal tax matter, the best thing to do may be to come clean with a voluntary disclosure. The IRS’s Voluntary Disclosure Practice may be able to help you prevent or reduce criminal prosecution for past actions related to IRS code violations. However, you should never take this step without consulting with an attorney — to get help now, contact us today at the Timothy S. Hart Law Group, P.C. Or keep reading to learn more. In this article, we’ll go through what the Voluntary Disclosure Practice is, who should consider using this program, and how to make a voluntary disclosure.

What Is Voluntary Compliance?

The United States relies on voluntary compliance for tax collection. This refers to the concept that citizens will help the government by filing honest and correct tax returns. The income tax system in the US runs on the assumption that people will voluntarily file honest tax returns, but to ensure compliance, the system has checks and balances such as random audits of returns. To put it another way, paying income tax is compulsory. You are legally required to pay taxes. But the responsibility of declaring income, however, falls on each individual taxpayer, and it is a voluntary process. Voluntary means that the taxpayer will prepare and file a return without prompting from the government. If someone does not voluntarily file a tax return, the IRS may come after them. The agency may assess taxes and penalties and then attempt to collect the debt without the taxpayer’s cooperation. However, if you want to get into good standing with the IRS before this happens, you may be able to come forward by making a voluntary disclosure.

What Is the Voluntary Disclosure Practice?

A voluntary disclosure is when a taxpayer provides the IRS Criminal Investigation (CI) unit with information about unreported income or other issues with their tax returns. The taxpayer must come forward of their own free will, and they must do so before the CI starts investigating them. If you have committed tax fraud or other tax-related offenses, the Voluntary Disclosure Practice is a compliance option. Taxpayers participate in the Voluntary Disclosure Practice plan to seek protection from criminal prosecution. Making a voluntary disclosure does not guarantee that you get immunity, but it increases the chances that the CI will not recommend your case for criminal prosecution.   When deciding whether to recommend criminal prosecution, IRS Criminal Investigation (CI) considers timely, accurate, and comprehensive voluntary disclosures.

Who Can Disclose?

Anyone who has committed tax fraud or other tax-related criminal offenses may want to consider voluntary disclosure. Typically, this option is for people who willfully broke the law. If you simply made a mistake on your tax return or failed to file by accident, you may not need to use the VDP. Instead, you can just amend your return or catch up on your unfiled tax returns. US residents, green card holders, non-resident aliens, expats, and business entities such as partnerships, corporations, non-profits, trusts, and estates are all eligible taxpayers for the Voluntary Disclosure Practice.

What Is a Timely Disclosure and Why is This Important?

You can only qualify to make a voluntary disclosure if you do so before the IRS contacts you. In particular, you must disclose before any of the following things happen:  

• The IRS starts a civil examination (such as an audit) or a criminal investigation into the issue.
• A third party (informant, another government agency, etc) alerts the IRS about your lack of compliance.
• A search warrant, subpoena, etc related to your noncompliance reaches the IRS.

Time is of the essence with voluntary disclosures. If you reach out after any of the above has occurred, you will not be able to make a voluntary disclosure. To protect yourself, contact a tax attorney as soon as possible.  

Who Should Consider Making a Voluntary Disclosure?

You should probably make a voluntary disclosure if you have engaged in willful noncompliance of the tax code and you want to get back into good standing with the IRS. Again, however, you should always consult with an attorney before making this decision.    

How to Make a Disclosure: IRS Form 14457

To request to take part in the Voluntary Disclosure Practice, there is a two-step process.   First, fill out Part 1 of Form 14457 to get preclearance before applying for the Voluntary Disclosure Practice. Preclearance establishes your eligibility for the practice but does not ensure preliminary acceptance. You then submit the form either via mail or fax, using the IRS contact details at the top of the form.   Once you’ve received preclearance confirmation, you have 45 days to submit Part II of the Voluntary Disclosure Application or make a written request for more time. Requests for extensions will be considered on a case-by-case basis. Only one 45-day extension will be authorized. To be on the safe side, you may want to ensure that you can complete all the paperwork within 90 days of applying for preclearance.  

How to Complete IRS Form 14457

As noted above, in order to take part in the Voluntary Disclosure Practice, you must first make a preclearance request, and then, if approved, you can file and submit your voluntary disclosure. Here is an overview of IRS Form 14457 and what you must include.

Part 1 – Preclearance Request

Part 1 of the form is filed to make a preclearance request to determine if you are eligible to use the Voluntary Disclosure Practice. The form has 13 sections, including:

• Your personal and contact information.
• Representative’s details (if required).
• Schedule of entities (if filing for a partnership, corporation, etc.)

The following sections help to determine that you are reaching out first and voluntarily. The IRS asks if you have any reason to believe that the IRS has obtained any information concerning your tax liability. This section also asks if you have received a notice of deficiency or are currently dealing with litigation related to the matter.

The next section is a schedule of your financial accounts. In this section, you must:

• List all domestic and foreign noncompliant financial accounts you owned or controlled (or were the beneficial owner of) directly or indirectly.
• Cover the entire disclosure period, including opened and closed accounts that held unreported funds during the disclosure period.

The final section is the schedule of virtual currency. In this section, you must:

• List all domestic and foreign non-compliant virtual currency you owned or controlled (or beneficial owner of) directly or indirectly.
• Cover the entire disclosure period, including assets acquired or disposed of during the disclosure period.

Part 2 – Voluntary Disclosure

Once you’ve received preclearance confirmation, you have 45 days to submit Part 2 of the Voluntary Disclosure Application. This part has 7 sections, including:

• Your personal and contact details, including your case control number.
• Source of the funds (US, foreign, gift/inheritance, etc.)

Next, you will need to provide your estimated total annual unreported income during the disclosure period. You will need to include the tax year and unreported income amount. If you conducted any business activity that took place outside of your home base, you will need to provide your estimated annual range of the highest aggregate value of your offshore holdings.

If you have no offshore holdings, you can skip straight to section 7, otherwise, you must complete section 6. This section concerns if you were advised that your offshore account records were susceptible to being turned over to the U.S. Government pursuant to an official request. You can simply use the checkboxes to mark your answers to the questions provided.

The final section concerns the full details of the willful tax noncompliance. In this section, you must include:

• Your personal and professional background, including age, health, education, and general financial history.
• Identify all professional advisors who rendered services to you from the inception of the noncompliance relating to the disclosure period.
• Describe the tax noncompliance in full detail.

   

What if You Don’t Make a Voluntary Disclosure?

Taxpayers who do not make a voluntary disclosure risk being caught by the IRS and facing significant penalties. If you do not participate in the IRS Voluntary Disclosure Practice and are caught, the IRS may conduct an Eggshell Audit, Reverse Eggshell Audit, IRS Special Agent Investigation, and/or Criminal Prosecution (depending on the extent and nature of the crimes). Here are some penalties you can face if you fail to make a voluntary disclosure and are caught by the IRS.

FBAR Penalties

The FBAR is an annual report that US citizens are required to file with the US Treasury Department if they have a financial interest in, or signature authority over, a financial account in a foreign country with an aggregate value of more than $10,000 at any time during the calendar year. Failure to file an FBAR on time may result in severe penalties. Willful failure to file means that a person was aware, or should have been aware, that they needed to file an FBAR but chose not to do so. For each year that a necessary FBAR was not filed, the standard penalty is $100,000 or 50% of the account’s balance at the time of the infraction, whichever is greater. Willful failure to file may even result in a prison sentence in rare situations. The usual FBAR penalty for non-willful failure to file, which means that a person did not know or could not reasonably be expected to know that they were needed to file an FBAR, is $10,000 for each year that a required FBAR was not filed.

Failure-to-File Penalties

A penalty is imposed for failure to file a tax return. Taxpayers are generally required to file income tax returns. If a taxpayer fails to do so, a penalty of 5% of the outstanding debt will be imposed. An additional 5% for each month or part thereof, while the failure persists, may also be imposed. The penalty cannot be more than 25%.

Failure-to-Pay Penalties

If a taxpayer fails to pay the amount of tax reported on the return, a penalty may be imposed of .5% of the total amount of tax shown on the return, plus an extra .5% more for each additional month or part thereof that the amount is not paid. Eventually, this penalty increases to 1% per month and it can get up to 25% of the unpaid tax.

Criminal Charges

In most cases, the IRS assesses civil penalties rather than criminal charges, but if you’re considering a voluntary disclosure, you’re probably dealing with a situation where criminal charges may come into play. If this happens, you can face severe penalties and imprisonment. Tax evasion, filing a fraudulent return, and failing to file an income tax return are all possible charges relating to tax returns. Failure to file an FBAR and filing a fake FBAR are both infractions that can carry criminal penalties. An individual convicted of tax evasion faces up to five years in prison and a fine of up to $250,000. Criminal failure to file an FBAR can result in a prison sentence and criminal penalties of up to $100,000 per form.

Why Work with a Tax Attorney

The Voluntary Disclosure Practice can be complicated. The IRS advises that taxpayers should consult a tax attorney when they are concerned that their failure to report income, pay taxes, and file mandatory information returns may be a criminal offense. Working with a tax professional provides you with experienced advice, guides you through the Voluntary Disclosure Practice, and provides up-to-date and accurate information for the IRS.

What to Expect After This Form is Filed?

Criminal Investigation will assess Part 2 of Form 14457 and determine whether you are eligible to participate in the Voluntary Disclosure Practice. If you are approved to participate, CI will send you a Preliminary Acceptance Letter and will forward your Form 14457 to an IRS civil section. An examiner will contact you after your case has been assigned. You must work with the examiner to provide additional documentation and information as requested.

Types of Issues Addressed with Voluntary Disclosure

There are several issues addressed with voluntary disclosure. Here are some taxable incomes and transactions that must be declared on your tax returns and are covered under the Voluntary Disclosure Practice.

Overseas Income and Assets

The Offshore Voluntary Disclosure Program (OVDP) is accessible to taxpayers who willfully neglect to report foreign assets in order to avoid paying taxes. OVDP offers criminal liability protection as well as special terms for resolving civil tax and penalty issues.

Unreported Tax Liabilities

The Voluntary Disclosure Practice offers taxpayers a pathway to address their outstanding tax liabilities, including income taxes.

Cryptocurrency Transactions

Cryptocurrency transactions were recently added to the Voluntary Disclosure Practice. The income tax ramifications are largely the same whether a person holds their cryptocurrency in the United States or offshore in a foreign jurisdiction. Through voluntary disclosure, taxpayers can bring both domestic and foreign cryptocurrency into tax compliance.

Business Owners with Unreported Income

It is critical to maintain tax compliance and report your business income. Voluntary disclosure allows you to report any unreported business income to address outstanding business tax liabilities.

Foreign Gifts, Bequests, and Trusts

If you deal with foreign trusts or receive foreign gifts or bequests, you may need to file Form 3520 along with your US tax return. The rules are complicated so consult with a tax pro for advice. If you didn’t file this form, you may be able to use the VDP.

Off-the-Books Employment

Working off the books refers to employment that is not reported to tax authorities, typically in order to avoid paying taxes or other legal obligations. You can use the Voluntary Disclosure Practice to reduce the risk of criminal prosecution for hiring people under the table.

Unreported Real Estate Transactions

In general, you must report any transaction that involves the sale or exchange of any present or prospective ownership interest for money, indebtedness, property, or services.

Tax Evasion

A taxpayer who commits tax evasion and is caught by the authorities without making a timely and full voluntary disclosure faces harsh penalties. Tax evasion will result in monetary penalties ranging from one-third to triple the amount of tax evaded, depending on the severity of the offense. This is a fundamental component of the Voluntary Disclosure Practice, and it is extremely rare for a person to be pursued for tax evasion if they make a full voluntary disclosure.

Gambling Winnings

Winnings from gambling are fully taxable and must be reported on your tax return. Winnings from lotteries, raffles, horse races, and casinos are examples of gambling income. It includes monetary rewards as well as the fair market value of prizes like cars and trips.  

FAQ’s

I’m Currently Under Investigation, Can I Make a Voluntary Disclosure?

No, if the IRS has launched a civil investigation, whether it is related to undeclared foreign accounts or undisclosed foreign companies, you will not be allowed to participate in the IRS’s Voluntary Disclosure Practice.  

I Only Recently Discovered that I Should Have Filed FBARs in Previous Years. Can I Make a Voluntary Disclosure to Fix This?

The objective of the Voluntary Disclosure Practice is to allow taxpayers who have previously failed to report taxable income to voluntarily come forward and resolve their tax issues. Therefore, if you reported and paid tax on all taxable income but did not file FBARs, you should file the missing FBAR reports in accordance with the requirements and attach a statement explaining why the reports are late.  

Will I Need to File or Amend My Old Tax Returns?

Yes. The taxpayer must file any tax return that was not filed during the prior six-year period that was otherwise required to be filed by law. Furthermore, any incorrect returns for any of the six years must be rectified by the taxpayer.  

What if I Have a State Tax Criminal Issue?

The rules vary from state but state, but most states, including New York, have a voluntary disclosure program. Talk with a tax attorney who has experience with your state revenue department to learn more.  

Get Help Today

Living under the threat of prosecution takes its toll. Regardless of the severity of your tax offense, addressing it when you have more influence over the issue is likely to provide better results. Taxpayers who do not make a voluntary disclosure risk being caught by the IRS and facing significant penalties. At Timothy S. Hart Law Group P.C., we specialize in tax debt resolution. If you suspect you may be investigated for a criminal tax matter and want to make a voluntary disclosure, we can help you file Form 14457 and explore your options to reduce the risk of prosecution and additional penalties. Need help? Contact us today at (917) 382-5142.