The Internal Revenue Service’s (“IRS”) Voluntary Disclosure Practice (“VDP”) is a program—and longstanding practice of IRS Criminal Investigation (“CI”)—that provides noncompliant taxpayers (e.g., previously undisclosed income) a way to resolve their tax matters with the IRS.[1] If a taxpayer has been noncompliant, he or she may participate in the VDP to seek protection from potential criminal prosecution. Note, however, that the VDP does not extend to income obtained from illegal sources.[2]
What is the Voluntary Disclosure Practice?
A voluntary disclosure occurs when a taxpayer provides a truthful, timely, and complete disclosure of his willful noncompliance through designated procedures. According to the IRS, the requirements of the VDP are as follows:
1. Timely submitting all required documentation including a Form 2848 for each taxpayer and entity;
2. Cooperating with the IRS to determine the taxpayer’s correct tax liability; and
3. Paying in full or securing a full-pay installment agreement for the tax, interest, and any applicable penalties the taxpayer owes.[3]
When Should the Taxpayer Disclose?
The voluntary disclosure must be timely, meaning that it must be received by the IRS before the IRS has:
1. Commenced a civil examination or criminal investigation or notice to the taxpayer that the IRS intends to commence an examination or investigation;
2. Received information from a third party alerting them of the taxpayer’s noncompliance;
3. Initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
4. Obtained information directly related to the taxpayer’s specific noncompliance from a criminal enforcement action. (Examples include search warrants, grand jury subpoenas, etc.).[4]
Who May Disclose?
A taxpayer can submit a disclosure to the IRS to seek protection from potential criminal prosecution if: (1) the taxpayer has willfully failed to comply with IRS tax or tax-related obligations, and/or (2) the taxpayer has committed tax crimes that would bring criminal exposure.
The failure to comply must be willful to be eligible for the VDP. If the taxpayer was not willful (he simply made an error or mistake), he can correct those mistakes by filing amended or past due returns. He does not need to submit a disclosure through the VDP. Also, as mentioned earlier, to be eligible for the VDP, any undisclosed income cannot come from illegal activities.[5]
How to Make a Voluntary Disclosure?
Taxpayers who wish to participate in the VDP must go through a two-part electronic application process. Part I determines if the taxpayer is eligible for the program. Part II determines if the taxpayer is accepted into the program. A taxpayer may apply via Form 14457, Voluntary Disclosure Practice Preclearance Request andApplication.
Part I: The taxpayer fills out Part I of the application, supplying all required documentation. If a power of attorney is filling out the application, a Form 2848, Power of Attorney and Declaration of Representation, must be submitted for each individual and entity entering the program. Once the application is filled out and submitted, the IRS will review the application and determine if the taxpayer is eligible. If so, the IRS will send the taxpayer a preclearance letter.
Part II: Once the taxpayer receives a preclearance letter, he must submit Part II of the application within 45 days. Then, the IRS will review the application and determine if the taxpayer is accepted into the program. If the taxpayer is approved, the IRS will send him a preliminary acceptance letter and the application will be sent to a civil section of the IRS. Next, an IRS civil examiner will contact the taxpayer, and the taxpayer will submit requested specific documents and information.[6]
Conclusion
If you have willfully not complied with your federal tax obligations, it may make sense to submit a disclosure through the VDP program to resolve your tax matters and avoid potential criminal prosecution.
Contact Montgomery Legal today to discuss your case and legal options. Schedule a Consultation or call (214) 432-6100.
[1] See IRS Criminal Investigation Voluntary Disclosure Practice, IRS, available at https://www.irs.gov/compliance/criminal-investigation/irs-criminal-investigation-voluntary-disclosure-practice.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
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