IRS Criminal Investigation Voluntary Disclosure Practice 

Voluntary Disclosure

If you have purposefully broken a tax law, you may be able to get relief through the IRS's Criminal Investigation Voluntary Disclosure Practice. This program allows you to get back into compliance with the IRS, and it reduces your risk of criminal prosecution. In contrast, if you don't come forward voluntarily and the IRS discovers that you have purposefully failed to comply with your tax obligations, you can face criminal charges, imprisonment, fines, and penalties. 

However, before taking advantage of this program, you should consult with a tax attorney. In the meantime, keep reading to learn more. 

What Is the IRS Criminal Voluntary Disclosure Practice?

A voluntary disclosure is when you come clean to the IRS about breaking the tax code. Making a voluntary disclosure does not give you immunity, but it can help you avoid criminal prosecution. When you submit a voluntary disclosure, the IRS Criminal Investigation team reviews the disclosure carefully to determine whether or not to recommend criminal prosecution. 

Who Can Use the Voluntary Disclosure Practice?

This program is for people who have committed tax crimes or tax-related crimes. It is not for people who simply made mistakes on their returns. The Voluntary Disclosure Practice is also designed for people who willfully took actions; it's not for people who violated the tax code by accident or un-willfully. 

You can use the voluntary disclosure program if you have unreported cryptocurrency transactions, unreported offshore accounts or assets, and some other types of unreported income. Note, however, that this program is not for taxpayers with illegal source income. That includes income from activities, such as selling marijuana, that are legal on the state level but illegal on the federal level. 

If you have made a disclosure through the IRS's former disclosure program, the Offshore Voluntary Disclosure Program (OVDP), you cannot make a disclosure through this program for the same tax year. For instance, say that you used the OVDP to disclose unreported offshore accounts from 2017. Then, you cannot include the 2017 tax year in the CI Voluntary Disclosure. However, if the disclosures are not related to the same year, you may qualify to make a disclosure through this program. 

Consult with a tax attorney if you're not sure whether or not this is the right program for you. The IRS advises taxpayers to seek guidance before using this program. 

When to Make a Voluntary Disclosure

You must contact the IRS before they contact you. Making a timely disclosure is critical if you want to qualify for the Voluntary Disclosure Practice. The IRS considers your disclosure as "timely" if it's received before any of the following occurs:

  • The IRS starts a civil or criminal investigation against you. This includes audits.
  • The IRS receives info from a third party about your lack of compliance. 
  • The IRS gets info related to your non-compliance from a criminal enforcement action such as a search warrant or subpoena. For example, a grand jury subpoenas the IRS for information about your tax returns. 

Once you make a disclosure, you must cooperate with the IRS as the agency tries to determine your tax liability. You must also make arrangements to pay the tax, interest, and penalties in full. If you cannot pay in full, you must prove to the IRS that you qualify for a hardship plan. 

Types of Voluntary Disclosures

The Voluntary Disclosure Practice may be right for you if you committed a tax-related offense dealing with one of the following issues:

  • Overseas income and assets
  • Unreported foreign inheritances
  • Unreported business income
  • Off-the-books employment
  • Cryptocurrency transactions
  • Unreported real estate transactions
  • Previous tax evasion - intentionally filed false tax return
  • Trusts and estates - for example, didn’t file gift tax returns
  • Gambling winnings

If you're unsure, the best decision is to contact a tax professional. They will listen to your concerns and guide you toward the best option for your situation. 

Voluntary FBAR Disclosures

If you didn't report your foreign bank accounts, you can make a voluntary disclosure. However, there are also other options. For example, if you didn't file an income tax return or a report of your foreign bank accounts, you may be able to use the Streamlined procedures to get back into compliance with the IRS. 

Voluntary Cryptocurrency Disclosures

You can use the voluntary disclosure practice if you have unreported crypto, but depending on the specifics of the situation, you may be able to amend your return. Talk with a tax professional to learn about the right move. Remember, the voluntary disclosure program is for people who have committed tax crimes or tax-related offenses, not for people who made small mistakes on their tax returns. 

 

How to Make a Voluntary IRS Disclosure

To make a voluntary disclosure, you must request preclearance. Then, if the IRS accepts your request, you have 45 days to complete your disclosure. You can request one 45-day extension (giving you 90 days total to make your disclosure). The IRS reviews extension requests on a case-by-case basis. Here is a breakdown of the process with a brief overview of the instructions for Form 14457.

Preclearance

The preclearance request goes on Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application). You will note your name, tax ID, and the type of issue you're disclosing. The options include estate and gift tax, virtual currency, offshore tax issues, employment tax, and "other." You should also provide details about any entities (businesses, non-profits, trusts, etc.) related to the disclosure. 

Then, you explain if you, your spouse, or your entities have dealt with or are currently dealing with any of the following related to the disclosure: notices of deficiency, IRS audits, criminal investigations, or litigation. You must also list all of your accounts, businesses that you own(ed), and your crypto. 

Preclearance Review

The IRS will review your application and notify you if they accept your preclearance request. Once approved, you have 45 days to complete Part II of Form 14457. You have one chance to request an extension, but there's no guarantee that the IRS will accept your request. To be on the safe side, you should have your disclosure ready to go as soon as possible after you submit the preclearance. 

The Disclosure

Part II requires details about your unreported income or the value of your offshore accounts/assets. You will also share if anyone advised or helped you when you were non-compliant with the tax code, and you will outline your professional history. You can also note whether or not you can afford to pay the tax bill in full. 

What Happens After You Make the Disclosure

If Criminal Investigation accepts your disclosure, they will send it to civil examination, the part of the IRS that handles audits. The examiner will send you Letter 2205 (Initial Contact), and then they will contact you or your Power of Attorney over the phone. 

During the phone call, they'll talk with you about the documents they want to see and any questions/concerns they have. They should also outline your rights and answer your questions about the rest of the process. 

The IRS will let you know if they have any additional questions about the tax years related to the disclosure. As part of the rules of this program, you must provide the IRS with any requested information, including accounting records, bank statements, and advice you received from tax professionals. Remember, you also must help the IRS investigate anyone who helped with your noncompliance. In some cases, the examiner may make you do an interview under oath.

Once the disclosure has been accepted, you must pay in full or make arrangements to pay over time. If you cannot pay the tax bill, you can apply for relief, but you must file Form 433-A. This financial disclosure shows the IRS all of your assets, debts, income, and expenses. Then, depending on the situation, you may be able to settle your tax bill in a lump sum, set up partial payments, or get the IRS to mark your account as currently non-collectible.

If you do not cooperate with the IRS to pay your tax bill, you can lose your chance to participate in this program. At that point, IRS-Criminial Investigation may decide to pursue criminal charges against you.

Penalties for Voluntary Disclosures

If Criminal Investigation accepts your disclosure, they won't recommend criminal charges against you. But you will likely still face penalties on your account. The penalties vary based on the type of tax related to the disclosure. Here's an overview:

Individual Income Tax Disclosures

Typically, when you make a disclosure related to individual income tax, the IRS assesses the civil fraud penalty or a fraudulent failure-to-file penalty based on the disclosure year with the highest tax liability. The civil fraud penalty is 75% of the unreported tax, and the fraudulent failure-to-file penalty is 15% per month late, with a maximum of 75%. 

For example, if you disclosed six years and the highest tax bill from any of those years was $20,000, your maximum penalty would be $15,000.

Individual and Corporate Tax Disclosures

However, if you're making a disclosure for both an individual and a taxable entity such as a C-corporation, you will incur penalties at both the individual and corporate levels. For example, say that you disclosed criminal issues related to six years of time, and to do so, you filed six amended individual income tax returns and six amended corporate income tax returns. 

In this situation, the IRS will assess a civil fraud or fraudulent failure-to-file penalty based on the highest tax liability on your individual returns and an additional 75% penalty for the highest tax liability on your corporate returns. Neither you nor the corporation will get a penalty for the other five years.

Estate Tax Disclosures

With estate taxes, the 75% penalty gets dropped to 50%. For example, say that you failed to disclose a $3 million asset on an estate tax return. When you disclose, the IRS will assess a penalty of 50% of the tax liability related to that asset.

Gift Tax and Generation-Skipping Transfer Tax Disclosures

If you're making a disclosure for a single year, the IRS will drop the fraud penalty from 75% to 50%. However, if you make a disclosure about gift or generation-skipping transfer tax over several different tax years, the penalty will be 75% of the highest tax liability from those years.

Employment Tax Disclosures

With employment tax disclosures, the IRS will assess the civil fraud or fraudulent failure-to-file penalty to the tax period with the highest tax liability. Then, you will also incur a failure-to-deposit penalty for all applicable periods. 

FBAR Disclosures

If you make a disclosure about unreported foreign bank accounts, you may incur a willful FBAR noncompliance penalty. These penalties will apply based on the IRS's current penalty guidelines. 

How to Pay After Making a Voluntary Disclosure

To qualify, you must make your disclosure as timely as possible, but you may also want to take some time to think about how you're going to pay the tax liability before you make the disclosure. Be aware that you will owe tax related to the unreported income, as well as interest and penalties. 

If possible, try to pay in full. You can pay the IRS with checks, cashier's checks, and credit/debit cards for a fee. If you cannot pay in full, consider applying for one of the following:

  • Installment agreement — Make monthly payments on the tax liability until it's paid in full. Interest and a small penalty will continue to accrue on your account every month. 
  • Partial payment installment agreement — Pay the most you can afford to pay every month and when the collection statute expires (about 10 years after the disclosure), the IRS writes off the rest.
  • Offer in compromise — Pay a settlement based on your assets and income. Pay a one-time lump sum or a slightly higher amount in payments over 24 months. 
  • Currently not collectible — Get your account marked as CNC by showing that you don't have enough income or assets to pay anything. 

Alternatives to Voluntary Disclosure

If you've read through this information and you don't think a voluntary disclosure is the right option for you, consider one of these alternatives. Again, the right option depends on the situation.

  • If you made a mistake File an amended return. You can amend most returns by filing the same return number followed by an X. For example, you can amend a 1040 by filing a 1040-X.
  • If you didn't file a return — Unless you didn't file in an attempt to commit criminal tax evasion, you can just catch up by filing the returns that you missed. Generally, you only need to file the last six years to get back into compliance. 
  • If you non-willfully failed to report foreign financial assets — Use the IRS's Streamlined Filing Compliance Procedures.
  • If you filed your return but didn't report foreign bank accounts — Use the IRS's delinquent FBAR submission procedures
  • If you reported all income and paid all tax but didn't file international informational returns — Use the IRS's delinquent international information return procedures. 

Note that all of these programs are valid at the time of writing. However, the IRS may decide to stop the Streamlined Compliance Procedures at any time and without warning. 

FAQs About Voluntary Disclosure

How can I check the status of my pre-clearance request?

If you haven't gotten a response to your pre-clearance request, send an email to [email protected]. Or talk with the tax pro who submitted your request. 

When did the IRS start the Voluntary Disclosure Practice?

The IRS has offered versions of this program since the 1950s. The current program started in the fall of 2018, and it provides additional emphasis on cryptocurrency disclosures. The last version was called the Offshore Voluntary Disclosure Program, and it primarily focused on taxpayers who had unreported foreign bank accounts or assets. 

Are there penalties for making voluntary disclosures?

The IRS typically assesses a 75% civil fraud penalty for the tax year with the highest liability. For instance, if you make disclosures for three tax years, and the highest year shows a tax liability of $10,000, the penalty would be $7,500. 

What if I don't make a voluntary disclosure?

If you don't make a voluntary disclosure about tax-related offenses, you risk getting caught and facing criminal charges. Tax crimes can lead to significant fines and imprisonment. 

Can you make a voluntary disclosure on behalf of a deceased person?

In most cases, no, you should not use this program for a deceased person. Criminal exposure ends when someone dies. However, there are exceptions. 

In particular, if you are submitting a disclosure for criminal acts that are related to the decedent, you may also need to make a disclosure on behalf of the decedent. When doing so, file Form 56 (Notice Concerning Fiduciary Relationship) with documents to support the relationship.

How do you make a voluntary disclosure on a jointly filed return?

If a couple files as married filing jointly and one spouse willfully committed a tax crime, then only that spouse needs to make a voluntary disclosure. However, both spouses can file a disclosure, and according to the IRS, this can make the process easier from an administrative perspective. 

If both spouses were involved, they should both make a voluntary disclosure. They can each file their own Form 14457 or they can file this form together. 

What is the disclosure period?

The disclosure period refers to the tax years that you want to make disclosures about. For example, if you want to make a disclosure about unreported income on your 2022 tax return, that year is your disclosure period. 

However, if multiple tax years are involved, the IRS will generally only require a civil examination of the last six tax years. The IRS may extend the time frame in certain situations, such as when a taxpayer refuses to cooperate with the civil examination. Then, the IRS may look at more than the last six years. 

What is the number for the Voluntary Disclosure hotline?

The Voluntary Disclosure hotline number is (267) 466-0020. You can call this number if you have an urgent question and an examiner has not been assigned to your case yet. If you already have an examiner, you should contact them directly.

Get Help Making a Voluntary Disclosure

Before making a voluntary disclosure, you should always consult with a tax professional, but keep in mind that not every tax pro has experience with this narrow aspect of the law. To find an experienced professional who can give you the guidance you really need, use TaxCure to search for local tax pros. Then, narrow down your search based on the experience you need.

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