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October 30, 2020

IRS Voluntary Disclosure Program; Alive and Well, or Dormant?

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As a business and tax attorney that routinely works with individuals and owners of closely-held businesses on IRS tax delinquencies, we try to continuously stay on top of current trends and events. As many of us have experienced since the impact of COVID-19, the IRS has basically come to a screeching halt in terms of customer service and enforcement. From my perspective, however, there is no better time than the present in terms of pursuing and submitting a voluntary disclosure. Thus, we thought it would be helpful to provide an update as to the voluntary disclosure process.

Background

On November 20, 2018, the IRS released a memorandum to taxpayers, detailing the new process for voluntarily disclosing violations due to willful behavior. The new program titled the "Updated Voluntary Disclosure Practice" ("UVDP"), applies to both domestic and offshore matters, whereas the OVDP only applied to undisclosed offshore accounts. The purpose of the UVDP is to provide taxpayers—who are concerned that their conduct is willful or fraudulent—a way to come into compliance with the law and avoid potential criminal prosecution. The IRS set out the following procedures regarding the UVDP. I provided a detailed summary of that November 20, 2018 memorandum in a prior blog dated April 23, 2019.  

Update and Process

Since that April 23, 2019 blog, however, the IRS has been slow in terms of processing voluntary disclosure applications under the November 20, 2018 memorandum procedures. To be clear, the slow response is not related to the lack of the IRS personnel’s willingness to process the applications—I do not believe. Rather, it is the lack of resources, and now with COVID-19 in play, it is the lack of resources and the lack of personnel actually working in the various offices to process the applications. Overall, this is a difficult time. But, difficult times also provide us with opportunities. And, in this instance, if you are a taxpayer that has been in the dark for some time, and have either not filed tax returns, not reported income, or otherwise filed false returns in the past, the lack of the IRS enforcement activities provides you with an opportunity to come out of the cold, and get into compliance.

Now, if we look back at a number of our current voluntary disclosures that have been submitted, we can see that it is really taking upwards of six months for us to receive an initial response. The Voluntary Disclosure Practice Preclearance Request and Application consists of two parts. In Part I, the “Preclearance Request,” the taxpayer provides more general information in regards to their noncompliance. Part I does not specifically ask for any account valuations, nor does it ask for any specific detail in regards to the taxpayer’s noncompliance. This is the initial response I am referring to above. In Part II, the “Voluntary Disclosure,” the taxpayer goes into detail, fully disclosing their financial accounts, including offshore accounts. The taxpayer is also required to provide a full narrative, detailing the circumstances and motive behind their noncompliance.

Filing a Preclearance Request and a Voluntary Disclosure does not prevent the IRS from pursuing a criminal investigation, and it does not prevent the IRS from pursuing criminal charges related to a taxpayer’s noncompliance. But, to the extent a taxpayer meets the minimum qualifications of the voluntary disclosure program, it would be a rare instance where the IRS chose to pursue criminal charges against a taxpayer that has voluntarily and timely stepped forward. That is, rather than incurring the cost to investigate, prosecute, and collect from a non-compliant taxpayer, the Service would rather encourage the noncompliant taxpayer to step forward and pay their previously unreported tax liability. As such, the Voluntary Disclosure process can serve as an effective means to shield the taxpayer from potential prosecution. To do so, however, the taxpayer must be completely open and upfront in regards to their noncompliance. The taxpayer should strive to provide the most accurate information they can provide, and should provide as complete a picture as they can to the IRS.

Conclusion

 In sum, when we are working with our individual and our closely-held business clients, no matter the specific project, we always focus on the concept and idea of: minimizing disruption to maximize profit. In the context of a voluntary disclosure, we minimize disruption by timely submitting a voluntary disclosure, fully disclosing, and fully cooperating with the IRS. There is no better time than the present to do so. If you have questions, you can contact me at vnardone@walterhav.com. And, you can find additional information on the home page of my personal website here.

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October 30, 2020

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