Since 1952, practitioners are unaware of any situation where the IRS has referred a timely, truthful and complete voluntary disclosure to the Department of Justice for criminal prosecution. A truthful, timely and complete voluntary disclosure is a factor considered in the IRS decision re a possible criminal prosecution referral to the U.S. Department of Justice. [i] The taxpayer must fully cooperate with the government, make good faith arrangements to pay any tax, interest, and penalties determined to be applicable, and must disclose every aspect of noncompliance. [ii]
The voluntary disclosure practice of the IRS and the Department of Justice are designed to encourage non-compliant taxpayers to come forward into compliance. Our system of tax administration requires a perception of fairness and respect for those who make a voluntary, conscious decision to come into compliance before being contacted about their previous tax indiscretions. The various offshore voluntary disclosure programs of 2009 OVDP and the 2011/2012 OVDI represent a formalization of the historic voluntary disclosure practice in effect for limited taxpayers and for a limited time frame. These initiatives provided an important opportunity for the government to publically demonstrate the benefits to taxpayer’s voluntarily coming into compliance.
Historically, a disclosure is timely if it is received before 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; 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; the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or 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). Importantly, the IRS Voluntary Disclosure Practice describes a voluntary disclosure to include:
(6) Examples of voluntary disclosures include: a. a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all elements . . . above are met.[iii]
The Department of Justice maintains a voluntary disclosure policy that provides:
Whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person’s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution. If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure practice, the Tax Division may consider that factor in its exercise of prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary disclosure, what prompted the person to make the disclosure, and whether the person fully and truthfully cooperated with the government by paying past tax liabilities, complying with subsequent tax obligations, and assisting in the prosecution of other persons involved in the crime. [iv]
Further, the Department’s Policy Directives and Memoranda provides:
. . . the Service’s voluntary disclosure policy remains, as it has since 1952, an exercise of prosecutorial discretion that does not, and legally could not, confer any legal rights on taxpayers. If the Service has referred a case to the Division, it is reasonable and appropriate to assume that the Service has considered any voluntary disclosure claims made by the taxpayer and has referred the case to the Division in a manner consistent with its public statements and internal policies. As a result, our review is normally confined to the merits of the case and the application of the Department’s voluntary disclosure policy set forth in Section 4.01 of the Criminal Tax Manual.[v]
Taxpayers submitting a voluntary disclosure as well as those who “opt-out” of the 2009 OVDP or the 2011 OVDI remain within IRS Criminal Investigation’s Voluntary Disclosure Practice. Therefore, they are still required to cooperate fully with any following examination by providing all requested information and records and must pay or make arrangements to pay the tax, interest, and penalties they are ultimately determined to be due. If a taxpayer does not cooperate or make payment arrangements, their matter may be referred back to Criminal Investigation. The opt-out decision should follow an extremely careful consideration of all relevant facts and circumstances that may adversly impact the taxpayer as a result. Benefits from opting out are, at best, far from certain.
[i] IRM 188.8.131.52 (June 26, 2009)
[iii] Id. See also the Criminal Information in United States v. Schiavo, Case 1:11-cr-10192-RGS-1 (USDC Mass, May 19, 2011) regarding the prosecution of a taxpayer for quietly filing a false amended return disclosing earnings on a foreign account but failing to disclose the underlying income deposited into the foreign account (¶ 11.A “silent disclosure” occurs when a U.S. taxpayer with an undeclared account files FBARs and amended returns and pays any related tax and interest for previously unreported offshore income without notifying the IRS of the undeclared account through the Voluntary Disclosure Program. A silent disclosure does not constitute a voluntary disclosure. On its website, the IRS strongly encourages taxpayers to come forward under the Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years. ¶ 18. On or about October 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the Voluntary Disclosure Program. Schaivo reported on the amended individual income tax returns the interest income that he earned from the previously undeclared account he held at HSBC Bank Bermuda but did not report on the 2006 return the income earned that he earned from Headway Partners. ¶ 19. On or about October 27, 2009, a Special Agent from the IRS attempted to interview Schiavo at his home. ¶ 20. On or about October 29,2009, Schiavo prepared and executed a second amended individual income tax return for tax year 2006 on which he reported the income earned that he earned from Headway Partners and that had been deposited into his previously undeclared account at HSBC Bank Bermuda.).
[iv] Section 4.01, Criminal Tax Manual, U.S. Department of Justice (2008)
[v] Section 3, Policy Directives and Memoranda, Tax Division, U.S. Department of Justice (02/17/1993)