If you have knowingly failed to report income or claimed deductions you know you are not entitled to, or just decided not to file your tax returns and pay the tax owed, you may be liable for civil penalties and even jail time for criminal tax evasion. Taxpayers with civil and criminal tax exposure may want to fix their past mistakes but are afraid of what will happen if they “come clean.” So, the majority of offenders keep offending year after year. But did you know there is an Internal Revenue Service (IRS) program that can help taxpayers get out of that “evasion” cycle, and clean up past tax issues, usually without criminal liability?

The IRS has a longstanding program through which taxpayers can make voluntary disclosures of tax underreporting and tax criminal evasion. Such disclosures may help taxpayers limit their criminal exposure, although disclosure does not automatically guarantee immunity from criminal prosecution.

The latest iteration of the voluntary disclosure program is known as the Voluntary Disclosure Practice (VDP). (Here is a link to the IRS’s VDP program description.) Under the terms of the program, a taxpayer must submit Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, which contains basic identifying and procedural information necessary to determine if the taxpayer is eligible to participate in the VDP program. The IRS uses this information to verify that the taxpayer is not already under criminal investigation, which is a bar to entering into the VDP program. Once the taxpayer has been “precleared,” the taxpayer must submit Part II of Form 14457, which seeks detailed information regarding the nature of the tax reporting failures and the associated unpaid tax liabilities. If the taxpayer is approved to participate in the VDP program, the taxpayer’s case is transferred to the appropriate IRS civil division for examination. Ultimately, the taxpayer must cooperate with the IRS to determine its correct tax liability and must make good faith arrangements to pay all unpaid liabilities, including interest and penalties. Typically, this will include the filing of corrected tax returns for six years; the payment of the correct tax and interest for those returns; and the payment of enhanced penalties for one tax year.

The current version of Form 14457 was released in April 2020. On July 14, 2020, Carolyn A. Schenck, the National Fraud Counsel for the IRS Fraud Enforcement Program, stated that the IRS is planning to issue additional instructions for Form 14457 to provide further guidance on the mechanics of the VDP. Conforming additions will be made to the Internal Revenue Manual.

Practice Point: The risk of criminal prosecution for tax offenses is increasing due to significant improvements in IRS enforcement strategies. IRS commissioner Charles Rettig was formerly in private practice defending taxpayers and has implemented significant changes in IRS programs and leadership. There is an unprecedented degree of coordination among the enforcement divisions and emphasis on preventing tax fraud, with Eric Hylton, previous deputy chief of IRS Criminal Investigation, leading the Small Business/Self-Employed division; Carolyn Schenck recently appointed as national fraud counsel; and Damon Rowe, another veteran of IRS Criminal Investigations, leading a new Fraud Enforcement Office. Messrs. Hylton and Rettig have implemented an initiative called Unlocking Fraud, which includes fraud detection and case development training for every division compliance employee. International cooperation is also very high, with the Joint Chiefs of Global Tax Enforcement (J5) working together to share information efficiently. Finally, IRS Criminal Investigations has developed a highly effective data analytics group, the Nationally Coordinated Investigations Unit (NCIU). The IRS will continue to focus more resources to investigate and prosecute the tax evaders. If you fall into this category, our best advice is to work with a professional who understands how to navigate this area of tax law, and resolve your issues as soon as possible.