- 1 Why Voluntarily Disclose?
- 2 Domestic Voluntary Disclosure
- 3 When is Criminal Prosecution Recommended?
- 4 How does Domestic Disclosure Help
- 5 What does this Mean?
- 6 How to Make a Domestic Voluntary disclosure?
- 7 Tax Fraud, Tax Evasion and Other Tax Crimes
- 8 Case Study: Brian the Entrepreneur
- 9 Why is this so Common for Small Business Owners?
- 10 It is Human Nature…
- 11 Apologizing to the IRS is Never Enough
- 12 Domestic Disclosure – The Basics
- 13 The Dilemma – Domestic Disclosure or Not?
The IRS Domestic Voluntary Disclosure is a method for getting into compliance with IRS if you have unreported Domestic (aka U.S. Based) Income, as long as the money is not from Illegal Sources.
Why Voluntarily Disclose?
The IRS is cracking down on all forms of Tax Fraud and Tax Evasion.
While the IRS’ recent focus has been directed toward Offshore Disclosure (OVDP and the Streamlined Program) involving Foreign Money, Assets and Income – U.S. Tax Crime is still a major enforcement priority.
Whether you are a U.S. Resident or business with unreported Domestic Income, or a Foreign Person with unreported U.S. Business Income, Assets or Earnings, it is important to remain in tax compliance.
For individuals who reside overseas or in the U.S. and only have Unreported Domestic income, the Domestic Voluntary Disclosure program is the mechanism used to get into compliance.
**If a person has both domestic and foreign/offshore unreported money, than the Offshore Disclosure Programs are usually the preferred option, but you should speak with an experienced Voluntary Disclosure Lawyer before making any representation to the IRS, DOJ or DOT.
Domestic Voluntary Disclosure
For many years, the IRS has had a domestic voluntary disclosure in place. The program is designed for anyone who is out of tax compliance for failing to report U.S. income.
What many people do not realize, is that their failure to file/pay U.S. tax on income earned in the United States may lead to significant fines, penalties and worse depending on the nature and extent of the non-compliance?
*Please keep in mind the program is designed for money that was earned legally but not reported; if the money was earned illegally — you do not qualify for the program.
When is Criminal Prosecution Recommended?
If the IRS catches you committing a tax crime, chances are they will investigate. As recent history has shown, Movie Stars, Musicians, Moguls and the like are all fair game when it comes to IRS Prosecutions. While there are no hard and fast rules regarding investigating tax crimes, the general consensus is that after two years of either non-filed tax returns, under-reporting income, embellishing deductions/expenses or any number of other related tax misgivings, you are begin to tread in criminal territory.
Moreover, situations that will greatly heighten your chances of getting caught, include:
- A scorned spouse or lover;
- Angry or vindictive Business Partner;
- Third-Party who just doesn’t like you (you would be amazed…);
- Someone who overheard something about what you did and wants to “blow the whistle”
- Someone who is already in trouble and uses information he or she has against you to leverage a better deal
How does Domestic Disclosure Help
As provided by the IRS: “It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.”
What does this Mean?
Presumably, if you make a full disclosure and pay all the necessary taxes, fines, penalties and interest associated with the disclosure — you should be able to avoid criminal prosecution. Of course, there are no guarantees, but the IRS does have somewhat limited resources; in other words, the IRS simply does not have the time or money to enforce tax crimes against each and every person who may have made a mistake – or worse – in prior tax years.
As further provided by the IRS:
- voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.
- A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:
- A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability.
- The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
How to Make a Domestic Voluntary disclosure?
Unlike the offshore disclosure programs, domestic voluntary disclosure program is a bit different. With offshore disclosure, there very specific rules and regulations involving the actual disclosure those rules and procedures are not met, then the disclosure will be rejected.
With the domestic voluntary disclosure program there is no one particular way to make a disclosure. Why? Presumably because there are so many different rationales and alternatives for somebody not reporting US-based income that a simple set of procedures would simply not suffice.
To that end, the Internal Revenue Service has provided guidance in terms of what would need to be done in order to facilitate an acceptable submission, as follows:
– 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 of the elements set forth in (3) above, have been met.
– A disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges but before it has commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so. In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and because all of the elements set forth in (3), above have been met.
– A disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme that is the subject of an IRS civil compliance project. Although the IRS already obtained information which might lead to an examination of the taxpayer, it not yet commenced any such examination or investigation or notified the taxpayer of its intent to do so. In addition, the taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all of the elements set forth in (3), above have been met.
– A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay, in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all of the elements set forth in (3), above have been met.
Tax Fraud, Tax Evasion and Other Tax Crimes
If a person is criminally investigated before they have an opportunity to enter the domestic voluntary disclosure program, they may find themselves on the receiving end of a criminal prosecution by either the Internal Revenue Service or the Department of Justice (depending on the extent and nature of the crimes).
Even though there are no guarantees under the domestic voluntary disclosure program, is probably a better alternative than to risk noncompliance and be caught by the IRS. Although the IRS is not prosecute each and every criminal case, the IRS generally only prosecutes the ones they think they can win.
This explains why the IRS has a nearly 100% conviction rate on any tax evasion case for tax fraud case it brings against a taxpayer. Moreover, The jail sentences and prison sentences for white-collar crimes, including tax funds have risen significantly in the last few years-due to the term or phrase “financial murder,” which is a term the government likes to use and presented to a jury when bringing this type of matter.
The following is a case summary example of how an individual would get caught prior to entering a domestic voluntary disclosure
Case Study: Brian the Entrepreneur
Brian is the owner of his own business. He has worked hard to build, grow and expand his the business — and all that hard work has paid off. When Brian first started he barely made enough money to cover his bills and expenses. As time goes on, Brian’s business has blossomed into a small but thriving, multi-million dollar business.
Unfortunately, Brian developed a bad habit (which many small business owners to develop) which is that he never increased his salary in accordance with the increase in profits, and continue skimming money off the top which he does not report as profit or income.
– Moreover, not only did Brian fail to increase his salary (and thus his Employment Taxes) but Brian also receives a portion of his income via cash sales. Nothing is more tempting to a small business owner, then to take those cash sales and not report them on the tax returns — keeping them hidden from the government.
Another term for this type of action is tax evasion.
Why is this so Common for Small Business Owners?
All in all, most businesses fail. And even with all Brian’s moxy, he was a realist. He knew his chances for success were slim. Thus, when six years ago Brian first failed to report $5000 of cash income from his business, he had just assumed his business was not going make it. In reality, has his business failed from the start, the chances are very slim that he’d be detected by the Internal Revenue Service.
But Brian’s business did not fail; he became a success. Unfortunately, his habit only grew worse. Only now, instead of skimming $5,000 off a $50,000 gross he was skimming, .$300,000 off of a $3 million gross and the IRS caught wind of it.
It is Human Nature…
Once a person “gets away with it” chances are they feel a bit empowered and untouchable…so they continue to take more and more off the top. The problem is that it is not so easy to just put the money back and “get good” with the IRS. Why? Because each tax return has its own liability for tax, and for each year that Brian skimmed off the top, he committed another count of Tax Fraud and Tax Evasion.
Apologizing to the IRS is Never Enough
When a person commits a crime, but then apologize for the the crime and returns the item (while noble) does not reduce the “crime” at all. In other words, apologizing for your actions does not negate that the action occurred. For example, if you steal a T-shirt from the store and one week later apologized to the store owner and returned the T-shirt – that does not make the crime of theft any less – it just shows you have a conscience and are a good person. The store owner still has every right to report you and your theft crime.
Domestic Disclosure – The Basics
Domestic disclosure is the idea that a person can essentially come forward and admit to unreported income and other tax crimes in exchange for paying an extremely high penalty and be in a better position to avoid prosecution — but it is not bullet-proof.
The problem is the IRS has no idea what type of crime you committed before you come forward; thus, the IRS does not guarantee immunity from prosecution and you will not know whether you will receive immunity from prosecution until you come forward; a catch-22?
The Dilemma – Domestic Disclosure or Not?
There are three decisions to make for a person who has committed a tax crime:
Do Nothing: Every tax professional has the duty and responsibility to tell taxpayers who are out of compliance and/or not properly filing their taxes that they should go back and make sure their taxes are correct. With that said, it is not a taxpayer’s responsibility to have to listen to their tax attorney or CPA. In other words, the tax attorney cannot force the taxpayer to go back and amend their tax returns – or report the person to the IRS. By amending tax returns, a person may be opening themselves up for liability more so than if they do nothing and hope that they are never audited.
– One issue keep in mind is that if the IRS believes and can prove that the taxpayer committed fraud, there is generally no time limit as to how far back the IRS can go to try and detect how long tax crimes have been going on for – which can increase your penalties exponentially.
– Amend Prior Returns: It is important to keep in mind that the disclosure program is a voluntary program. In other words, a person does not have to enter the voluntary disclosure program in order to move forward and amend their tax returns – no matter how much damage has been done. For all the taxpayer knows, he or she may be able to amend his/her tax returns, pay any outstanding taxes and interest – and the IRS never audits the individual.
– The problem with this strategy is that if they are detected and it turns out that the person is prosecuted, the taxpayer would probably be in a worse position then if they had come forward under the voluntary disclosure program; paid the taxes, fines and penalties, and resolved the matter.
It all boils down to a taxpayer’s risk management level — whether they want to pay the outstanding tax fraud penalties (which can reach 75%), and how bad they want to try to avoid prison, which brings us to our third option.
– Voluntary Disclosure: Due to the potential criminal nature of Voluntary Disclosure, a Taxpayer should first speak with an experienced voluntary disclosure lawyer before making any representation to the IRS.
Call Today; let us help.