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The Most Important Elements of a Successful IRS Voluntary Disclosure? Timing and Luck.

By Joel N. Crouch on February 27, 2024
As in comedy, the most important element in an IRS voluntary disclosure is generally timing.   However, a couple of U.S. Tax Court memorandum opinions in Whistleblower 14376-16W v. Commissioner, T.C. Memo 2017-181 and T.C. Memo 2024-22, point out that timing and luck are the most important elements of a voluntary disclosure.

The IRS Voluntary Disclosure program is “a longstanding practice of IRS Criminal Investigation (CI) providing taxpayers with criminal exposure for tax and tax-related crimes as a means to come into compliance with the law and potentially avoid criminal prosecution.” (Internal Revenue Manual (IRM) 4.63.3.1.1.3.)  Although an IRS voluntary disclosure does not automatically guarantee immunity from prosecution, as a matter of practice, the IRS does not pursue criminal charges against a taxpayer who meets the program’s requirements. A voluntary disclosure occurs when a taxpayer timely, truthfully, completely and voluntarily notifies the IRS about an unfiled tax return or an inaccurate tax return or document filed with the IRS. A voluntary disclosure is timely if received before the IRS has started a civil examination or criminal investigation or before the IRS “has received information from a third party (e.g., informant, other government agency, or media) alerting the IRS to the specific taxpayer’s noncompliance.” (IRM 9.5.11.9(4)(b)).

In Whistleblower 14376-16W, the whistleblower submitted a Form 211, Application for Award for Original Information to the IRS Whistleblower Office (WBO) on November 12, 2010, asserting that a certain taxpayer had received unreported income as reflected in a memorandum attached to the Form 211. Before the WBO had taken any action on the whistleblower claim, on January 27, 2011, IRS CI received a letter from a representative of the taxpayer to enter into the IRS Voluntary Disclosure Program (VDP). In March 2011, the WBO forwarded the whistleblower’s Form 211 to CI for initial review.

Because the taxpayer’s VDP request was sent to the IRS after the whistleblower’s Form 211 was filed, it would appear the taxpayer’s VDP was too late. However, this is where luck comes into play. The taxpayer received no response to their initial VDP letter and sent a second letter to IRS CI on May 12, 2011. Eight days later CI accepted the taxpayer’s request and referred the VDP request to the IRS Small Business/Self-Employed Examination Division for review and examination. The SB/SE examiner preliminarily concluded that the VDP request was too late and invalid because the IRS had received the whistleblower’s information before the VDP request was submitted. However, after talking with the WBO and CI personnel, the examination division decided to honor the voluntary disclosure and notified the taxpayer’s representative that “we would follow the spirit of the law and honor the voluntary disclosure.”

Lefty Gomez, an all-star pitcher for the New York Yankees in the 1930's, is credited with saying "I'd rather be lucky than good." In this case, the taxpayer was very lucky.

For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact me at jcrouch@meadowscollier.com.