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Thinking about Selling your Business? Now May be the Time to Make a Voluntary Disclosure To The IRS.

By Joel N. Crouch on May 13, 2024
Prior blog posts have discussed making voluntary disclosures to the IRS generally and for specific issues, such as offshore bank accounts, virtual currency and most recently the Employee Retention Credit. One thing we have never discussed is making a voluntary disclosure in the context of the sale or transfer of a business.

Anyone who has bought or sold a business knows that there is a great deal of due diligence that goes on during the negotiation process. A potential buyer will want to review the seller’s financial information and records in detail looking for potential issues or problems. The purchase agreement will require the seller to represent and warrant many facts about the company. The purchase agreement will also require the seller to indemnify the buyer for certain things, like breaches of reps., warranties, and covenants, certain pre-closing liabilities, and most importantly pre-closing taxes.

The owner of a business which has significant tax issues such as unreported income or overstated expenses may have to choose between accepting an offer to sell the business, thus exposing the tax problems, or turning down that once-in-a-lifetime opportunity to sell due to the tax problems. Imagine a business owner having to tell the potential buyer, “Our books say we have this much in annual income, but that doesn’t include the cash we don’t report to the IRS”, (wink, wink). No buyer wants to take on tax issues they did not create, especially tax issues that may have serious criminal implications. Tax compliance issues can also arise when one business partner is buying out another or when children inherit a business from their parents.

Fortunately, the IRS Voluntary Disclosure Practice is a means for “cleaning up” significant tax issues. A voluntary disclosure occurs when a taxpayer provides a truthful, timely, and complete disclosure of willful noncompliance with the tax laws, for example, unreported cash income. It requires a taxpayer to (1) timely submit all required documentation for each taxpayer and entity entering the program, (2) cooperate with the IRS in determining the correct tax liability, and (3) pay in full or secure a full-pay installment agreement for the tax, interest and any applicable penalties that are due.

Most importantly a voluntary disclosure is timely if it is received before the IRS (1) commences a civil examination or criminal investigation (2) receives information from a third party telling the IRS about the taxpayer’s noncompliance, or (3) acquired information directly related to the taxpayer’s noncompliance from a criminal enforcement action, such as a search warrant or grand jury subpoena. Although a voluntary disclosure does not automatically guarantee immunity from prosecution, in over 35 years of tax practice, the IRS has never prosecuted any client of mine who makes a proper and complete voluntary disclosure.

If you have any tax-related questions please feel free to contact me at jcrouch@meadowscollier.com.