This is a two-part blog post on the evolution of IRS voluntary disclosure programs. The first post traces these programs from their inception through the 1990’s. The second post discusses the programs beginning in 2000 and carrying through to the present day.
Overview
Since the Justice Department sued UBS in 2009, people with foreign bank accounts have become the targets of the IRS’s efforts to crack down on tax evasion. Clients of the Union Bank of Switzerland (UBS) and the Liechtenstein Global Trust (LGT) are amongst those that have already provided information to the IRS, whether by choice or by force. Many have learned that it is better to volunteer your information before the IRS finds you because the criminal and civil penalties can be very severe. The IRS offered a Voluntary Disclosure Program in 2009 that awakened many to the reporting requirements of people with money in foreign financial institutions. But while the program itself was new, the idea behind it was not. Here is a brief history of the various policies and programs that the IRS has offered through the years.
Prior to 1952
The Treasury Department had a formal policy prior to 1952 in which they would not recommend prosecution of any taxpayer that fully disclosed any tax fraud, so long as they disclosed it before any civil or criminal investigation against them had begun. In the early 1950s, the formal policy was discontinued after congressional hearings concluded that there was corruption and laxity in enforcement.
1961
The IRS announced a voluntary disclosure practice in 1961 in which a taxpayer that had disclosed information in a timely manner and prior to any IRS investigation would receive certain benefits. Among other things, the IRS would consider the disclosure with the other facts in order to decide whether to recommend prosecution. It did not go so far as to say that the IRS would guarantee not to prosecute the taxpayer, but in the vast majority of cases the government decided not to prosecute. Also, Section 707 of the IRS’ Regional Counsel Enforcement Division Manual officially defined what it would consider timely. According to their definition, “timely” meant that the information was communicated to the IRS when the IRS was not actively considering information which is virtually certain to lead to evidence that the taxpayer committed a tax crime.
1972
In January of 1972 the immunity afforded previous tax evaders became less defined and the Treasury Department changed its voluntary disclosure policy. They decided that voluntary disclosure of tax fraud to an appropriate IRS official before any investigation was no longer a basis for declining prosecution. They did stipulate, however, that the fact that a taxpayer voluntarily tried to rectify a false return would be given weight.
1974
The IRS withdrew Section 707 of the IRS’ Regional Counsel Enforcement Division Manual and redefined the term “voluntary”. Previously it had an objective definition but it was replaced by a subjective standard, which not only took into consideration a taxpayer’s timeliness but also their motivation. A disclosure was not deemed voluntary if it was “triggered” by an outside event. The vague natures of these definitions caused some confusion and, as a result, they have been constantly refined over the years.
The Early 1990’s
Taxpayers in the early 1990’s had become afraid to voluntarily disclose information that they did not include on previous tax returns because of the uncertainty of the punishment. In late 1992, IRS Commissioner Shirley Peterson confirmed that the IRS’ intention was to not recommend criminal persecution of non-filers who voluntarily disclosed their failure to file. Essentially, her statement said that the IRS would not recommend criminal prosecution if the non-filer did all the following:
- informed the IRS that he or she had not filed one or more tax returns or did not disclose all sources of income
- only had income from legal sources
- made the disclosure before being contacted by the IRS
- filed true and correct tax returns and/or cooperated with the IRS in ascertaining his or her correct tax liability; and
- made full payment of the amount due or made arrangements to pay
In April of 1993 the Internal Revenue Manual was modified to coincide with the statements made by Peterson. The certainty for taxpayers achieved by this change did not last long. In 1995 the IRS again amended the Internal Revenue Manual and changed it back to the policy in effect prior to the Peterson Announcement.
This is the second post of a two-part series on the history of IRS’s voluntary disclosure programs. This post outlines such programs from the early 2000’s to present day.
2002
On December 11, 2002, the IRS again redefined the word “timely” in connection with a voluntary disclosure in an effort to reduce the number of confused taxpayers. The IRS decided they would consider a voluntary disclosure timely if they received the disclosure before they had initiated an investigation or examination, and before they had received information from a third party or another criminal enforcement agency concerning the specific taxpayer’s noncompliance. In keeping with previous versions of the voluntary disclosure practice, the disclosure had to be truthful and complete, with the proceeds coming only from legal sources.
2003
The next month, January of 2003, the IRS announced an amnesty program called the Offshore Voluntary Compliance Initiative (OCVI) for taxpayers who had failed to report foreign account income, and/or to file foreign account forms. This was different than the update to the voluntary disclosure just one-month prior. The major characteristics that differentiated this from other voluntary disclosure policies were that OCVI targeted a precise class of violator, negated exposure to certain civil tax penalties, and provided immunity from criminal tax prosecution. It also provided protection against the foreign account reporting a penalty; a topic never addressed by other amnesty programs. To qualify, the taxpayer could not be any of the following:
- Currently under civil examination or criminal investigation;
- Already known to the IRS to be noncompliant
- Had promoted or solicited others to participate in offshore noncompliance; and
- Had income from illegal activity or had participated in any illegal activity in connection with the offshore arrangements
This was a short-lived opportunity, ending only a few months later on April 15, 2003. Although amnesty was no longer an option after this date, taxpayers continued to participate in the voluntary disclosure program put in place prior to the OCVI.
2009
On March 26, 2009, the IRS announced a new program centered on Foreign Bank and Financial Accounts. This is the most recent voluntary disclosure program that was discussed in the news in connection with UBS and LGT. The program utilized the IRS voluntary disclosure practice previously set forth in the Internal Revenue Manual. It was designed to be available until October 15, 2009. The incentive was that criminal prosecution was eliminated and monetary penalties were reduced for a person who disclosed the existence of their foreign bank account. The same qualifications that applied to the earlier versions of the voluntary disclosure program applied to this program (not to be confused with the OCVI).
Today
Although taxpayers that have not properly disclosed their foreign bank accounts can no longer qualify under the voluntary disclosure program that ended October 15, 2009, the voluntary disclosure program is alive and well. It has been the experience of our tax law firm that in almost all cases that although the government could chose to criminally prosecute someone that has provided information under the voluntary disclosure program the government has instead in almost all cases after a careful review of all the evidence submitted has decided not to prosecute, which is the basic premise of the program, which is essentially correct what was done wrong, avoid criminal prosecution and pay, or make arrangements to pay a greatly reduced civil penalty. Seeking the protection of the voluntary disclosure program is a major decision and should be done properly. We at the law firm of Stephen Moskowitz, LLP have many years of substantial experience with the voluntary disclosure program and what goes with it. Let us explain to you how this program could relate to you, whether you have an unreported foreign bank account, or if you could be accused of other tax wrongdoing. Call 415-394-7200 or email at steve@moskowitzllp.com for your complimentary attorney-client privileged consultation with the senior partner of our tax law firm.