Disclosing False or Unfiled Tax Returns to the IRS.

• Author: KAJAN, ELLIOT H.
• Position: Brief Article

One of the thorniest problems a tax practitioner can encounter is when a new client admits he or she has not filed a tax return for a period of years. Even worse is when a current client admits that tax returns prepared in the past were false. What do you do when both want to correct their indiscretions? You will need to be familiar with the concepts of voluntary disclosure to the IRS and FTB.

DISCLOSE AND SELF-INCRIMINATE

Taxpayers undertake voluntary disclosures prior to an IRS investigation that might reveal either a falsely filed tax return or before filing a series of delinquent tax returns. The object of a voluntary disclosure is, of course, to avoid criminal tax prosecution. However, making the disclosure is not without peril. Indeed, the act of disclosing either the fraudulent or delinquent return is an admission of all definitions of criminal elements except willfulness and thus constitutes a waiver of the Fifth Amendment privilege against self-incrimination.

Furthermore, although a successful voluntary disclosure might dissuade the government from prosecution of the tax crime, it may still subject the taxpayer to the fraud or accuracy-related civil penalty and statutory interest.

TIMING AND COOPERATION

Both the voluntary disclosure policy's history and provisions under the IRS Internal Revenue Manual's Special Agents Handbook provide guidance on successful voluntary disclosure, the basic elements of which are timeliness and cooperation.

Your client must disclose a false or delinquent return before the IRS begins its criminal investigation. This objective test cannot be satisfied even when the taxpayer makes a disclosure in good faith, erroneously believing that there is no ongoing criminal investigation at the time. Equally significant is the subjective test of whether the disclosure is motivated by an event that the taxpayer believes may trigger an IRS investigation, such as the belief that a disgruntled ex-partner of a business venture or an ex-spouse is about to inform on the taxpayer.

The second and equally important element in a successful voluntary disclosure is the taxpayer's full and complete release of all facts to assist the IRS in determining the proper tax liability. The taxpayer must give almost blind cooperation to the IRS, including waiver of advantageous return positions. This also includes payment with the disclosure, or within a reasonable time thereafter, of the additional tax, penalties and interest. If the...