Voluntary disclosure and immunity.

• Author: Stein, Ronald A.
• Position: Information disclosure to IRS

Does the IRS's voluntary disclosure policy effectively immunize taxpayers who comply with it? The issue is vital for nonfilers who wish to come back into the tax system and for the tax professionals who advise them.

While the Service says "no," a recent decision, Tenzer, 950 F Supp 554 (DC N.Y. 1996), rev'd on other grounds, 2d Cir., 1997, suggests otherwise.

Background

For decades, Treasury has flirted with voluntary disclosure as a tool to stimulate taxpayer compliance. In 1945, Treasury officials publicly pledged that any nonfiler who "voluntarily" disclosed his unreported tax liability before investigation would not be prosecuted. However, this offer of immunity stoked litigation over what qualified as a voluntary disclosure. Consequently, Treasury abandoned the policy in 1952; see Press Rel. 7-2930 (1/10/52). Thereafter, voluntary disclosure was merely to be considered, along with other factors, in deciding whether to prosecute.

The IRS publicly reemphasized this position in 1961; see News Rel. IR-432 (12/16/61). The taxpayer who made a voluntary disclosure was understood to do so at his own peril (Hebel, 668 F2d 995 (8th Cir. 1989)).

Then, in 1992, the Service unveiled the Nonfiler Program, an outreach program intended to reintegrate nonfilers into the tax system; see News Rel. IR-92-94 (9/30/92). Voluntary disclosure was a cornerstone of the initiative.

To make a voluntary disclosure, a taxpayer had to:

* Have only legal source income.

* Make disclosure prior to being contacted by the IRS that he was under criminal investigation.

* Either file a true and correct tax return or cooperate with the Service in ascertaining the correct tax liability.

* Either pay the full amount due or, if unable to make full payment, make bona fide arrangements to pay; see IR-92-114 (12/7/92).

The Internal Revenue Manual (IRM) was revised shortly afterwards consistent with this approach; see Special Agent's Handbook, IRM [9781] 342.142:(3) (4/5/93).

IR-92-114 offered no assurance that a nonfiler who made a voluntary disclosure would elude prosecution. In public, however, the Commissioner stated that the IRS would not recommend criminal prosecution of any taxpayer who came forward, made a true voluntary disclosure, and filed an accurate return. The theme could also be found in IRS Publication 1715:

Our long standing practice has been not to recommend prosecution of individuals for failure to file tax returns--provided they voluntarily file, or make...