To Disclose or Not To Disclose: The IRS Tightens the Requirements of the Voluntary Disclosure Program

Overview of the Voluntary Disclosure Program

The IRS Voluntary Disclosure Program (“VDP”) provides taxpayers who have willfully failed to report income, assets, or other tax-related information an avenue to resolve their noncompliance with the IRS. In order to be eligible, taxpayers must have willfully violated the tax law and must make a disclosure before the IRS initiates a civil or criminal examination.

The program offers two key benefits:

(1) Limiting criminal exposure related to past noncompliance: Taxpayers who enter into the VDP are rarely referred to IRS Criminal Investigation (“CI”).

(2) Reduced penalty framework: Through the VDP, failure-to-file and failure-to-pay penalties are waived. Instead, the program applies a 75% civil fraud penalty on one tax year, typically the year with the highest balance owed. In extraordinary cases, the IRS will apply an alternative penalty at the request of the taxpayer based on the facts and circumstances of the case.

To begin the process of entering the VDP, taxpayers must submit Part I of the Form 14457 Voluntary Disclosure Practice Preclearance Request and Application (the “Preclearance”). After reviewing the Preclearance, if CI determines that the taxpayer is eligible to participate in the program, CI will send the taxpayer a Preclearance Letter. Once the taxpayer receives their Preclearance Letter, they have 45 days to send Part II of the Form 14457. CI will then review Part II of the Form 14457 to determine whether the taxpayer should be accepted to participate in the VDP. If the taxpayer’s application is pre-approved by CI, the taxpayer’s case will be assigned to a revenue agent, to whom the taxpayer will provide their tax returns.

In the previous versions of the Form 14457, taxpayers were required to make a “good faith” effort to pay all taxes, penalties, and interest due. However, the taxpayer could establish, by providing Form 433-A Collection Information Statement for Wage-Earners and Self-Employed Individuals and other accompanying documents, an inability to pay in full. If the taxpayer establishes an inability to pay in full to the satisfaction of the revenue agent, they were historically afforded collection alternatives, such as Installment Agreements or Offers in Compromise.

Recent Updates to the VDP

In November, the IRS rolled out a revised version of the Form 14457. For most, the stricter requirements of the latest version of the Form 14457 came as a surprise. For tax attorneys and other tax practitioners that frequently deal with revenue agents as part of the VDP, the new form solidified the recent trend that most revenue agents have been pushing since months before the updated Form 14457 was published: full payment of the tax obligation with no collection alternatives.

Expanded Definition of Digital Assets

The new form brings a few big changes, including expanding the term “virtual currency” to “digital asset,” which can include stablecoins and non-fungible tokens (NFTs).

Focus on Full Payment Obligations

The most notable change on the latest Form 14457 is the emphasis on full payment of the liability. A quick scan of the instructions of the latest Form 14457 demonstrates the IRS’s latest interest in limiting taxpayers’ collection alternatives through the VDP. In glaring bold letters on the ninth page of the form, it reads that the “voluntary disclosure is not complete until you have come into compliance and made arrangements with the IRS to pay in full the tax, interest, and penalties.” Previous versions of the form implied that taxpayers could seek collection alternatives that resulted in less than full payment, such as Offers in Compromise.

Conflicting Language in Form 14457

However, like many government-published documents, the latest Form 14457 contains conflicting language. For example, on page thirteen, the form states that “any closing agreement resolving a case with less than full payment at case closing will require the waiver of collection due process rights under I.R.C. §§ 6320 and 6330 for all tax periods addressed in the closing agreement.”

Additional Insight:

This raises questions about whether voluntary disclosure can be deemed complete without full payment. Taxpayers should prepare for stricter enforcement of full payment requirements while consulting with a qualified tax professional for cases where collection alternatives might still apply under specific circumstances.

How Will Recent Changes Affect the Future of the VDP?

The big question here is how will the latest push toward full payment affect the future of the VDP?

• Reduced Participation: Perhaps fewer taxpayers will come forward to make a disclosure if the IRS enforces the full payment rule, resulting in a less successful program for the IRS in terms of recovered tax losses.
• Increase in Quiet Disclosures: Perhaps more taxpayers will make “quiet disclosures,” filing past due returns with the IRS and accepting the failure-to-file and failure-to-pay penalties in exchange for the opportunity to submit an Offer in Compromise to reduce their tax liability.
• Concerns About Retroactive Enforcement: Perhaps some taxpayers who entered the VDP under a different version of the Form 14457 will withdraw from the VDP if the IRS refuses to abide by the terms of the previous versions of the form.

Additional Insight:

While the future of the program remains uncertain, one thing is clear: whether to enter the VDP should be a strategic decision between attorneys and their clients. Taxpayers must weigh the program's benefits and drawbacks carefully, especially under the tighter restrictions on collection alternatives.

Resolve Your Tax Concerns with The Wilson Firm

The IRS Voluntary Disclosure Program offers a valuable opportunity to address noncompliance and protect your financial future. At The Wilson Firm, our skilled tax attorneys understand the complexities of the VDP, including the recent changes to Form 14457. Throughout this process, we provide personalized strategies tailored to meet your unique needs.

Whether navigating collection alternatives or ensuring full compliance with IRS tax requirements, our expertise will help you achieve the best possible outcome. Take the first step toward resolving your tax challenges. Contact The Wilson Firm today.