IRS Updates Voluntary Disclosure Program to Include Crypto | Foodman CPAs and Advisors
The IRS wants to encourage participation in voluntary disclosure and reduce taxpayer uncertainty, but its Current voluntary disclosure program is not configured to succeed according to the National Taxpayers’ Advocate 2021 Annual Reportreleased in January 2022. Shortly thereafter, in February 2022, the IRS updated the program to include crypto reporting, a penalty structure for labor tax and estate and gift issues and a inability to pay in full.
The National Taxpayer Advocate’s 2021 Annual Report to Congress says the current Voluntary Disclosure Program (VDP) raises questions about whether the program is fulfilling the IRS’ historic policy of encouraging taxpayers to voluntarily identify themselves. The current VDP was amended on November 20, 2018, when the IRS issued a new interim guidance memorandum to address updated VDP procedures. The Taxpayer Advocate Service (TAS) reports that the changes incorporated into the current VDP discourage taxpayer participation, expose taxpayers to possible criminal prosecution, and leave tax agents with wide discretion in penalties.
The current VDP
Is managed by the IRS Criminal Investigation Unit (IRS-CI). A voluntary disclosure occurs with the IRS-CI when a Taxpayer:
- Provides truthful, timely and complete disclosure through designated procedures.
- Cooperate in determining their fair tax liability.
- Arranges in good faith to fully pay applicable tax, interest, and penalties due.
Timely, accurate, and complete voluntary disclosures are considered by the IRS-CI when determining whether to recommend criminal prosecution. While voluntary disclosure does not automatically grant immunity from prosecution, it historically does not result in any prosecution.
Current Voluntary Disclosure is a 2-STEP process
To claim the current VDP, a Taxpayer must first:
- Complete Part I of Form 14457, the Voluntary Disclosure Practice Pre-Authorization Request and PDF Request to Request Pre-Authorization. Preclearance determines a taxpayer’s eligibility for the program, but does not guarantee preliminary acceptance. Part I can be faxed or emailed to IRS-CI. Part I is the preclearance application and it is required by the IRS-CI.
- Submit Part II of the Voluntary Disclosure Application within 45 days or make a written request for additional time once the taxpayer receives confirmation of preclearance. Extension requests are approved on a case-by-case basis. No more than a 45 day extension is permitted. Part II is the actual voluntary disclosure and must include a narrative statement of facts detailing the taxpayer’s willful conduct.
The IRS-CI reviews Part II of Form 14457 and determines if the taxpayer is eligible to participate in the VDP. If his participation is approved, CI will provide the taxpayer with a preliminary acceptance letter and forward the taxpayer’s Form 14457 to a civil section of the IRS. Once a taxpayer’s case has been assigned, an examiner contacts the taxpayer. Full cooperation of the taxpayer with the examiner in providing documents and information is expected.
Under the current VDP, taxpayers are required to admit potentially incriminating details of their tax status in their pre-clearance which is signed under penalty of perjury before obtaining a preliminary acceptance in the VDP. This could be self-incrimination as the taxpayer proceeds without certainty from the IRS.
Although the program provides “general guidance” to an IRS examiner, CAS feels the examiner has significant discretion if a taxpayer refuses to agree to all tax and penalty calculations. offered. In the event that a Taxpayer disagrees with the Examiner’s calculations, the Examiner may label the Taxpayer as uncooperative, and the preliminary acceptance may be revoked. Additionally, the examiner may audit additional tax years outside of the normal six-year disclosure period; increased fines and penalties.
Determining whether a taxpayer’s behavior is deliberately more complicated than it first appears
Under the US tax code, a “wilful error” on a US tax return can mean the difference between financial consequences alone and a jail sentence. So yes, there is a substantial difference between an “innocent error” and a “willful error”.
In February 2022, the IRS announced a updated Form 14457, Voluntary Disclosure Practice Pre-Authorization Application and Request. Did they listen to TAS?
The IRS has announced that Form 14457, Voluntary Disclosure Practice Pre-Authorization and Request, has been revised, including expanding a section on reporting virtual currency. Form 14457 allows taxpayers who may be subject to criminal prosecution for willful violations of tax law to voluntarily disclose information to the IRS that they have not previously disclosed. The IRS said updates and additions to this form include:
- IRS Criminal Investigation now accepts photocopies, faxes and scans of taxpayer signatures. Taxpayers can submit this form via eFax to 844-253-5613 to reduce filing and processing times. Previously, Part II of this form had to be mailed.
- An expanded section for reporting virtual currency.
- A penalty structure for labor tax and estate and gift issues.
- A checkbox for inability to pay in full.
- Hire a US-licensed CPA with international tax practice who will recommend a US-licensed tax attorney so that all information and work performed prior to submitting amended tax returns can be protected under attorney-client privilege. counsel until a VDP is performed.
- It’s obvious that the IRS is cracking down on potential cryptocurrency tax evasion. Have all your records up-to-date and organized to identify cost basis, taxable transactions, and potential capital gains, losses, and income.
The voluntary disclosures cover a period of six years and are intended for taxpayers who wish to comply and avoid possible criminal prosecution. If the IRS finds the taxpayer first, the taxpayer will not be eligible for the VDP.