There are technically two types of voluntary disclosure which may help with mitigating the damage, or in some cases, avoiding criminal liability altogether. Both the IRS and DOJ Tax have policies which offer some form of consideration for letting the government know of a tax violation.
IRS Voluntary Disclosure
Some cases may qualify for the IRS’ voluntary disclosure policy, which could help to avoid criminal liability altogether. Under the voluntary disclosure practice, a taxpayer who may have violated internal revenue laws can willingly let the IRS know of this non-compliance with some protection. See IRM 18.104.22.168.
The tax system relies heavily on the voluntary self-reporting of the public, and this policy is just another way for the government to encourage this compliance. However, this is a policy of the IRS and not the law, so it does not completely ensure immunity from prosecution.
Each case is different, and if you are considering making a voluntary disclosure, it is imperative you discuss this option with your attorney first. This practice is usually best suited in a situation where a taxpayer willfully files a false tax return and quickly wants to make amends before being contacted by the IRS.
If a timely and truthful disclosure is made, the taxpayer cooperates with the IRS to determine the actual amount of taxes due, makes a good faith effort to pay, the IRS may not refer the taxpayer for prosecution. See id.
Timing is important with a voluntary disclosure. While it is possible that you may still be able to disclose the violation if you are being civilly audited, if the government has already been made aware of the tax violations and/or you are reasonably certain you are being investigated criminally by the IRS, the disclosure would not be considered timely.
According to the IRS disclosure is timely before the IRS has: (1) Commenced a civil examination or criminal investigation; (2) Received information from a third party (e.g., informant, other governmental agency, John Doe summons, etc.) alerting [them] to your noncompliance; (3) Acquired information directly related to your specific noncompliance from a criminal enforcement action (e.g., search warrant, grand jury subpoena, etc.). See id. If a voluntary disclosure is made, CI will likely be involved from the outset.
A voluntary disclosure as contemplated by the IRS practice is different from what is known as a “quiet disclosure” which involves the filing of amended returns reporting the assets or property previously not reported or under reported. This is a risky practice, and one that is disfavored by the IRS.
DOJ Tax Voluntary Disclosure
The Tax Division ultimately decides whether or not to pursue prosecution for a tax case referred to them, and voluntary disclosure of a tax offense is one factor that the Tax DIvision will take into account in making this decision. See generally USAM, § 9-27.220, et. seq.
The DOJ Tax voluntary disclosure policy is in line with the IRS. If the defendant has complied with the IRS practice, the Tax Division “may consider” this in making its own decision to prosecute. See CTM § 4.01 . However, there is no guarantee that the Tax Division will not prosecute an offense where the defendant complied with the IRS practice. See id.
Specifically, DOJ Tax looks into the timeliness of the disclosure and the cooperation of the taxpayer. See id. The Tax Division does not look at timeliness as an objective standard (i.e, if the disclosure occurred before or after an objective event) but rather a subjective case-specific approach. See id.
For example, if the taxpayer is already being audited, but is aware of something that the auditor would never find and discloses this fact anyway, the Tax Division may still consider this timely.
For cooperation, this generally requires that the taxpayer pay what is due to the government. However, if the taxpayer doesn’t have the ability to do this they must fully disclose their financial situation along with the violation. See id.
A voluntary disclosure may also be used in sentencing as a reason for downward departure from the sentencing guidelines. See USSG A75K.16.
Know Your Rights
If you are the subject of a civil audit, the case does not necessarily have to be turned over to CI. Even if you are already being investigated by CI, the IRS administrative investigation, while criminal in nature, does not need to be recommended to the Tax Division for prosecution.
There are a number of rights and privileges afforded to defendants throughout the process. These can and should be used appropriately to avoid offering statements or evidence that may indicate criminal intent, display willfully misleading conduct, or could be used against the defendant in prosecution.
Oftentimes, a bad situation can be made worse by over-divulging or lying. The proper use of privileges and rights can avoid this situation.
Many people have already heard of the attorney-client privilege. The essence of this privilege is that information told in confidence to an attorney for the purposes of obtaining legal advice, does not have to be disclosed. Fed. R. Evid. 501; see Johnson v. Commissioner, 119 T.C. No. 27 (2002). This can be waived if the taxpayer also told this information to a third party. Fed. R. Evid. 502.
The work-product privilege is another applicable privilege in the tax world where information generated in “anticipation of litigation” does not need to be disclosed. See United States v. Foxworthy, 457 F.3d 590 (6th Cir. 2006).
For example, a document created to assist with the defense of a taxpayer’s case after they have been investigated by CI would be created in anticipation of litigation and may be privileged.
Marital privileges allow for the non-disclosure of information provided in the confidence of marriage, and there are two separate privileges within this category. In the marital communications privilege, either spouse can invoke the privilege in regard to communications that occur between them during the marriage. United States v. Ramirez, 145 F.3d 345, 355 (5th Cir. 1998); United States v. Chagra, 754 F.2d 1181, 1182 (5th Cir. 1985).
Even if the couple is no longer married, the privilege can still be invoked for communications that happened during the marriage. United States v. Entrekin, 624 F.2d 597, 598 (5th Cir. 1980).
On the other hand spousal immunity can only be invoked by the spouse who is not the defendant, and can’t be invoked after the marriage is over. Crawford v. United States, 541 U.S. 36 (2003). A partner who invokes spousal immunity can’t be forced to testify against the defendant partner.
The Fifth Amendment to the United States Constitution grants many important rights to individuals accused of a crime. Among these rights is the right against self incrimination, or the right to remain silent. There are many points within a criminal tax case where this right is abundantly important and the taxpayer needs to consider whether or not to exercise this right.
Stages at which it is possible to exercise this right are in answering certain questions on a tax form, during a civil or criminal investigation, while in custody of law enforcement, and at all court proceedings including trial.
Even if the IRS has referred the case to the Tax Division, the case must first be authorized by the Tax Division for prosecution. Each of these steps can weed out weak cases. Therefore, understanding your specific situation, knowing your rights and consulting with a lawyer early on can be greatly beneficial in mitigating the damage.
Call my office and set up an appointment for a consultation. At Brotman Law you’ll attain the advice and defence of legal professionals with experience in civil and criminal tax law. We will help you decide on the timeliness and type of voluntary disclosure on your tax offence that can best help your case.