Sunday, May 10, 2009

Noise about noisy and quiet voluntary disclosures

Historically, practitioners have recommended to clients two types of voluntary disclosures designed to meet the IRS voluntary disclosure practice at IRM (09-09-2004). First, a "noisy" disclosure which means a disclosure to the IRS CI (often preceded by advance testing of the water to see if, under a "hypotherical" set of facts, the IRS will be inclined to pronouncement the disclosure a qualifying voluntary disclosure (meaning no civil prosecution of the taxpayer). Second, a "quiet" disclosure effected by filing true and complete amended or delinquent returns with the Service Center. (There is some discussion in the tax community as to whether the amended or delinquent returns must also have some type of narrative of the underlying problem being solved, but let's set that aside for purposes of this discussion.)

At the Civil and Criminal Penalties Section meeting (at the larger ABA Tax Section May Meeting), a panel discussed voluntary disclosure both the continuing historic voluntary disclosure practice and the special version most recently pronounced for offshore accounts. (IRS documents describing the special version for offshore accounts may be viewed here.) I will deal in a later blog about further nuances of the special initiative, but now turn to the historic practice. IRS CI Chief Eileen Mayer initially pronounced that the only voluntary disclosure qualifying for the IRS' voluntary disclosure practice was a noisy disclosure effected by opening the kimona to IRS CI. Later, a practitioner noted that the IRS IRM on voluntary disclosure policy was far from crystal clear on limiting the practice to noisy disclosures. And, another practitioner then asked the panel (including Ms. Mayer) to clarify a key point in the discussion -- as he stated it, the difference between the noisy disclosure and the quiet disclosure is that the noisy disclosure would draw a IRS letter -- let's call it a comfort or at least comforting letter -- giving the assurance of qualifying, whereas the quiet disclosure will not draw such a comfort or comforting letter. (This is my paraphrase of the clarification he requested). The panel consensus seemed to be that that was correct. If I read the events correctly, it thus appears that at least this panel thought that a true quiet voluntary disclosure would work.

One of the panelists (I can't recall which) said, in effect, he would be stunned if the IRS would recommend or DOJ would prosecute someone who made a true quiet voluntary disclosure. I think that, from a policy perspective, that has to be the right answer. But I doubt that the IRS will say that publicly in an unequivocal fashion. Morever, that merely invites the question as to whether the quiet disclosure, in order to be consider true and correct and complete (i.e., as a reasonable noisy disclosure substitute), must disclose considerably more information than normally disclosed on an amended or delinquent returns reporting additional or a new tax liability. I don't have an answer for that one, and just make the judgment as to how much disclosure is required based upon particular facts and circumstances. Obviously, the most risk averse of clients considering a voluntary disclosure will want to take the noisy route in any event. But more risk tolerant clients might pursue a quiet disclosure with the degree of "disclosure" in the amended or delinquent return(s) being determined by their tolerance for risk. Of course, they will have to fully and completely report their true and correct tax liabilities; the only question is what and how much to say about the reason they did not do that earlier.

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