Friday, May 29, 2020

Revised IRS Form 14457 for Voluntary Disclosure Preclearance (5/29/20; 7/17/20)

In April 2020, the IRS revised its preclearance form for voluntary disclosure – Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here.  I have not compared the new form with the old, so cannot point out the differences.  I do note that the instructions (beginning on p. 6 of the 14 page form) has a Section titled “What’s New” which I found unhelpful.  Basically all it says is that “The Service revised and retitled Form 14457.”  In broad overview, it seems that it has the same two-stage process as the prior form, but there may be some disclosure items in the two-stage process that changed.  I presume also that the instructions may have changed to address some issues that have come up in the processing of voluntary disclosures under the old form.

Joel Crouch, here, of Meadows Collier has a discussion, titled Update on IRS Voluntary Disclosures on the firm’s blog here.

Added 7/17/20 1:15am:

On July 14, 2020, the ABA Tax Section Civil and Criminal Penalties Committee held a virtual meeting in lieu of the in-person meeting at the annual May Meeting.  One of the issues discussed was the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the IRS practice with respect to the Form.  Here are some bullet points that I summarize from the meeting with, in some cases, exact quotes as best I could reconstruct them using the contemporaneous computer generated transcription (I think audio of the meeting is available from the ABA):

  • The IRS participants providing the information in the bullet points here were:  Carolyn A. Schenck, National Fraud Counsel and Assistant Division Counsel (International), SB/SE, Office of Chief Counsel, IRS, and D. Richard (Rick) Goss, Acting Director, International Operations, Criminal Investigation, IRS.  I won’t separately identify which of those two made the comments I bullet point here.
  • The related slide states the key requirements of the program:  (i) only legal source income qualifies; (ii) the disclosure must be timely, meaning that the IRS has not commenced civil examination or criminal investigation, received information from a third party, or acquired information of noncompliance from a criminal enforcement action (i.e., search warrant, grand jury subpoena, etc.); and (iii) must be truth and complete and with taxpayer cooperation with the IRS in the process by identifying all enablers, submitted returns and reports and making good faith arrangements to pay.
  • Voluntary disclosure and the benefits the program offers requires the submission of the Form for pre-clearance.  No Form and pre-clearance, no voluntary disclosure.  Quiet disclosures do not work.
  • The voluntary disclosure program is only for the client who has criminal exposure.  “So this is not for a negligent client.  This is not for someone who doesn't have any indicators of fraud.  No criminal exposure, this is not the practice for them.”
  • The program has a requirement for a civil fraud penalty for the year with the highest tax liability.  In some limited cases, the civil fraud penalty may not be asserted, but that will be rare.  “It will be unusual for a case to come out without an application of a civil fraud penalty.”
  • Apparently new Form 14457 instructions will be forthcoming with more information so “stay tuned.”  No timing for such additional instructions was given.
  • Multiple disclosures may be made on a single Form.  If two spouses file a single form, “make sure you clearly delineate which facts relate to which spouse.  If there's one spouse with willful conduct and one without, just make sure that's clearly delineated.”
  • For Part I Section 7, all entities must be listed.  Omissions may result in disqualification for voluntary disclosure.
  • Identify inability to pay the expected taxes, penalties and interest.  “What that means we are going to bring collection into the discussion early on.  So trying to hide that aspect from the IRS may be deemed as lack of cooperation.  So be aware of that.  You need to lay that out up front.  As well as working out some kind of a payment process.  This is all being deemed as cooperation.”
  • For any omissions from Part I if deemed inadvertent, the IRS may ask for correction or information, with a 14-day turn around request.
  • Part I is to permit the information necessary for a timeliness check.
  • Once pre-clearance is given, submit Part II of the Form without returns or payments.
  • A key requirement of the Form is a Noncompliance Narrative Statement (Question 7 on Part II of the Form).  The Narrative Statement must give (a) the taxpayer’s personal and professional background, (b) professional advisors, and (c) Non-compliance narrative.  The disclosures are particularly key to a qualifying voluntary disclosure.  Ms. Schenck emphasized that Part II, including this disclosures, are critical to be complete and fairly present the taxpayer’s non-compliance because they will be a key factor in determining whether the voluntary disclosure is accepted or denied.  She emphasized that this is a “one-shot” opportunity.  Get it right the first time, telling the “whole story.”  She said:  “There are no do-overs here.”  
  • One feature of Question 7's requirement of a Noncompliance Narrative is that the "narrative must include a thorough discussion of all Title 26 and Title 31 willful failures to report income, pay tax, and submit all required information and reports."  Note that the request is only for Title 26 and Title 31 willful failures, so other crimes within the jurisdiction of other state and federal agencies are not included.  So taxpayers and practitioners should tailor their narratives to avoid unnecessary disclosure of other potential crimes unless necessary to contextualize and fairly present a narrative of the Title 26 and Title 31 willful failures.  But, obviously a fair discussion of the Title 26 and Title 31 willful failures might require some information that might directlyr or indirectly suggest that other crimes were committed.  A related topic, therefore, is whther that information might be available to other enforcement agencies.  The participants discussed that issue in the context of § 6103 return confidentiality.  I will post a separate blog on the § 6103 issues when I can get to it.
  • Once the IRS pre-clears and the taxpayer submits Part II and it is reviewed, the matter will be transferred to examination in Austin for working the civil side.  Once transferred to examination, it is not expected that any fraud referral would come out of that (because the taxpayer is in the program), with the key caveat being that, if the examination indicates that the disclosures were not complete or the taxpayer fails to meet the key ongoing condition for cooperation.
  • There was some discussion about whether it is required to disclose some potential other criminal activity (other than illegal income which is an up-front disqualifier).  Mr. Goss indicated that they are looking for tax non-compliance issues and disclosing other illegal activities is not critical unless they are related to the income tax or FBAR non-compliance to which the program is directed.  Mr. Goss did indicate that, if other non-tax illegal activities are disclosed or discovered in the process, the IRS may make disclosures to other law enforcement agencies consistent with the return information disclosure authority in § 6103.  “So if we identify criminal behavior, kind of what was alluded to in the question, that is not under our jurisdiction as part of this process, we will make an effort to make a legal disclosure.  If there's an avenue to make a legal disclosure, CI will try to make that effort.”  There was a discussion following that comment by Grace Albinson of DOJ Tax about the authorities in § 6103 for disclosing non-tax violations to the appropriate federal agencies.  (I don’t get into that here.)
  • One question that came up is what happens if the taxpayer is denied review.  Mr. Goss said that the request is just denied.  “We don't take other action typically.”  The suggestion is that there is no routine referral as to a matter that the taxpayer has self-identified by filing the Form with Part I completed (or even Part II later in the process) as having potential criminal exposure.  I say that was a suggestion, but I would personally be careful about that issue.  Certainly if the IRS thinks there is revenue and even criminal potential in the case that has been rejected from the voluntary disclosure program, there will likely be some follow-through rather than let the taxpayer continue to play the audit lottery.

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