Updates on Developments in IRS Penalty Administration and Voluntary Disclosure (1/11/25)

I post here links to earlier posts on my Federal Tax Procedure Blog about the IRS’s Voluntary Disclosure Practice (“VDP”). ABA Tax Section Comments on VDP Disclosure Form 14457, Voluntary Disclosure Practice Preclearance and Application (1/5/25), here; and IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24; 1/5/25), here.

Also, I have just recently learned that, in the National Taxpayer Advocate’s Annual Report to Congress 2024, here, the NTA discusses two of 10 Most Serious Problems Encountered by Taxpayers that relate to tax administration of the type addressed in this blog (Federal Tax Crimes) and the companion blog (Federal Tax Procedure). Items 9 and 10 are, respectively:

9. Civil Penalty Administration (pdf 16 pages), here; and

10. Criminal Voluntary Disclosure (pdf 17 pages), here.

The most relevant to the initial item in this blog is the Criminal Voluntary Disclosure which I generally refer to as the IRS Voluntary Disclosure Practice (“VDP”). From the discussion of both items, I gather that the practitioner community has major concerns with IRS administration, that the NTA has listened to those concerns (calling the community “external stakeholders”), and that, in large part, the NTA has adopted those concerns.

Although it probably does not matter what I believe, I will state my belief anyway:

1. Many of the complaints in the Most Serious Problems #9 and #10 are probably resource issues as the IRS tries to deal with Congressional underresourcing. I thus think that a significant part of the solution would be to have more resources. That’s a congressional issue, not something that the IRS can administratively solve. Thus, for example, if the IRS were to have a live review (with supervision and including good cause review) of all penalty assessments before they are made, the IRS will have to either forego many penalty assessments for lack of resources or pull resources from other priority items. I agree that such live pre-assessment review is a worthy goal, but Congress should work with the IRS to fund the needed resources.

2. On the VDP discussion, the NTA seems to prioritize revenue collection. Surely, by making the VDP more taxpayer-friendly—probably better described as “tax-cheat” friendly—more revenue might be raised and, considered in isolation, that is good. But, if it is too taxpayer-friendly, then taxpayers will be encouraged to play the audit lottery with the thought that they will catch up later with the costs of the covered years (usually 6) substantially less than the benefits over all the years. That is not fair to other taxpayers who comply with their tax obligations. So, it is a delicate policy decision as to where to strike the balance, my only point being that revenue collection is only part, and perhaps not a major part, of the consideration for the VDP.

This blog entry is cross-posted on the Federal Tax Procedure Blog here.