Some Thoughts on the IRS Voluntary Disclosure Program for Offshore Accounts (3/31/09)

I have outlined the key points of the IRS' new initiative here. (IRS documents related to the initiative may be accessed here.) I offer some comments below:

1. Taxpayers must meet the traditional voluntary disclosure requirements. Taxpayers already under criminal investigation do not meet those requirements. Since a taxpayer may not know that he or she is already under criminal investigation, the taxpayer's attorney will have to do a careful song and dance with IRS CI so as not to disclose incriminating information only to find out the taxpayer does not qualify for the program. There are ways to do that and mitigate the risk.

2. Practitioners have discussed the possibility that the Department of Justice, the Government agency charged with prosecution of tax crimes, might prosecute even if the taxpayer is accepted into this new IRS initiative. (See here.) I understand that the spector of that possibility may have already surfaced for a taxpayer making a voluntary disclosure under the regular voluntary disclosure program prior to the new initiative. A question I have is whether the Department of Justice is authorized to prosecute a tax crime where the IRS does not recommend or otherwise concur in the prosecution? I have FOIA requests to DOJ Tax that I hope will flush out a definitive answer to that question but at this time I cannot discount the concerns of the practitioners of possible DOJ prosecution even a taxpayer is compliant with this new Voluntary Disclosure initiative.

3. I do have concerns about the message that this initiative sends to the taxpayers of the U.S. Practitioners in this area routinely represent one-off alleged tax cheats whose alleged crimes are systemically not nearly as damaging to the fisc as the systemic raid through offshore accounts. Players in the offshore tax haven abuse area as a group systemically are far more damaging than one-off tax cheats. Yet, all the one-off tax cheats have at best is the old voluntary disclosure program which might give some reasonable assurance against criminal prosecution but gives no assurance of substantially reduced civil penalties. Why are these offshore tax cheats given preferable treatment on the civil penalties? I actually can articulate good reasons for favorable treatment given these offshore tax cheats. My concern is with preferable treatment. I think that just as favorable treatment (substantially reduced penalties) will get the right response for offshore tax cheats, it will also get the right response for one-off tax cheats. I therefore urge that penalty relief be given in all voluntary disclosure situations. Indeed, for much the same reasons as justifying the qualified amended return no penalty relief, I suggest that regular taxpayers doing a regular voluntary disclosure should have no penalties (but an open statute of limitations in cases of fraud for, say, six years, so that the IRS collects substantial tax and interest). The offshore tax cheats subject to the current initiative should not qualify for this extra relief because, as I noted in starting this comment, those cheating offshore did far more systemic damage than did the ordinary one-off tax cheat. The current initiative for those guys seems to get it right, although even here there may be factual circumstances in particular cases that might further penalty relief (perhaps by coming in under the regular voluntary disclosure policy which now permits more nuanced application and, under my proposal above, would not attract penalties at all).