IRS Return Information Disclosures to Other Federal or State Authorities for Information Obtained in Voluntary Disclosure Processing and other Agency Activity (7/18/20)

I previously blogged on the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application.  See Revised IRS Form 14457 for Voluntary Disclosure Preclearance (Federal Tax Crimes Blog 5/29/20; 7/17/20), here; for prior discussion, see New Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (Federal Tax Crimes Blog 4/16/19), here; and New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (Federal Tax Crimes Blog 11/29/18; 11/30/18), here.

The Form grows out of the offshore account voluntary disclosure initiative (variously initialized OVDP and OVDI), but now covers the entire IRS voluntary disclosure practice to filing of the Form to seek preclearance to the practice.  The IRS voluntary disclosure practice is described on a web page titled IRS Criminal Investigation Voluntary Disclosure Practice, here (which also includes links to historical information).

I previously discussed the revised form in the link above and added to that discussion comments from a July 14, 2020 an ABA Tax Section Civil and Criminal Penalties Committee virtual meeting in lieu of the in-person meeting at the annual May Meeting.  In that discussion, I noted the importance of a full and complete narrative disclosures on the Form Part II, Question 7.  That narrative disclosures “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.”   The participants emphasized the requirement for disclosure only includes Title 26 and Title 31 crimes (as to the latter, those crimes under Title where the IRS has been delegated enforcement responsibilities, such as FBAR and dual IRS and FINCen Forms 8300, titled Report of Cash Payments Over $10,000 Received in a Trade or Business).

One issue I indicated I would discuss later was the discussion of whether information disclosed on the Form or in the voluntary disclosure process would be available to other federal or state law enforcement agencies who enforce crimes outside Title 26 and 31.  Of course, if the unreported income is illegal income, the taxpayer is disqualified from joining the voluntary disclosure practice.  But often in the milieu involving a taxpayer’s tax or Title 31 noncompliance, there will be other illegal activity in which other nontax federal or state agencies may have an interest.  Need taxpayers trying to join the voluntary disclosure practice be concerned that the disclosures the taxpayers make in the practice (including the narrative on Part II, Question 7 of Form 14457) or any other information the IRS develops other than submitted by the taxpayer will be available to those other federal or state law enforcement agencies and potentially used for criminal prosecution of the taxpayer with no protection offered by the IRS voluntary disclosure practice?

The issue extends well beyond the voluntary disclosure practice, for it raises questions as to the scope of the IRS’s authority to disclose to other law enforcement agencies return information (virtually everything the IRS knows or has about the taxpayer) and taxpayer return information (basically return information submitted by the taxpayer).  See § 6103(b)(2)(1) & (2).  That field is covered by § 6103, titled Confidentiality and disclosure of returns and return information, here.  Section 6103 is labyrinthian.  It starts in § 6103(a) with a simple proposition:  “Returns and return information shall be confidential” and thus not disclosable to anyone.  The exceptions to that simple proposition are many and, as I said, labyrinthian.  That is where we need to look to assess, if possible, the risk of taxpayer disclosures in the voluntary disclosure process being served up to other law enforcement agencies for nontax use.  For general overview of the IRS directions to its personnel regarding disclosures under § 6103, see IRM 11.3 Disclosure of Official Information (with many subparts), here.

Return information and/or taxpayer return information may be disclosed to other agencies as follows (the participants in question were:  Grace Albinson from DOJ Tax CES and Richard ("Rick") Goss, from Acting IRS Director International Operations, Criminal Investigation):

1. State agencies involved in tax administration.  Section 6103(d) permits disclosure of return information to state tax agencies.  Disclosures are required only for states “with which the Commissioner of the Internal Revenue Service has entered into an agreement regarding disclosure.”  IRM 11.3.32.1.4 (06-23-2020), Terms and Definitions, “State.”  (The same IRM provision lays out the requirements for such agreements.  The key limitation is that the disclosures by made only for state tax administration, which would include state criminal tax enforcement but would not include state nontax crimes.  Ms. Albinson emphasized that (i) IRS return information (including that disclosed by the taxpayer in the voluntary disclosure process) that indicate a state nontax crime could not be disclosed under § 6103(d); and (ii) there is no exclusion of taxpayer return information (as there is for other disclosure authorities in § 6103).

2. Disclosures to federal agencies for nontax administration.  Section 6103(i) provides for disclosures in certain circumstances.  These disclosures are like “spontaneous disclosures” made on the initiative of the IRS rather than some request or order generated elsewhere.  The DOJ Tax attorney referred specifically to IRM Section 34. Disclosure for Non-tax Criminal Violations, here.  The part most pertinent here provides:

• Return or return information may be disclosed upon an ex parte order from a U.S. District Judge (Article III) for purposes of investigating (including grand jury investigation) or trying any nontax criminal case (§ 6103(i)(1).
• Return information other than taxpayer return information may be disclosed upon a request from a head of Department (with certain narrow exceptions) to the IRS (§ 6103(i)(2)).
• Return information other than taxpayer return information “which may constitute evidence of a violation of any Federal criminal law (not involving tax administration) to the extent necessary to apprise the head of the appropriate Federal agency charged with the responsibility of enforcing such law” (§ 6103(i)(3)(A)).
• Return Information may be disclosed to federal or state law enforcement agencies if the information (i) involves “imminent danger of death or physical injury;” (ii) if necessary to advise federal law enforcement agencies of flight from prosecution; or (iii) if, other than taxpayer return information related to terrorist activities.

3. Disclosures necessary for tax administration.  Section 6103(k) authorizes disclosure of return information in certain cases.  In part here pertinent, Mr. Goss mentioned § 6103(k)(6) which permits disclosures “in connection with his official duties relating to any audit, collection activity, or civil or criminal tax investigation or any other offense under the internal revenue laws” to the extent “necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforcement of any other provision of this title.”  Mr. Goss mentioned gave this specific example in the context of the IRS processing of the initial Form 14457 preclearance request (slightly cleaned up):

So the way that might impact this discussion is, for instance, I find information through my timeliness searches that would indicate that there's potentially a nexus to narcotics trafficking.  It is within the bounds of this program for me to attempt to determine whether or not [the taxpayer is involved in an] investigation by the DEA.  So, I wouldn't say tell a DEA this taxpayer is engaged in X types of crime, but I would ask the DEA potentially does this taxpayer -- is this person under investigation or is this entity under investigation by your agency.  And they [DEA] might infer from that question that there's a potential for that person for me to look at.

JAT Comments:

1.  Note that some of the authorized disclosures are for return information other than taxpayer return information.  As respects the voluntary disclosure practice, the information the taxpayer discloses on or in conjunction with the voluntary disclosure practice, the information will be taxpayer return information and thus excepted from some types of authorized disclosure.  This may be a good reason for the taxpayer to lard up his disclosures to include more than perhaps the IRS would accept with minimalist disclosures.  I have never had to research whether there is some type of fruit of the poisonous tree concept that could apply -- i.e., if the taxpayer disclosed the information in the voluntary disclosure process but the IRS thereafter developed the information through nontaxpayer processes, could the IRS use the information?  There are possibly analogous circumstances where the IRS would have to prove that it received information for other sources independent of the information supplied (e.g., in the Fifth Amendment area with a Kastigar hearing after a taxpayer is compelled to testify).  Just a thought.

2.  In any event, in my opinion, it is pretty important to err on the side of overdisclosure rather than underdisclosure, in order to mitigate the risk that the IRS would claim underdisclosure as a basis for denying the taxpayer fully cooperated, a requirement for voluntary disclosure.

3.  If the taxpayer wants to play it close on the Part II Question 7a narrative by omitting information about nontax crimes and perhaps fuzzing information relevant to the tax crimes but also to the nontax crimes, the taxpayer should be guided by counsel sensitive to the issues and the risks involved.