ABA Tax Section Comments on Voluntary Disclosure Practice and Streamlined Filing Compliance Procedures (9/28/21)

The ABA Section of Taxation has submitted, here, comments on the Voluntary Disclosure Practice and the Streamlined Filing Compliance Procedures.  I have not had time to review them.  I post them now to get them out there for those who may not have received or may have overlooked the email notice.

I may comment later.

JAT Comments (added 10/29/21 at 4:00 pm):

On reading through the ABA Tax Section Comments, two items caught my attention:

1.  The problem of requiring disclosure for preclearance in Form 14457, Part I, of the foreign accounts gives the IRS (and DOJ) potentially incriminating information and thus creates the risk that that information may be used against the taxpayer if the IRS denies preclearance.  The recommended solution to the problem is (p. 6 footnote omitted):

• We recommend that the Service remove item #10 from Part I (requiring the disclosure of noncompliant accounts) and move it to Part II of Form 14457, so that the disclosure of the noncompliant accounts is made after (1) the taxpayer is precleared to make a voluntary disclosure and (2) the practitioner has time to conduct due diligence with respect to items that may constitute noncompliant accounts. The goal of preclearance is for the Service to determine that a taxpayer is “eligible for making a voluntary disclosure, including establishing unreported income is from legal sources and that the timeliness requirements are met.” We do not believe the bank account information is required to make such a preclearance determination. Requesting identification of, and information on, noncompliant accounts in advance of the preclearance determination requires the taxpayer to disclose incriminating information before he or she is cleared to proceed with disclosure. This deters taxpayers from using, and practitioners from recommending, the VDP.

I am not sure I know the solution to the problem.  I seem to recall some concern about use of tax returns that were “invited” by the agent in an audit.  I have not revisited that issue, but, conjuring up from the past, I recall (or seem to recall) there was some concern that,  if the agent requested returns and the taxpayer supplied them in good faith, there might be Fifth Amendment problems in the use of the information in criminal prosecution. I suppose Form 14457 might be analogized to that situation. 

This is all speculative because I do not have good recollection of the invited return issue and its resolution.  I did find the following on a quick search of my database from a recent case, Harrington v. Commissioner, T.C. Memo. 2021-95, *26 & &26, involving the civil fraud penalty:

            During the examination petitioner submitted amended joint returns for 2005-2010. Those amended returns show underpayments of tax for 2005-2009 totaling $103,756. Petitioner thus has conceded that he underpaid his tax for those five years. See Badaracco v. Commissioner, 464 U.S. 386, 399 (1984) (“An [*27] amended return, of course, may constitute an admission of substantial underpayment[.]”). Although the IRS in the notice of deficiency determined underpayments in slightly different amounts, it need not “establish the precise amount of the deficiency” to satisfy the first prong. See DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).

            Petitioner argues that his “amended returns should be disregarded because * * * [he] would not have filed them had they not been requested by the revenue agent.” Although the law is clear that “[s]tatements made in a tax return * * * may be treated as admissions,” Lare v. Commissioner, 62 T.C. 739, 750 (1974), aff’d, 521 F.2d 1399 (3d Cir. 1975), petitioner asks that we create an exception to this rule where the taxpayer has been cooperative during an examination. We decline petitioner’s invitation, finding no legal support for an exception of this kind.

That is not directly on point, but it seems to point to a problem for taxpayers concerned that they would not achieve preclearance.

2. A related problem is that, in submitting information of Form 14457 (Parts I or II), the IRS may reject the preliminary acceptance and then use the information submitted against the taxpayer in a criminal case.  The comments thus state (p. 11):

While the Section is not aware of any instances where the Service or the Department of Justice ever have sought to use narrative information provided by the taxpayer on a Form 14457 against the taxpayer when the Service has declined to issue a preliminary acceptance, the Service’s policy statements and the Justice Manual similarly provide no assurances that the form’s sworn narrative section could not be used against the taxpayer as an admission of guilt if the Service rejects the voluntary disclosure. In short, the Section believes that the sworn statement required in Part II of Form 14457 potentially raises Fifth Amendment concerns regarding self-incrimination.

Based on that concern, the recommendation is:

• We recommend that the Service assure taxpayers who submit Part II of Form 14457 that it will not withhold preliminary acceptance into the VDP if the taxpayer has obtained preclearance and provides complete and accurate information in Part II of the form. If the Service insists that the currently required level of detail is necessary prior to preliminary acceptance, we recommend that it provide assurances regarding what uses the federal government may make of the sworn taxpayer statement in the event the Service rejects a voluntary disclosure. At present, we believe the lack of such assurances is a significant deterrent for entry into the program.

My gut reaction to that request is that it probably will not be granted.  I would think that, as with the VDP through the years, the IRS will prosecute and use the information only for very, very bad behavior indicating failures of the requirements that the taxpayer be truthful and that his disclosures and cooperation be complete.  There are several of cases I have cited for this general proposition over the years, but a good example is United States v. Tenzer, 213 F.3d 34 (2d Cir. 2000).  I think the VDP has operated through the years quite well without that level of specific assurance be given.