Voluntarily Disclosing Tax Evasion to the IRS

Voluntarily Disclosing Tax Evasion to the IRS

Paying taxes is never fun, but evading taxes can lead to even bigger headaches. If you’ve failed to report income or pay taxes owed in the past, voluntarily disclosing this to the IRS through one of their programs can help you get right with the taxman and avoid criminal prosecution. This article will walk you through the pros and cons of coming clean, what the process entails, and potential outcomes.

Why You Might Want to Disclose

Before diving into the disclosure process, let’s look at some of the main reasons people choose to voluntarily disclose past tax evasion:

• Avoid criminal prosecution – This is the big one. By coming forward before the IRS catches you, you greatly reduce the chances of facing criminal tax evasion charges, which can mean massive fines and even jail time.
• Reduce penalties – Disclosing voluntarily means you only pay a percentage of the taxes owed as a penalty, rather than the much steeper penalties if caught by an audit.
• Peace of mind – For some folks, the anxiety of living with a tax evasion secret becomes too much, and they disclose to clear their conscience.
• Qualify for programs or licenses – Certain professions require you to be current with your taxes, so disclosing can allow you to qualify.

Many decide the potential savings and reduced risk of prosecution are worth coming clean. But there are also some drawbacks to consider.

Downsides of Disclosing

Voluntarily disclosing tax evasion isn’t all roses. Here are some of the main downsides to think about:

• Costs money – You’ll still have to pay back taxes, interest, and penalties, which can add up, especially the longer you wait.
• IRS scrutiny – Once you disclose, the IRS will likely look closely at future returns.
• Stress – The process involves lots of paperwork, information gathering, and waiting, which can be draining.
• No guarantee – There’s a chance the IRS could still bring criminal charges, depending on factors of your case.

Many feel the benefits outweigh the downsides, but it’s a personal decision. Consulting a tax attorney can help analyze your specific situation.

How to Disclose

If you decide to move forward with disclosure, the IRS offers a few different programs to facilitate the process and limit penalties. The most common options are:

• Offshore Voluntary Disclosure Program (OVDP) – For those with undisclosed foreign accounts or assets. Requires 8 years of returns and paying penalties of up to 27.5% of highest account balance.
• Streamlined Domestic Offshore Procedures – For those owing less than $1,500 per year in taxes. File amended returns and pay 5% penalty on unpaid taxes.
• Voluntary Disclosure Practice – Standard program for domestic disclosures. File 6 years of returns and pay penalties of up to 75% of unpaid taxes.

Each program has specific eligibility requirements, so you’ll need to research which is right for your situation. I’d recommend hiring a tax attorney experienced with disclosures to guide you through the process.

In general, the disclosure process involves:

1. Thoroughly gathering records of all previously unreported income and tax documents.
2. Filing amended federal and state tax returns for the required number of years.
3. Submitting payment of estimated taxes owed, interest, and penalties.
4. Waiting for the IRS to review your disclosure and determine penalties.
5. Negotiating final settlement with the IRS and making additional payments if needed.

This process takes many months, lots of paperwork, and usually high CPA fees. But for many, getting right with the IRS is worth the effort.

What to Expect After Disclosing

Once you take the plunge and disclose to the IRS, you’ll have to ride out the process to see how it shakes out. Here are some potential outcomes:

• Acceptance into disclosure program – This is the ideal scenario. You pay back taxes plus penalties and avoid prosecution.
• Rejection from program – The IRS may reject you from a voluntary disclosure program if you don’t meet the eligibility terms. Then you’re subject to steeper penalties and higher risk of criminal charges.
• Further investigation – Even if accepted into a program, the IRS can dig deeper and potentially discover additional violations, resulting in more taxes and penalties.
• Criminal prosecution – In cases of very large or egregious tax evasion that was knowingly and intentionally committed, the IRS may still pursue criminal charges.

While being rejected from a disclosure program or criminally prosecuted are rare outcomes, they are possibilities to be aware of. Have an experienced tax attorney review your situation to assess the likelihood of a positive result before taking the leap.

Strategies to Improve Your Chances

If you decide to disclose past tax evasion, taking certain steps can help improve your odds of a smooth process and positive outcome:

• Hire an experienced tax attorney – Their expertise navigating disclosures is invaluable.
• Don’t wait – Disclosing earlier increases eligibility for programs and reduces penalties.
• Come 100% clean – Fully disclose all past evasion to avoid trouble down the road.
• Gather thorough documentation – Have all records in order to accurately file amended returns.
• Remain compliant moving forward – Don’t give the IRS any reasons to doubt your good faith efforts.

It’s also wise to address any questionable activity with your tax preparer before filing your current year’s return. This gives you the option to make corrections or address discrepancies on the front end.

The Choice is Yours

Deciding whether to voluntarily disclose hidden tax evasion to the IRS is a complex decision with many factors to weigh. For some, reducing legal exposure and financial risk make it an obvious choice. Others may decide the potential penalties and IRS scrutiny just aren’t worth it.

Ultimately, you know your situation best. Carefully consider the pros and cons, consult trusted advisors, and don’t rush into anything. If disclosure makes sense for you, take steps to maximize your chances of a successful outcome. And if you decide to keep quiet, make sure you’re prepared to ride out any potential consequences down the road. Good luck untangling yourself from tax troubles!

References

IRS Offshore Voluntary Disclosure Program
IRS Streamlined Filing Compliance Procedures
IRS Voluntary Disclosure Practice