Should I voluntarily disclose tax evasion to the IRS?

Should I Voluntarily Disclose Tax Evasion to the IRS?

Deciding whether to voluntarily disclose tax evasion to the IRS is a really tough decision. There’s a lot of pros and cons to think about. This article will go over the main things to consider so you can make the best choice for your situation.

What is Voluntary Disclosure?

Voluntary disclosure is when a taxpayer who failed to report income, pay taxes, or made other mistakes comes forward to the IRS before the IRS finds them first. You disclose the mistakes to the IRS and pay back taxes, interest, and penalties. The main benefit is avoiding criminal prosecution for tax evasion.

The IRS has a formal voluntary disclosure program with steps you need to follow. You submit paperwork about the mistakes and go through an audit process. At the end you get a closing agreement from the IRS promising no criminal prosecution [1].

Pros of Voluntary Disclosure

Here’s some of the main pros of voluntarily disclosing tax evasion to the IRS:

• Avoid criminal prosecution – This is the biggest benefit. The IRS promises not to recommend criminal prosecution if you properly disclose.
• Avoid jail time – Voluntary disclosure can help avoid serving jail time for tax crimes.
• Avoid some penalties – You’ll still pay penalties, but voluntary disclosure can help avoid some of the largest penalties, like the civil fraud penalty.
• Peace of mind – Knowing the IRS won’t show up at your door with handcuffs can relieve a lot of stress.
• Get right with the IRS – Disclosing and paying back taxes can let you finally get your taxes squared away.

Cons of Voluntary Disclosure

There’s also some downsides to voluntary disclosure:

• Pay back taxes and penalties – You’ll need to pay back taxes plus interest and penalties, which can add up to a big bill.
• IRS audit – Voluntary disclosure means going through an IRS audit, which is stressful and time consuming.
• No guarantee – There’s a risk the IRS could still recommend criminal prosecution anyway, though it rarely happens if you properly disclose.
• Tax advisor costs – Hiring a tax attorney to guide you through voluntary disclosure gets expensive.

When to Consider Voluntary Disclosure

As a general rule, voluntary disclosure makes the most sense if:

• You didn’t report a significant amount of income or taxes.
• You’ve evaded taxes for multiple years.
• There was willful intent behind the evasion.
• The IRS has not already contacted you about an audit or investigation.

For smaller or accidental mistakes, there may be better options than voluntary disclosure, like filing amended returns or relying on penalty relief rules. But for larger or intentional evasion, voluntary disclosure is usually the best way to avoid criminal prosecution [3].

How to Make a Voluntary Disclosure

If you decide voluntary disclosure is right for you, here are the main steps:

1. Hire a tax attorney – Get an experienced criminal tax defense lawyer to represent you.
2. Complete IRS Form 14457 – This is the formal voluntary disclosure request form.
3. Send Form 14457 to IRS Criminal Investigation – They will pre-clear your disclosure if you qualify.
4. Amend past returns – File amended returns and report your unreported income.
5. Pay back taxes and penalties – Calculate taxes, interest, and penalties to pay.
6. Go through IRS audit – The IRS will audit your amended returns.
7. Get closing agreement – At the end you get a closing letter from the IRS agreeing not to prosecute.

This whole process usually takes 6-12 months with a tax attorney’s help [5]. It’s very important to have an experienced lawyer guide you through the complex voluntary disclosure process.

What Happens If You Don’t Disclose?

If you don’t disclose evaded taxes, here’s what could happen:

• IRS audit – The IRS could randomly audit you and uncover the evasion.
• Criminal investigation – If it’s large enough, the IRS could start a criminal probe.
• Prosecution – You could get charged with tax crimes.
• Jail time – Tax evasion over $10k can lead to 5 years in jail.
• Big penalties – No voluntary disclosure means harsher penalties.

Once the IRS already contacts you, it’s usually too late for voluntary disclosure. That’s why it’s important to discuss your options with a lawyer before the IRS finds you first [4].

The Bottom Line

Voluntarily disclosing tax evasion to the IRS through their formal program is the best way to avoid criminal prosecution and other serious penalties, but it still involves back taxes, IRS audits, lawyer fees, and stress. For anything but small, accidental mistakes, talking to criminal tax defense lawyer is highly recommended to discuss if voluntary disclosure is right for you.