Changes to IRS Voluntary Disclosure Practice: What You Need to Know

 Posted on December 16, 2024 in Taxation Law

There are a variety of situations where taxpayers may need to address non-compliance with their requirements to report information to the IRS or pay taxes owed. In many cases, these situations can lead to investigations or tax audits, and significant penalties may apply. Taxpayers may take steps to address these concerns, avoid criminal prosecution, and minimize penalties by voluntarily disclosing these issues to the IRS and taking steps to pay any taxes they owe. 

In some cases, the best method of disclosing and addressing tax issues is through the IRS’s Voluntary Disclosure Practice (VDP). This program allows taxpayers to notify the IRS of non-compliance, provide relevant information, and make arrangements for payment. However, the IRS has made some changes to the VDP in 2024, and taxpayers will need to be aware of how they may be affected. Working with a California attorney during the voluntary disclosure process is crucial, since it will ensure that a taxpayer understands the requirements that will apply and the effects that disclosures may have on their rights and their ability to address tax issues while minimizing penalties.

Adjustments to Form 14457 That May Affect Taxpayers

In general, taxpayers can use the Voluntary Disclosure Practice if the IRS is not yet aware of their non-compliance. If a civil examination (tax audit) or criminal investigation is already underway, or if the IRS has received information about non-compliance from other sources, voluntary disclosure will not be available. 

If a taxpayer is eligible, they will be required to make a complete disclosure of their non-compliance. They can begin the process by filing Part I of Form 14457. This is a request for preclearance that will determine whether they are eligible. If preclearance is granted, the taxpayer will submit Part II of Form 14457, where they will provide estimates of the amounts of taxes owed and other information about their non-compliance. If this form is accepted, the taxpayer will work with an IRS auditor to determine the full amount owed and make arrangements to pay outstanding taxes and any applicable penalties.

In June 2024, the IRS made some notable changes to Form 14457, including:

• Admission of Willfulness: In the past, a taxpayer did not have to admit that they willfully failed to comply with their tax obligations. The latest version of Form 14457 includes a checkbox in which the taxpayer must acknowledge that their non-compliance was willful, meaning that they intentionally attempted to hide assets from the IRS or avoid tax liabilities. This may raise some concerns for taxpayers. If a taxpayer’s request to use the Voluntary Disclosure Practice is denied, their admission of willful non-compliance could be used against them in a later tax audit or criminal investigation.

• Timelines for Submitting Documentation: Taxpayers are now required to have tax returns and other documents ready when they are contacted by an IRS auditor after receiving preliminary acceptance into the VDP. Rather than compiling documentation after learning that they have been accepted, taxpayers must state that they have prepared documents to turn over to the examiner when they are initially contacted. Taxpayers have 45 days to submit their full disclosure, and one 45-day extension may be granted.

• More Detailed Information About Non-Compliance: The 2024 version of Form 14457 requires taxpayers to provide a detailed disclosure of the facts of their case. The non-compliance narrative section of the form includes information about the parties and financial institutions that were involved, actions taken with the guidance of advisors, specific actions related to non-compliance, and any other facts that are pertinent to the case. Taxpayers will also be required to disclose information about their use of cryptocurrency or other digital assets in relation to their non-compliance.

• Full Payment: Previously, taxpayers had options for paying the taxes and penalties owed after making a voluntary disclosure, including setting up installment agreements or making an offer in compromise. Now, full payment of all outstanding taxes, penalties, and interest is a condition of acceptance to the VDP. While the updated Form 14457 does allow a taxpayer to indicate that they are unable to pay the amounts owed, they will be required to demonstrate that they cannot pay and work out payment arrangements in which the amounts owed are paid in full.

Contact Our San Jose, CA Tax Attorney

With the changes the IRS has made to the VDP, taxpayers will need to understand what steps they can take to protect themselves as they make disclosures to the IRS and address any taxes or penalties they may owe. At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide guidance on what information to provide to the IRS and how admissions of willfulness or other disclosures may affect you. To set up a consultation and learn how we can help you address and mitigate tax penalties, contact us at 408-866-1810.