If you find that you are not in compliance with the federal government’s tax laws, you have the option of filing a voluntary disclosure to fulfill your obligations. Although there are sharp penalties for voluntary disclosure in Washington DC, it could potentially reduce the risk of criminal prosecution. A trustworthy voluntary disclosure attorney could work with you to determine the best way to handle this disclosure.
The typical penalty that is implemented for voluntary disclosure is the civil fraud penalty under Internal Revenue Code Section 6663, which is a 75% penalty on the underpayment of tax that was previously related to fraud. For example: if the taxpayer were to have $100,000 of unreported and unpaid tax each year over the last six years, that is considered $600,000 of unreported tax. On top of that would be a 75% penalty of one of those years—in this case, a $75,000 civil fraud penalty.
Additionally, the IRS has the ability to impose other penalties, such as the fraudulent failure-to-file penalty under Internal Revenue Code Section 6651(f). The basic failure-to-file penalty is 5% of the unpaid taxes, and it continues to add 5% on a monthly basis until paid, not exceeding 25%.
There is also the failure-to-pay penalty, which is half a percent of the tax that is owed after the due date per month, and also capped out at 25%. The IRS would attribute that one civil fraud penalty to the year with the highest tax liability.
If someone were to have an unreported foreign account, the taxpayer should expect to get an assessment of the willful FBAR penalties. The willful FBAR penalties will be computed under existing IRS penalty guidelines under Internal Revenue Manual Sections 4.26.16 and 4.26.17.
A taxpayer in Washington DC will need to file Form 14457 to make a voluntary disclosure, which includes a preclearance check. Then they would then need to file the amended or original tax returns that correct any type of non-compliance from the past. The IRS is going to audit those tax returns and the taxpayer will need to have the underlying books and records to support the numbers that they submitted.
The main disqualifying factor from voluntary disclosure is having an illegal source income. If the IRS has already begun a civil or criminal investigation, or the IRS has already been alerted to the taxpayer’s non-compliance through information from third parties or from criminal enforcement, that is also a disqualifying factor.
Criminal prosecution is recommended when the IRS determines that they have enough facts and law against a taxpayer that they can prove fraud beyond a reasonable doubt. As the IRS and the Department of Justice have limited resources, they must choose their prosecutions carefully. Few cases ever make it to a criminal indictment but the egregious cases that do receive prosecution have a powerful deterrent effect on tax fraud which also urges other taxpayers to come into compliance.
Amnesty is a program that could guarantee no prosecution if a person cooperated with a specific matter. With the voluntary disclosure, there is no amnesty that is granted but the IRS still has the power to not recommend prosecution. There is also no guarantee of immunity from prosecution for taxpayers to stay in the voluntary disclosure process.
It is important to weigh all the options because once a local taxpayer discloses the problems and starts to correct the mistakes, it is then dangerous to back out because they have given the IRS a tip-off to their prior non-compliance.
The risk of not disclosing is that the IRS might uncover the tax crimes, and criminally investigate or even prosecute a taxpayer for breaking the law.
The taxpayer, as a part of the voluntary disclosure program, needs to make a good faith effort to fully pay the tax penalties and interests, but if there are extenuating circumstances, it would be important to evaluate their ability to pay before they make a disclosure.
Someone should seek a tax attorney for the voluntary disclosure program because it is a way to minimize the criminal exposure or risk of a taxpayer who has broken the IRS laws with an intention to commit a crime. By making this disclosure, that taxpayer will come back into compliance without the risk of a criminal prosecution and jail time.
Call now to learn about the risks and penalties involved for voluntary disclosure in Washington DC.
Pontius Tax Law, PLLC is a tax law firm that strives to resolve sensitive tax problems through trust, dedication and value. The law firm was founded by John Pontius with offices in Washington, DC, Rockville, MD, Bethesda, MD, Vienna, VA, and Alexandria, VA. Mr. Pontius represents individual and business clients with sensitive and serious tax matters before the Internal Revenue Service and state taxing authorities. His client base is local, national, and international.
Over the course of his career, Mr. Pontius has represented businesses and individuals with complex tax issues in the following areas: FBAR examinations, offshore and domestic disclosures, FATCA, FIRPTA, tax planning, unfiled tax returns, release of tax liens and levies, trust fund recovery penalty, IRS and state audit examinations, as well as appeals, penalty abatement, U.S. Tax Court litigation, along with defense of tax fraud and evasion. If you require assistance from a tax lawyer, contact Mr. Pontius to discuss your situation.