Source: http://taxexecutive.org/pros-and-cons-of-voluntarily-disclosing-past-wrongs/
Timestamp: 2019-04-23 02:58:47+00:00

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Hamlet’s thoughts weighed heavily upon him. Should he suffer the slings and arrows of outrageous fortune, or take arms against a sea of troubles? For the young Prince of Denmark seeking to avenge his father’s death, the choice was action or inaction, and ultimately life or death. Fortunately, most tax problems do not have such grave outcomes. Seemingly inconsequential tax errors can, however, lead to severe financial consequences. And, remote as it may seem, the prospect of imprisonment for tax crimes cannot be overlooked. When a past wrong is discovered, what should you do? Taking action—voluntarily disclosing the problem to the taxing authorities—can limit your direct monetary exposure for the specific problem but may have significant collateral consequences. Inaction—sweeping the problem under the rug and hoping for the best—may heighten your exposure if the taxing authorities ever catch on. In deciding whether to disclose a potential tax problem, you must fully consider multiple issues. This article identifies and explores those issues and provides practical insights for those who may one day face the momentous question of whether to disclose or not to disclose.
Not every taxpayer is eligible to participate in a voluntary disclosure program.
In conjunction with increased disclosure requirements and enforcement efforts, dozens of countries have implemented voluntary disclosure programs allowing taxpayers to disclose tax problems that, in the past, likely would have remained hidden.⁴ Encouraging taxpayers to resolve their tax problems by limiting their liability if they come forward and fix problems voluntarily should increase tax revenue and preserve scarce investigative resources. Consider the IRS’ Offshore Voluntary Disclosure Program (OVDP). Introduced in 2009, the OVDP encourages taxpayers with undisclosed foreign financial accounts to disclose those accounts by offering a limited lookback period, significantly reduced monetary penalties, and a promise not to recommend criminal prosecution.⁵ Since the inception of the OVDP, the IRS estimates that it has collected more than $10 billion in taxes, penalties, and interest from over 100,000 taxpayers, without expending significant investigative resources.⁶ Thus, while the chances that a taxing authority will learn of your tax problems have never been greater, governments around the world continue to see value in offering incentives for voluntary disclosures.
Hamlet enjoyed the luxury of ample time to consider his actions. Today’s taxpayers do not, and he who hesitates may be lost. Rushing into a disclosure, however, without a full appreciation of potential collateral issues can have disastrous consequences.
Will you really confess your tax problems to the IRS? Some would say that to do so is madness. After all, taxpayers are under no obligation to file an amended tax return even if they discover a significant mistake on their original return after it has been filed.⁸ And the Fifth Amendment to the U.S. Constitution provides significant protection against self-incrimination.⁹ So even if the IRS catches on, it may have a difficult time gathering the information and documents needed to accurately calculate any tax due or prove a violation of the internal revenue laws beyond a reasonable doubt. So why voluntarily confess anything to the IRS or other taxing authorities?
Although it may seem counterintuitive, disclosing a previously unknown tax problem to the IRS may be in the taxpayer’s best interest. But the decision—to disclose or not to disclose—is not easy. To make the right decision, taxpayers must fully consider all of the pros and cons.
The IRS and other taxing authorities typically show little mercy when taxpayers fail to voluntarily disclose and correct their tax transgressions. If the taxpayer does not voluntarily disclose, the IRS typically seeks to impose maximum penalties and draws all inferences against the taxpayer. Thus, arguments that the error was unintentional, or attributable to an innocent misunderstanding or erroneous tax advice, will likely meet with skepticism or fall upon deaf ears. Furthermore, once the IRS or other taxing authorities discover an error, they are likely to audit prior and subsequent years and other issues to determine the scope of the noncompliance. In such circumstances, taxpayers will have little to no control over IRS efforts to expand an audit beyond the initial years and issues.
Tax errors arise for a wide variety of reasons. An employee or outside tax advisor may have innocently misunderstood certain facts or tax obligations. Although valid reasons for the initial noncompliance may exist, there is no justification for continuing noncompliance after the error is discovered. Because fixing the problem going forward is critically important, it often behooves taxpayers to voluntarily disclose the problem to the IRS at or near the same time the problem is remedied on the current year’s return. Furthermore, tax filings are often presented to third parties in order to secure loans or raise capital. Continuing to rely on erroneous tax filings for nontax purposes compounds the initial noncompliance and could lead to allegations of bank or securities fraud. Voluntary disclosure programs provide taxpayers with the opportunity to clean up and avoid escalating past problems.
Additional taxes, penalties, and interest are not the only harms to consider. Taxpayers must also consider reputational harm that may arise if the IRS or other taxing authorities uncover a significant tax problem. Tax audits and investigations can take years to resolve. Lingering uncertainty over the outcome may cause stock values to decline or may negatively affect ongoing business needs, prompting shareholder lawsuits. Participating in a voluntary disclosure program provides the taxpayer with a vehicle to manage the problem and provides certainty with respect to potential damages.
A voluntary disclosure must be timely, accurate, and complete. A taxpayer cannot select which problems to disclose. Rather, because amended returns will be required, all errors and omissions on the original return must be corrected. If not, then the amended return will be yet another false return and will compound the original problem. And because information sharing agreements are in place among treaty partners as well as among federal, state, and local governments, a taxpayer should not cherry-pick the taxing authorities to which disclosure will be made. Full disclosure must be made to all relevant taxing authorities, which often look for amended filings when made aware of corresponding adjustments in other jurisdictions. Thus, fixing what was thought to be a relatively small tax problem can quickly grow into a substantial undertaking that requires filing multiple amended returns in multiple jurisdictions. While those other jurisdictions may also have voluntary disclosure programs in place, the administrative burden of full compliance can be daunting.
Eligible business entities that initiate a timely, accurate, and complete voluntary disclosure will avoid a recommendation for criminal prosecution, but the entities’ owners, officers and individual employees receive no such protection by virtue of the company disclosure. Moreover, while prosecutors may not be interested in pursuing criminal charges against business entities, because a corporation cannot be sent to prison, the same does not hold true for individual actors. In fact, recent U.S. Department of Justice policy reminds federal civil trial attorneys and prosecutors of the need for individual accountability.20 Thus, a voluntary disclosure, while good for the business, may have severe consequences for those individuals involved in the false filings. When considering a voluntary disclosure, a corporate taxpayer must evaluate whether its individual employees and officers will need separate legal counsel to provide independent legal advice and to advise them of their rights during the course of an internal or government investigation.
Additionally, once a taxpayer makes a disclosure, there is no turning back. The disclosing taxpayer must bring itself into full compliance and, going forward, must continue to cooperate with requests from the IRS for information, documents, or assistance, including requests for in-person interviews. Taxpayers can expect the IRS and other taxing authorities to conduct thorough examinations if the compliance failure disclosed is significant. The costs and consequences of cooperating with such examinations must be factored into the cost of making the disclosure.
Under voluntary disclosure programs, the IRS and other taxing authorities ultimately determine the amount of tax, interest, and penalties due. Especially in the international arena, tax calculations can be notoriously complex. Thus, it is not uncommon for taxpayers to enter into voluntary disclosure programs believing they have accurately forecast their monetary exposure, only to find that the taxing authorities have determined a significantly higher amount. Taxpayers should be aware that once they disclose a tax problem, they may be liable for related errors, regardless of whether the taxpayer was fully aware of them.
Moreover, related errors might not be limited to tax. A voluntary disclosure may lead to the discovery of violations of securities laws, import-export regulations, or the Foreign Corrupt Practices Act. Every effort should be made to determine if nontax violations exist and, if they do, to quantify the exposure. Voluntary disclosure of a relatively minor tax issue may not be the best option if such a disclosure is likely to lead to the discovery of more significant nontax violations.
An initial voluntary disclosure to the IRS does not end there. Taxpayers may also owe significant additional taxes, penalties, and interest to foreign, state, and local taxing authorities. As noted, the IRS is authorized to share information with all state taxing authorities,22 and most states require a taxpayer to file an amended state return if it has filed an amended federal return.23 And again, taxing authorities around the globe have been working together to exchange information to prevent the secrecy that once allowed income and assets in foreign jurisdictions to escape taxation. As a consequence, multinational taxpayers that make a voluntary disclosure in one country will almost certainly face tax liabilities in other countries. One way to avoid amending multiple foreign, state, and local tax returns is to avoid the initial voluntary disclosure. Similar to the other benefits of choosing not to disclose, this “pro” only lasts as long as the taxpayer avoids a civil audit or criminal investigation of the years and returns at issue.
For the crime of tax evasion, the statute of limitations is typically six years from the last “affirmative act” of evasion, not six years from the date the tax return was filed.26 Federal prosecutors often designate what may appear to be insignificant conduct as affirmative acts of evasion, thereby opening the door to charges related to tax periods outside the six-year window.
Absent a voluntary disclosure, a plague of uncertainty may hang over a company’s business operations for years to come. For corporate officers and employees, such uncertainty may prove intolerable, leading to whistleblower claims.27 The uncertainty may end only when the problem is involuntarily disclosed to the IRS or other taxing authorities.
In Shakespeare’s tragedy, Hamlet took action and avenged his father’s murder. But in doing so he paid the ultimate price of death. Fortunately, if individuals and businesses exercise caution when disclosing their tax transgressions, they stand a good chance of avoiding the most severe consequences. Although counterintuitive, voluntary disclosure can often be a prudent decision, providing a degree of amnesty and certainty, allowing businesses and individuals to normalize their affairs and plan for the future. However, the decision to make a voluntary disclosure should not be taken lightly. Taxpayers and their representatives should carefully evaluate all of the potential outcomes and collateral consequences that could arise before making the fateful decision to disclose, or not to disclose.
George Abney is a partner at the law firm Alston & Bird LLP in Atlanta. Wendy Abkin is a partner at Morgan, Lewis & Bockius LLP in San Francisco. Caroline Ciraolo is a partner at Kostelanetz & Fink LLP in Washington, D.C.
See OECD, Update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance, August 2015, at 5-6, www.oecd.org/ctp/exchange-of-tax-information/Voluntary-Disclosure-Programmes-2015.pdf.
See Internal Revenue Service, Summary of FATCA Reporting for U.S. Taxpayers, September 30, 2017, www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-us-taxpayers.
See “Justice Department Reaches Final Resolutions Under Swiss Bank Program,” Justice News, December 29, 2016, www.justice.gov/opa/pr/justice-department-reaches-final-resolutions-under-swiss-bank-program.
See, generally, OECD, Update on Voluntary Disclosure Programmes: A Pathway to Compliance, August 2015, www.oecd.org/ctp/exchange-of-tax-information/Voluntary-Disclosure-Programmes-2015.pdf.
See Internal Revenue Service, 2012 Offshore Voluntary Disclosure Program, September 10, 2017, www.irs.gov/newsroom/2012-offshore-voluntary-disclosure-program.
“IRS Offshore Account Collections Top $10 Billion, FATCA Hunt Continues,” Forbes, October 2016. www.forbes.com/sites/robertwood/2016/10/24/irs-offshore-account-collections-top-10-billion-fatca-hunt-continues/#6532dbf13250.
Internal Revenue Manual § 9.5.11.9(4) (12-02-2009).
See Badaracco v. Commissioner, 464 U.S. 386, 393 (1984) (“[T]he Internal Revenue Code does not explicitly provide either for a taxpayer’s filing or for the Commissioner’s acceptance of an amended return; instead an amended return is a creature of administrative origin and grace”); Broadhead v. Commissioner, TC Memo. 1955-328 (holding taxpayer is “not required by statute to file an amended return and if one had been tendered for filing [the IRS] could have declined to accept it”).
I.R.C. §§ 6662 & 6663.
I.R.C. § 7201; 31 U.S.C. § 5322.
See Internal Revenue Service, Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014, November 8, 2017, www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers-2012-revised. Note that the penalty is increased to fifty percent if either a foreign financial institution at which a taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. There is also a five percent penalty available under a streamlined procedure for U.S. taxpayers residing in the United States who certify that their conduct was nonwillful, but this recourse is available only to individuals.
See HM Revenue & Customs, Your Guide to Making a Disclosure, November 2017, www.gov.uk/government/publications/hmrc-your-guide-to-making-a-disclosure/your-guide-to-making-a-disclosure.
For more information on international voluntary disclosure programs, please see the 2015 OECD Update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance, August 2015, www.oecd.org/ctp/exchange-of-tax-information/Voluntary-Disclosure-Programmes-2015.pdf.
See Canada Revenue Agency, Voluntary Disclosures Program—Overview, www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.
See OECD, Common Reporting Standard, www.oecd.org/tax/automatic-exchange/common-reporting-standard/.
See Multistate Tax Commission, Multistate Voluntary Disclosure Program, www.mtc.gov/Nexus-Program/Multistate-Voluntary-Disclosure-Program.
See U.S. Department of Justice, Individual Accountability for Corporate Wrongdoing, Sally Quillian Yates, Deputy Attorney General, September 9, 2015, www.justice.gov/archives/dag/file/769036/download.
Internal Revenue Service, Offshore Voluntary Disclosure Program Submission Requirements, September 30, 2017, www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-submission-requirements.
I.R.C. § 6103(d) (“Returns and return information . . . shall be open to inspection by, or disclosure to, any State agency . . . which is charged under the laws of such State with responsibility for the administration of State tax laws for the purpose of . . . the administration of such laws . . .”).
I.R.C. §§ 7201 & 6531(2).

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