Voluntary Disclosure Program Planning

Being out of compliance with tax obligations is a terrifying endeavor. 

The fear and anxiety that every trip to the mailbox, every doorbell ring, or phone call from an unknown number brings cannot be measured. It feels like a ticking clock, simply wondering when the IRS will come looking for its share.

The Law Offices of Michael Raff has counseled countless individuals and businesses through one of the most stressful times in their lives. When utilized in the right scenario, the IRS Voluntary Disclosure Program (VDP) offers a life raft in the middle of the storm. The VDP allows taxpayers’ assurances such as caps on penalties, lookback periods, and, most critically, assurances that the IRS will not seek criminal punishment.

What Is the IRS Voluntary Disclosure Program? 

The IRS Voluntary Disclosure Program is a literal get-out-of-jail-free card. The program is designed to allow taxpayers who are willfully non-compliant with their federal tax reporting obligations to come into filing compliance before the IRS catches on to their activities. The VDP program offers a limited lookback period, favorable penalty rates, and the agreement that the IRS will not recommend a taxpayer for criminal prosecution.

The VDP, in its current iteration, has been open since 2018 and has helped thousands of taxpayers resolve issues with the IRS that, at first glance, would appear to be non-fixable. Unlike prior versions of the program, the VDP is open for those with both domestic and foreign tax issues.

Entering the VDP is different from disclosing non-compliance through traditional means, such as filing returns late or submitting amended returns to clear an error. The VDP is intended for taxpayers who knew that either their inaction in filing a return was wrong or they put fraudulent information on returns that were filed with the IRS.

Who Qualifies for the VDP?

There are strict eligibility requirements for applying to enter the Voluntary Disclosure Program. 

The VDP is open to individuals, businesses, trusts, or estates who:

• Have willfully failed to comply with tax or tax-related obligations or committed tax or tax-related crimes. 
• Are not already under audit or criminal investigation.
• The IRS has not already received information from a third party (e.g., informant, other governmental agency, John Doe summons, etc.) or acquired information directly related to a taxpayer’s specific noncompliance from a criminal enforcement action (e.g., search warrant, grand jury subpoena, etc.).

Timeliness plays a key role in qualification for the VDP; delaying too long can have draconian consequences of not being eligible for the program.

Key Benefits of the Voluntary Disclosure Program

The key benefits of the program include:

• Substantially reducing the risk of criminal prosecution upon successful completion of the program.
• Capping the lookback period of six years creates certainties and opportunities to limit tax, penalty, and interest.
• Creating a chance to file tax returns with lower penalties than if filing independent of VDP.
• Restoring compliance and peace of mind.

The VDP allows a taxpayer who has knowingly violated his tax obligations to come to the IRS before the Service finds him. The Law Offices of Michael Raff has counseled many taxpayers of all types through this process, and all of them feel a sense of relief knowing they beat the IRS to the punch.

How the Voluntary Disclosure Process Works

The Law Offices of Michael Raff breaks down its IRS VDP program representation into these steps.

Step 1: Eligibility Assessment

An initial eligibility assessment is performed by reviewing the tax deficiencies of the taxpayer. This could include non-filing of required returns, under-reporting receipts, over-reporting expenses, failing to disclose all payroll, etc. Oftentimes, taxpayers have more than one area of deficiency that needs to be addressed throughout the course of the disclosure.

Step 2: Preclearance Requests

Two different phases of preclearance requests are submitted to the IRS Criminal Investigation Division. 

The first preclearance requests will provide the identifying information of the taxpayer seeking to come into compliance, along with information about companies, bank accounts, and virtual currencies that may have been used during their period of non-compliance. 

Once accepted through the first phase of the VDP, a taxpayer will have up to 90 days to complete the second VDP phase, which estimates the tax deficiencies as well as provides a certification of willfulness, where a taxpayer must provide the IRS with a substantial amount of background information about themselves, identify all professional advisors who assisted them during the period of non-compliance, and provide a narrative to the IRS explaining behavior regarding non or incorrect filing.

Step 3: The Audit and Assessment

Once granted entry through both phases of VDP preclearance, the IRS Criminal Investigation Division will turn the case over to an IRS Revenue Agent (Examiner) who will audit the six-year disclosure period and propose an assessment of tax due and owing. 

This audit will be conducted in a similar manner to other IRS exams, but it is a requirement of the taxpayer to comply with all reasonable requests of the IRS during this audit or risk being removed from the VDP program.

Step 4: Installment Plan

If, at the completion of the Federal Voluntary Disclosure, the taxpayer cannot pay his obligations in full, the IRS will allow him to enter into an installment plan to pay the balance over time. This will require a review of the taxpayer’s ability to pay.

Step 5: Formal Closing Agreement

Unlike in other IRS examinations, at the conclusion of the audit, the taxpayer and the IRS will sign a formal closing agreement (Form 906) which will state in detail the terms both parties have agreed to, including: the IRS not recommending prosecution, the IRS limiting the lookback period, the IRS waiving certain penalties, the taxpayer agreeing to pay the taxes owed and certain Appeals rights waived by the taxpayer. 

The Law Offices of Michael Raff guides clients through every stage, ensuring compliance with IRS expectations and protecting client interests.

Illinois Tax Voluntary Disclosure Programs

The Illinois Department of Revenue offers its own version of a Voluntary Disclosure Program. The qualifications for the Illinois VDP differ from the Federal qualifications, and cannot be used to change filed returns. 

The Illinois VDP requires a four-year look-back period of filing compliance, along with full payment of tax and interest from the returns owed. Common Illinois tax issues, such as income tax, sales and use tax, and payroll tax, are all eligible for this program.

If the Taxpayer completes the requirements, the Department of Revenue will refrain from advising the State of Illinois to press criminal charges, as well as abate outstanding penalties. Like the IRS program, if the Department of Revenue has information about a taxpayer prior to requesting entry into the VDP, the request to enter will be denied.

The Law Offices of Michael Raff is committed to helping taxpayers who fear criminal repercussions for their inactions gain both Federal and Illinois peace of mind and will plan and execute strategies to ensure both agencies are no longer a threat to an individual, business, trust, or estate.

Why You Need a Tax Attorney for VDP Planning 

If you have gone so many years without tax compliance to the point you are contemplating the IRS VDP, it is crucial to engage the services of a qualified tax attorney as there are several legal risks involved in noncompliance.

The Law Offices of Michael Raff has the experience and judgment in these high-stakes situations to:

• Ensure confidentiality under attorney-client privilege, including hiring accountants under a special agreement that will allow them to assist in the planning.
• Develop a strategic disclosure plan aimed at maximizing tax savings as a result of the disclosure.
• Communicate with IRS on your behalf.
• Plan and execute from start to finish the Voluntary Disclosure Process. 

This is a multiyear project, and the expectation should be that, to be successful, there needs to be frequent communication and honesty between the parties.