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An In-Depth Look at the IRS Criminal Investigation Voluntary Disclosure Practice

Aug 18, 2022

Introduction and Background

Dating back to the 1950s, the U.S. Department of the Treasury initiated a voluntary disclosure policy for taxpayers. Thereafter, in the 1960s, the Internal Revenue Service (“IRS”) offered taxpayers several iterations to participate in its voluntary disclosure practice. The IRS Criminal Investigation Division (“IRS-CI”) continues to encourage noncompliant taxpayers, who have either failed to file tax returns or intentionally filed false or fraudulent returns, to participate in its current voluntary disclosure practice. This is intended for taxpayers to potentially avoid or mitigate criminal prosecution for past conduct in connection with violating IRS and information reporting laws.

The article will summarize significant aspects of IRS-CI’s current domestic and offshore voluntary disclosure practice, introduced in November 2018, that replaced the prior Offshore Voluntary Disclosure Program (“OVDP”), which ended in September 2018.

Sources relied upon for this article are found (1) on the IRS website (; (2) in IRS Internal Revenue Manual (“IRM”) section, Voluntary Disclosure Practice, which explains the basis to determine taxpayer eligibility for the current IRS-CI Voluntary Disclosure Practice and IRM, Voluntary Disclosure Practice (Post OVDP), which provides guidance for civil field audits and examinations; (3) in IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application; (4) in the instructions to IRS Form 14457; and (5) in the IRS Voluntary Disclosure Practice Examiner Guide Paper (Rev; 1/26/2022).

Current IRS Criminal Investigation Voluntary Disclosure Practice

Encouraging taxpayers to make a voluntary disclosure has been a long-standing practice of IRS-CI. Making a voluntary disclosure provides taxpayers, whose conduct involved willful noncompliance in meeting their tax obligations, a means to become compliant with their tax returns and information-reporting requirements. It also provides a path for taxpayers to potentially avoid or mitigate criminal prosecution for violations of the Internal Revenue Code (“IRC”) under Title 26 of the United States Code and failure to report foreign financial and information returns, such as FBARs and related-reporting requirements, under Title 31 of the United States Code.

Although making a voluntary disclosure will not automatically guarantee a taxpayer immunity from prosecution, it will—with all other facts and circumstances—be considered by IRS-CI in making a recommendation for criminal prosecution.

Who Should Consider Making a Voluntary Disclosure Under the Current Practice?

The current IRS-CI Voluntary Disclosure Practice (“VDP”) provides guidance to taxpayers and their representatives whether to make a voluntary disclosure (“noisy disclosure”) or choose to file original or amended tax returns (“quiet disclosure”) without the potential to avoid criminal exposure that a voluntary disclosure may provide.

Under the current IRS voluntary disclosure practice, a taxpayer should consider applying if he/she—in consultation with a competent criminal tax attorney—engaged in willful noncompliance that could expose him/her to criminal liability for tax and tax-related information return-reporting crimes. If a taxpayer decides to become tax compliant to avoid criminal prosecution, then he/she should consider making a voluntary disclosure. Eligible taxpayers include U.S. citizens, green card holders, non-resident aliens, expatriates and business entities including corporations, partnerships, LLCs, trusts and estates.

Who Should Not Consider Making a Voluntary Disclosure Under the Current Practice?

As with prior IRS voluntary disclosure practices, the current IRS-CI VDP bars a taxpayer from making a voluntary disclosure if the source of unreported income is from any illegal source . Also, a taxpayer may not have to consider making a voluntary disclosure if he/she—in consultation with a competent criminal tax attorney—did not engage in any affirmative acts that rise to the level of tax return or tax-related information-return reporting crimes. A taxpayer can correct less-serious noncompliance mistakes or errors by filing amended or delinquent tax returns, including unreported offshore income or delinquent international information returns.

If a taxpayer participated in the IRS’s Offshore Voluntary Disclosure Program (“OVDP”), which the IRS ended in September 2018, he/she would not be eligible to use the current IRS-CI VDP where the OVDP disclosure period includes one or more overlapping tax years with the current practice.

What Are the Eligibility Requirements for a Taxpayer to Make an IRS-CI VDP?

To be eligible to make a voluntary disclosure, the IRS requires a taxpayer to be truthful, timely and complete. The IRS also requires a taxpayer to (1) cooperate with the IRS in determining tax liability and compliance reporting requirements; (2) cooperate with the IRS in investigating any enablers including, but not limited to, promoters and professional advisors who aided in a taxpayer’s noncompliance or were in any way involved in the noncompliance; (3) submit all required tax returns, information returns and reports for the disclosure period; and (4) make good-faith arrangements with the IRS to make full payment of tax, interest and penalties determined by the IRS. Generally, the IRS will assess a 75% civil fraud penalty for the tax year that results in the highest tax liability.

Taxpayers who want to make a timely voluntary disclosure should come forward before the IRS has information about his/her noncompliance. Otherwise, it will be too late to take advantage of the voluntary disclosure practice.

When Is a Voluntary Disclosure Not Timely?

IRS-CI will not consider a taxpayer’s voluntary disclosure to be timely if it already has (1) commenced a civil examination or criminal investigation; (2) received information from a third party such as an informant, John Doe summons or other governmental agency alerting the IRS to a taxpayer’s noncompliance; or (3) acquired information directly related to a taxpayer’s specific noncompliance from a criminal enforcement action, such as a search warrant or grand jury subpoena.

Disclosure Period

The disclosure period to make a voluntary disclosure generally includes one six-year disclosure period requiring civil examinations of the most recent six tax years for which the due date has passed. However, the IRS may extend the scope of the disclosure period if, for example, a taxpayer fails to cooperate during the civil examination. The taxpayer can also expand the disclosure period by obtaining IRS consent.

Form 14457, Voluntary Disclosure Practice Preclearance Request and Application

A taxpayer must prepare and submit IRS Form 14457 to participate in the VDP. Form 14457 is divided into two parts: Part 1 - Preclearance Request, and Part II - Voluntary Disclosure. Parts I and II can be mailed or faxed to the IRS.

The purpose for submitting Form 14457, Part I, is to determine whether a taxpayer is eligible to receive preclearance to participate in the VDP. If a taxpayer receives preclearance, he/she may then submit Form 14457, Part II, to request preliminary acceptance into the VDP. Submitting the information requested in Part I of Form 14457 does not guarantee acceptance.

Form 14457, Part I - Information Requested for Preclearance

Part I consists of 13 lines with subparts to complete each line.

Lines 1-6, Personal Background and Contact Information

Lines 1-6 request personal background and contact information.

Lines 7-11, Schedule of Entities

Lines 7-11 request a taxpayer to provide a schedule of all entities by entering data about each entity that is in any way related to the noncompliance during the disclosure period, a taxpayer-owned or controlled entity, or the taxpayer was the beneficial owner either directly or indirectly.

The instructions define related entity to mean all foreign or domestic entities (e.g., corporations, partnerships, associations, limited liability companies, trusts, estates, escrows, charitable foundations, insurance companies, international business companies) that a person (defined broadly to include natural persons and entities)— personally or through any other person—owns, controls or in any way can exercise authority over either directly or indirectly. The term “related entity” goes beyond constructive ownership and attribution rules and should be interpreted broadly. It is not synonymous with the generally understood tax-related term “related parties.”

Line 12, Schedule of Financial Accounts

Line 12 requires a taxpayer to provide a schedule listing all domestic and foreign noncompliant financial accounts he/she owned or controlled or was the beneficial owner of either directly or indirectly. The listings must cover the entire disclosure period and include opened and closed accounts that held unreported funds during the disclosure period as well as accounts held through entities a taxpayer owned or controlled or was the beneficial owner of either directly or indirectly.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit or other account maintained with a financial institution (or other person performing the services of a financial institution). The definition of a financial account includes any type of relationship with a third party established to provide or engage in deposit-type services or other financial services regardless of who provides the arrangement.

A noncompliant financial account is an account that (1) generated income and the income was not reported for federal income tax purposes; (2) received previously untaxed funds; or (3) was required to be reported on an information return or report and was not reported.

Line 13, Schedule of Virtual Currency

Line 13 requires a taxpayer to provide a schedule of all domestic and foreign noncompliant virtual currency assets he/she owned or controlled or was the beneficial owner of either directly or indirectly. The listings must cover the entire disclosure period and include virtual currency assets acquired or disposed of during the disclosure period and held through entities a taxpayer owned or controlled or was the beneficial owner of either directly or indirectly.

The term “virtual currency” encompasses assets beyond what many define as virtual currencies. The IRS recommends taxpayers refer to for additional guidance on virtual currency and related topics, including FAQs on virtual currency transactions.

A noncompliant virtual currency is an asset that should have been reported on a federal income tax return or other required federal information return and was not previously reported. IRS instructions state each virtual currency should be listed once.

The online version of Form 14457, found on the IRS website, enables the listing of additional financial institutions and virtual currency assets after listing the first financial account or virtual currency.

Form 14457 Information Requested in Part II – Voluntary Disclosure Application

The purpose for submitting Form 14457, Part II, is for a taxpayer to make a voluntary disclosure after IRS-CI notifies him/her that it has granted preclearance in a written preclearance notice. IRS-CI will mail the taxpayer a written preclearance notice that includes a case control number to assign to each voluntary disclosure application submitted on Part II.

A taxpayer must submit Part II within 45 days of receiving a written preclearance notice. IRS-CI may grant an additional 45-day extension upon receiving a written request for an extension.

Form 14457 Information Requested in Part II – Voluntary Disclosure

Form 14457, Part II consists of seven lines with subparts to complete each line.

Line 1

Line 1 requires a taxpayer to include (1) the case control number provided by IRS-CI in its written notice confirming a taxpayer’s preclearance application was approved; (2) whether the taxpayer can pay tax, penalty and interest; and (3) personal background information populated from Form 14457, Part I.

Line 2

Line 2 requires a taxpayer to identify the source of funds attributable to unreported income.

Line 3

Line 3 requires a yes or no response as to whether a taxpayer was a bona fide resident of a U.S. territory or filed an income tax return with a U.S. territory.

Line 4

Line 4 requires a taxpayer to provide an estimate of the total annual amount of unreported income during the disclosure period.

Line 5

Line 5 requires a taxpayer to provide an estimate of the annual range of the highest aggregate value of a taxpayer’s offshore holdings.

Line 6

Line 6 requires a “yes” or “no” response to acknowledge whether anyone, including a foreign government or a foreign financial institution, advised a taxpayer that a taxpayer’s offshore account records, which are the subject of the voluntary disclosure, were susceptible to being turned over to the U.S. government pursuant to an official request.

Line 7

Line 7 has three parts. It requires a taxpayer to provide (Line 7a.) personal and professional background; (Line 7b.) names of professional advisors, services rendered and whether a taxpayer disclosed noncompliance to professional advisors; and (Line 7c.) a noncompliance narrative that requires a taxpayer to admit to and describe willful noncompliance conduct.

IRS-CI requires a taxpayer to include in the noncompliance narrative (a) a thorough discussion of all Title 26 (income tax) and Title 31 (information returns and reports) willful failures to report income, pay tax and submit all required information returns and reports; and (b) to explain the roles professional advisors had in a taxpayer’s noncompliance.

Line 7a.

Personal background includes a taxpayer’s age, health, education and general financial history. Professional background must include a summary of a taxpayer’s work and business experience.

Line 7b.

A taxpayer must identify all professional advisors and facilitators who rendered services to him/her from the inception of the noncompliance relating to the disclosure period, regardless of their connection or knowledge of their client’s noncompliance.

Professional advisors include, but are not limited to, attorneys, accountants, financial planners, private bankers and consultants. In addition to providing advisors’ contact information, a taxpayer must explain the type of advice or services provided by professional advisors and whether the taxpayer fully disclosed his/her noncompliance and/or if the advisors helped facilitate noncompliance. If known, a taxpayer should describe all interaction among professional advisors related to a taxpayer’s noncompliance. Additionally, a taxpayer must identify all persons who maintained records on his/her behalf.

A taxpayer is not required to summarize legal advice concerning his/her voluntary disclosure from an attorney currently representing them in applying for voluntary disclosure.

Line 7c.

A taxpayer must describe the federal tax noncompliance in complete and thorough detail. This includes—for income tax, FBAR and information reporting noncompliance—all tax and tax-related willful failures to report income, pay tax and submit all required information returns and reports (including FBARs). For estate, gift and/or generation-skipping transfer tax (“GST”), employment tax and virtual currency noncompliance, a taxpayer must include all the details, including all favorable and unfavorable facts along with the entire history of noncompliance from inception to present. A taxpayer must provide specific facts explaining his/her willful compliance failures; address the source of all unreported income; and address the use of nominees, alter egos and any other methods used to conceal his/her willful noncompliance.

The instructions to complete line 7c. include additional information that supplements and details the noncompliance narrative required in line 7c. Careful attention to detail is essential to provide complete and thorough information about a taxpayer’s noncompliance.

IRS-CI emphasizes throughout the preclearance and application process that it requires a taxpayer to be truthful, timely and complete in making the voluntary disclosure. It also admonishes a taxpayer that “if you do not provide all the details, your disclosure may be rejected (or preliminary acceptance may later be revoked) as not truthful and/or not complete.”3

Signature Box

The taxpayer making the voluntary disclosure must sign Form 14457, Part II, under penalties of perjury. In the case of a joint disclosure, both taxpayers must sign. There are additional rules for estates and entities.

By signing Part II, a taxpayer declares he/she examined the document and accompanying schedules and statements and—to the best of his/her knowledge and belief—confirms they are true, correct and complete. Additionally, signing is a certification that he/she will cooperate with the IRS including, but not limited to, determining his/her tax liability; responding to requests for information; consenting to statute of limitation extension requests; providing supporting documents and workpapers; and making good faith arrangements to pay all taxes, interest and penalties associated with the voluntary disclosure.

Voluntary Disclosure Practice Examiner Guide Paper (Rev: 1/26/2022)

In January 2022, the IRS published the 57-page Voluntary Disclosure Practice Examiner Guide Paper for IRS examiners. Its index covers virtually all aspects of the current IRS-CI VDP, including guidance on obtaining background history about the taxpayer, conducting a VDP examination, performing related substantive and administrative procedures, and consulting additional resources. The additional resources are divided into subcategories to assist IRS examiners obtain further guidance when conducting a VDP examination in related issues such as taxpayer and representative cooperation, scope of the examination, statute considerations, pre-audit planning, interest computations, collection issues, penalty determination, closing agreements, revocation of preliminary acceptance, offshore issue cases, case building and assignment.

Summary and Conclusion

Compared to previous IRS-CI voluntary disclosure practices, the current IRS-CI VDP preclearance and application practice requires taxpayers to comply with requests to submit substantially more detailed personal, background, professional, and financial information and documents pertaining to themselves, related entities, financial accounts and virtual currency transactions than it had in the past.

Tax practitioners and their clients should familiarize themselves with the sources of information and guidance published by the IRS, including the Voluntary Disclosure Practice Examiner Guide Paper, that provides an insight into what tax practitioners and taxpayers can expect during an IRS examination of the tax and information reporting returns submitted to the IRS.

Form 14457, divided into two parts, requires taxpayers to complete six pages of questions and answers informing IRS-CI of a wealth of information including, but not limited to, a taxpayer’s past and current conduct, names of professional advisors, and a willful noncompliance narrative in which taxpayers state in detail their intentional conduct and affirmative acts not to file accurate, truthful, and complete tax and information returns.

Form 14457 Instructions, which include 12 pages, not only provide line-by-line guidance on how to complete Parts I and II, but also provide information about what a taxpayer can expect by participating in the program, potential applicable penalties attributable to income tax, estate, gift, generation-skipping transfer tax, employment tax, and information return and FBAR noncompliance penalties. The instructions include definitions and special rules pertaining to the meanings of related entity, financial account and virtual currency.

Lastly, the noncompliance narrative required to complete Part II, Line 7c., constitutes an admission by a taxpayer that he/she voluntarily and intentionally violated a known legal duty. Not to be taken lightly, or with little consideration for its potential consequences, a taxpayer should seek legal advice of a competent criminal tax attorney knowledgeable in these matters. In certain complex situations this may also require the counsel of an experienced tax controversy forensic accountant to analyze and compile multi-year accounting and financial information required to be included on Form 14457, Part II. This could help further mitigate the taxpayer embarking on a path that could ultimately lead to and result in IRS-CI revoking his/her voluntary disclosure application due to noncompliance.


1 “Voluntary, intentional violation of a known legal duty”, U.S. v. Pomponio, et al., 38 AFTR 2d 76-5905 (97 S.Ct.22), 10/12/1976.

2 The IRS considers illegal source income to be activities determined to be legal under state law but illegal under federal laws for purposes of IRS-CI VDP.

Line 7c. Instructions.

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