Voluntary Disclosure – Yes or No?

by Sanford Passman, Esq. and Gary S. Wolfe

The Internal Revenue Service (“IRS”) Offshore Voluntary Disclosure Program (2012) is offered by the IRS to American taxpayers who may be in violation of U.S. tax laws for a myriad of reasons. Given the enormous sums of money which are spirited to offshore tax havens throughout the world, the IRS has prioritized the recapture of taxes on those funds which have been evaded by U.S. taxpayers. As can be seen from the recent cases involving international banks such as UBS, Wegelin and Bank Leumi, the IRS in concert with the U.S. Department of Justice, has made it a priority to ferret out those tax transgressors and their network of financial advisors, financial institutions, lawyers, accountants and even family and friends, all of whom may have been complicit in the various tax evasion schemes.

The publicity surrounding the efforts of the various government agencies to shed light on these various nefarious activities has created great concerns among those individuals participating in this form of conduct. Hence, the Voluntary Disclosure Program (the “Program”), which appears on its face to be a quick fix solution to mitigate the civil and criminal penalties for such violations, but which in effect can place the applicants to the Program in far greater jeopardy. First, it would be safe to say that every criminal and civil lawyer is familiar with the Fifth Amendment which provides protection against self incrimination and which is the starting point for the discussion as to why a strong argument can be made for advising client taxpayers not to attempt to avail themselves of the Program.

The single most compelling reason to avoid what may appear to an inexperienced practitioner to be a simple solution to the client’s actual or potential tax problems is in fact a minefield in waiting. The reason for that is, in order to gain entrance to the Program, an individual or individuals must give up two fundamental Constitutional Right, the right not to hoist oneself on their own petard, i.e. the Fifth Amendment and the protection afforded by the Fourth Amendment, i.e. Unlawful Search and Seizure. Metaphorically speaking, the IRS is offering the rope for the client to use to hang themselves. Harsh though it may appear, those are the facts.

The rationale for this conclusion is due to the fact that voluntary disclosure does not provide for the grant of immunity, either use or transactional. For those readers who are not familiar with the aforementioned concepts, immunity is a method whereby individuals can be protected from prosecution as a result of disclosures made either orally or in writing. The types referred to herein are either use or transactional immunity. The latter form of immunity provides broader protection from prosecution than the former, which is academic, because neither of these forms of immunity is available under the Program. The reader may ask why is this important for a procedure ostensibly designed to allow the transgressing taxpayers to expiate their tax sins and avoid the civil and/or criminal penalties attendant thereto? The answer is that nothing prevents civil and criminal prosecution being initiated after the taxpayer “confesses” and details to the IRS, the entire scope of their conduct which gives rise to their application.

The information which the taxpayer must provide includes the identities of every person who advised and participated, actively or passively, in furtherance of the taxpayer’s non-compliance with U.S. tax laws. This body of individuals and/or entities includes the financial institutions who actively or passively facilitated the taxpayer’s non-compliance conduct. The applicants to the Program must disclose the duration of time for which the taxpayer was in non-compliance with U.S. tax laws; the amounts of money involved and location thereof; the identity of all entities used by the taxpayer in evading tax compliance, be they corporations, limited liability companies, general and/or limited partnerships, trusts, lawyers, accountants, tax advisors, business managers, investment portfolio managers, banking officials, corporate officers, “straw men” in every form, shape and fashion; and last, but not least, family members of the taxpayer, including spouses, all of whom may potentially be subject to civil and/or criminal prosecution by the United States Government.

In the Summer of 2011, the Practical Tax Lawyer published an article which discussed the Program and stated that the Criminal Investigation Division of the IRS was given the responsibility for initially screening the amended tax returns of applicants to the program in order to determine their eligibility to participate therein. With that said, the application itself is very detail specific and mandates compliance by the taxpayer who must also execute the application under penalty of perjury.

To gain entry to the Program, the taxpayer must disclose every scintilla of damning evidence that can be used against the taxpayer without any self incrimination protection. Also, if the taxpayer is accepted into the Program, that taxpayer can still be prosecuted criminally and civilly for tax violations if the IRS determines that the taxpayer was not forthcoming in the submitted application. The IRS embraces the concept that no one knows the level of one’s transgressions better than the person who commits them and damn if they won’t search Heaven and Earth to ferret out that information. Voluntary disclosure gives it to them on the proverbial “silver platter”. Anything disclosed by the taxpayer voluntarily, absent protections, i.e. immunity, can be used against the taxpayer.

Furthermore, the clients should be advised that if they are admitted into the program and the IRS dismisses them therefrom, which they can do, all of the information provided to the IRS can be used against that very taxpayer who provided it, absent either form of immunity, which the IRS simply does not offer. Talk about hedging your bet, the IRS has covered all the bases!

Again, in summary, all of the “evidence” that the IRS and/or the U.S. Department of Justice needs to prosecute an offending taxpayer for tax fraud; tax evasion; conspiracy to commit tax evasion; money laundering and conspiracy to commit money laundering; and wire fraud are already in their possession. Thus, the question must be asked as to what circumstances would the Voluntary Disclosure Program be beneficial to a taxpayer given the absence of any self incrimination protection. The answer for the individual lawyer, whose counsel is sought by the taxpayer, is that every case is fact dependent but, on the surface, it appears to this author that any practitioner would have to think long and hard before advising any client to apply to the Program. [1] Perhaps attorneys should advise their client to seek other alternatives to the Program and should consider Statute of Limitations issues which could benefit the taxpayer. If you truly believe that voluntary disclosure is a boon to your client, be advised you cannot put the genie back in the bottle.

[1]  This article is not intended to be a complete nor comprehensive review of the various State and Federal immunity statutes, but rather is used in the context of the IRS Voluntary Disclosure Program.

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