Niles Elber Comments on Voluntarily Disclosing Tax Violations in Law360

Law360 Tax Authority

Tax practitioners and their clients have had more than eight months to work with a set of new Internal Revenue Service procedures to voluntarily disclose domestic and international tax violations to the agency in exchange for leniency.

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Niles Elber, a member at Caplin & Drysdale, told Law360 that one of the first things to do when considering disclosing potential tax violations to the IRS is to collect as much relevant information as possible in order to understand the full scope of the possible infraction and estimate potential penalties.

"It's really important to marshal all of the information so you know the entire scope," he said. "Some of the biggest problems we've had with voluntary disclosure is [that] we couldn't get all of the information, it wasn't available or the banks were being difficult."

A lack of comprehensive information undermines the ability of a tax practitioner to figure out whether the client will be accepted into the voluntary disclosure practice and if there will be additional difficulties in filling out the necessary paperwork, Elber said.

To initiate a voluntary disclosure, a client must first request preclearance from the IRS Criminal Investigation division and promptly submit all documents using a Form 14457. The form requests information about the noncompliance in a narrative that lays out the facts, circumstances, entities, related parties and any professional advisers involved.

Elber said he recommended first figuring out the banks and financial institutions that may be involved in the domestic or foreign tax noncompliance and reaching out to them for the relevant information because it is important to get the form filled in as soon as possible.

"It behooves you to move that process forward," he said. "The form itself requires you to provide the information, so hurry up and start getting it done. Don't put that to the back end of the process because if you do you may find out that certain institutions will be very difficult and you're slowing yourself down."

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Elber said it may be beneficial to provide more information than required in order to help the IRS reach a decision on whether to accept the petition.

"I may put a lot of meat on the bones to make it easier for them to go through," he said. "If I'm coming in to make a voluntary disclosure, I'm eliminating my biggest concern that they'll prosecute me for a crime. The rest of the case comes to money. What will they tax me and what will they penalize me."

Another reason to volunteer extra facts in the initial disclosure is to potentially avoid a protracted audit, especially if the tax noncompliance narrative is complex, Elber said.

"I may spend some more time upfront because I don't want this being a three-year-long audit," he said.

Manage Expectations

A potential delinquent client needs to manage his or her expectations when deciding to initiate a voluntary disclosure because the related penalties are still significant and one must convey this information so that he or she is not surprised by the cost, according to Elber.

"I would hope that all of my colleagues are doing this. You have to be very upfront," he said. "I go through what the options are that are available, explaining what all of the ramifications are because I don't want the client to be surprised down the road."

Elber said he typically presents the worst-case scenario if his client decides to make a voluntary disclosure so they will not be surprised with the result. For an FBAR violation, expect to pick up a fraud penalty, FBAR penalty and disclose six years of tax returns along the way, he said.

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