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Avoiding The Worst-Case Scenario: The IRS’s Domestic Voluntary Disclosure Practice

By Brian P. Ketcham
The CPA Journal
June 2016 Edition

Most CPAs are by now familiar with the IRS’s heavily publicized Offshore Voluntary Disclosure
Program (OVDP), which allows taxpayers with previously undeclared foreign assets to file amended tax returns and delinquent information returns in exchange for immunity from criminal prosecution and reduced civil penalties. Many, however, are unaware that the IRS has a long-standing policy permitting general voluntary disclosures involving domestic
tax issues.

Many taxpayers engage CPAs because of unfiled tax returns or unreported domestic income. The default strategy in such cases tends to be to amend and correct the taxpayer’s returns for the three most recent years–commonly referred to as a “silent disclosure”–and hope for the best. Making an affirmative voluntary disclosure, however, will allow a CPA to engage directly with IRS from the beginning and will often help mitigate penalties. Moreover, proceeding under the IRS’s voluntary disclosure program is an especially attractive option for taxpayers with substantial past noncompliance that puts them at risk of a criminal investigation. Unlike the rigid protocols found in the OVDP, a domestic voluntary disclosure affords some flexibility and empowers revenue agents with more discretion in making penalty determinations. Details concerning the IRS’s domestic voluntary disclosure practice are set forth at section of the Internal Revenue Manual, but the primary aspects are described below.


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