On February 15, 2022, the IRS announced updates and additions, both technical and substantive, to the Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and its instructions. The updates reflect input from practitioners and taxpayers and take into account trends in the type of financial assets that taxpayers hold. Doug O’Donnell, IRS Deputy Commissioner Services and Enforcement, stated: “This is an important form and process for people who recognize it’s better to step forward and address their tax situations head-on, before facing IRS enforcement action. … The revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional.”
Those updates and additions are as follows:
Submission of Part II: Previously, taxpayers were required to sign and mail hard copies of Part II of the Form 14457 to the IRS. Under the revised Form 14457, IRS Criminal Investigation now accepts photocopies, facsimiles and scans of taxpayer signatures. Taxpayers are encouraged to send the Form 14457 via eFax to 844-253-5613 to reduce mailing and processing times. Practitioners should note that the fax number to submit both Parts I and II of Form 14457 has changed to the number listed above.
Disclosure Period: Generally, voluntary disclosures include a six-year lookback disclosure period. Previously, that disclosure period was six years from before the date Part II of the Form 14457 was submitted to the IRS. Under the revised Form 14457, and perhaps consistent with the new eFax system, the disclosure period is now six years from the date that Part II of the Form 14457 is received by the IRS.
Virtual Currency: Form 14577 now has an expanded section dedicated exclusively to the reporting of virtual currency. The taxpayer must list all domestic and foreign noncompliant currency either owned or controlled by the taxpayer, or of which the taxpayer was the beneficial owner.
Civil Penalty Structure: Generally, a 75-percent fraud penalty is imposed, in lieu of all other tax-related penalties, on the year with the highest income during the six-year lookback period of a voluntary disclosure. The revised Form 14577 instructions provide additional guidance on the imposition of civil penalties.
- Taxable Entity and Individual Fraud: When a voluntary disclosure involves fraud by a taxable entity (most commonly a Subchapter C corporation) and by an individual related to the entity, a 75 percent fraud penalty will be imposed at both the corporate and individual levels, whether or not the entity submits a separate Form 14457.
- Employment Tax Penalties: When employment tax filings are the subject of a voluntary disclosure, the 75 percent fraud penalty will apply to the tax quarter with the highest employment tax liability. In addition, the IRS may impose a failure-to-deposit penalty under Internal Revenue Code § 6656.
- Estate Tax Penalties: The fraud penalty will be reduced to 50 percent for all disclosures involving estate tax matters.
- Gift Tax and Generation-Skipping Transfer Tax Penalties: The six-year disclosure period does not apply to Form 709, Gift (and Generation-Skipping Transfer) Tax Return. Rather, the taxpayer must submit all Forms 709 that are required and the 75 percent fraud penalty will be imposed on the year with the highest tax liability. If the voluntary disclosure only involves one year, the fraud penalty is reduced to 50 percent.
Disclosure of Notices of Deficiency: The revised Form 14457 requires the taxpayer to disclose whether the taxpayer, his or her spouse, or any related entities have received a notice of deficiency from the IRS for any year subject to the voluntary disclosure, and provide a copy of any such notice. The disclosure of notices of deficiency relates to the timeliness of a voluntary disclosure. Previously, a voluntary disclosure was untimely if the taxpayer had been contacted by the IRS about any disclosure year. The revised instructions state that “[a] notice of deficiency issued by an automated underreporter unit will not automatically render a voluntary disclosure untimely. Rather, the IRS will analyze the notice of deficiency and make a preliminary timeliness determination while processing Form 14457, Part I.”
Disclosure of Tax Litigation: Similarly, the revised Form 14457 requires that the taxpayer disclose if the taxpayer, his or her spouse, or any related entities are currently litigating, or have litigated in the past, any federal tax matters for any year subject to the voluntary disclosure, in the United States Tax Court, the United States Court of Federal Claims, or any United States District Court. The instructions state that any such prior or ongoing litigation may render a voluntary disclosure untimely.
Inability to Pay and Waiver of CDP Rights: The IRS previously required a taxpayer making a voluntary disclosure to pay in full all tax, interest and penalties. Part II of the revised Form 14457 now provides a check-box for inability to pay in full. The burden is on the taxpayer to establish inability to pay. The revised instructions state that any closing agreement that resolves a voluntary disclosure for less than full payment will require the waiver of collection due process rights.
Correspondence Concerning the Voluntary Disclosure: The revised Form 14457 provides a check-box if the taxpayer would like correspondence concerning the voluntary disclosure to be sent to the taxpayer as well as his or her representative. If the box is left blank, only the representative will receive correspondence from IRS Criminal Investigation.