Improving Voluntary Compliance: Reform the IRS Criminal Voluntary Disclosure Practice

The IRS Criminal Voluntary Disclosure Practice (VDP) has long served as an important tool for taxpayers with potential criminal exposure to rectify their noncompliance and meet their tax obligations. However, recent modifications to the program’s structure and requirements have introduced new challenges, diminishing its effectiveness and discouraging participation. In my opinion, the VDP program is broken and needs to be fixed.

In response, the recently released IRS National Taxpayer Advocate’s 2024 report (Problem #10) provides a thoughtful and well-founded analysis of these issues, offering actionable recommendations to strengthen the VDP.

Identifying Barriers to Participation in the VDP

While the VDP is intended to offer taxpayers a structured pathway to compliance, changes implemented in 2018 and 2024 have inadvertently created significant barriers. The requirement for taxpayers to self-assess willfulness on Form 14457, coupled with the 75% civil fraud penalty, has raised concerns among practitioners and taxpayers alike​​. These structural and procedural hurdles have made the program less appealing, particularly to taxpayers who are hesitant to expose themselves to potential penalties without clear guidance on outcomes.

The changes to the VDP have made tax professionals reluctant to recommend the program to their clients, thereby undermining its ability to encourage voluntary disclosures​.

Recommendations for Strengthening the VDP

The Taxpayer Advocate’s proposed reforms deserve robust support. Key recommendations include:

  1. Stakeholder Collaboration
    Convening a working group of tax practitioners, policymakers, and subject matter experts to evaluate and improve the program’s structure to ensure that reforms address practical concerns​.
  2. Revised Penalty Framework
    Reviewing and potentially revising the 75% civil fraud penalty to reduce the fear of excessive financial repercussions, thereby encouraging greater participation​.
  3. Streamlining Form 14457
    Removing the willfulness checkbox would reduce ambiguity and increease participation.
  4. Flexible Payment Options
    Allowing installment agreements and offers in compromise for participants unable to pay in full would promote fairness and accessibility​.
  5. Enhanced Appeals Rights
    Granting administrative appeals rights to VDP participants would bolster confidence in the program’s fairness and transparency​.
  6. Improved Data Collection and Monitoring
    Establishing systems for tracking program participation and long-term compliance would enable the IRS to assess the VDP’s effectiveness and refine its processes​.

Advancing Voluntary Compliance and Public Trust

The proposed reforms offer a clear path to restoring the VDP’s effectiveness and ensuring its alignment with the IRS’s broader compliance objectives. A streamlined and equitable VDP will encourage noncompliant taxpayers to come forward, enhancing revenue collection and narrowing the tax gap.

The National Taxpayer Advocate’s leadership in identifying and addressing these issues is both timely and commendable. By adopting these recommendations, the IRS can reinforce its commitment to fostering voluntary compliance, improving taxpayer service, and building a stronger and more equitable tax system.

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