Last week the IRS released a memorandum with new procedures for an "Updated Voluntary Disclosure Practice" impacting…
IRS announces an update to its Voluntary Disclosure Practice Preclearance Request and Application
Last month, the IRS announced revisions to Form 14457 and its accompanying instructions. Specifically, the IRS updated Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, to reflect a shift away from paper filing and include an expanded section on reporting virtual currency.
These revisions to the Voluntary Disclosure form allow for the disclosure of a wider range of noncompliance, but may also create traps for the unwary with respect to the full and accurate disclosure of all financial holdings.
According to the newly revised Form 14457 instructions, the definition of “financial account,” interpreted broadly, includes “any type of relationship with a third party established to provide or engage in deposit-type services or other financial services . . .[including] . . .virtual currency. Additionally, the instructions now state that for preclearance purposes an account is considered a “noncompliant financial account” if it: generated income and the income was not reported for federal income tax purposes, received previously untaxed funds, or was required to be reported on an information return or report (e.g., Form 8938 or FBAR) and was not reported.
Furthermore, the IRS is clear that it considers the term “virtual currency” to include “assets beyond what many define as virtual currencies.” And the instructions further explain that for preclearance purposes, the term “noncompliant virtual currency” means “an asset that should have been reported on a federal income tax return or other required federal information return and was not previously reported.”
The revised instructions continue by requiring that applicants: Provide details for all noncompliant virtual currency you owned or controlled or were the beneficial owner of, either directly or indirectly. The listings must cover the entire disclosure period, including assets acquired or disposed of during the disclosure period and those held through entities. Additionally, if you used a “mixer” or “tumbler” in connection with your virtual currency or any virtual currency transaction, identify the mixer or tumbler used and explain why you used it.
Taxpayer virtual currency usage has increasingly captivated the IRS’s attention in recent years. And all indicators point to further increasing IRS resources and attention devoted to monitoring this area. As such, willful taxpayers who still need to disclose virtual currency transaction federal income tax consequences should avail themselves of this expanded opportunity to report their virtual currencies via the IRS CI VDP and avoid potential criminal liability.
The IRS announcement is pasted below.
IR-2022-33, February 15, 2022
WASHINGTON — The Internal Revenue Service announced today that Form 14457, Voluntary Disclosure Practice Preclearance Request and Application PDF, has been revised, including expanding a section on reporting virtual currency. Form 14457 permits taxpayers who may face criminal prosecution for willful violation of tax law to voluntarily disclose information to the IRS that they failed to previously disclose.
Updates and additions to this form include:
- IRS Criminal Investigation now accepts photocopies, facsimiles and scans of taxpayer signatures. Taxpayers can send this form via eFax to 844-253-5613 to reduce mailing and processing times. Previously, Part II of this form had to be mailed.
- An expanded section for reporting virtual currency.
- A penalty structure for employment tax and estate and gift issues.
- A check-box for inability to pay in full.
The updates reflect input from practitioners and stakeholders and take into account trends in the type of financial asset that taxpayers hold.
“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,” said Doug O’Donnell, Deputy Commissioner Services and Enforcement. “The revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional.”
Thousands of taxpayers have used the Voluntary Disclosure Practice since its inception. It serves as a compliance option for taxpayers who have potential criminal exposure and wish to come into compliance with the tax laws. Those making such disclosure are still subject to civil examination and the payment of all applicable taxes, interest and penalties.
Taxpayers who did not commit any tax or tax-related crimes and wish to correct mistakes or file delinquent returns should consider other options available to comply with their tax and reporting obligations. The IRS encourages taxpayers to consult with professional tax or legal advisors in determining which option is the most appropriate.
A taxpayer’s voluntary disclosure must be timely, accurate and complete. The taxpayer must also cooperate with the IRS in determining the correct tax liability, and make full payment of the tax, interest and any applicable penalties.
Cooperation includes full payment of all tax, interest and penalties. A taxpayer who is unable to make full payment may request that the IRS consider other payment arrangements. If a taxpayer anticipates they cannot pay the total amount of tax, interest and penalties required, they must disclose this and submit a proposed payment arrangement and a completed, and executed, Collection Information Statement (Form 433-A). The burden is on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income, domestic and foreign, under the taxpayer’s control.
For more information on the Voluntary Disclosure Practice, as well as other options to come into compliance with the law please visit:
- IRS Criminal Investigation Voluntary Disclosure Practice
- IRM 9.5.11, Investigative Process – Other Investigations
- IRM 4.63.3, Withholding and International Individual Compliance – Offshore Voluntary Disclosure Program, Streamlined Filing Compliance Procedures and Voluntary Disclosure Practice
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