IRS's Voluntary Disclosure Policy Is Threatened, Tax Lawyers Say

The undersigned are private practitioners who specialize in criminal tax matters. Many of us have served in senior tax enforcement positions in the Internal Revenue Service and the Department of Justice. We have all spent our careers in the public and private sectors advancing tax compliance and good tax enforcement policy, and we have always believed that a core component of the IRS compliance mission is its Voluntary Disclosure Policy ("VDP"). The decades old VDP embodies a determination that our tax system benefits from having a mechanism for non-compliant individuals to come forward and avoid criminal prosecution by disclosing their prior misconduct.

We write as a group to address a development that could jeopardize the VDP at the height of its visibility and success, as it recently brought thousands of American taxpayers into compliance and likely billions of dollars in assets into the tax system. Our immediate concern is the prospect that the government may bring criminal tax charges against persons who attempted voluntary disclosures but were later advised that pursuant to the VDP they were not timely. Such action would effectively destroy the VDP.

The individuals involved in these cases started the process of making a voluntary disclosure at various times, some in 2008 and others later. But irrespective of when or how they began, such persons did come forward in the utmost good faith and make a full and complete disclosure to the IRS of their foreign accounts. Indeed, in official statements and public presentations during 2008 and 2009, the Commissioner of Internal Revenue and other IRS and Justice Department officials explicitly encouraged them to do so. Yet, the government now may decide that based on a literal reading of the VDP these persons were too late in coming forward and should be prosecuted.

We understand that the VDP is an act of administrative grace by the IRS, creating no enforceable rights. We also understand that there are different cases with distinct facts. However, in our view, prosecuting persons who came forward in good faith during the fast moving events of late 2008 through mid-2009 would smack of trickery, like playing "gotcha." It would undercut the credibility of the Commissioner and his office. It would be public fodder for press stories, articles and panel discussions for years.

In a practical sense, it would also change what we tell our clients. To a very large extent, we are the gatekeepers of the VDP. Clients come to us with a high level of distrust of the IRS. We routinely explain that because the IRS wants to encourage voluntary disclosures, it has treated those who come forward with fairness. Indeed, the undersigned had such conversations with thousands of clients last year, leading nearly all of them into the IRS settlement initiative. If the government now prosecutes persons who attempted good faith disclosures, we, and any other practitioner in this business, will necessarily have to change the risk assessment we provide to our clients. They will not care about the technical nuances of why certain taxpayers who attempted disclosures were prosecuted and others were not. Disclosures will likely grind to a halt.

The highly charged and uniquely visible developments in the offshore account area have put enormous pressure on the interpretation and application of the VDP. We believe that if the government moves forward in these cases, the VDP will for all practical purposes become irrelevant. Surely the government has enough ongoing offshore account criminal investigations that do not involve attempted voluntary disclosures to achieve its enforcement objectives without eviscerating a vital component of the IRS's compliance mission at the very peak of its extraordinary recent success.

We respectfully urge the relevant decision makers to consider these views in deciding whether to recommend prosecution in cases where good faith disclosures have been attempted. Indeed, some of the signatories to this letter have clients directly implicated in this issue, and we believe that referrals in some of these cases are being reviewed at this time, with a rapid decision requested by the line attorneys. We would therefore appreciate your prompt attention to this matter.

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