IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24)

The IRS Voluntary Disclosure Practice (VDP) is implemented by Filing Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here. The Form includes instructions on pages 8-19. The instructions are clear that VDP is for disclosure of willful conduct.

Some claim that willful conduct may cover conduct beyond the criminal definition of willful conduct required for tax crimes and FBAR crimes. As to the tax crimes, see Cheek v. United States, 498 U.S. 192 (1991); as to FBAR crimes, see Ratzlaf v. United States, 510 U.S. 135 (1994). For example, FBAR civil penalties require willful conduct, but willful for the civil penalties may include recklessness, which imposes liabilities on conduct not criminalized for willful conduct.

An example of a claim of at least the possibility of the VDP willful requirement going beyond the Cheek/Ratzlaf standard of specific intent to violate a known legal duty is the following from Baker & McKenzie’s web site title “United States: IRS tightens voluntary disclosure rules” (11/25/24), here (viewed 11/29/24).

The new "willfulness" check box requires that taxpayers certify that they were "willful in the actions that led to…tax noncompliance," and a failure to formally admit intent will result in automatic denial of access to the VDP with no opportunity for appeal or reinstatement. "The "willfulness" checkbox represents a significant change from past procedure and may make taxpayers less likely to participate in the program. Previously, the VDP process did not require a formal admission of intent—taxpayers detailed their conduct through the narrative explanation or had unique facts that led them to want to use the VDP as a hedge in a non-willful situation. Now, however, such options are off the table. While the taxpayer may want to choose to make the voluntary disclosure, there is a lack of clarity because the term "willful" is not defined on the form. The IRS website merely establishes that "willfulness" is not mistake but an intentional effort to hide assets or tax liability. However, there are different definitions of the term "willful" in different tax contexts, and it is not clear from the instructions on the form whether a civil or criminal definition of "willfulness" applies. Additionally, there are grey areas around when an action is willful versus a mistake or a failure to correct, and different practitioners may have different opinions about whether or not an action was willful. It is not clear from the new form how the IRS will evaluate the taxpayer's admission of willfulness. There is another potential caveat to the new requirement to admit that past tax noncompliance was willful: acceptance to the VDP, even after admitting willfulness, is not guaranteed, and there are ways a taxpayer can lose the benefit of the program (discussed later in this article). If the taxpayer loses VDP benefits or is not accepted into the program despite the admission of willfulness, they are potentially at risk for the admission to be used against them in a civil or criminal proceeding.

With due respect, however, I think the IRS instructions and web site are clear that criminal Cheek/Ratzlaf willfulness is required. I have today made an update to my Federal Tax Procedure Book for the portion of the book dealing with the IRS VDP. See the page to the right titled “Federal Tax Procedure Book 2024 Editions Updates (7/26/24; 11/29/24)”, here. In that update here, I include a discussion of this issue as follows (footnotes omitted) with respect to step one of the Form (Part 1) required for the initial application (footnotes omitted):

    (a) Requirement of Criminal Willfulness. The Form cautions (emphasis supplied) that “You should consider applying for the IRS-CI VDP if you engaged in willful noncompliance that exposes you to criminal liability for tax and tax-related crimes.” Further, “You should not use the IRS-CI VDP if you did not commit any acts that rise to the level of tax or tax-related crimes. (Emphasis in original.) Criminal liability for tax and FBAR crimes requires Cheek willfulness–i.e., specific intent to violate a known legal duty. In order to emphasize this target group for the VDP, the Form emphasizes at several points the limitation to persons with criminal exposure through the criminal willfulness standard. This requirement that the person admit criminal willfulness is controversial among tax practitioners; those considering the VDP must carefully consider this required admission of criminal willfulness. It is reported that any equivocation by the taxpayer of the taxpayer’s willful conduct during the VDP process will result in exclusion from the VDP. Of course, qualifying for and completing the VDP will solve the criminal prosecution exposure for the crimes covered by VDP, but there might be some other, particularly nontax, consequences from a voluntary admission of criminal conduct. Accordingly, I recommend that a taxpayer contemplating VDP consult with an experienced attorney dealing with tax crimes so that a good assessment of the taxpayer’s material risk of criminal prosecution for the crimes required to be admitted; if that assessment indicates that the taxpayer is not at material risk of criminal prosecution, it may suggest that some other way to bring the taxpayer into compliance, at least on a go-forward basis. (See discussion of quiet disclosure below.)

Then for Step Two (after preliminary acceptance into the VDP), I have the following (footnotes omitted):

          (a) Disclosures of Willful Conduct. A key part of the disclosures in Part II is a narrative statement, under penalty of perjury, of “a thorough and detailed discussion of all Title 26 and Title 31 willful failures to report income, pay tax, and submit all required information returns and reports,” along with a certification, by check mark, that the taxpayer was willful. See the discussion of the willful requirement in paragraph 1 above.

 Accordingly, I think that at each step in the process the taxpayer must admit criminal willfulness. The consequences of that admission must be carefully considered, particularly in a situation where the facts are inconclusive (dare I say, in equipoise) as to criminal willfulness.