ABA Tax Section Comments on VDP Disclosure Form 14457, Voluntary Disclosure Practice Preclearance and Application (1/5/25)

I previously expressed concerns about the IRS VDP Practice reflected in Form 14457, Voluntary Disclosure Practice Preclearance and Application (November 2024) I was concerned with the requirement that the taxpayer admit criminal willfulness in order to complete parts of the application. IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24; 1/5/25), here.

The purpose of this post is to alert practitioners of the ABA Tax Section’s Comments on the Form 14457. See 12/20/24 Abreu Cover Letter to Werfel, Commissioner, with Comments on VDP and Streamlined Filing, TN here.

I do not offer further comments principally for lack of time and energy (I came down with a significant serious flue-type affliction shortly after Christmas, and have not regained full energy but should later next week (in which I case I might offer comments by expanding this blog entry)). In addition, I am not yet sure that my comments could add anything material to the ABA Tax Section comments. See the list of persons contributing to the comments.

I also alert readers that I have significantly revised (or re-revised) the VDP discussion in my Federal Tax Procedure Book. The revisions are here. See also Federal Tax Procedure Book 2024 Editions Updates (7/26/24; 1/5/25), here.

IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24; 1/5/25)

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 FBAR 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 on 1/6/25 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 1/6/25 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):

Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13)

I have posted a discussion on this topic on my Federal Tax Crimes blog.  The title is the same, Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13), here.  That gravamen of my discussion is that (i) in Fiore v. Commissioner, T.C. Memo. 2013-21, the Tax Court applied the criminal law concept of willful blindness to find that the IRS had proved civil fraud to hold the taxpayer liable for the civil fraud penalty under Section 6663; and (ii) the Court's discussion of the concept of willful blindness is confusing.  Since willful blindness is a criminal law concept that certainly is not -- at least not yet -- mainstream in its application to the tax civil fraud discussion, I do not repeat the discussion here and just review readers to the discussion.

Practitioner Disbarment from Practice Before the IRS (11/26/12)

The Treasury Department regulates IRS practice before the IRS.  Under Circular 230, here, practitioners may be sanctioned for inappropriate conduct and disbarred from practice before the IRS.  I cover that process   (I cover that process in my Federal Tax Procedure Book at pp. 31-38 of the footnoted version and pp. 26 of the nonfootnoted version).  The ultimate sanction is, of course, disbarment.  That can severely impact a practitioner's ability to earn a living.  Hence, it would behoove practitioners to avoid the conduct that would draw any sanction, particularly the disbarment sanction.

In Banister v. United States Department of the Treasury, 2012 U.S. App. LEXIS 24179 (9th Cir. 2012), here, an unpublished opinion,  the Ninth Circuit affirmed the district court's decision affirming the disbarment of Mr. Banister from practice before the IRS.  The Court opens:

Banister admitted to advising clients that they were not liable for income taxes based on his belief that the Sixteenth Amendment was not properly ratified and his understanding that Section 861 of the Internal Revenue Code, 26 U.S.C. § 861, and the regulations thereunder ("Section 861") exempted the clients from having to pay income taxes. He also admitted to signing a client's tax returns as the returns' preparer when the returns stated that the client was not liable for income taxes under Section 861. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.

The ho-hum, routine, nonprecedential affirmance is not surprising given the claims that Banister made.  But, I think the Court's discussion if Banister's Cheek good faith defense is noteworthy, as a reminder.  The Cheek defensen is that the defendant did not know the law and therefore could not have violated a known legal duty.  Cheek was a criminal case interpreted the statutory element for tax crimes that the defendant have acted "willfully."  Cheek interpreted that term as the intentional violation of a known legal duty.  Cheek embellished that this defense was not available to a person who knows the law but claims the law is invalid.  That was Mr. Banister's problem in asserting the belief that the Sixteenth Amendment had not been properly ratified.

But, Mr. Banister had another arrow in his quiver -- that Section 861, properly read, exempted the persons he counseled from the income tax.  The question here was the role of the reasonableness of his belief.  Readers will recall that Cheek established the even an unreasonable belief that the law, properly interpreted, did not apply is a defense, but that the trier of fact (there the jury) could consider the unreasonableness of the belief as bearing upon whether the defendant actually knew the law's command and intentionally violated the command.  The Ninth Circuit said: