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Taxpayers who knowingly broke tax law could soon pay much smaller penalties for coming forward. The Internal Revenue Service is preparing new rules for its voluntary disclosure program, which lets people fix past violations before the agency catches them.
Jarod Koopman, the IRS chief tax compliance officer and head of its Criminal Investigation division, described the changes last week at the UCLA Extension Tax Controversy Conference.
Koopman said the agency is “extremely close” to releasing the revamped program and wants it out before December, ahead of next year’s tax filing season. The details won’t be final until the IRS publishes them.
What is the IRS program for coming clean about unpaid taxes?
The voluntary disclosure program is for people whose violations were willful, meaning deliberate. That includes hiding income, filing returns they knew were false or not filing at all, all of which can lead to criminal charges.
Taxpayers who come forward before the IRS opens an audit or investigation, or learns about them some other way, can generally avoid prosecution. They still owe back taxes, interest and penalties, and protection isn’t automatic.
Under the current rules, the cost is steep. The IRS usually applies a civil fraud penalty to the year with the largest amount owed, and other penalties can be added on top.
The process is also slow. Cases can take a year or more, and applicants must admit to willful conduct before they know whether the IRS will accept them.
What changes under the new IRS rules for taxpayers?
Koopman said the overhaul targets the three biggest reasons people stay away from the program: cost, delays and the inability to pay. He outlined these changes:
- Lower penalties: Penalties “will be a lot less” than they are now, Koopman said, though he gave no figures.
- Faster answers: The IRS is aiming to resolve cases within 120 days after a taxpayer files a complete submission.
- Payment options: The agency is considering installment agreements, which spread payments over time. It is also considering offers in compromise, which settle a tax debt for less than the full amount.
- Crypto included: There won’t be a separate program for digital assets. Unreported cryptocurrency will be handled like any other taxable income.
It’s still unclear whether the IRS will lower the fraud penalty rate, apply it to fewer years or create a new penalty structure. Koopman also didn’t say whether applicants will still have to admit willful conduct up front.
A faster timeline also means less room to fix paperwork along the way. Applicants will likely need corrected returns ready when they apply.
Who should use the IRS program, and what should taxpayers do now?
The program isn’t meant for honest mistakes. Koopman noted that taxpayers who misunderstood the rules or made accidental errors may have other routes, such as a qualified amended return, which can reduce some penalties.
For people who knowingly broke the rules, timing matters most. Eligibility generally ends once the IRS opens an audit or investigation, so waiting for the launch carries risk.
Criminal tax attorneys advise getting a lawyer involved now to prepare corrected returns before the rollout. When the lawyer, not the taxpayer, hires the accountant, that work is protected by attorney-client privilege.