According to the Taxpayer Advocate, the IRS’s Criminal Voluntary Disclosure Practice (VDP) has long served as a crucial avenue for taxpayers with potential criminal tax exposure to self-correct, pay back taxes, penalties, and interest, and avoid criminal prosecution. When the program is fair and accessible, it benefits both taxpayers and the government by closing the tax gap and encouraging future compliance. However, changes made in 2018 made the VDP more burdensome and less attractive, leading to lower participation rates.
The Willfulness Checkbox: A Barrier to Participation
One of the most controversial changes was the addition of a “willfulness checkbox” on Form 14457, the VDP application. Taxpayers were required to check this box and explicitly admit, under penalty of perjury, that their noncompliance was willful. This admission carried significant legal risk, as it could be used against them if the IRS denied their participation or revoked their acceptance into the program. Unsurprisingly, this requirement had a chilling effect, discouraging many taxpayers and practitioners from using the VDP.
After advocacy from the Taxpayer Advocate Service (TAS), the IRS has agreed to remove the willfulness checkbox in the next revision of Form 14457. This move is a significant win for taxpayers, reducing the legal risk of self-incrimination and encouraging greater participation in the VDP. The recommendation is also that the IRS not require taxpayers to check the box on the current form while updates are underway.
Promising Steps: Program Review and Data Collection
Beyond the checkbox, the IRS has agreed to several other TAS recommendations aimed at making the VDP more accessible and effective. These include:
· Convening a working group to comprehensively review the VDP, with input from stakeholders.
· Narrowing the definition of illegal source income, which should broaden eligibility and encourage more taxpayers to come forward.
· Collecting robust program data, including amounts collected through the VDP, to better measure its effectiveness.
A comprehensive review that includes stakeholder input is essential to ensure the VDP is viable and meets its goal of increasing compliance. Collecting data will also help the IRS evaluate the program’s success and make informed improvements.
Ongoing Challenges: Penalty Structure, Appeal Rights, and Payment Flexibility
Despite these positive steps, the IRS has declined to address some of the most significant barriers to VDP participation:
· Penalty Structure: Currently, taxpayers must accept a six-year disclosure period and the 75 percent civil fraud penalty, as well as the willful FBAR penalty (if applicable) on the highest tax liability period. This one-size-fits-all approach can be excessively punitive and discourages participation, especially for those whose circumstances may not warrant such severe penalties.
· Appeal Rights: Taxpayers in the VDP have no right to dispute the IRS’s determination of taxes, penalties, and interest. They must accept the IRS’s assessment or withdraw from the program.
· Payment Flexibility: The VDP requires full payment at the close of examination or a full-pay installment agreement. Taxpayers unable to pay in full are removed from the program, leaving no room for alternative payment arrangements.
These rigid policies mean that taxpayers face a “take it or leave it” scenario, which can deter even those who want to come into compliance. Participation in the VDP remains low, with only 161 criminal VDP cases completed since 2019—a clear sign that the program’s structure and penalties are not working as intended.
Looking Ahead
The IRS’s agreement to remove the willfulness checkbox and collect program data signals positive change for taxpayers. However, real progress will require a willingness to reconsider the penalty structure, provide appeal rights, and allow flexible payment options. A truly comprehensive review of the VDP is needed to make it fairer and more effective, encouraging more taxpayers to come forward and resolve their tax issues.
Taxpayers and practitioners should watch for updates to Form 14457 and further changes to the VDP as the IRS continues its review. With continued advocacy and stakeholder input, there is hope for a more balanced and accessible voluntary disclosure program in the future.
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