Overview
On February 15, 2022, the IRS updated Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, to reflect a shift away from paper filing and include an expanded section on reporting virtual currency. These revisions to the Voluntary Disclosure form allow for the disclosure of a wider range of noncompliance, but may also create traps for the unwary with respect to the full and accurate disclosure of all financial holdings.
The Voluntary Disclosure program is a way for taxpayers facing potential criminal tax exposure from willful conduct to disclose their noncompliance to the IRS. If the disclosure satisfies several requirements, including that the filing happens before the IRS has learned of the taxpayer's noncompliance, the agency promises not to refer the case for criminal prosecution. "This is an important form and process for people who recognize it’s better to step forward and address their tax situations head-on, before facing IRS enforcement action," said Doug O’Donnell, Deputy Commissioner Services and Enforcement said in News Release IR-2022-33. According to O’Donnell, "[t]he revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional."
The Voluntary Disclosure form contemplates the use of the program for reporting domestic, offshore, estate and gift, employment tax, and virtual currency noncompliance issues, as well as a catch-all checkbox for "Other Issues." The updated version of the Voluntary Disclosure form provides greater flexibility for filing, including the option to submit the disclosure via fax and bypass the IRS’s backlog in mail processing times. Additionally, voluntary disclosure submissions now allow for the use of electronic signatures, including photocopies, facsimiles, and scans of taxpayer signatures.
The revised Form 14457 now includes a section for reporting all virtual currency which the taxpayer owned or was the beneficial owner of during the disclosure period. The prior version of the form required taxpayers to try to fit their virtual currency holdings in the section for general financial institution reporting. Beneficially, the new form provides greater clarity on how taxpayers should report virtual currency.
Nonetheless, the new cryptocurrency section can pose hazards for taxpayers. The News Release IR-2022-33 notes: "A taxpayer's voluntary disclosure must be timely, accurate and complete." Taxpayers must be careful to report their cryptocurrency holdings correctly and in full for the disclosure period. However, taxpayers may face difficulties because the information available from their exchanges is insufficient for reporting required details, such as the dates of acquisition and disposition or whether the currency is domestic or foreign.
"With the significant amount of financial data that must now be included in a voluntary disclosure preclearance request, taxpayers may be concerned that the IRS could use this information for another purpose," Lawrence Hill stated. Practitioners are also troubled by the length of time it takes for voluntary disclosure submissions to be processed. It is not uncommon for preclearance into the voluntary disclosure program to take more than a year and for multiple years to pass before a final determination. "It provides little comfort to taxpayers who are anxious about criminal exposure and the amount they owe to have to wait years for resolution. It behooves the IRS to take steps to expedite the process," Mr. Hill said. It is unclear whether the expanded reporting on virtual currency will impact IRS processing times for voluntary disclosures.
