Summary:
If you repent, will the Internal Revenue Service forgive or hit you with a penalty?

For several years the IRS didn’t prosecute a person for criminal fraud if he disclosed his crime before the agency investigated. Now, voluntary disclosure does not “guarantee immunity from criminal prosecution” though it’s “an important factor.” Anxious to get offenders to come forward, the agency explained in detail what a disclosure is and when it’s timely.

But first, what is and is not fraud. Under-reporting taxes alone is not fraud. This could be caused by mistake, negligence, lack of education or reliance on wrong advice, none of which is fraud. Fraud is evading taxes deliberately. It means reducing taxes through deceit, subterfuge or concealment.

For a disclosure to be timely, the person must tell the IRS truthfully, timely and completely. In addition, he must: (1) Prepare his returns or cooperate with the IRS to determine the correct tax. (2) Pay taxes, penalties and interest or arrange to pay if he is unable to pay the full amount.

Here are specific details:

Disclosure Details. (1) A letter from the taxpayer’s attorney enclosing amended returns and relaying the offer to pay amount due. (2) Even a disclosure after receiving a notice the IRS has no record of returns qualifies if the person files them and arranges to pay amount due.

Non-qualified: (1) A letter from an attorney stating the client wishes to remain anonymous.
(2) Disclosures of income from an illegal source.

Timely Defined. Disclosure is timely if the agency receives it: Before the IRS gets information from a third party (e.g., informant, other government agency or the media) alerting it to the person’s noncompliance. Before the IRS starts an audit of another entity related to the person’s tax obligation, like the taxpayer’s partnership or corporation. Before the IRS receives information related to the person’s taxes from criminal enforcement action like a search warrant or grand jury subpoena. And before the IRS notifies the person it intends to start an audit.

Cornelius Knottnerus was aware of the voluntary disclosure rules. He expected the IRS to show up someday: He hadn’t filed returns for seven years, though he had total taxable income of $369,000.

He sees a stranger photographing his Bristol, Wisc., home. So Knottnerus greets him. He shakes his hand, says, “Can I help you?”

Darrick Rhymes identifies himself as an IRS agent.

Knottnerus says, “Okay, hold on,” walks to his truck and speeds away.

Rhymes waits 15 minutes and leaves when it becomes apparent Knottnerus will not be returning to continue their conversation.

The IRS denied Knottnerus’ request to participate in the program.

When the court said the disclosure must be made before an IRS contact, Knottnerus replied that agent Rhymes never told him he was auditing.

The court ruled against Knottnerus. Awareness of the audit could be inferred.

THE MORAL: The IRS doesn’t make social visits.

(more at Fraud and Scams)