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TCL > May 2003 Issue > IRS and Colorado Announce New "Voluntary Disclosure" and Amnesty Policies

May 2003       Vol. 32, No. 5       Page  90
Specialty Law Columns
Tax Tips

IRS and Colorado Announce New "Voluntary Disclosure" and Amnesty Policies
by Joseph H. Thibodeau

Joseph H. Thibodeau, P.C., Denver

(With appreciation to Gelt, Paddison & Grassgreen, P.C. for its research assistance)

IRS Voluntary Disclosure

On December 11, 2002, the Internal Revenue Service, once again, changed its general policy with respect to "voluntary disclosure" of past tax indiscretions (both of commission and omission)—this time for the better (see IR-2002-135). Henceforth, a successful "voluntary disclosure" and its principal benefit—declination of criminal prosecution—should be more readily and predictably available (liability for tax, interest, and possible civil penalty survives).

In a related development (IR-2003-5; Rev. Proc. 2003-11; 2003-4 I.R.B. 311), on January 14, 2003, the Service invited "voluntary disclosure" (albeit through April 15, 2003 only) in the specific context of "offshore" payment (debit/credit) cards and/or " . . . other offshore financial arrangements [designed] to hide . . . income. . . ." In addition to affording "voluntary disclosure" relief with respect to potential criminal exposure, during its ninety-day life, this measure also eliminated exposure to the 75 percent civil fraud and certain "information" return (relative to offshore transactions) penalties.

In contrast, the new, generally applicable provision has no expiration date, nor have its core requirements changed. The disclosure must be: (1) "timely," (2) "truthful," and (3) "complete." It must include: (4) the taxpayer’s cooperation in determining true and correct tax liability (subject to the preservation of all administrative and judicial rights and remedies of review); and (5) a good-faith arrangement for the payment of any tax liability ultimately determined to be due and owing. Finally, (6) the taxpayer’s income must all be of a "legal source."

The provision effects a significant change as to "timeliness"; that is, it seeks to draw bright lines in disregarding certain constructive "triggering events" (e.g., divorce, business dispute, newspaper or other media report, and/or other motivating influences), which previously might have been viewed as tainting the "purity" of the taxpayer’s "voluntariness."

Henceforth, irrespective of such events, a disclosure will be viewed as "timely" if commenced before the Service has: (1) initiated a civil examination or criminal investigation of the taxpayer or has notified him or her of its intent to do so (routine "return," "filing status," and "collection" notices will not be viewed as the initiation of an examination or investigation); (2) received information from a third party alerting it to the specific taxpayer’s non-compliance; (3) initiated a civil examination or criminal investigation (of another) directly related to the specific liability of the taxpayer; or (4) acquired information directly related to the specific liability of the taxpayer from a (non-tax) criminal enforcement action (e.g., search warrant or grand jury subpoena).

The Service reaffirms its prior position that "voluntary disclosure": (1) is a matter of internal procedure only, which (2) creates no substantive or procedural taxpayer rights, and (3) does not afford a guarantee of immunity from prosecution. It remains but a single factor to be considered, along with all others, " . . . in determining whether criminal prosecution will be recommended. . . ." (The national criminal tax defense bar is generally unaware of any recommendation for criminal tax prosecution following a properly executed voluntary disclosure.) [Cf. U.S. v. Hebel, 668 F.2d 995 (8th Cir. 1982), cert. denied, 456 U.S. 946 (1982); see also U.S. v. Tenzer, 127 F.3d 222 (2nd Cir. 1997), cert. denied, 523 U.S. 1096 (1998) (wherein the disclosure was determined to have been defective).] Experience suggests that a qualifying federal disclosure, shared with the state, likely also will be effective for Colorado income tax purposes.

Colorado Tax Amnesty—June 1—June 30, 2003

In an equally positive development, the state of Colorado has announced a tax amnesty, effective during the month of June 2003 only. Amnesty generally will be available to any individual or business (including non- and part-time residents) not under criminal or civil fraud investigation as of June 1, 2003, who comes forth during the month of June to cure: (1) any failure to file; or (2) any false or fraudulent return relative to any returns due (without regard to extension) prior to December 31, 2002 (inapplicable to 2002 income tax returns, due on or before April 15, 2003).

The amnesty generally will apply to most Colorado taxes (that is, income, sales/use, severance, wage withholding, estate, fuel, lodging, and rental), as well as to those non-state taxes administered by the Department of Revenue ("CDOR"). A few notable exceptions include taxes not collected by the CDOR: home-rule city sales, property, unemployment, and liquor excise taxes. Moreover, it is not applicable to any tax with respect to which the state has, as of June 1, 2003, issued a bill to the taxpayer.

Application (a separate one for each type of tax involved) must be made, together with the submission of requisite amended returns, on or after May 31, and prior to July 1, 2003. The benefits are significant: (1) no criminal tax prosecution; (2) no civil penalties; and (3) if payment in full is made on or before June 30, a reduction by one-half of any interest due. If full payment is not made at that time, but arrangements are then made to pay thereafter, interest will continue to accrue at the normal rate.

For additional information, see

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