Mr. David C. Hilliard, Esq.
President, Chicago Bar Association
29 South LaSalle Street
Chicago, Illinois 60603
Dear Mr. Hilliard:
I have received your letter of March 28, 1983 recommending that the
Internal Revenue Service adopt a remedial filing program in an
effort to return numerous taxpayers to the tax rolls. Your proposal
resembles in some respects the Service's "voluntary disclosure"
policy, which was abandoned in 1952. Under the voluntary disclosure
policy, a taxpayer who made a truly voluntary disclosure of a
willful violation of the Internal Revenue laws was not subject to
criminal prosecution for that violation. This policy generated a
substantial amount of litigation regarding what constituted a
voluntary disclosure and the Service concluded that the problems
created by the policy outweighed its benefits. Under current
procedures, a voluntary disclosure of a tax violation by a proposed
defendant is one factor which is considered in arriving at the
determination of whether the case warrants a recommendation of
criminal prosecution.
Your proposal attempts to use a more mechanical test, related to the
timing of the disclosure, as a substitute for the concept of
"voluntary". In my opinion problems similar to those encountered in
the old voluntary disclosure policy would still remain unanswered.
For example, the proposed standard applies to disclosures made prior
to contact by the Internal Revenue Service with the taxpayer or
other "related party" regarding a matter "relating to any of the
years for which the taxpayer has not filed". In our opinion the
meaning of the term "related party" and issues regarding whether the
contact "related" to the years in issue would soon become the basis
of heated litigation. Would contact by the Service with an employer,
employee, customer, supplier, acquaintance or other witness who could
reasonably be expected to provide evidence relating to the offense
be a contact with a related party? Would the examination of a
customer's or employer's tax liability, that will likely lead to
discovery of the taxpayer's crime, be a related matter?
The proposal raises questions regarding the extent of disclosure
necessary to qualify. Would the taxpayer be required to disclose
his/her intent to defraud and any affirmative acts taken to defraud
if evasion of taxes was intended? The fifty percent addition to tax
for fraud may be dependent on full disclosure. Would denial of
fraudulent intent when fraud could be proven allow the Government to
prosecute?
Your letter says the proposal would apply only to misdemeanor
prosecutions for failure to file; however, the proposed standard
gives amnesty from prosecution for "any criminal offense relating to
such failure to file". While a mere failure to file is a misdemeanor
punishable under 26 U.S.C. § 7203, a failure to file combined with
any affirmative act, the effect of which would be to mislead or
conceal and thus defeat the tax, could give rise to a felony
prosecution for willful evasion in violation of § 7201. If the
proposal related only to a misdemeanor, a taxpayer who voluntarily
disclosed that he/she did not file would not know at the time of
disclosure whether there was still a possibility for a felony
prosecution.
From the standpoint of tax administration, there is some doubt about
the effect of your proposal upon voluntary compliance in the future.
There is the possibility that some taxpayers who would otherwise
timely file their returns may anticipate future amnesty programs and
not file. There is also a possible negative reaction from those
taxpayers who have filed timely returns and complied with the tax
laws. Also unanswered is the affect such a program will have on
prosecution of similarly situated taxpayers who were detected prior
to the program.
The Service appreciates your interest and work in attempting to
improve the tax system. This issue has been approached many times
over the years and it has proven difficult to formulate a
satisfactory answer. I have forwarded your letter to Mr. Donald
Bergherm, the Associate Commissioner (Operations) for his further
consideration.
Sincerely,
Kenneth W. Gideon
Copy sent to Messrs. Dennis J. Carlin, Burton H. Litwin and Theodore
A. Sinars on May 2nd.
