The IRS recently made notable changes to Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and its instructions that reflect a stricter approach to enforcement with regard to taxpayers who participate in its voluntary disclosure practice (VDP). The revised instructions released in June and September include more stringent requirements regarding documentation, a mandatory admission that the taxpayer acted willfully, the required disclosure of digital assets and other changes.

The VDP offers taxpayers with previously undisclosed income a way to cooperate with the IRS to resolve their tax issues. If the disclosure is timely and accurate, the IRS will take it under consideration when deciding whether to recommend criminal prosecution. But, the disclosure does not guarantee immunity from prosecution. Because the VDP is not authorized by statute, taxpayers must follow the administrative requirements laid out by the IRS in the instructions for Form 14457 to participate.

Document submission

The updated Form 14457 requires the taxpayer to check a box attesting that they have prepared and hold all required documents to provide to the examiner upon initial contact. The form includes a note stating that failure to check the attestation boxes will result in the immediate denial of a taxpayer’s VDP and that no appeals will be granted.

Previously, Form 14457 included no attestation regarding the required documents. The instructions for that version said taxpayers granted preliminary acceptance into VDP should wait for an IRS examiner to contact them with an initial letter, usually followed by a telephone call. It then listed the documents that may be requested by the examiner.

The documents that are now required include:

• Delinquent or amended tax and information returns
• Statute extensions for all applicable income tax and FBAR years
• Accounting books, records, workpapers and supporting documents
• Bank statements and related account opening documents
• Advice provided by a professional
• Any materials the taxpayer received from a promoter, enabler or facilitator of tax noncompliance
• Full payment of tax, interest and penalties

While the instructions list full payment of tax, interest and penalties as required documents, taxpayers still have the option of claiming an inability to immediately pay all outstanding federal tax liabilities by checking a box on the form. If the IRS agrees the taxpayer can’t immediately pay in full, the taxpayer must work out other financial arrangements with the agency.

Willful actions

The revised Form 14457 also added a check-the-box attestation that the taxpayer’s willful actions led to their noncompliance and that they understand that admitting to their willfulness is a requirement for VDP consideration. The previous version of Form 14457 did not require taxpayers to attest to the willfulness of their actions, but the instructions said taxpayers should use VDP when they have engaged in willful noncompliance.

Digital assets

The provisions addressing digital assets on Form 14457 have been updated and expanded. For example, the disclosure special features checklist in Section 2 of Part I now includes a checkbox for digital asset issues.

Additionally, a schedule of digital assets has replaced the schedule of virtual currency that was in the previous version of the form. The schedule now requests information on a taxpayer’s digital assets that includes:

• Centralized digital asset exchange name
• Transactions recorded on a public blockchain
• Digital asset transactions conducted within an exchange or peer-to-peer transaction
• The dates on which specified digital asset transactions took place
• Information on the buyer of digital assets for transactions conducted within an exchange or peer-to-peer transaction

Other changes to the form

The voluntary disclosure included in the revised Form 14457 now seeks an estimate of both annual unreported income and/or overstated deductions for the disclosure period. Previously, the form only required an estimate of annual unreported income.

When the form is disclosing fraud involving both a corporate officer and the corporation and the corporation is voluntarily making the disclosure, it is now made on a single Form 14457. Previously, when fraud involved both a corporate officer and the corporation, a separate Form 14457 was required for the corporation.