Voluntary Disclosure Is the Last Safe Door if IRS Is Weaponized

The risk of a politicized IRS is real even if its internal culture has historically resisted such pressure. Taxpayers wary of landing in the agency’s crosshairs should recognize that careful preparation is the best defense.

Regardless of politically motivated scrutiny from the Trump administration, a taxpayer who has willfully underreported income or failed to file tax returns faces daunting consequences if the IRS discovers the omission. The IRS Criminal Investigation division emphasizes that timely, truthful, complete voluntary disclosure can prevent criminal prosecution—but only if made before any audit, investigation, or law enforcement action begins.

Once the IRS has notice of your case through any channel, the safe harbor window closes permanently.

Fiscal 2024 alone saw 2,667 IRS-CI investigations, 1,571 convictions, and $9.1 billion in fraud uncovered. Digital asset tracing, global bank data, and paid informants mean “waiting to see if you’re caught” is no strategy at all.

Voluntary Disclosure

If you have decades of unfiled tax returns, an offshore account you never reported, or any historical pattern of willful tax evasion, the voluntary disclosure practice is still the single structured path that minimizes the risk of a criminal tax indictment as long as you file before the IRS opens an audit or a criminal tax investigation.

Engaging the appropriate counsel is key to successfully navigating voluntary disclosure. Remember that only an attorney can cloak this entire process in attorney-client and work-product privilege. A CPA can be compelled to testify. And drafts, spreadsheets, and emails prepared by non-attorney tax preparers aren’t privileged.

Experienced counsel will conduct a privileged review, examining bank feeds, crypto wallets, FBAR exposure, and Schedule K-1s, to calculate true liability without triggering premature disclosure.

They then will craft a minimally damaging but fully compliant confession, submitting complete restitution and navigating the IRS-CI pre-clearance process directly. Finally, they will help institute measures such as quarterly reconciliations, employee retention credit reviews, and FBAR calendaring to avoid future voluntary disclosures.

The 2025 Process

Revisions to the IRS voluntary dislosure practice have transformed IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, from mere paperwork into a potential written confession, making the process trickier to navigate. There is now a two-step requirement for the form, which includes six years of amended returns submitted electronically.

Applicants for the program must check a box admitting intentional wrongdoing under penalty of perjury. Declining to check it triggers automatic rejection with no appeal; checking it hands prosecutors sworn evidence if IRS-CI later rejects the case.

The current voluntary disclosure practice requires a civil examination with potential confrontational interviews and eliminates direct administrative appeals. Taxpayers must pay all taxes, interest, and penalties in full or via installment plans, as offers in compromise are essentially ruled out. Non-cooperation, penalty challenges, or procedural failures result in removal from the program, exposing taxpayers to the criminal prosecution they sought to avoid.

Taxpayers should plan for a lengthy, document-intensive process. After the initial pre-clearance request, it often takes several months to get a response.

If approved, the IRS will demand detailed financial records, amended returns, and explanations for each year of omission. IRS-CI examiners may interview the taxpayer and review bank records or crypto exchange data.

Civil penalties—such as fraud penalties or the miscellaneous offshore penalty—are applied on the highest-deficiency year. FBAR-related penalties are calculated based on the inflation-adjusted thresholds and penalty rules in effect at the time the IRS makes the assessment, and are applied separately for each year of noncompliance.

Avoiding Common Missteps

Timing is key in the disclosure process, as taxpayers must file before any audit, summons, or whistleblower tip. Miss that window, and the criminal shield disappears.

Beyond that, an incomplete package can have significant consequences. Part II of Form 14457 must land fully documented within 45 days—one missing bank statement or a late upload equals rejection. IRS-CI cross-checks Foreign Account Tax Compliance Act, blockchain, and whistleblower leads. One omitted wallet, trust, or foreign account voids the filing.

Don’t ignore specialty filings. Willful FBAR lapses invite a penalty of 50% of the account balance per year. The first purely crypto indictment (nearly $4 million of Bitcoin sales) in 2024 proves digital assets are now fair game.

Don’t Take Risks

If you fear being targeted by the IRS, ignoring the voluntary disclosure practice could bring about significant ramifications. Skip the program, and the IRS retains full enforcement power. Tax evasion carries a 75% fraud penalty plus up to five years in prison and $250,000 fines per count.

Willful FBAR violations impose penalties up to 50% of account balances per year plus potential 10-year sentences and $500,000 fines. Filing false returns adds another 75% fraud penalty with three-year prison terms and $250,000 fines per count. These overlapping penalties compound quickly.

The voluntary disclosure practice can help bring a taxpayer who has willfully committed tax crimes back into compliance while avoiding criminal tax prosecution. Taxpayers must maintain complete transparency and cooperation. The process is document-heavy and unforgiving, but those who fear prosecution shouldn’t overlook this last safe door.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Klasing is founder and managing partner of the Tax Law Offices of David W. Klasing in Irvine, Calif.

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