IRS Moves to Clarify Rules on Tax Cheats

The Internal Revenue Service, in a continuing effort to beat the bushes for tax scofflaws, on Wednesday revamped its so-called voluntary disclosure practices.

The new rules, which will be written into IRS procedure manuals, clarify that the IRS will go easy on certain tax cheats as long as they come clean before the agency starts after them.

The move is significant, tax attorneys said, particularly in light of the agency’s continued push to find and prosecute Americans who have used offshore accounts, questionable trusts and complicated shelters to hide income or underpay their taxes.

“People want to come out of the woodwork,” said Martin Laffer, partner at the Beverly Hills tax law firm of Laffer & Gottlieb. “We see people approach the problem, wanting to know how to come clean without going to prison or being killed with fraud penalties. A lot of them have decided not to do it, because the voluntary disclosure rules were so nebulous that they couldn’t be sure what would happen.”

The rules have particular significance in Los Angeles, long believed to be a hotbed of tax cheats, said Elliott Kajan, partner with Kajan Mather & Barish in Beverly Hills.

“L.A. has always had more tax shelters and more tax-advantaged investment programs than any other city in the country,” he said. “It seemed to be the hub, and the spokes went out all over the state.”

In three pages of guidance, the IRS said it would not automatically guarantee immunity from prosecution or penalties, but the agency probably would not recommend prosecution when taxpayers come forward with truthful, timely and complete information about transgressions. Taxpayers also must be willing to pay any tax, interest and penalties “determined by the IRS to be applicable.”

“This is very good,” Kajan said, about the wording of the section on penalties. “It shows me they are willing to talk about waiving penalties. I’d say this is as close to an amnesty program as they’re going to get.”

However, the agency said it will not consider letters from lawyers, who wish to keep their clients anonymous, to be valid voluntary disclosures. And it’s not interested in giving breaks to taxpayers already under grand jury investigation, IRS examination or who have participated in illegal activities to generate their taxable income.