IRS RESPONSE TO RECOMMENDATION: ​The IRS actively seeks ways to incorporate taxpayer perspectives into the planning, design, and execution of its operations, including modernization initiatives. For example, the Taxpayer Experience Office was established to specifically ensure that the taxpayer experience is at the center of the IRS’s continuous efforts to improve and modernize its operations.

The IRS is already in the process of comprehensively reviewing the VDP with input from stakeholders to ensure the program achieves its intended purpose of increasing compliance among taxpayers with potential criminal liability. The IRS is in the process of making allowances for income derived or related to the sale of marijuana.

CORRECTIVE ACTION: The IRS is already in the process of comprehensively reviewing the VDP with input from stakeholders to ensure the program achieves its intended purpose of increasing compliance among taxpayers with potential criminal liability. The IRS is in the process of making allowances for income derived or related to the sale of marijuana.

TAS RESPONSE: It is vital that the IRS engage with stakeholders going forward to ensure that taxpayer perspectives are incorporated into the VDP and the taxpayer experience is at the center of the program. The IRS’s commitment to a comprehensive review of the VDP which includes input from stakeholders is key to guaranteeing the program is viable and meets its intended goal of obtaining increased compliance. TAS supports the IRS narrowing the definition of income but also encourages the IRS to define and clarify other essential terms of the program so that taxpayers fully understand the terms of participation in the program.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing

IRS RESPONSE TO RECOMMENDATION: The current VDP penalty structure balances the need to encourage noncompliant taxpayers with criminal exposure to come forward by using criminal prosecution as a strong, credible deterrent to willful conduct, which is integral to sound tax administration. The 75 percent civil fraud penalty is an integral part of achieving this balance for taxpayers in VDP by reducing the six-year disclosure period to one year. For offshore disclosures, taxpayers are generally subject to one willful Foreign Bank Account Reporting penalty (if applicable). Additionally, examiner discretion will determine whether other international information return penalties apply based upon facts and circumstances of that case and whether the case can be resolved by agreement. Reviewing the current VDP penalty structure should only be considered when the proposed changes do not degrade the deterrence that the current structure provides.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is disappointing that the IRS is unwilling to review the structure and penalty requirements of the current VDP. As of August 31, 2024, the IRS had completed only 161 criminal VDP cases since the beginning of fiscal year 2019 when the 75% civil penalty requirement was incorporated. This fact underscores the reality that the structure and penalty framework of the VDP is not encouraging participation and working effectively. A comprehensive review would necessitate examination of all terms of the program, including a review of the current penalty structure. TAS encourages the IRS to include the current penalty structure in its review of the VDP.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: Criminal Investigation will remove the checkbox from Form 14457. It will be removed in the next form update.

Completion date: Fall 2026 (estimated)

CORRECTIVE ACTION: Criminal Investigation will remove the checkbox from Form 14457. It will be removed in the next form update.

TAS RESPONSE: TAS commends IRS CI for listening to taxpayer concerns regarding the willfulness checkbox on the Form 14457 – it’s a start in improving the program. The deletion of the checkbox in the next revision will help allay taxpayer and practitioner concerns regarding the legal effect of making an explicit admission of willfulness and will encourage greater participation in the VDP.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 9/30/2026

IRS RESPONSE TO RECOMMENDATION:The payment options available under the terms of the VDP are intentionally narrow. This is to ensure taxpayers receive the benefits of VDP (i.e., the IRS likely refraining from criminal prosecution, a limited disclosure period, and a set penalty framework) only if they fully comply with their tax, penalty, and interest obligations under the law. In addition to signing a closing agreement (and FBAR agreement, if applicable), the VDP requires taxpayers to either remit full payment for obligations that are owed or make arrangements via an acceptable installment agreement, which allows them to fully pay their liability over as many months as necessary. The IRS notes that offers in compromise (OIC) are premature in the context of VDP because OIC are only available for assessed taxes, and VDP taxpayers’ liabilities are not assessed until their cases are closed.

CORRECTIVE ACTION: N/A

TAS RESPONSE:The National Taxpayer Advocate is disappointed in the IRS’s unwillingness to bring these taxpayers into compliance. The IRS’s VDP payment policy serves to exclude taxpayers who want to come forward and resolve their tax noncompliance but are unable to pay in full. Without flexible payment options, many taxpayers may not be able to participate in the VDP. This limits the effectiveness of the program and does not lead to compliance. TAS recommends that as part of the IRS’s VDP program review it consider the effect of this policy and reevaluate its position based upon the findings and consideration of the information gathered.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: ​Extending appeals rights to VDP participants would contravene the purpose of the program and create significant administration challenges. Admission into VDP requires taxpayers to accept its terms, which includes agreeing to the assessment and collection of income tax liabilities (including interest and penalties). Because it is a voluntary program, the taxpayer must fully cooperate with the IRS throughout, usually concluding with signing a final position which is known as Form 906, Closing Agreement, for all years in the disclosure period. Such closing agreement is not reviewable by Appeals. Technical issues are developed by technical specialists, counsel, and management, working in concert, to determine the IRS’s final position. Safeguards are in place to ensure terms are consistently applied and any penalty deviation must be approved by designated counsel. These strict parameters give certainty and finality to the taxpayer, and to the IRS, which is conducive to sound tax administration. The VDP program would not operate effectively or efficiently if taxpayers were able to press for a better outcome of their case in Appeals after pursuing resolution through VDP.

Taxpayers who believe they can achieve a better result in Appeals than in VDP are entitled to challenge an examination adjustment in Appeals if they have not yet entered the VDP program. They are also equally entitled to withdraw from the VDP program if, at any point, they believe their best option is to present their issue to Appeals.

The applicable IRS stakeholders and Appeals remain committed to improving the taxpayer experience including through the VDP process so long as such efforts fall within the scope of the program’s defined parameters.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS disagrees with IRS not providing taxpayers the opportunity to challenge the IRS’s proposed assessments while participating in VDP. While TAS acknowledges the parameters of the VDP program, taxpayers still retain the right to pay no more than the correct amount of tax. TAS has been informed of several situations in which the IRS revenue agent asserts legal positions that the taxpayer believes are incorrect. Currently the taxpayer’s options are accepting an incorrect legal position or withdrawing from the program – a Hobson’s choice. The IRS response assumes that the examination function is correct. The reason for the Independent Office of Appeals is to provide an independent review of the IRS’s position as not all revenue agents are correct. Providing taxpayers the ability to have the issues reviewed by an Appeals Officer does not prevent the parties from entering into a Closing Agreement. Another option would be to permit the parties to participate in an Appeals Fast Track option which would allow an Appeals Officer to assess the merits of the parties’ position while the case is pending in Exam. Fast Track would allow the examination function to make the final decision in the case. This would provide some protections to the taxpayers when the revenue agent is asserting an incorrect position. Providing this option would be a start in protecting taxpayer rights within the VDP program. Outside of Appeals, the IRS could explore other avenues to resolve taxpayer disputes within the program, such as a managerial conference.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: Criminal Investigation will evaluate shifting the internal ownership of the VDP to focus on compliance and taxpayer support.

CORRECTIVE ACTION: Criminal Investigation will evaluate shifting the internal ownership of the VDP to focus on compliance and taxpayer support.

TAS RESPONSE: TAS supports the IRS’s willingness to evaluate shifting the internal ownership of the VDP from CI to the Tax Compliance Office after a taxpayer is accepted into the program. As most of the administration of the VDP is completed by Compliance, a shift of ownership would serve to streamline the program and help ensure that taxpayer compliance and support are the focus.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing

IRS RESPONSE TO RECOMMENDATION: The IRS already has a considerable number of programs and procedures that facilitate resolution of a taxpayer’s non-criminal compliance issues while encouraging voluntary disclosure and future compliance. While the IRS does not have a discrete program to address every emerging issue, the existing programs allow taxpayers to resolve any issue when the noncompliance does not rise to the level of criminal fraud.

Before establishing a new civil disobedience or settlement program, whether for a longstanding or emerging issue, such as digital assets, or other areas of noncompliance, the IRS would need to consider whether the scope of the issue and level of noncompliance merit the creation of a new program specific process. Additionally, the time and resources needed to establish and administer any such program can be substantial. Rather than creating new programs, the IRS would want to consider whether alternative approaches such as improved outreach and communications strategies could help taxpayers learn about the best paths to compliance.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS appreciates the IRS’s commitment to finding ways to resolve emerging noncompliance issues through alternative approaches and recognizes there are challenges to addressing these issues, including time and resource constraints. TAS supports the IRS’s focus on improved outreach and communication strategies as a first step in attempting to resolve areas of noncompliance but believes more can be done by way of civil voluntary disclosure programs.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: The IRS has commenced collecting data on tax, interest, and penalties collected related to VDP in May 2024.

CORRECTIVE ACTION: The IRS has commenced collecting data on tax, interest, and penalties collected related to VDP in May 2024.

TAS RESPONSE: The amount of money collected through the VDP is key data the IRS needs to evaluate the effectiveness of the program. The IRS’s commitment to collecting this data is a positive step to ensuring the program is viable and successful.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing

IRS RESPONSE TO RECOMMENDATION: Before signing a closing agreement, the IRS conducts a thorough review of the taxpayer’s filings to confirm that it has complied with all required reporting in the years immediately after the disclosure period. This review covers, among any other applicable filings, income tax returns, FBARs, international information returns, employment tax returns, and estate and gift tax returns. However, the IRS does not have the resources or administrative capacity to continue tracking and verifying compliance by taxpayers who have completed the VDP process. Even if the IRS did have such capacity, dedicating the kind of attention suggested by the recommendation to taxpayers who had completed the VDP program would likely deter at least some of those taxpayers from even coming into the VDP program if they knew they would be subject to continuous scrutiny. Such an approach might also be construed as targeting a specific class of taxpayer, since the IRS does not monitor other groups of examined taxpayers for subsequent compliance.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS acknowledges that there are administrative and resource constraints involved in tracking future compliance. However, some compliance systems are already in place in other areas, including the five-year compliance requirements after an offer in compromise is accepted. TAS encourages the IRS to consider implementing similar compliance monitoring to help make certain that the VDP is encouraging future compliance.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A