Walking The Sawdust Trail

Those who responded to the altar call after one of Billy Sunday’s sermons were said to walk the sawdust trail, because the temporary venues he preached in back in the 1910s and 1920s often had sawdust on the floor as a deodorizer.

Before he became a travelling evangelist, and possibly even before he became a Christian, depending on what source you believe, Mr. Sunday played eight seasons of Major League Baseball between 1883 and 1890. During that time, he roamed the outfield for the Chicago White Stockings, Pittsburgh Alleghenys and Philadelphia Phillies. Mr. Sunday left the game with a lifetime .248 batting average, which was pretty good for the pre-modern era. He was also a speedy player who finished in the top ten in stolen bases three times and led the league in outfield putouts in 1888.

His 1885 White Stockings won the National League pennant and went on to face the St. Louis Browns in the World Series – or World’s Championship, as it was then known. That series ended in a disputed 3-3-1 tie after St. Louis manager Charles Comiskey pulled his team off the field in Game Two in protest of a series of calls from umpire Dave Sullivan. The final straw came with two out in the top half of the sixth inning, when Mr. Sunday scored the go-ahead run from third base on a ground ball hit by future Hall of Famer King Kelley, who appeared to be out at first.

From Then to Now

100 years ago, some folks walked the sawdust trail to get right with Jesus. Today, some folks walk the sawdust trail to get right with the IRS through voluntary disclosure, a subset of which is the Offshore Voluntary Disclosure Program. Some taxpayers intentionally play hide-the-ball and brazenly file tax returns which they know are false, while others are honestly mistaken about the tax liability of non-U.S. assets, such as a Swiss bank account.

The majority of “tax cheats” fall somewhere in between these extremes. John Taxpayer may know, deep within his heart of hearts, that his return is incomplete or inaccurate, but he files it anyway and hopes for the best. As time passes, and he envisions IRS auditors examining his paperwork with an electron microscope, he begins to feel guilty and remorseful. Eventually, he reaches a tipping point when his negative emotions outweigh the extra money in his pocket. This time of year, nary a day goes by that I don’t get a call or email from a “penitent” taxpayer who has failed to report their overseas assets (or underreported the value of those assets), either knowingly or negligently, and who are looking for advice.

Strictly speaking, the crime of tax evasion is complete when you click “send” or slip the return in the mailbox. An amended return filed before the deadline can effectively wipe away the taxpayer’s criminal liability, but in most cases, the filing deadline has already passed, and there is no way to turn back the clock.

Enter OVDP. OVDP offers a second chance, by virtually immunizing a taxpayer from criminal prosecution, or perhaps better put, by “minimizing” a taxpayer’s chances of being criminally prosecuted. When a taxpayer truthfully, timely, and completely complies with all provisions of voluntary disclosure, the IRS will not recommend criminal prosecution to the Department of Justice.

Voluntary disclosure is not something that the IRS or DOJ offers out of the “goodness” of their hearts or because they want to cut noncompliant taxpayers a “break.” Instead, the nation's coffers are in dire need of an infusion of cash and the IRS, as the nation's tax collection agency, has the responsibility of replenishing it. While prosecuting those who are willfully noncompliant might seem like the most expedient way of remedying this conundrum, it is cheaper for the government if taxpayers come forward on their own than it is for them to hunt you down like a fugitive from justice and devote what are otherwise “scarce resources” to investigating and prosecuting the case.

Hanging in the Balance

As with all tax policies, voluntary disclosure involves a balancing of interests. On the one hand, there is a significant revenue loss. Those taxpayers contributing to the gap – whether non-filers or evaders – need to be nudged to come back into the system or at least become more forthcoming. This militates in favor of the policy. In one sense, the policy gives the government the best of both worlds – it can continue to litigate as many criminal cases as its' heart desires while encouraging taxpayers to “get right” with Uncle Sam. See Tax Crimes, Jack A. Townsend et al., Matthew Bender & Company, Inc., 2008.

If the government had no policy or if the policy had so many restrictions that it would be easier for the taxpayer to climb Mount Rushmore in sneakers than to qualify, the government would lose revenue because taxpayers would have very little if any incentive to come out of the shadows and disclose. See Tax Crimes, Jack A. Townsend et al., Matthew Bender & Company, Inc., 2008. Thus, a carefully structured and implemented voluntary disclosure policy is a “win-win” for both wayward taxpayers and the government. Id.

Not So Fast

As you probably guessed, there are a few important caveats. Although the law on this point is a bit unsettled, it looks much better if the taxpayer doesn’t wait until the final stanza of “Just As I Am” to walk the sawdust trail. The essence of voluntary disclosure is that a taxpayer will not be prosecuted if he voluntarily discloses his misconduct before the IRS or DOJ is in "hot pursuit." See Tax Crimes, Jack A. Townsend et al., Matthew Bender & Company, Inc., 2008.

The metaphor that I like to use here is the hunting of a fox by a thirsty bloodhound. If the bloodhound has already detected the scent of the fox and is hot on his trail, then the fox is “squat.” Indeed, no amount of pleading with the bloodhound is going to save the fox from the sharp and carnivorous teeth of the salivating bloodhound.

Moreover, the OVDP is not a one-night stand. In addition to filing accurate paperwork, the taxpayer must agree to cooperate on an ongoing basis. If the IRS has more questions, the taxpayer must provide answers, or the deal is off. This element is often overlooked initially only to become a matter of grave concern later on, because many taxpayers may have more to hide than a few dollars in the Azores.

How Does OVDP Affect the Case?

As unsettling as this might sound, a noncompliant taxpayer who tries to "get right" with the IRS may still become the target of a criminal prosecution. There are a myriad of reasons why from the Service wanting to make an example out of the taxpayer in order to discourage other would-be “tax cheats” from engaging in similar conduct to a taxpayer outright refusing to give ongoing cooperation. Here is where it is crucial to make an important distinction. While OVDP significantly “minimizes” a taxpayer’s chances of being criminally prosecuted, it does not provide an ironclad guarantee of immunity from prosecution.

What becomes of a taxpayer who the government decides to prosecute in the wake of having made a voluntary disclosure? Let’s assume that the taxpayer is charged with tax evasion for allegedly filing fraudulent returns. To the extent that the taxpayer-defendant’s voluntary disclosure is deemed “admissible” at trial – and it may not be if the judge rules that it is not relevant in a legal sense – the voluntary disclosure is open-and-shut proof that the original return was fraudulent. However, that is only part of the case.

The IRS must still convince a jury that the tax evasion was willful. Willfulness is the cornerstone of any criminal tax matter. See Tax Crimes, Jack A. Townsend et al., Matthew Bender & Company, Inc., 2008. And it is a battleground where the odds are generally stacked against the taxpayer. Id. When willfulness exists, it is like the “Helen of Troy,” in the sense that the government will mount an offensive as fierce as the “launching of one thousand ships.”

While voluntary disclosure might help the government establish that the original return was fraudulent, it may actually hurt the government’s case on the issue of willfulness. What I mean to say is that it might backfire. How so? The fact that the taxpayer “fessed up” before the government came “knocking” may plant a seed of reasonable doubt in the minds of sympathetic jurors, causing them to acquit, rather than convict. Also, voluntary disclosure should not be overlooked as another arrow in the quiver of the criminal defense attorney when it comes to pretrial negotiations with prosecutors, who probably have fatter fish to fry elsewhere.