Understanding the Tax Division’s Policy on Voluntary Self-Disclosures for Companies

Last week, the Department of Justice updated their relatively new voluntary self-disclosure policy, which establishes standards for voluntary self-disclosure in corporate criminal enforcement actions. This policy indicates that when a corporation voluntarily discloses criminal conduct by one of their employees or agents, they are likely to receive certain benefits, as long as the corporation fully cooperates with the investigation and makes appropriate and timely remediation for the criminal conduct. The intention of these benefits is to incentivize early disclosure of criminal conduct while encouraging companies to self-monitor and cooperate with government agencies.

What are the Benefits of Voluntary Self-Disclosure?

Provided there are no aggravating factors, The Tax Division states that it will not seek a guilty plea for the misconduct as long as the corporation meets the necessary criteria throughout the entire process:

• Voluntary self-discloses the misconduct in accordance with the policy requirements, and
• The corporation fully cooperates with government agencies and officials, and
• The criminal misconduct is appropriately remediated in a timely manner

Aggravating factors that may eliminate the voluntary self-disclosure benefits include:

• Executive management involvement in the misconduct
• Long-standing or pervasive criminal misconduct
• Prior civil findings of misconduct by the IRS, such as unpaid taxes or civil penalties, that are similar to the new misconduct
• Criminal recidivism

Aggravating factors do not necessarily indicate the pursuit of a guilty plea; the Tax Division has indicated that it will consider all relevant facts and circumstances as they move toward a solution.

If a criminal penalty is imposed, the Tax Division will not impose a penalty that is more than 50% of the low end of the U.S. sentencing guidelines. Additionally, provided that the company can demonstrate that it has implemented and tested an effective compliance program, the Tax Division will not impose independent compliance monitoring. Regardless of the circumstances, the Tax Division will generally require all payments of restitution to be made by the corporation.

The objective of these benefits for companies who fulfill the guidelines is to standardize voluntary self-disclosure policies and incentivize corporations to voluntarily disclose misconduct in a timely fashion. Corporations who choose not to self-disclose criminal misconduct that is discovered later through investigation, audit, or law enforcement actions are likely to face more stringent penalties.

What are the Requirements for Self-Disclosure?

In order to obtain the benefits of voluntary self-disclosure, corporations must meet all criteria:

Voluntarily self-discloses: If there was an obligation to disclose the information, such as under the terms of a contract, the disclosure will not be considered voluntary and the benefits will not be obtained.

Timing: The self-disclosure must be made “prior to an imminent threat of disclosure or government investigation” according to U.S. Sentencing Guidelines (“U.S.S.G.”) § 8C2.5(g)(1) and within a “reasonably prompt time” of the corporation becoming aware of the criminal misconduct. The company bears the burden of demonstrating their timeliness.

Substance: All relevant facts and information that are known at the time must be disclosed. For their own protection, companies should clearly indicate that the disclosure is based upon preliminary investigation.

Document preservation: Companies must collect, preserve, and provide all relevant documentation related to the criminal misconduct.

Cooperation: The corporation must fully cooperate with the investigation and provide the appropriate remediation in a timely manner.

Consent: The company must provide written consent with their voluntary disclosure, giving the Tax Division authorization to utilize the provided information in consultation with the IRS.

Method: Voluntary self-disclosure must be submitted directly to the Tax Division.

To qualify for self-disclosure benefits, the company must fully cooperate with all investigations and disclose all non-privileged facts as they become aware of them. This includes both the identification of all individuals who were involved in the misconduct and sources for all facts that are presented. The Tax Division will carefully consider whether a company has taken adequate steps to investigate the facts of the situation through independent investigation. Self-disclosure must be proactive, not a reaction.

Timely and appropriate remediation must be observed by the corporation in order to qualify for voluntary self-disclosure benefits. The company must:

• Demonstrate that they have thoroughly analyzed the causes of the misconduct
• Demonstrate that they have remediated the root causes
• Effectively implement and test compliance and ethics programs within the company
• Repay any necessary restitution and/or forfeit the proceeds of the criminal misconduct
• Appropriately discipline employees who were responsible for the criminal actions, whether through direct action or oversight, including supervising authorities
• Retain all business records and prohibit inappropriate deletion or destruction of records
• Implement appropriate control of personal communications within the company

The updated policy from the Tax Division is intended to benefit corporations who voluntarily self-disclosure criminal misconduct as soon as it is discovered within their company. Companies that choose to hide criminal activity or refuse to disclose in a timely fashion will suffer increased penalties upon discovery.

Obtain Trusted Legal Advice for Corporate Tax Controversies

If your company is facing an audit, allegations of criminal misconduct, or another corporate tax controversy, you need immediate guidance from Arizona’s trusted tax attorneys, Silver Law, PLC. With over 100 years of collective experience in tax law, previous employment by the IRS, and extensive experience handling all types of tax disputes, our attorneys are ready to provide the expert advice and representation you need to successfully navigate your tax challenges. Contact us today to schedule your confidential consultation and learn more about how we can protect your company.

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