The Internal Revenue Service is set to end Sept. 23 its voluntary disclosure program that allows U.S. taxpayers to avoid criminal prosecution if they pay taxes, interest and penalties for the past six years, in addition to a penalty equal to 20 percent of the highest account balance. Although the cost of voluntary disclosure is significant, it is much less than the costs of being pursued, either civilly or criminally, by the U.S. tax authorities.

The voluntary disclosure program was put in place after it was revealed that thousands of wealthy Americans were illegally hiding money in Swiss bank accounts. The activity came to light when a former employee of the Lichtenstein bank, LGT, provided data to the German government in 2008 on foreign accountholders using LGT to evade taxes. Later that summer a former employee of the Swiss bank, UBS, also admitted that UBS was assisting many wealthy Americans in evading taxes by hiding money offshore. Names were released and again the U.S. government was in hot pursuit of tax evaders. The UBS scandal gave rise to a lawsuit where UBS admitted to assisting in tax evasion, paid the U.S. government a $780 million fine, and ultimately agreed to turn over details on U.S. citizens with Swiss accounts at UBS.

To date, the IRS has witnessed an overwhelming response to its voluntary disclosure program. Stephen Ziobrowski, a tax partner in the Boston office of Day Pitney LLP, says: "the voluntary disclosure program has turned into a convenient revenue generator for the IRS. The IRS is able to collect significant past due taxes, interest and penalties without utilizing the resources that would be necessary to pursue these taxpayers on an individual basis." Mr. Ziobrowski added that "many clients come to us, unable to sleep at night, due to their fear of being caught by the IRS. Although the costs of voluntary disclosure are significant, clients often consider it a good investment to regain their peace of mind and ensure that their children or grandchildren do not someday inherit their tax problems."

Once the voluntary program ends there is no indication as to whether the IRS will extend the program beyond the current deadline. Daniel L. Gottfried, a tax attorney in the Hartford office of Day Pitney LLP, says, "the only way to resolve these tax compliance problems with a high degree of certainty is to enroll in the voluntary disclosure program, and taxpayers have a limited time to get into the program before the doors close. Affected taxpayers must consult their attorneys immediately in order to meet the Sept. 23 deadline."