IRS Revises Voluntary Disclosure Preclearance Form
The IRS recently released a revised version of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, that includes an expanded reporting section and instructions for reporting virtual currency.
The form is used to make a preclearance request for the IRS to determine a taxpayer’s eligibility to use the voluntary disclosure practice, a group of procedures by which they may avoid criminal prosecution for willful violation of tax laws by full and timely disclosure to IRS Criminal Investigations.
Like the previous version of the form, the revised form includes a checkbox in Part I, line 2 for "Virtual Currency Issues." In addition to space for identifying financial accounts (line 12), the revised form includes a new "Schedule of virtual currency" (line 13). For each type of virtual currency, taxpayers must disclose its name, identifying number or other designation, date acquired, date disposed of, account holders and whether it was held domestically or offshore.
Taxpayers must also detail all domestic and foreign noncompliant virtual currency they owned, controlled or were the beneficial owner of - either directly or indirectly via an entity or other intermediary – throughout the disclosure period. The IRS defines a noncompliant virtual currency as an asset that should have been reported on a federal income tax return or other required federal information return but was not.
In addition, taxpayers must identify and explain their reasoning for the use of a mixer or tumbler in connection with virtual currency if they have used these services.
Part II, line 7c of the form requires taxpayers whose preclearance application in Part I has been approved to write a noncompliance narrative. The form’s instructions state that this may mean describing any exchange, host wallet or private wallet in which the virtual currency is held or how the virtual currency was obtained.
Other revisions include a penalty structure for employment tax and estate and gift issues and a checkbox for the inability to pay in full. Taxpayers may also now sign the form by photocopy, fax or scan of their signatures, and the form may now be faxed.
The IRS generally considers virtual currency to be a digital representation of value that functions as a unit of account, store of value or medium of exchange other than digital representations of the U.S. dollar or foreign currency. The IRS refers taxpayers to Frequently Asked Questions on Virtual Currency Transactions for more information on what constitutes virtual currency according to the IRS.