Now let’s take a look at how this “re-entry” problem occurs, Although the specifics of what might start someone thinking about making a voluntary disclosure are many, classically there are three main situations. The first involves a person who sees himself as being potentially implicated in an I.R.S. investigation of someone else’s tax affairs. For example, a tax investigation of a restaurateur suspected of squirreling away large amounts of unreported cash could point to a dentist who received (and didn’t report) some of that cash in return for fixing the teeth of the restaurateur’s child. Once the dentist learns that the restaurateur is being inves­tigated for possible tax violations, it will surely occur to the dentist that perhaps he should make a voluntary disclosure.

The second classic situation is when an individual gets pangs of conscience, really believing (for whatever reason) that he has done the wrong thing in not filing, not reporting or underreporting income, in taking excessive deductions, or in otherwise filing a false tax return. For example, a genuine religious conversion may cause an individual to reassess his entire past conduct, including certain shortcuts that may have been taken with the I.R.S. Believe it or not, this phenomenon is not uncommon.
Perhaps the most common example is the individual who simply can no longer live with the worry of what can happen if he’s caught. Many people who have cut a tax corner live with the relentless fear that they may be found out and have to pay a very heavy price. These, too, are the kind of people who wonder whether they should make a voluntary disclosure. Until the early 1950s, the Internal Revenue Service had a policy that it would not prosecute anyone making a voluntary disclosure of a tax crime.

If, before an investigation had started, an errant taxpayer voluntarily disclosed that he had committed a tax crime, and then corrected the problem, no prosecution would be recommended by the I.R.S. (Needless to say, interest and penalties would be assessed).