Voluntary Disclosure Attorney Considerations for Clients Trying to Avoid IRS Penalties & Prosecution
To pass assets on to the next generation instead of passing on a basket full of legal problems, one needs to become tax compliant, and that involves certain considerations before voluntary disclosure should be attempted without an attorney.
First, in a criminal IRS matter, there is no client-accountant privilege. A CPA is required to disclose everything he or she learns from the client. This behooves a taxpayer who is considering a voluntary disclosure to hire an attorney who may then retain an accountant to advise the taxpayer and work with the taxpayer in preparing the tax returns. The attorney-client privilege allowed to a taxpayer and his or her attorney will apply to the accountant hired by the attorney.
In the hiring of an accountant, the attorney should not attempt to convert the taxpayer's regular accountant into a Kovel accountant. When the same person has served in both capacities, it can be difficult for the accountant to distinguish what he or she learned previously from the taxpayer as opposed to what he or she learned while in the employ of the taxpayer's attorney.
Second, all dealings with the IRS by the taxpayer should be done by the taxpayer's attorney. That attorney must advise the client of the client's responsibility to comply by all tax rules when completing each year's tax returns, regardless of whether or not the client has made a voluntary disclosure. Any suggestion by the attorney to provide false information on upcoming tax returns can subject the attorney to criminal liability and disbarment for aiding or assisting the taxpayer to file a false return.
Third, any amended returns must be completed in such a manner as to make them bulletproof and able to withstand the toughest possible IRS scrutiny. False statements in the amended returns can lead not only to increased penalties but also prosecution for further tax evasion charges and the elimination of any presumed reliance that the IRS won't recommend criminal prosecution for the original failures to report income and foreign bank accounts by the taxpayer.
Fourth, a voluntary disclosure letter to the IRS along with amended returns should not contain any admissions of wrongdoing or explanations why the taxpayer has been evading the payment of taxes. The Internal Revenue Manual section covering voluntary disclosure communications should instead be followed. The client or preferably the client's attorney should state he or she wishes to make a voluntary disclosure, provide identifying information, list the types of returns involved and the tax periods, briefly describe the omitted income, the tax scheme used by the taxpayer and a dollar estimate of the taxes owed. The letter should state that the taxpayer is willing to completely cooperate with the IRS in a determination of what the taxpayer's tax liability is. If possible, the amended tax returns should also be included but this is not required. Finally, the letter should state why the taxpayer is making the disclosure. This is not the time to be flippant. Rather, a statement that the taxpayer wishes to be fully tax compliant and pay all of his tax obligations is the better course.
Once a taxpayer's attorney sends the IRS a voluntary disclosure letter, the letter is assigned to a Criminal Investigation special agent. After the special agent determines if the taxpayer is disqualified for any reason, such as the fact that there is an ongoing investigation of the taxpayer, and once the agent obtains the IRS information on the taxpayer, in most cases the agent will send the taxpayer's attorney a letter indicating whether or not the taxpayer is eligible to make a voluntary disclosure. However, with the voluntary disclosure program now expired, this may no longer always be the case as it was while the program was in effect.
What followed while the program was in effect, was for the IRS to then make a request for information and documents, utilizing the Information Document Request form (IDR). This form requests copies of the original tax returns, amended returns, bank records, FBARs and, to the chagrin of many taxpayers, the names of anyone the taxpayer received advice from. The larger the amounts in foreign financial accounts, the greater the amount of documentation required.
Today, with the voluntary disclosure program expired, it is unclear whether taxpayers making voluntary disclosures will more often or less often be asked to face an examination, as they were if they opted out of the voluntary disclosure program if they wished to appeal the determinations made by the IRS. An examination can, of course, present some risk to the taxpayer.
The statute of limitations on a tax deficiency and the substantial understatement penalty is three years to six years, depending upon whether or not there was more than a 25 percent omission of income. As stated herein, however, there is no civil statute of limitations for fraud, and the difference in the penalty percentages can result in a difference in the hundreds of thousands of dollars.
For those interested, the IRS has in the past had, and may continue to operate a Voluntary Disclosure Hotline to answer questions about foreign account disclosures. The hotline number is (215) 516-4777 which, at the time it was set up, went to the IRS's Philadelphia Offshore Identification Unit (POIU). If that number is no longer in service when you are reading this article, undoubtedly calling the IRS and asking for the number of the Philadelphia Offshore Identification Unit should produce results. The IRS also has local phone numbers and Criminal Investigation Offices in all 50 states and IRS offices in numerous foreign countries at which taxpayers can contact the IRS about voluntary disclosure. It is recommended, however, that taxpayers should have an attorney act on their behalf to speak to the IRS when discussing specifics.
It is estimated that every year, the government loses billions in tax revenues from unreported income from offshore accounts. Taxpayers with foreign offshore accounts can bet their bottom dollar the IRS will continue to try to identify holders of these accounts, no matter which administration is in office. With the government's ever increasing debt, and with billions at stake, the efforts by the IRS will only become that much more important to reducing the debt. While such taxpayers may lose a sizeable portion if not all of their foreign accounts, by bringing themselves into compliance, they may at least avoid criminal prosecution.
In compliance with IRS requirements, we must advise you that any U.S. voluntary disclosure or federal tax advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.