A Proven Strategy to Cutoff IRS Civil Tax Fraud Investigations (Updated)

A Proven Strategy to Cutoff IRS Civil Tax Fraud Investigations (Updated) - Golding & Golding

A Proven Strategy to Cutoff IRS Civil Tax Fraud Investigations (Updated) – Golding & Golding

Under most circumstances, the IRS has three (3) years, or possibly six (6) years to audit you. Depending on which jurisdiction you are in, and when the IRS alleges the fraud “should have” been discovered, the clock will begin ticking (and expire) at some point.

One major exception is Civil Tax Fraud

Civil Tax Fraud Has No Statute of Limitations

It is important to note that the IRS typically does not run around and start auditing people for tax fraud violations that occurred 25 years ago. With that said, most people do not want to spend their days (especially our retirement age clients) worrying if they are going to get the wrong guy or gal on the wrong day – looking to make an example out of them.

Voluntary Disclosure

With Voluntary Disclosure, the IRS almost always cuts off any criminal and civil liability beyond the submission. And, to date we have never had a single client prosecuted for fraud/evasion.

Updated Offshore & Domestic Voluntary Disclosure Rules

The IRS has announced a new set of rules involving OVDP and the IRS Voluntary Disclosure practices. 

While the general practice of IRS OVDP and Offshore/Voluntary Disclosure is similar to what it was before, there have been some significant changes (some better, some worse).

The IRS will be providing future updates, modifications, and revisions – but for now here are the key takeaways from the memorandum the IRS issued on 11/29 (memo dated 11/20).

Combined Offshore & Domestic Voluntary Disclosure

Old OVDP

Previously, OVDP (Offshore Voluntary Disclosure Program) required that applicants had at least some offshore (aka foreign or international) income in order to apply for the program.

If a person had offshore income, they could also have domestic income as well – but could not apply to OVDP unless they had some offshore income. Otherwise, the IRM 9.5.11.9 disclosure rules would apply.

Updated Voluntary Disclosure Procedures

Now. with the updated voluntary disclosure procedures, IRM 9.5.11.9 will be the only disclosure program for willful applicants (or those not applying for reasonable cause/delinquency proceedings)

Preclearance Letter

The IRS is in the process of preparing a new “preclearance letter,” which will be an updated form 14457 (which was a form used in OVDP). It is unclear at this time whether the Preclearance will be required or voluntary.

“To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457.

IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility. Taxpayers must request preclearance from CI via fax or mail.”

Processing the Offshore Disclosure

This aspect of the disclosure is more for aligning the civil and criminal factions of the IRS in order to coordinate effective case processing, than something you really care about. Just know, the IRS is “doing their best” to make case coordination as easy as possible.

Time Period of Disclosure

Old OVDP

Under OVDP, the period of disclosure was 8 years.

Updated Voluntary Disclosure Procedures

Typically, under the new procedures, the disclosures will be for 6 years (which is less than the 8 years required under OVDP). BUT, if a person wants to submit for prior years beyond the 6 years, that may be a possibility.

“With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period.

Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).”

Civil Resolution Framework

The penalty is all you really care about, right?

The penalty situation may be better, or worse, depending on the amount of your tax liability and FBAR penalties vs. your non-filing of informational returns.

Penalties on Taxes Due

Old OVDP

With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. For example: You owed $25,000 in tax for Year 1, you paid a $5,000 penalty (plus estimated interest) in addition to the taxes due. Then, for Year 2, if you owed $50,000 in tax, then you had to pay another $10,000 penalty (plus estimated interest), and so on for all eight years.

Updated Voluntary Disclosure Procedures

Now, Taxpayer will pay a 75% penalty on the amount of tax due (for the highest year only).  If the taxpayer never filed taxes, a similar framework applies IRC 6651(f).

“Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty. 

In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”

*Taxpayer can try to argue for a reduced penalty under IRC 6662, but the IRS has stated that it is unlikely the reduced penalty would be granted.

Penalties on FBAR

Old OVDP

The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance. For example, if you had $2,000,000 in unreported balances for the highest year in the compliance period (no bad banks involved), your penalty would be $550,000.

Updated Voluntary Disclosure Procedures

Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.

If there are multiple years of unreported FBARs, then the procedures do generally cap the penalty at 50% for all unreported accounts within the compliance period, BUT the IRS is not limited to that amount.

After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.

Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.

Failure to File Information Returns

Old OVDP

Under prior OVDP rules, informational returns did not receive preferential treatment.

Updated Voluntary Disclosure Procedures

 This is a pleasant surprise. The IRS will NOT automatically issue penalties against applicants who failed to file informational returns.

Informational returns typically include:

  • Form 5471 (Corporation)
  • Form 5472 (Corporation)
  • Form 8865 (Partnership)
  • Form 3520-A (Trust)

Rather, the IRS Agent will look at the totality of the circumstances. In other words, if no FBAR penalties were issued since there were no foreign accounts per se, then some penalties may be warranted. Conversely, if significant FBAR penalties were issued, then the applicant may get a break on informational return penalties.

“Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.”

Other Penalties

Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.

Appeal

Taxpayers retain the right to request an appeal with the Office of Appeals.

We Specialize in Safely IRS Voluntary Disclosure 

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

If You Were Non-Willful….

You may qualify for one of the other approved programs, which generally have a lower penalty. A summary is provided below:

Contact Us Today; Let us Help You.