Attorney Fees in Foreign Tax Compliance Matters: Case Study Example

Attorney Fees in Foreign Tax Compliance Matters

How a “Simple” Offshore Disclosure Turns Complex & Costly

How a Simple Offshore Disclosure Turns Complex & Costly: By way of brief background, the streamlined disclosure procedures (stand-alone) were developed by the IRS in 2014. They are a less onerous way for certain non-willful taxpayers to get into compliance with the IRS for unreported foreign accounts, assets, investments, and income. With the IRS recently closing OVDP and ending DIIRSP, some attorneys have taken to falsely stating how the process works, what the fees are, and what the chance of audit is.

The following is an example of how a low upfront hourly fee retainer, coupled by false promises of 100% success rate and no chance of future audit — can negatively impact a taxpayer’s expectations and wallet and why attorney fees for foreign tax compliance matters should be flat-fee. 

Quick aside:

Experienced Offshore Disclosure Lawyers always charge flat-fee, never hourly.

Why?

Because these matters can drag-on for years, but you want to know what you are paying up-front, right?  You want to pay $500 per hour for your lawyer and $300 per hour for your accountant without knowing when the matter will end? Of course not.

Surprises are for birthdays and for your kids playing let’s hide Dad’s keys and watch him panic right before he leaves for a meeting —

Example: Dante and the Foreign Tax Compliance Dilemma

Dante is originally from India. He first moved to the UK for school and employment and then to Australia, before coming to the United States where he’s living as a permanent resident and getting ready to apply for naturalization (citizenship).

When Dante first came to the United States he received some incorrect advice about reporting his foreign accounts. In addition, it was before FATCA form 8938 was required by US taxpayers – and FBAR was not at the forefront of enforcement.

Dante recently learned that his foreign accounts, assets, investments, and income required to be reported.

What Assets does Dante Have?

Based on the different countries that Dante has lived in he has a smorgasbord of foreign money (Each common in their respective country). This includes:

• India: EPF, PPF, FD, Bank Account and Mutual Funds
• Australia: Commsec and Superannuation
• UK: Pension, ISA and Investment account

The total value of the portfolio is around $900,000, and generates a couple thousands dollars of distributed income each year. But there is significant accrued income in the mutual funds, ISA and investment account.

Flat-Fee vs Hourly

Dante speaks with an hourly attorney who quotes Dante a small upfront fee and tells him that his CPA would take care of the tax portion and the CPA fees should be minimal ($2,000-$4,000) and the chance of audit is low.

(Unfortunately,) Dante takes the bait.

Outside CPA Has a Separate Fee

The CPA fees are not bundled into the attorney’s package. The CPA charges hourly and after reviewing the case and speaking with Dante, he quotes Dante $25,000 – $35,000.

What!?

Dante is perplexed.

He tells the attorney who speaks to the CPA and they realize that the attorney vastly under quoted the fee because the attorney did not realize the following:

• Mutual Funds were redeemed over a staggered 3-year period PFIC.
• Superannuation is SMSF and 3520/3520-A may be required.
• ISA is not retirement in the US and the ISA was an “Investment ISA with PFIC complications”
• Dante has 19% share in family business in India.

The attorney then says he needs to review the file in more detail and sends Dante a replenish request for $7,500.

Dante is understandably upset, so he tells the attorney he’s not interested in moving forward.

CPA And Kovel Jeopardy

One major problem is that Dante told the outside CPA information that is not covered by the attorney client privilege and would not fall under Kovel (even if Kovel was to apply). That means all the confidential information that Dante told the CPA is now discoverable by the IRS.

Dante goes back to the attorney and asks why he didn’t appear with Dante at the CPA.

The attorney explains that for the attorney to appear at the communications between him and the CPA, would be an additional fee and to replenish the retainer it should actually be $15,000 and not $7,500.

He also charges Dante for this communication they are having about fees —

So now in order for Dante to ask a few questions, he is paying a combined $800 an hour between the attorney and the CPA.

Dante is staring down the barrel of a $60,000+ fee for a Streamlined Submission, whereas an experienced tax specialist charging an industry standard flat-fee would be a fraction of the price.

This is why Attorney Fees for foreign tax compliance matters should always be flat-fee.

Beware of Artificially Low Fees

A flat fee model for streamlined and other offshore disclosure cases is the preferred method of experienced practitioners. It protects the client from unforeseen fees that always arise during representation.  Of course, if It turns out the client was willful and not qualifying for the non willful submission, the VDP submission is much more complicated than a non-willful disclosure and the original fee may vary – which is then renegotiated with the specialist firm if the parties both agree to move forward.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.