Avoidable Mistakes Taxpayers Make in Disclosing Foreign Accounts - Golding & Golding

Avoidable Mistakes Taxpayers Make in Disclosing Foreign Accounts – Golding & Golding

Avoidable Mistakes Taxpayers Make When Disclosing Foreign Accounts

IRS Offshore and Voluntary disclosure can be a confusing area of law.  When taxpayers make mistakes, it is typically because they relied on inexperienced counsel.

Technically the general catchall term is called IRS Voluntary Disclosure (Practice).

And, while there is a traditional IRS Voluntary Disclosure that was established 50 years ago and identified in the Internal Revenue Manual (IRM), it is not the same as the traditional OVDP/OVDI (which ended on September 28, 2018).

There are also Streamlined Voluntary Disclosures, Reasonable Cause Submissions, Force Disclosures, Delinquency Filings, etc.

IRS Disclosure is All We Do (Golding & Golding)

At Golding & Golding, we limit our entire tax law practice to IRS Disclosure matters. 

While oftentimes a voluntary disclosure is primarily for Foreign/Offshore/International disclosures, many times it will also include domestic disclosures as well.

With OVDP over, and rumblings that the streamlined program might be next to follow, it is important to understand the process, and take precaution when submitting a voluntary disclosure to the IRS.

Here are the five (5) most common mistakes to be aware of:

Voluntary Disclosure is Not a Criminal Admission

By entering into the voluntary disclosure program, you are not entering a plea of guilty. It is not an admission of criminality. We have had clients contact us, telling us they were pushed into Streamlined or Reasonable Cause (even when they were willful), because if they entered the traditional IRS Voluntary Disclosure, or OVDP, it was an admission of guilt – which is absolutely false.

Rather, you are simply acknowledging that for one reason or another, you are out-of-compliance and are not submitting to either the streamlined program (non-willful) or reasonable cause (negligence).

In other words, you are representing to the IRS that there is a problem, you are aware of the problem — and you want to fix the problem.

Submitting a “Placeholder” Submission

This is a common misconception. A client will contact us to let us know they had a prior attorney (or worse, a CPA with no Attorney-Client Privilege), who is in the process of working on their case.  Before submitting the full disclosure, the representative will reach out to the IRS to let them know that they are working on getting into compliance.

While the thought is honorable, the strategy is terrible. Why? Because all you are doing is letting the IRS know that you are out of compliance.

Just because you alerted them that you want to get into compliance does not mean you will get into compliance. Why would the IRS believe you…since you are already out of compliance. All you are doing is making their job easier for them.

In other words, the IRS is not going to take your word for it, and all you are doing is tipping them off that you are out of compliance.

Inappropriately Relying on a KOVEL Letter

A Kovel Letter is a very limited extension of the Attorney-Client privilege to an accountant in the specific situation in which an Attorney/Client requires the assistance of an account in order for the Attorney to provide legal advice. It is not a carte blanche extension of the attorney-client privilege.  

Moreover, a Kovel letter is not statutory law.

Unfortunately, many newer Voluntary Disclosure lawyers (less than 15 years representing their own clients as an attorney) think they can just issue a Kovel Letter/Agreement, and all the communications between the accountant and client are covered.

They are not, and it puts the client as serious risk!

There is a reason why the majority of experienced voluntary disclosure lawyers are also Enrolled Agents or CPAs, have a Masters degree in Tax Taw (LL.M.), and preferably a Board Certified Tax Law Specialist.

The reason is because there is no attorney-client privilege directly with a CPA, and to avoid unnecessary privilege issues, the Attorney/EA or Attorney/CPA handles the entire submission (with support staff).

Streamlined Submission Experience is Not the Same

Recently, we have been referred cases from clients who first spoke with inexperienced counsel who try to “puff-up” up their experience by making false representations about having 100% success rate…or other false statements.

In reality, under most situations, streamlined program clients will have more than $5,000 of unreported income each year. Therefore, under the updated rules, the IRS generally gets an automatic six (6) years to audit or examine individuals for each year – instead of three (3).

This means that since the modified/newly updated streamline program only started in mid-2014, even with the first batch of cases, the IRS would still have six years to audit, which would mean they have until at least 2020 to audit the return.

Streamlined or Reasonable Cause When a Person is Willful

It a common misconception that even if a person was willful, they can submit to Streamlined or Reasonable Cause if the foreign balances are low, income was minimal, or they were in the U.S. for only a few years.

This is terrible advice that can get a client into very deep trouble with the IRS, and the Attorney hit with an ethical bar violation or worse.

*To learn more about the serious risk you (and the attorney) are taking, click here.

Use Experienced Counsel

If an attorney says that they focus on offshore disclosure for voluntary compliance and they have 5 other websites, practicing in 5-10 different areas of tax law, then they do not specialize in voluntary disclosure.

Anybody can buy web domain names that match various different types of law – that does not make them a specialist; it is just an inexpensive form of advertising.

There is no knowing whether the voluntary disclosure you submitted will be audited. That is why it is crucial your voluntary disclosure attorney has litigation/trial experience.

Mr. Golding has represented numerous clients as lead counsel in complex litigation matters for high-dollar cases and clients facing jail or prison. He has helped numerous clients avoid indictments and prosecution.

*Only 1 % of attorneys in the country are Board Certified Tax Law Specialists.

**Click here to learn about false marketing claims and scams to be careful of.

Most experienced IRS Voluntary/Offshore Disclosure Lawyers will have:

  • Around 20 years experience representing their own clients as Lawyers
  • Completed a Master’s Degree in Tax (LL.M.)
  • Litigation and Eggshell/Reverse Eggshell Audit Experience as an Attorney for their own clients
  • Achieved either the Enrolled Agent Credential (EA) or are a licensed CPA
  • Preferably a Board Certified Tax Law Specialist (Less than 1% Nationwide)

We Specialize in Safely Disclosing Money to the IRS

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  holds 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.)

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

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

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.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.