Delinquent Tax Returns (2018) – IRS Procedures For Filing past Returns
- 1 Delinquent Tax Return
- 2 Do You Have Taxable Income?
- 3 When does Not-Filing Returns Become Criminal
- 4 Have You Met the Threshold for Filing a Tax Return?
- 5 What Strategy Do You Choose?
- 6 Is Your Tax Situation More Complicated
- 7 4 Types of IRS Offshore Voluntary Disclosure Programs
- 8 IRS Voluntary Disclosure of Offshore Accounts
- 9 When Do I Need to Use Voluntary Disclosure?
- 10 Common Un-filed IRS International Tax Forms
- 11 Golding & Golding – Offshore Disclosure
- 12 The Devil is in the Details…
- 13 What if You Never Report the Money?
- 14 Getting into Compliance
- 15 5 IRS Methods for Offshore Compliance
- 16 1. OVDP
- 17 2. Streamlined Domestic Offshore Disclosure
- 18 3. Streamlined Foreign Offshore Disclosure
- 20 4. Reasonable Cause
- 21 Domestic Voluntary Disclosure
- 22 When is Criminal Prosecution Recommended?
- 23 How does Domestic Disclosure Help
- 24 What does this Mean?
- 25 How to Make a Domestic Voluntary disclosure?
- 26 Tax Fraud, Tax Evasion and Other Tax Crimes
- 27 Case Study: Brian the Entrepreneur
- 28 Why is this so Common for Small Business Owners?
- 29 It is Human Nature…
- 30 Apologizing to the IRS is Never Enough
- 31 Domestic Disclosure – The Basics
- 32 The Dilemma – Domestic Disclosure or Not?
Delinquent Tax Returns (2018) – IRS Procedures For Filing past Returns
There are many reasons why a person may get behind on their taxes, and usually, what may start out as one year of non-compliance may turn into several years out of IRS tax compliance.
Common issues include:
- Unfiled U.S. Tax Return(s)
- Past-Due Taxes
- Penalties for Not Filing Taxes
- IRS Tax Amnnesty
- Filing Bax Taxes
Delinquent Tax Return
As a result, typically at some point, whether it’s because of an intrinsic need to be in compliance (uncommon), or the person is looking to buy a house or some other life-changing event that requires the proper taxes be filed (more common), the person wants to get into IRS compliance.
In order to get into IRS compliance, the person will have to file a delinquent return (or multiple returns) and develop a strategy to minimize, reduce, or avoid late filing tax penalties.
Before filing a delinquent return, there are various issues to contend with, which we will summarize below:
Do You Have Taxable Income?
Here are a few common circumstances and situations when a person has taxable income and may have to file an IRS tax return:
Employed – Are You Having Taxes Withheld?
If you are like most people and you have an employer, chances are that either weekly, bi-weekly, or semi-monthly/monthly your employer issues you a paycheck, and withholds taxes.
This is important, because even if you have not filed taxes, if you have had the proper tax amount being withheld or deducted from your earnings (absent other types of additional unreported income) then once you do file a tax return — you may not owe any tax.
In addition, if you do not owe any tax then there’s a high likelihood that you will not owe any penalties (notwithstanding offshore and foreign money/self-employed related penalties, which are detailed below).
Why? Because IRS tax penalties are usually based on the amount of the outstanding tax liability. For example, if you owed $25,000 in tax and were hit with a 20% penalty, you would owe $5000.
Likewise, if you did not owe any money to the IRS then you have a zero basis for the IRS to compute penalties — and therefore you may end up with no penalties.
Substituted Filed Return (SFR)
When a person is employed or has other reportable income, and has filed tax returns in the past, sometimes the IRS will prepare its own version of your return, which is called an SFR (Substituted Filed Return). Typically, these returns do not account for any of the potential tax savings, deductions, etc. but at least you have the return on file.
Self- Employed – Estimated Tax
If you are self-employed and have not filed the return, then it could be a much bigger problem. That is because then you may then have significant amounts of unreported income.
But, if you are paying estimated tax throughout the year, then at the time you do decide to get into compliance, you may possibly have sufficient taxes paid on the books to avoid any substantial penalty against you for late-filing of the returns.
**If you are self-employed, there are many more potential issues to contend with, especially if you make significant amounts of income
If the only type of income you have is Investment income, then even though you haven’t filed your tax return, if you received a 1099 and notice that certain taxes were withheld, that may help you in the future when you do file return — because you may be due a refund
That is because if you are in one of the two lowest tax brackets, and the majority of your income is derived from qualified dividends and/or certain capital gains then you may potentially be able to sidestep any potential tax liability because your tax rate on the investment earnings maybe zero.
If your only income with Social Security, then you may not have any tax liability. But, if in addition to social security you also have additional income, it may be very important to file.
Here’s why: If a person’s only income is Social Security, and let’s say they earned $20,000 a year in Social Security, typically that amount of Social Security is not going to be taxed — and therefore there is no tax liability.
But, if in addition to the Social Security the person also has some investment (domestic and foreign) and other income that pushes the total income over a certain threshold, then the IRS begins to tax a portion of the Social Security.
As a result, while you may have $20,000 social Security and $30,000 a part-time income, as a result you have $50,000 of income and even after deductions, exemptions, etc. you may earned enough money for the IRS to begin taxing a portion of your Social Security.
If a person has foreign income, they still have to report that income on a US tax return. Unlike almost every other country in the world, the United States taxes individuals on their worldwide income.
Therefore, even if you have no domestic income (or your domestic income consists solely of social security) if you are also earning foreign income, then the foreign income must also be combined with your domestic income to determine how much money you earn and your tax filing requirements.
** if you reside overseas, you may qualify for the Foreign Earned Income Exclusion and/or no matter where you live if you already paid foreign taxes on the income, you may qualify for a Foreign Tax Credit.
When does Not-Filing Returns Become Criminal
Typically, it is considered criminal when a person knows they have a requirement to file and knows they have unreported income that the IRS is unaware of, but does not file the tax return. Usually, it will not appear on the IRS’ radar unless it has been 2 years of non-filing.
Oftentimes, clients will tell us, that they thought it was no big deal, or they thought that they had sufficient tax credits to offset any income, but unfortunately…the IRS is not that forgiving.
With that said, the IRS only pursues a very limited number of criminal cases each year, so if you like to play the odds, you can take some solace in the fact that the chances are very low that you would be on the receiving end of criminal investigation unless you had some other egregious facts.
Have You Met the Threshold for Filing a Tax Return?
If you have met the threshold for filing a tax return, and before making any affirmative representation to the IRS, it is important to understand what you may be required to do.
Namely, can you just go back and file returns — or should you submit the under the amnesty program and/or reasonable cause?
What Strategy Do You Choose?
It is important to note that each situation is different, and the path you choose depends on your specific facts and circumstances.
If you typically file tax returns, and for one reason or another are simply out of compliance and all you have is domestic income, and that income is Earned income from US employment in which taxes of been withheld, it may not be that big of a deal.
You may consider working backwards, preparing a few years worth of returns (along with a Reasonable Cause Statement) and beginning the track of getting into compliance. If you owe taxes, then you may have a failure-to-file and failure-to-pay penalty.
Is Your Tax Situation More Complicated
These situations are usually considered more complicated:
If you have unreported foreign income, and especially if the income was generated at all through foreign accounts, assets, or investments, then you typically have to enter one of the IRS Offshore Voluntary Disclosure Programs in order to get into compliance. The programs usually consist of traditional OVDP or one of the Streamlined Offshore Procedures.
Undisclosed Foreign Accounts, Assets or Investments
If you have unreported Foreign accounts, assets, or investments, then you may have very significant reporting requirements on the various different international informational returns.
Many times, this will include multiple forms for the same asset or account, and the failure to file the form may result in significant fines and penalties-and in some situations, may reach 100% value of the maximum balance of the accounts (multi-year audit in which you are found willful).
This is not intended to scare you, but rather to just give you a realization of how the IRS operates especially when involves foreign money. Here is a brief list of the different international forms you may have to file, and what the penalties are.
Undisclosed U.S. Income
If a person self-employed, or otherwise has significant amounts of unreported US income that was not reported to the IRS, then they may find themselves in some serious trouble. Even if a person only has undisclosed domestic income, they can usually submit to the Domestic Voluntary Disclosure Program – presuming that the money was legally sourced.
In other words, you cannot take dirty money and launder it through the domestic voluntary disclosure program.
4 Types of IRS Offshore Voluntary Disclosure Programs
There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:
- Offshore Voluntary Disclosure Program (OVDP)
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.
Common Un-filed IRS International Tax Forms
Common un-filed international tax forms, include:
- 1040 (Tax Returns)
- Schedule B (Ownership or Signature Authority over Foreign Accounts)
- FBAR (FinCEN 114)
- FATCA (Form 8938)
- Form 3520 (Gift from Foreign Person)
- Form 5471 (Foreign Corporations)
- Form 8621 (Foreign Investments, aka PFIC)
- Form 8865 (Foreign Partnership)
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”
It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause
Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.
Domestic Voluntary Disclosure
For many years, the IRS has had a domestic voluntary disclosure in place. The program is designed for anyone who is out of tax compliance for failing to report U.S. income.
What many people do not realize, is that their failure to file/pay U.S. tax on income earned in the United States may lead to significant fines, penalties and worse depending on the nature and extent of the non-compliance?
*Please keep in mind the program is designed for money that was earned legally but not reported; if the money was earned illegally — you do not qualify for the program.
When is Criminal Prosecution Recommended?
If the IRS catches you committing a tax crime, chances are they will investigate. As recent history has shown, Movie Stars, Musicians, Moguls and the like are all fair game when it comes to IRS Prosecutions. While there are no hard and fast rules regarding investigating tax crimes, the general consensus is that after two years of either non-filed tax returns, under-reporting income, embellishing deductions/expenses or any number of other related tax misgivings, you are begin to tread in criminal territory.
Moreover, situations that will greatly heighten your chances of getting caught, include:
- A scorned spouse or lover;
- Angry or vindictive Business Partner;
- Third-Party who just doesn’t like you (you would be amazed…);
- Someone who overheard something about what you did and wants to “blow the whistle”
- Someone who is already in trouble and uses information he or she has against you to leverage a better deal
How does Domestic Disclosure Help
As provided by the IRS: “It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.”
What does this Mean?
Presumably, if you make a full disclosure and pay all the necessary taxes, fines, penalties and interest associated with the disclosure — you should be able to avoid criminal prosecution. Of course, there are no guarantees, but the IRS does have somewhat limited resources; in other words, the IRS simply does not have the time or money to enforce tax crimes against each and every person who may have made a mistake – or worse – in prior tax years.
As further provided by the IRS:
– Voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.
– A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:
– A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability.
– The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
How to Make a Domestic Voluntary disclosure?
Unlike the offshore disclosure programs, domestic voluntary disclosure program is a bit different. With offshore disclosure, there very specific rules and regulations involving the actual disclosure those rules and procedures are not met, then the disclosure will be rejected.
With the domestic voluntary disclosure program there is no one particular way to make a disclosure. Why? Presumably because there are so many different rationales and alternatives for somebody not reporting US-based income that a simple set of procedures would simply not suffice.
To that end, the Internal Revenue Service has provided guidance in terms of what would need to be done in order to facilitate an acceptable submission, as follows:
– A letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all of the elements set forth in (3) above, have been met.
– A disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges but before it has commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so. In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and because all of the elements set forth in (3), above have been met.
– A disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme that is the subject of an IRS civil compliance project. Although the IRS already obtained information which might lead to an examination of the taxpayer, it not yet commenced any such examination or investigation or notified the taxpayer of its intent to do so. In addition, the taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all of the elements set forth in (3), above have been met.
– A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay, in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all of the elements set forth in (3), above have been met.
Tax Fraud, Tax Evasion and Other Tax Crimes
If a person is criminally investigated before they have an opportunity to enter the domestic voluntary disclosure program, they may find themselves on the receiving end of a criminal prosecution by either the Internal Revenue Service or the Department of Justice (depending on the extent and nature of the crimes).
Even though there are no guarantees under the domestic voluntary disclosure program, is probably a better alternative than to risk noncompliance and be caught by the IRS. Although the IRS is not prosecute each and every criminal case, the IRS generally only prosecutes the ones they think they can win.
This explains why the IRS has a nearly 100% conviction rate on any tax evasion case for tax fraud case it brings against a taxpayer. Moreover, The jail sentences and prison sentences for white-collar crimes, including tax funds have risen significantly in the last few years-due to the term or phrase “financial murder,” which is a term the government likes to use and presented to a jury when bringing this type of matter.
The following is a case summary example of how an individual would get caught prior to entering a domestic voluntary disclosure
Case Study: Brian the Entrepreneur
Brian is the owner of his own business. He has worked hard to build, grow and expand his the business — and all that hard work has paid off. When Brian first started he barely made enough money to cover his bills and expenses. As time goes on, Brian’s business has blossomed into a small but thriving, multi-million dollar business.
Unfortunately, Brian developed a bad habit (which many small business owners to develop) which is that he never increased his salary in accordance with the increase in profits, and continue skimming money off the top which he does not report as profit or income.
– Moreover, not only did Brian fail to increase his salary (and thus his Employment Taxes) but Brian also receives a portion of his income via cash sales. Nothing is more tempting to a small business owner, then to take those cash sales and not report them on the tax returns — keeping them hidden from the government.
Another term for this type of action is tax evasion.
Why is this so Common for Small Business Owners?
All in all, most businesses fail. And even with all Brian’s moxy, he was a realist. He knew his chances for success were slim. Thus, when six years ago Brian first failed to report $5000 of cash income from his business, he had just assumed his business was not going make it. In reality, has his business failed from the start, the chances are very slim that he’d be detected by the Internal Revenue Service.
But Brian’s business did not fail; he became a success. Unfortunately, his habit only grew worse. Only now, instead of skimming $5,000 off a $50,000 gross he was skimming, .$300,000 off of a $3 million gross and the IRS caught wind of it.
It is Human Nature…
Once a person “gets away with it” chances are they feel a bit empowered and untouchable…so they continue to take more and more off the top. The problem is that it is not so easy to just put the money back and “get good” with the IRS. Why? Because each tax return has its own liability for tax, and for each year that Brian skimmed off the top, he committed another count of Tax Fraud and Tax Evasion.
Apologizing to the IRS is Never Enough
When a person commits a crime, but then apologize for the the crime and returns the item (while noble) does not reduce the “crime” at all. In other words, apologizing for your actions does not negate that the action occurred. For example, if you steal a T-shirt from the store and one week later apologized to the store owner and returned the T-shirt – that does not make the crime of theft any less – it just shows you have a conscience and are a good person. The store owner still has every right to report you and your theft crime.
Domestic Disclosure – The Basics
Domestic disclosure is the idea that a person can essentially come forward and admit to unreported income and other tax crimes in exchange for paying an extremely high penalty and be in a better position to avoid prosecution — but it is not bullet-proof.
The problem is the IRS has no idea what type of crime you committed before you come forward; thus, the IRS does not guarantee immunity from prosecution and you will not know whether you will receive immunity from prosecution until you come forward; a catch-22?
The Dilemma – Domestic Disclosure or Not?
There are three decisions to make for a person who has committed a tax crime:
Do Nothing: Every tax professional has the duty and responsibility to tell taxpayers who are out of compliance and/or not properly filing their taxes that they should go back and make sure their taxes are correct. With that said, it is not a taxpayer’s responsibility to have to listen to their tax attorney or CPA. In other words, the tax attorney cannot force the taxpayer to go back and amend their tax returns – or report the person to the IRS. By amending tax returns, a person may be opening themselves up for liability more so than if they do nothing and hope that they are never audited.
– One issue keep in mind is that if the IRS believes and can prove that the taxpayer committed fraud, there is generally no time limit as to how far back the IRS can go to try and detect how long tax crimes have been going on for – which can increase your penalties exponentially.
– Amend Prior Returns: It is important to keep in mind that the disclosure program is a voluntary program. In other words, a person does not have to enter the voluntary disclosure program in order to move forward and amend their tax returns – no matter how much damage has been done. For all the taxpayer knows, he or she may be able to amend his/her tax returns, pay any outstanding taxes and interest – and the IRS never audits the individual.
– The problem with this strategy is that if they are detected and it turns out that the person is prosecuted, the taxpayer would probably be in a worse position then if they had come forward under the voluntary disclosure program; paid the taxes, fines and penalties, and resolved the matter.
– Taxpayer’s Risk Tolerance Level: It all boils down to a — whether they want to pay the outstanding tax fraud penalties (which can reach 75%), and how bad they want to try to avoid prison, which brings us to our third option.
– Voluntary Disclosure: Due to the potential criminal nature of Voluntary Disclosure, a Taxpayer should first speak with an experienced voluntary disclosure lawyer before making any representation to the IRS.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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