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IRS Audit (2018) – Tread Lightly when you have Foreign Reporting Issues

IRS Audit (2018) - Tread Lightly when you have Foreign Reporting Issues

IRS Audit (2018) – Tread Lightly when you have Foreign Reporting Issues

IRS Audit (2018) – Tread Lightly when you have Foreign Reporting Issues

Typically, the IRS has three (3) years to audit you. In other words, if you file your tax return timely, then under most circumstances you only have to sweat it out for three years before the time for the IRS to audit you will expire.

But if you are U.S. Taxpayer in an IRS Audit and you have unreported foreign income, assets, accounts, or investments — the time might be extended to 6-years, or indefinitely if the agent smells Civil Tax Fraud.

IRS Audit – Foreign Reporting

Since the IRS has made offshore and foreign related matters a key enforcement priority, the US government as a whole has modified the rules when it comes to foreign related income being generated from certain foreign accounts or assets.

In these types of situations, in which more than $5,000 is being generated from foreign related accounts or assets, the time for the IRS to audit you doubles — and extends to six years.

What Does the IRS Already Know?

Now that the IRS Whistleblower recovery amount can include FBAR money, coupled by the fact that more than 110 countries and 300,000 Foreign Financial Institutions are already reporting U.S. Account Holder information to the U.S. Government — the IRS may already have your foreign financial information.

Therefore, even in you are in an audit for matters unrelated to foreign money, accounts, or assets – but you have undisclosed foreign money, accounts, or assets — you have to be very careful.

Eggshell and Reverse Eggshell Audit Concern

Eggshell Audit

With an Eggshell Audit, the IRS is simply auditing you – BUT, you have a secret. You know you committed a Tax Crime(s). And, you have to walk the fine line during the audit to:

– Not make any Intentional Misrepresentations
– Not make any Intentional Omissions (within the scope of the questions)
– Avoid Getting Scared and Pleading the 5th Prematurely

In all reality, you and your Attorney (Never go to an IRS Audit when you know you committed a Tax Crime without counsel) may be the only ones who know about the crime (Read: Poker Face).

You need an Attorney, because you need to be able to rely on the confidentiality of the Attorney-Client Privilege.

Reverse Eggshell Audit

These suck. They are probably not even legal, but they happen. The IRS agent Knows or is Pretty Sure you committed a Tax Crime. With that said, the IRS Agent dances around the issues in order to collect as much financial and other background as he or she can, couching it in the fact that it is required to support a civil audit case against you — when in all reality, the Agent/Examiner is mounting a criminal case against you.

This is nearly always illegal. Why? Because if you are ever in a Civil Audit and Auditor/Examiner suspects Tax Fraud or another Tax Crime, he or she must immediately cease the audit. You have the absolute right against self-incrimination and it is illegal to couch a criminal investigation in a civil audit.

The Problem: It may be hard to prove it was Criminal Investigation couched as a Civil Audit.

IRS Section 6501 – Foreign Income

The general rule is that if the taxpayer omits from gross income an amount properly includible therein and— such amount

is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.

What is 6038D?

Section 6038D refers to Specified Foreign Financial Assets. Specifically:

For purposes of this section, the term “specified foreign financial asset” means

(1) any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and

(2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))

– any stock or security issued by a person other than a United States person

– any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and

– any interest in a foreign entity (as defined in section 1473).

What Does This Mean to You?

It means that if you have specified for financial assets that generate more than $5,000 of income a year and it was omitted from your tax return, then the IRS will have double amount of time to come after you in order to audit you.

Moreover, the IRS has several offshore penalties begin issuing against you, and penalties can be severe.

Civil Tax Fraud of Foreign Money

In some instances of civil tax fraud, the IRS may go back as many years as they would like to enforce the laws against you.

Unlike other IRS Statutes of Limitations which typically expire after three years (example: failure to file an informational return) or possibly six years (example: willful failure to pay tax), there is no statute of limitations for Civil Tax Fraud. As with all tax matters, there are exceptions, exclusions, and limitations to be aware of.

Why Is the IRS So Strict About Tax Fraud?

The answer is relatively simple: Tax Fraud is a very serious violation in the eyes of the IRS. With Tax Fraud, a person is essentially trying to pull the wool over the IRS’ eyes by tricking the U.S. government – typically either by reducing income or falsifying deductions – in order to artificially reduce their tax liability.

While in general, the IRS seems to take every little thing way too seriously, when it comes to Civil Tax Fraud, there is a higher level of scrutiny against any individual the IRS believes committed Tax Fraud.

Therefore, the statute is written to provide the government with as much time as the government may need in order to go back and try to uncover the nucleus of facts leading to the fraud.

Does the IRS Always Have Forever?

No. Whether or not the IRS can enforce the forever statute for civil tax fraud depends on various factors.

If the matter is appealed or brought to the U.S. Court of Claims, not all courts agree as to whether the IRS may be able to enforce the civil fraud statute forever, and there are some limitations depending on who committed the fraud, when the fraud commenced (and ended), and what happened in the interim.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs before you are audited. If you are already under audit, be sure to retain experienced counsel.

We Specialize in Safely Disclosing Foreign Money

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.