- 1 You are Still Willful, Just Lucky
- 2 Watch Out For Bad Advice
- 3 Right Against Self-Incrimination
- 4 Eggshell Audits
- 5 You Make it Past the Eggshell Audit
- 6 Offshore Disclosure and Foreign Reporting
- 7 Common Offshore Reporting Requirements
- 8 Offshore Voluntary Disclosure – What are Your Options?
- 9 IRS Voluntary Disclosure of Offshore Accounts
- 10 When Do I Need to Use Voluntary Disclosure?
You are Still Willful, Just Lucky
No, you cannot go streamlined. As my Grandfather used to always say… Stay Humble.
And, if anyone tells you that you can, they are giving you bad advice. Why? The main determination as to whether you qualify for either the IRS Streamlined Offshore Disclosure or OVDP is whether you were willful.
If you made it through an Eggshell Audit or Reverse Eggshell Audit (Read: Congratulations, Nice Work) unscathed, and not having to disclose that you knew you had foreign accounts to report, that does not make you non-willful, it makes you lucky.
In other words, don’t try to throw it back in the IRS’ face. Think about how you felt during the audit, wondering if the IRS Agent was going to delve further into your non-reporting of foreign accounts and income — and how that made you feel (Read: Terrified).
Avoiding a criminal investigation following an Eggshell Audit, does not negate the willfulness aspect of your non-disclosure. Thus, if you are going to disclose, Streamlined Offshore would not be a viable option for you.
*The nuances of applying for OVDP following an Eggshell or Reverse Eggshell Audit is a very complex situation and something you need to fully analyze with experienced counsel.
Watch Out For Bad Advice
In the past few months we’ve had multiple clients contact us after speaking with Tax Lawyers/CPAs who gave them bad advice on Offshore Disclosure timing issues.
These clients all had the same question/concern: they know they were willful at the time they failed to report foreign income. Then, they were audited, but the audit had nothing to do with international tax. As a result, the clients never volunteered the information regarding the undisclosed income and it was never asked.
While a Taxpayer has a duty to disclose information to the IRS Agent to assist with the facilitating a successful audit, a Taxpayer also has a right against Self-Incrimination.
Right Against Self-Incrimination
It wasn’t that the Client intentionally misrepresented facts (or omissions) to the IRS. Rather, the IRS agent never asked, and the audits were based on other areas of business tax. In one case we recently took over, the issue involved complex depreciation schedules which resulted when the C Corporation transferred to an S corporation and there was BIG Tax (Built-in-Gain).
Thereafter, this law firm told the Clients they could now go Streamlined, since the Audit was complete.
The Client asked his attorney: “But I was still willful?”
The Attorney’s Response: “How is anyone going to find out?”
While this is true…not necessarily the best advice to give.
Eggshell audits are when the IRS is auditing you and you know you previously committed a crime but you try to dance around the issue during the audit, legally. In other words, the IRS agent never asks you directly, and you never have to make any intentional misrepresentations or omissions to the auditor.
You have a right against self-incrimination and since the civil audit is not a criminal investigation, you are not required to incriminate yourself. At the same time, if it anytime during the audit, or the preceding IDR, the IRS asks about unreported income (even if it is not mentioned regarding foreign or income from abroad), you are supposed to disclose any income, whether it is domestic or foreign, or plead the 5th – but you should never lie, or misrepresent facts to the IRS.
You Make it Past the Eggshell Audit
Now You Want to go Streamlined…
This is a horrible idea. That is because during the audit you knew you were supposed to have previously reported income. That is the element of willfulness. It doesn’t matter that the auditor never ask you about it, the reality is you cannot sign a statement under penalty of perjury or show that you had reasonable cause if you acted willfully, or with reckless disregard.
Sure, you may not currently be on the record for having had a knowledge of the unreported income, but if you knew during the audit that you are supposed to have reported the foreign income, but never reported it — the fact that the auditor never asked is a luxury and you should be relieved.
It is not the best time to jump back into the lion’s den and proactively make a statement to the IRS telling them that you are non-willful. If the IRS doesn’t believe you, or takes you to task, you could find yourself is in serious criminal trouble in facing significant criminal sized monetary penalties.
Offshore Disclosure and Foreign Reporting
If you are reading this article, then chances are you are aware that you have an important requirement involving your foreign accounts. Without getting into too much detail, there are a broad range of reporting requirements for individuals who have foreign accounts.
The minimum threshold requirements will vary based on whether the person is reporting accounts, interests in business, and/or other types of disclosures.
Common Offshore Reporting Requirements
FBAR – More than $10,000 in annual aggregate total on any day of the year.
FATCA – Specified Foreign Financial Assets with different thresholds depending on whether a person resides in the U.S. or not, and the tax filing status
PFIC – Reporting starts when there is annual aggregate total of PFIC investments that are more than $25,000 or $50,000 MFJ – unless there was an excess distribution in which there is no minimum.
Form 5471 – More than 10% ownership and/or control and various other threshold requirements.
Form 3520 – Receiving a Foreign Gift from a person or business, and/or Foreign Trust Distribution.
Offshore Voluntary Disclosure – What are Your Options?
If you are not currently under Audit or Examination, your best option may be to enter one of the Offshore Voluntary Disclosure Programs to get into compliance.
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 if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
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 Voluntary Disclosure.
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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