IRS Offshore Account Amnesty – Reporting Offshore Accounts After OVDP
Now that OVDP has ended, the big question is what people can do (when they were willful or acted with reckless disregard) and want to get into Offshore Account Amnesty compliance with the IRS?
- 1 Can I Just Go Streamlined?
- 2 What Happens When you Get Caught Lying to the IRS?
- 3 IRS Voluntary Disclosure
- 4 IRS Voluntary Disclosure Program – What is it?
- 5 Why Must Money be from Legal Sources?
- 6 Why Voluntarily Disclose?
- 7 IRS Voluntary Disclosure
- 8 When is Criminal Prosecution Recommended?
- 9 How does IRS Voluntary Disclosure Help
- 10 What does this Mean?
- 11 What is at Risk if You do Not Disclose?
- 12 The Dilemma – Should I Voluntarily Disclose or Not?
- 13 How to Make an IRS Voluntary disclosure?
- 14 IRS (IRM) Voluntary Disclosure Practice
- 15 What Must Be Included in the Letter?
- 16 The Submission Must be Timely
- 17 What Type of Letter is Submitted?
- 18 What are Disqualifying Factors?
- 19 How Does the IRS Evaluate the Disclosure?
- 20 What if You Don’t Make the Cut?
- 21 A Few Key Tips as Provided by the IRS
- 22 Examples of what are Not Considered an IRS Voluntary Disclosure
- 23 Golding & Golding, A PLC
Can I Just Go Streamlined?
No. And by submitting to Streamlined when you are willful, you may be setting yourself up for some MAJOR problems.
That is because if you are willful and apply for Streamlined, you are proactively making intentionally false representations to the IRS.
Here are some common misconceptions perpetuated by inexperienced counsel:
The Amount of Unreported Income is Low
So what. The IRS does not have any de minimis rules involving the reporting of foreign income once a person is required to file a tax return. Therefore, if you have $200 of unreported for income but you were willful, you have to enter OVDP. You have no other option, if you’re going to disclose.
If you submit a Reasonable Cause Statement or Streamlined Submission instead of OVDP when you are willful, you are making an affirmative misrepresentation to the IRS that you had reasonable cause or were non-willful, when you knew you were willful.
Congratulations, you have just committed multiple crimes.
If you knew you were willful, do not enter the Streamlined Program and do not make a Reasonable Cause Submission. But, these attorneys want to sell you, so against your better judgment they convince you Streamlined or Reasonable Cause is still a viable option.
The IRS is understaffed
This is true, but again – so what. Even though the IRS only prosecutes a few thousand individuals a year, hundreds of thousands of individuals get caught with extremely high fines and penalties due to two (2) main situations:
The IRS only goes after “Big Fish”
This is an absolute lie. Why? Usually because “Big Fish” come armed with “Big Attorneys.” Experienced attorneys would take the IRS to task around each corner, costing the IRS incredible amounts of time and money. Chances are, if you are considering offshore disclosure and you are looking to get into compliance before the IRS finds you, then this is not the type of cat and mouse game you want to play with the IRS.
Big fish typically remain out at sea until they are contacted by the IRS, and by the time they are contacted, they have already developed and implemented a multifaceted plan to avoid detection. Even if they are audited, they have prepared for it; you, on the other hand, have not.
The chances of getting caught are low
This is true. So the question is — are you risk-averse? Some people are willing to take that chance because they are risk-takers and are willing to lie to get out of OVDP. We absolutely do not represent clients who want to lie and go Streamlined just because they believe they will not get caught with their hand in the cookie jar. If this is you, please stop reading this blog and go contact a different attorney. We are not the right firm for you.
Some people are cautious. They remember that one time that something absolutely odd/random happened to them and realize that these things DO happen. Like the one time you leave the house sloppily dressed because it’s an odd hour or you’re going someplace secluded, and of course, that is the day you bump into someone you know. Chances of this occurring? Very low. Did it happen? Yes.
In addition, many people commonly are audited for issues completely unrelated to the Streamlined/Reasonable Cause Submission (such as charity donations, home office deductions, self-employment expenses, mileage, changes in income, etc.). Unfortunately, this can automatically lead to questions about your Streamlined/Reasonable Cause Submission.
What Happens When you Get Caught Lying to the IRS?
Here is the reality: Not everybody is going to get caught. You may be willful, make a Streamlined Submission, and get away with it (at least for now). Thereafter, down the line you may be audited. And, you are obviously somewhat risk-averse to start with…since you are considering proactively making an Offshore Disclosure in the first place.
IRS Voluntary Disclosure
When you are willful or acted with Reckless Disregard, IRS Voluntary Disclosure is usually your best option.
IRS Voluntary Disclosure Program – What is it?
The IRS Voluntary Disclosure is a method for getting into compliance with IRS if you have unreported Income, as long as the money is not from Illegal Sources.
Why Must Money be from Legal Sources?
The reason the money must be from legal sources is simple: If the money was from illegal sources, then by entering the IRS Voluntary Disclosure Program, you would be “cleaning dirty money,” and the IRS would be serving as the launderer…
Why Voluntarily Disclose?
The IRS is cracking down on all forms of Tax Fraud and Tax Evasion.
While the IRS’ recent focus has been directed toward Offshore Disclosure (OVDP and the Streamlined Program) involving Foreign Money, Assets and Income – U.S. Tax Crime is still a major enforcement priority.
In addition, with OVDP coming to and end, the traditional IRM disclosure will the primary source of disclosure for people who were willful.
Whether you are a U.S. Resident or business with unreported Income, or a Foreign Resident (U.S. Person) with unreported Business Income, Assets or Earnings, it is important to remain in tax U.S. tax compliance.
IRS Voluntary Disclosure
For many years, the IRS has had a non-OVDP voluntary disclosure in place. The program is designed for anyone who is out of tax compliance for failing to report income to the U.S Government.
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.IRS Voluntary Disclosure Practice (Avoid Criminal Tax Investigation, Indictment & Prosecution) – Golding & Golding
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, Politicians are all fair game when it comes to IRS criminal 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 misgiving — you are beginning to tread into criminal tax 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 IRS Voluntary 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:
No Guarantee of Immunity from Prosecution
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.
Truthful and Timely
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 tax liability
- The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties.
What is at Risk if You do Not Disclose?
If a person is criminally or civilly investigated before they have an opportunity to enter the IRS Voluntary Disclosure Program, they may find themselves on the receiving end of an Eggshell Audit, Reverse Eggshell Audit, IRS Special Agent Investigation, and/or 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 IRS Voluntary Disclosure Program, it 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 fraud has 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 Dilemma – Should I Voluntarily Disclose or Not?
There are three decisions to make for a person who has committed a tax crime:
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.
One issue keep in mind is that if the IRS believes it can prove that the taxpayer committed civil 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.
It all boils down to a taxpayer’s risk management level — whether they want to pay the outstanding tax fraud penalties, and how bad they want to try to avoid prison, which brings us to our third option.
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.
How to Make an IRS Voluntary disclosure?
Unlike the offshore disclosure programs, the IRS 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 IRS 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.
IRS (IRM) Voluntary Disclosure Practice
Let’s focus on how thw non-OVDP IRS Voluntary Disclosure Practice (program) works:
What Must Be Included in the Letter?
Instead of providing exact instructions, the IRS provides guidelines and examples. Here, the Guidelines for voluntary disclosure provide that the IRS requires that a taxpayer include the following in their disclosure:
Willingness to Cooperate
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.
The Submission Must be Timely
In order for an IRM Voluntary Disclosure submission to be timely, it must be:
Not Under Personal IRS Examination
The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation.
Hopefully, Nobody Snitched on You
The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.
No Directly Related IRS Examination
The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.
No Criminal Action Initiated
The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
What Type of Letter is Submitted?
Unlike the pre-clearance letter in the traditional OVDP, there is no set introductory letter that is submitted for the IRM program. Rather, the Internal Revenue Manual provides examples of what a proper disclosure may consistent of.
Here are examples examples provided by the IRS:
Example 1 (Attorney Letter and Amended Returns)
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.
Example 2 (Barter Exchange)
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.
Example 3 (Tax Scheme, IRS Compliance Project)
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.
Example 4 (Unfiled Returns, IRS Notice)
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.
What are Disqualifying Factors?
The IRS has listed various factors that will disqualify a person from successfully making an IRS Voluntary Disclosure. These factors include:
If a taxpayer expresses an interest in making a voluntary disclosure, he/she must be asked the following questions to determine if potential disqualifying factors exist:
- Are you currently the subject of a criminal investigation or civil examination? (If yes, specify)
- Has the IRS notified you that it intends to commence an examination or investigation? (If yes, specify)
- Are you under investigation by any law enforcement agency? (If yes, specify)
- Is the source of any of your income from illegal activity?
- Do you have any reason to believe that the IRS has obtained information concerning your tax liability? (If yes, specify.)
*If the taxpayer responds yes to any of the above questions, the facts and circumstances of each investigation must be clarified to determine if it is a disqualifying factor.
How Does the IRS Evaluate the Disclosure?
As with most issues that have a criminal aspect to it, it is typically the IRS Special Agents who will evaluate the submission.
As provided by the IRS:
– Special agents will evaluate disclosures to determine if the information provided is truthful and complete, and shall make a recommendation to the SAC, as to whether or not the taxpayer has met all voluntary disclosure practice criteria.
– The evaluation should be completed as expeditiously as possible, ideally within 10 working days or less from the date the complete voluntary disclosure communication from the taxpayer has been received. The SAC should be apprised if an evaluation cannot be completed within 30 days.
As part of the evaluation process special agents will query the following databases:
- The Criminal Investigation Management Information System (CIMIS)
- Integrated Data Retrieval System (IDRS)
- The Currency and Banking Retrieval System (CBRS) Database
- The National Crime Information Center Database (NCIC)
– The special agent needs to query all applicable databases during the evaluation process of the voluntary disclosure matter including a national query for criminal investigations within the CIMIS database as noted above.
– If the indices checks (or any other evaluative steps) disclose potentially disqualifying information the taxpayer should be contacted and offered an opportunity to provide an explanation.
– If a satisfactory explanation cannot be provided, this may constitute a disqualifying factor.
– If the indices checks disclose no disqualifying information, the voluntary disclosure will be referred to the SAC, with a recommendation that the matter be forwarded to SB/SE or LB&I Offshore Identification Unit.
What if You Don’t Make the Cut?
Like with any audition or tryout, not everyone makes the team, gets the part…or is accepted into IRS Voluntary Disclosure.
As provided by the IRS:
– If the SAC determines that a disclosure does not meet all IRS voluntary disclosure criteria, a letter will be sent to the taxpayer informing them of the reason(s) he/she is ineligible to participate in the IRS’s voluntary disclosure practice. It is not necessary to cite specific reasons for the rejection if it would compromise an ongoing investigative matter.
– Criminal Investigation will evaluate the criminal potential of all negative evaluations. Therefore, the assigned special agent should initiate a PI number within CIMIS. This PI number is a separate number from the voluntary disclosure number. If the matter is not acceptable for investigation, it will be forwarded to PSP for whatever action they deem appropriate.
A Few Key Tips as Provided by the IRS
When is the Disclosure Considered Untimely?
a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
Examples of what are Not Considered an IRS Voluntary Disclosure
a. a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met.
b. a disclosure made by a taxpayer who is under grand jury investigation. This is not a voluntary disclosure because the taxpayer is already under criminal investigation. The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.
c. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership. This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.
d. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently under examination. This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.
e. a disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer’s double set of books. This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer’s noncompliance. The conclusion would be the same whether or not the taxpayer knew of the informant’s contact with the IRS.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.