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Misuse of Kovel Jeopardizes Voluntary Disclosure Confidentiality

Misuse of Kovel Jeopardizes Voluntary Disclosure Confidentiality (Board Certified Tax Law Specialist)

Misuse of Kovel Jeopardizes Voluntary Disclosure Confidentiality (Board Certified Tax Law Specialist)

Misuse of Kovel Jeopardizes Voluntary Disclosure Confidentiality

As we approach the thick of tax season, our blog entries get less frequent — but we thought this was a very important topic for our clients around the world who are being misled by other attorneys and firms to take the time to read.

IRS offshore compliance enforcement is at an all-time high. 

The IRS is pursuing major penalties for non-compliance, so it is absolutely critical you understand how the legal vs. accountant privilege works (in the real world).

Misplaced Reliance on Kovel

In recent months, we have received numerous inquiries from individuals coming to the realization that they were misled by their less experienced Offshore Disclosure Lawyer about being able to rely on a Kovel Letter for the preparation of taxes in Offshore Disclosure.

For these unsuspecting individuals, their attorney-client privilege and confidentiality may be at high risk.

*Misuse of Kovel is usually a problem with newer private practice tax attorneys (less than 5-10 years private practice law firm experience – it is generally not an issue with more experienced attorneys.)

Attorney Client-Privilege

The Attorney-Client Privilege is a serious benefit to clients. It facilitates near airtight confidentiality (short of the client indicating he or she is going to inflict death or serious bodily harm to another person).

Accountant Client Privilege

The Accountant-Client Privilege is not as awesome. While the privilege provides some protection, it does not extend to criminal investigation, and is limited in scope.

IRS Offshore Disclosure & Privileges

When a person is out of compliance for Offshore/Foreign related matters, there are various IRS offshore amnesty “voluntary disclosure” programs a person can submit to.

No matter which amnesty program a person submits to, there are generally five (5) main components to the submission:

  • Evaluating and assessing the tax and legal situation in detail
  • Submitting amended or original tax returns
  • Submitting FBARs and International Informational Returns
  • Preparing a detailed Legal Statement(s)
  • Providing back-end support and defense

A Dually Licensed Attorney/EA or Attorney CPA Understands the Interplay Between Law and Taxes

Even simple tax situations are usually much more complicated than they first appear. It takes an attorney with an extensive legal and tax background (from years of legal and tax preparation experience) to effectively evaluate and asses all the tax and legal issues involving offshore disclosure, in order to piece them together properly to present your disclosure in the best light.

If the Attorney does not have experience preparing complex tax returns, they will not be able to complete this part of the task for you.

Your case is already at a disadvantage.

So what happens when your Attorney is not dually licensed, and is neither qualified to prepare your taxes nor answer your tax questions?

The attorney generally refers the case out to an accountant firm, EA, or CPA — and the trouble begins.

What is Kovel?

Kovel is a case ruling. It is not statutory law and it is not guaranteed to be upheld by a judge in a court of law.

A Kovel Letter is used by attorneys/clients in situations in which the attorney and/or client must communicate with another non-attorney accountant such as a CPA or Enrolled Agent, but the Attorney wants to try to extend the privileged communications beyond the Attorney, and to the Tax/Accounting Professional.

Misuse of Kovel in Offshore Disclosure

For many newer firms in over their head on tax related issues (usually small tax firms trying to juggle 5-10 different areas of tax), they begin to refer you to an Accountant for any tax related questions – and it can take weeks for the Accountant to come back with an answer — especially if it is during tax season, and/or International Tax is not the main area of tax the accountant practices.

You start to get nervous, and are unsure what the Attorney is actually doing for you. You want a “second opinion” about your situation — who better to ask than your accountant, right?

This has three (3) major drawbacks for your IRS offshore disclosure:

  1. The IRS clock is still ticking away…
  2. It is not covered under Kovel, and
  3. It significantly increases the likelihood that you may break the privilege and jeopardize your confidentiality.

Being Dually Licensed Has a Big “Real World” Benefit

Being dually licensed is not about wearing different hats — unless your Attorney is also a fashion model…

When some lesser experienced attorneys are not dually licensed as an EA or CPA (and do not have the litigation or trial experience to see how privilege plays out in the real world) they are quick to dismiss the dual-license, by intentionally mis-categorizing the purpose of being dually licensed to try to fool the general public (you).

There are thousands of dually licensed Attorneys (Attorney/Enrolled Agent and Attorney/CPA) in all different areas of tax.

The main two privileges are the Attorney-Client Privilege and Accountant-Client PrivilegeThe Accountant privilege does not extend to legal matters or criminal investigations.

And, being dually licensed does not extend the Attorney-Privilege to Accountant related matters.

That is not the purpose of being dually licensed.

While being dually licensed does not extend the Attorney-Client Privilege to all non-legal tax related issues, there is a much bigger benefit when it involves Offshore Disclosure. 

It helps protect against a client mistakenly breaking the privilege by talking about legal matters with a CPA, which are not covered under Kovel.

Common Example from Clients Who First Used a Non-Dually Licensed Less-Experienced Attorney

Your Attorney refers you off to some accountant, whom you do not really know. During your tax talk with the accountant, the accountant starts to ask some more background questions, and the conversation becomes more “casual.”

During these communications, you accidentally divulge legal information about your case that would have been protected had you told your Attorney. 

Since the discussion turned to legal, those communications about your case are no longer protected as they would have been had you been talking with your dually-licensed attorney about those same legal matters.

Your Confidentiality and Offshore Disclosure Submission is Now at Risk

This is a much bigger problem: if there is any issue about willfulness that you may have divulged to the accountant — your entire case may be compromised.

While the IRS cannot interview your Attorney, the IRS has the right to investigate your CPA.

Now you have to trust that your accountant will not disclose this information if:

  • Your streamlined or Reasonable Cause  is audited due to legal issues involving willfulness that you may have leaked to the CPA
  • The accountant’s practice is audited or investigated by the IRS (OPR) and all his or her files may be compromised, or
  • The accountant needs it for leverage to defend against other investigations the IRS or other agency is taking against him/her.

And, if the IRS issues your CPA a summons or subpoenas about his files (or your file specifically) — the information you told the CPA about your legal issues or concerns are not protected.

What is to prevent the CPA from blowing the whistle on you, if he or she gets jammed up? Just look what happened to Paul Manafort.

While a Kovel Letter extends very-limited protection with an Accountant, misplaced reliance on it can get you in very serious trouble.

Now, your privilege is compromised.

Other Considerations for Selecting an Offshore Disclosure Attorney

Masters in Tax Law (LL.M.)

A Masters in Tax Law requires 15-20 graduate level tax law classes. This type of education provides a great foundation to best understand the highly complex areas of law involving international tax.

The Attorneys have Extensive Offshore Disclosure Experience

At Golding & Golding, we have handled several hundred disclosures (OVDP, IRM Voluntary Disclosure, Streamlined and Reasonable Cause) for clients around the world in nearly 70-countries.

We have the knowledge and experience to help you get compliant.

Litigation Experience

Our attorneys have handled many complex litigation cases. We are routinely retained as consultants on international tax related matters involving offshore disclosure and divorce, litigation, business and corporate matters.

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Board Certified Tax Law Specialist Credential

Once an Attorney earns the prestigious Board Certified Tax Law Specialist credential, it proves to the general public that the attorney is dedicated to tax law, and has real tax law practice experience as an Attorney.

Few tax attorneys have passed the tax speciality exam (regarded as one of the most difficult tax exams in the country) — and met the additional education, experience, and recommendation requirements necessary for certification.

Once a person becomes “Board Certified in Tax,” it shows they have met the following requirements:

  • Advanced tax education 
  • Extensive tax law experience
  • Attorney & Judge recommendations for certification

In California for example, there are 200,000 active Attorneys, with tens of thousands of Attorneys practicing in some area of tax — and only 350 Tax Attorneys have successfully earned the designation.

Less than 1% of Attorneys nationwide have earned the credential.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

IRS Offshore Disclosure is ALL we do.

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned 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.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

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

Tax Law Specialty Firms are Best Prepared to Represent You in Specialized Tax Matters

Unless the firm has 50-100 attorneys, with a $25 million operating budget, a successful boutique tax-law firm will almost always have all of the attorneys in the firm devote the firms’s time, energy, and resources to one specific area of tax.

In other words, all the attorneys in the boutique tax firm practice the same, single area of tax law.

Some common niche areas of tax law include:

  • Tax Litigation
  • Employment Tax
  • Sales Tax
  • Offshore Voluntary Disclosure

For example, in employment tax, all tax attorneys in the firm handle employment tax related cases. In sales tax, all the tax attorneys in the firm handle sales tax. It may be “Sales Tax” in various different fields and industries — but the firm will limit the niche practice to sales tax.

The same is true for Offshore Voluntary Disclosure. If a firm handles Offshore Voluntary Disclosure, then all tax attorneys at the firm should be handling the same area of tax law.

This area of Offshore Disclosure law is constantly evolving, and becoming infinitely more complicated — including highly complex issues involving:

  • FBAR
  • FATCA
  • PFIC
  • CFC
  • International Cryptocurrency
  • J5
  • Increased Schedule B Enforcement (Paul Manafort)
  • Foreign Gifts
  • Foreign Inheritance
  • Foreign Business 
  • Foreign Trusts
  • OVDP
  • IRM
  • SDOP
  • SFOP

If a small firm has attorneys practicing 5-10 different areas of tax law (and even non-tax law related matters) – it can put your case at a severe disadvantage.

Why? Because it is impossible for these types of “general tax firms” to establish set protocols, policies and procedures sufficient to handle all the complexities and nuances for multiple different types of niche tax law areas.

At our tax specialty firm, we handle matters involving Offshore Voluntary Disclosure, and each case is led by one or more highly experienced attorneys.

This guarantees that your case gets the time and dedication it deserves.

Why Do We Care?

Because each month, like clockwork, we get calls from individuals in an utter state of panic, because the “Expert” or “Specialist” who made themselves out to be knowledgeable, has no real knowledge of Offshore Disclosure.

It turns out, the Attorney has never handled a complex Offshore Disclosure.

Oftentimes, Golding & Golding is called upon to fix these messes. Click Here to learn about some of the representative matters we have handled.

Serious Tax Matters; Serious Tax Consequences

Getting hit with an eggshell audit, reverse-eggshell audit, or IRS Special Investigation involving offshore money is serious business – it’s not like getting a traffic ticket or speeding ticket.

The ramifications of serious tax inquiries by the IRS (especially in the area of Offshore Disclosure and Compliance), can result in serious consequences such as monetary fines, penalties and even jail time.

Golding & Golding – IRS Offshore Disclosure Lawyers

Each and every case is led and managed by Mr. Golding and his team.

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases including issues such as:

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.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

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.