Streamlined Disclosure Program – IRS Audits & Possible Subpoena Requests
- 1 Why an IRS Audit?
- 2 Why Hire an Attorney From the Start?
- 3 Why May the IRS Issue a Subpoena?
- 4 Considering Offshore Disclosure?
- 5 How to Get Into Compliance
- 6 IRS Voluntary Disclosure
- 7 When Do I Need to Use Voluntary Disclosure?
- 8 Golding & Golding – Offshore Disclosure
- 9 The Devil is in the Details…
- 10 What if You Never Report the Money?
- 11 Getting into Compliance
When it comes time for you to apply to the IRS Streamlined Offshore Disclosure Program there are two main factors to keep in mind:
First, you should make sure you negotiated a flat-fee arrangement that includes audit representation, and Second — that you utilize an attorney throughout the entire process.
Why? Because in recent months, we have received inquiries from individuals who either did not use an attorney, or did not negotiate a flat-fee arrangement that included representation in an audit — and are now being audited in accordance with their application for the Streamlined Offshore Disclosure Program.
In response to the audit request, these scared individuals are getting responses from their prior representation, such as:
– From a CPA, “You Need to Hire an Attorney.” (Also, the CPA may also be investigated and since there is no Attorney-Client privilege with a CPA, this can turn very bad, very quickly — as the information you thought you provided to the CPA in confidence may be discoverable to the IRS.”
– From the initial Attorney, “Audits are $550 per hour, with a $25,000 initial retainer”
– From an inexperienced Tax Attorney “I don’t represent clients in Audit, you need to find new counsel.”
*These are real responses we have been told from clients that their initial representative told them when the client told them about the audit notice.
Why an IRS Audit?
The basis of a Streamlined Disclosure Audit is to inquire about the decision to go Streamlined. In other words, to examine the applicant to determine if the facts and circumstances will show that the applicant was non-willful (The IRS does not provide an exact definition of the term “Non-Willful.”) The Auditor may request documents such as the foreign bank and other documents, in order to substantiate the information provided in the streamlined application.
The reason why the IRS is auditing individuals under the streamlined program is relatively simple. The IRS understands that many individuals chose the streamlined option instead of traditional OVDP because of the reduced penalty. Under OVDP, the penalty can reach as high as 50% of the highest max balance (or 27.5% of the highest max balance presuming the individual or business does not have accounts in a bad bank)
Alternatively, the penalty under the streamlined domestic program is only 5% and is based on year-end max balances (which are traditionally lower than other max balances), or if the person qualifies as a foreign resident the entire penalty is waived. Thus, the IRS understands that this extreme reduction in penalty may lead some people to select the streamlined program when they are in fact, willful.
Why Hire an Attorney From the Start?
When a person hires an attorney, they are entitled to the attorney-client privilege. That is one of the highest privileges permitted by law, and allows the individual to confidentially speak with the attorney under the guise that the attorney is not going to relate any of that confidential information to the IRS (the Attorney is legally prohibited from doing so). In addition, the attorney cannot personally be subpoenaed and forced to provide client confidences to the IRS.
If you use a CPA or EA who is not also an attorney, you do not have the same privilege. There is an accountant-client privilege, but it is nothing compared to attorney-client privilege, and provides no protection in case the IRS wants to speak directly with the CPA regarding the communications between CPA and the client the case turns into a criminal investigation.
Why May the IRS Issue a Subpoena?
Part of responding to an audit is strategy. Yes, technically the client does not have to appear before the IRS, but that may lead to the IRS issuing a subpoena against the client requiring the attendance.
An audit is not a criminal investigation, it is an inquiry. If a person was non-willful than to start putting up roadblocks and refusing to appear at an audit can be a telltale sign to the auditor that not even the client believes that he or she was not willful. In other words, for these types of matters, it is not always the best strategy.
Rather, when the client appears with an attorney who has represented a client throughout the entire process (and with whom the client feels confident), not only will the client be prepared for the audit, but the attorney will be present at the audit to ensure that the auditor has not violated the clients rights — which is a protection that a CPA is not able to provide (due to the heightened level of confidentiality and communications between an Attorney and the Client).
Considering Offshore Disclosure?
Offshore disclosure is not a scary undertaking and is usually the best option for individuals who have unreported/undisclosed assets accounts, assets, investments, insurance policies, or other income abroad.
How to Get Into Compliance
Depending on the facts and circumstances of your case, you may consider offshore disclosure as a means for getting into compliance. The United States government has different programs established depending on the facts and circumstances of your case. If you happen to reside overseas already, meet the foreign resident requirement, and were non-willful in your failure to comply — you might qualify Streamlined Foreign Offshore Procedures, which qualifies you for complete penalty waiver.
IRS Voluntary Disclosure
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.
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.
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. Unlikes 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.
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