- 1 Willfulness
- 2 Willful vs. Non-Willful, The Amount of Money is Immaterial
- 3 Inexperienced Counsel and Reverse Fear Mongering
- 4 Foreign Money May Not Need Be What Causes The Audit
- 5 How Much Does the IRS Know Already About You?
- 6 But I Only Have Small Amount of Foreign Income?
- 7 Common Example – Indian Accounts
- 8 This is Terrible Advice from “Counsel”
- 9 Protect Yourself, Think Long-Term
- 10 You Are Not Alone
- 11 IRS Voluntary Disclosure of Offshore Accounts
- 12 When Do I Need to Use Voluntary Disclosure?
The issue of being willful and going IRS Streamlined is becoming more of an issue than it ever was before. The primary reason why this is becoming such an issue is twofold:
– The IRS (up until recently) had not began auditing the streamlined offshore applications
– Inexperienced Counsel is recommending to clients with lower dollar amounts that streamlined is a safe haven, because their chance of audit is a low, even if they were willful or reckless in their noncompliance.
The main threshold in determining whether a person will qualify for the IRS Streamlined Program (though it still may not be the best option based on the Taxpayer’s specific set of facts & circumstances ) or traditional OVDP is whether they were willful or non-willful.
In recent months, we have received a number of inquiries from individuals who were sold into streamlined, even though they told the attorney that they believed they were willful – and are now regretting it.
Willful vs. Non-Willful, The Amount of Money is Immaterial
If a person is willful, then they lose the right to enter the streamlined program – that is the end of the analysis.
The streamlined program is a program designed for individuals who were clearly non-willful. The streamlined program offers a reduced penalty as well as reduced paperwork – but it comes at a risk.
The risk is that a person may still be audited or examined under the Streamlined Program. While a person may, in very rare circumstances (and usually only when the OVDP disclosure also involves unreported U.S. Income) still be audited or examined under traditional OVDP, it is very uncommon. That is because even the IRS has stated that as long as a person makes a full disclosure under OVDP they will avoid an examination/audit or criminal investigation.
Inexperienced Counsel and Reverse Fear Mongering
The way inexperienced counsel sells individuals in going streamlined (even though they were willful) is telling the client that there is no chance of audit, or that the chances are slim-to-none.
While the chance of audit is relatively low, by putting yourself into position where you are making a proactive misrepresentation to the IRS in writing, you may be setting yourself up for serious issues down the line.
We cannot recommend enough that if a person is willful, they should never enter the streamlined program under any circumstance; it is equivalent of throwing yourself into the lion’s den, unarmed.
Foreign Money May Not Need Be What Causes The Audit
This is a situation in which is getting many individuals into trouble. While it is true that the streamlined program in and of itself has not been the catalyst that leads to an IRS Audit, if a person is otherwise potentially subject to audit, and they are audited — the IRS is still going to inquire about the foreign accounts, income, investment, etc.
People can be audited for any one of a number of reasons, which has nothing to do with offshore disclosure. For example, the following situations are relatively common, and if you are already “audit prone” will put you into an potential audit situation.
- Distributions from a Self-Owned S corporation and Reasonable Compensation Issues
- Business Startup or Travel Expenses
- Unreimbursed Expenses
- Self-Employed Increase in Earnings
How Much Does the IRS Know Already About You?
That is anybody’s guess. Any attorney with significant criminal tax and litigation experience, and who has sat through trial and complex audit matters will tell you that you should never underestimate the IRS.
Specifically, with the introduction and enforcement of FATCA, there are more than 300,000 Foreign Financial Institutions (FFIs) that are proactively reporting information to the IRS, including reporting individual “U.S. Account Holder” names to the IRS.
But I Only Have Small Amount of Foreign Income?
Having a small amount of money when you are willful…still makes you willful. And, going Streamlined when you are willful just because the amount of unreported income is minimal is terrible advice.
In the last year or so, clients have been telling us that about a handful of less experienced attorneys who are undermining the advice provided by other much more experienced Offshore Disclosure lawyers, and trying to coerce them to enter the streamlined program even when they are willful.
Why, Because the attorneys misrepresent to these scared clients that “The IRS is not going after people with small amounts of income, so why would they come after you?”
This logic is faulty for two reasons: First, the audit may not necessarily stem from the foreign offshore accounts and therefore the audit is actually the result of the domestic audit but now the client has filed streamlined and is stuck in the IRS crosshairs.
Second, it is very easy for the IRS to know if you are willful or non-willful, even when the amounts of unreported income are small.
Common Example – Indian Accounts
Let’s take a common scenario in which individuals may have had no initial intent to defraud. We have represented numerous individuals from India, who have accounts in Financial Institutions such as ICICI, Axis, HSBC, and SBOI.
Sidd is originally from India, and moved to the United States in 2008. As the value of the Rupee continues to drop, Sidd has able to purchase more FDs in India. During one trip, Sidd updated institution that he was residing in the United States on a visa and therefore to please forward his information to his US address.
In 2015 Sidd receives a FATCA Letter which was accompanied by a W9 and W8 BEN form. The letter told Sidd that if he was a US person (he is now a Legal Permanent Resident/Green-Card Holder) he needed to sign the W-9 form and return it back to them. Sidd reads the letter and understands that as a U.S. Account Holder, he is required to sign and return the W-9, but he does not do so.
Nevertheless, 2015 and 2016, Sidd file tax returns, but does not file the requisite form 8938 or FBAR.
In 2017, Sidd speaks with an inexperienced offshore disclosure attorney who tells him that he can go streamline, no problem — because there will be no issue since the amount of income is small.
This is Terrible Advice from “Counsel”
Why? Because it turns out in this example, the foreign financial institution already sent a copy of the FATCA information to the IRS regarding regarding Sidd — as well as tens of thousands of other US account Holders. Thereafter, Sidd is audited. Even though the audit has nothing to do the foreign accounts, in reviewing the file the IRS agent realizes that Sidd received the FATCA letter back in 2015 and therefore had knowledge of the reporting requirement.
As such, during the audit, the IRS agent asks when Sidd first had knowledge of the reporting requirement. Sidd tells the IRS agent it was in early 2017 when he was at his friends house and his friend was prepared tax returns for the year.
This is Offshore Tax Fraud, and the IRS Agent will probably end the audit and refer the matter to the IRS Criminal Investigation Unit…for criminal investigation.
Protect Yourself, Think Long-Term
We understand your scared, and there are a lot of vulture attorneys out there. These attorneys prey on your weakness, and try to assure you that you have no problem going streamlined – even when you are Willful or acted with Reckless Disregard. They are doing so solely to collect a quick check from you and are not acting in your best interest.
Then, when it’s time for you to be audited they will be little to no help to you — although you may have a malpractice and ethics lawsuit against them.
You Are Not Alone
Is important to read up on IRS offshore voluntary disclosure before making a decision. Some websites were simply regurgitate information they find on the IRS website for SEO purposes; we do not do that.
The following are links to examples and case studies we have authored on the subjects:
- OVDP Willfulness – Penny Wise and Dollar Foolish
- Eggshell Audits, Reverse Eggshell Audits, and Criminal Tax Liability
- FBAR Audits & FBAR Audit Triggers
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.
We Can Help You.