Thursday, June 13, 2013

Quiet Disclosures That Don't Stay Quiet - Civil Examinations (6/13/13)

Chuck Rettig, a major player in representing taxpayers through the thicket of correcting offshore account noncompliance, has written a very good summary article of the quiet disclosure that is discovered and examined by the IRS.  Charles Rettig, IRS FBAR Voluntary Disclosure Program: Taxpayer Interviews (Forbes 6/12/13), here.

The problem, he notes, is that "Many taxpayers continue to enter the OVDP. Others have bypassed the OVDP and simply amended returns or begun filing accurate returns on a prospective basis."

After discussing, the GAO report (previously blogged here), Chuck says that for persons filing amended returns -- quiet disclosures -- in lieu of joining OVDP:: " It should be anticipated that the IRS will pursue examinations of these amended returns in some manner."

With respect to the interviews in those examinations, Chuck says
When discovered, U.S. taxpayers who have bypassed the OVDP by filing amended or delinquent returns and FBARs should anticipate detailed IRS examinations likely to include interviews of the taxpayer, their return preparer and pehaps others. Numerous taxpayers having previously undisclosed interests in foreign financial accounts have recently been interviewed by representatives of the IRS as well as many having been interviewed by prosecutors associated with the Tax Division of the Department of Justice.
He then describes the types of questions and inquiries made.  He concludes:
Taxpayers continuing to have undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the OVDP.  Some may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. If discovered before any voluntary disclosure submission, the results can be devastating. 
I recommend Chuck's article to those contemplating or having made a quiet disclosure.

JAT comments:

Of course, the big uncertainty with the quiet disclosures for those taxpayers with material criminal investigation and prosecution risk is that, according to the IRS's rhetoric, quiet disclosures for offshore accounts are not "voluntary disclosures" subject to the voluntary disclosure program to mitigate or eliminate such risk.  The message -- or risk -- that the IRS intends to convey is, dammit, join the program or take the risk.

Despite the IRS's rhetoric, one has to ask the question whether a taxpayer otherwise have criminal investigation and prosecution risk can eliminate or mitigate the risk with a good quiet disclosure (whatever that is, but I know it when I see or do it)?  I think many practitioners think that the taxpayer can do that; that there are good reasons that the IRS and DOJ Tax would make the call at least not to criminally prosecute a good quiet disclosure.  Of course, I approach it a different way.  If the taxpayer has material criminal investigation and prosecution risk, joining the program is the way to go and the taxpayer should not be doing a quiet disclosure upon the uncertain hope that it will not be discovered and, if discovered, it will mitigate or eliminate the criminal investigation and prosecution risk.  Having said that, however, I suspect that, in the final analysis, for good quiet disclosures, the IRS will exercise discretion to conduct just a civil examination.  I suspect that the real risk is in the amount of the civil penalties that will be asserted and the number of income tax years that will be put in play.  And for those taxpayers will real criminal prosecution risk, there is a major risk of severe penalties and thus should join without quiet disclosure to get better penalties or, if the quiet disclosure was made and not yet discovered by the IRS, join the program.

28 comments:

  1. Jack,
    this is an interesting topic in light of GAO reports and virtual lack of news. What has your experience been so far with quiet disclosures in regards to following?
    - are audits being done for quiet disclosures that are within the 3 year SOL for taxes? Or, if 3-year SOL is over, is 6 year FBAR SOL being invoked?
    - are SOLs being extended to "unlimited" by claiming fraud even if 3-year SOL is over? I guess this could be done if the box is checked "No" on schedule B or if income is not reported.
    - what is a practitioner's thought process to do a QD even if the 3-year SOL is over?

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  2. I only had a couple of quiet disclosures. Basically, my attitude was that, if a taxpayer had no material criminal risk and concomitant civil fraud or willfulness risk, a go forward strategy was as good as a quiet disclosure strategy. And, on the quiet disclosures with which I did deal, we have not heard anything from the IRS. I can't predict comfortably whether or not we will hear, but we haven't heard to date.


    I do represent a client who did a go-forward when he should have joined the program but didn't. I began representing him only after the audit started. The IRS seems to be considering all alternatives in the audit, including the 6-year statute (both the traditional one and the new one for foreign financial accounts).


    Jack Townsend

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  3. Jack, you mention risk of civil fraud penalties when considering QD or go-forward. Is it because civil fraud opens you up to much higher (and willful) FBAR penalties or because civil fraud can stay on a person's record and cause issues later (like lighter version of criminal indictment)?


    Other implication of civil fraud can be unlimited SOL.



    Or, would the tax due would change because of determination of civil fraud?

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  4. I know that material criminal risk is hard to define without knowing all the facts and that we're talking about shades of gray as to where criminal risk becomes "material" as differentiated from "slight" or "major" but, could one conclude that all the prosecutions we've read about involved material criminal risk, and that simply checking no (or no answer) on Sched. B and not filing FBARS or reporting the income, but not engaging in active behavior (entities, sending money outside the US) there would generally not be material criminal risk? Or is this a question that can't be answered in general terms?

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  5. The list of interview questions is informative. Jack, does this list reflect your experience with interviews?

    A policy decision the IRS needs to make is what the effect will be of aggressively pursuing quiet or go-forward disclosures. The article states that "The GAO Report asserts that a failure by the IRS to identify and pursue “quiet disclosures” will undermine the integrity of the OVDP and the
    incentive of others to participate in the IRS offshore programs."


    I would suggest that pursuing quiet and go-forward disclosures may well discourage any type of disclosure (except for those for whom OVDP is the only realistic option.) Those residing abroad, as well as immigrants, have the means to effectively hide foreign assets. Instead of allowing them to easily and inexpensively correct past mistakes, and then receiving income tax payments in the future, the IRS is getting harsh penalties from a minority while driving the majority underground.

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  6. If you don't mind, can you please clarify the audit process?
    - is the audit of your go-forward client limited to just offshore assets or the entire return is being audited for the years within SOL?
    - roughly speaking, how long did it take from when your client filed his/her return to getting the audit notification? Or, if the audit was triggered by FBAR then how long after that?
    Thanks in advance.

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  7. An audit (whether an opt out audit, a quiet disclosure audit, or a go-forward audit) can be of everything. It is not automatically limited to the offshore stuff. As a practical matter, however, the opt out audit is likely to be so limited unless something about the amended returns virtually on their face demands attention. In this regard, the amended returns that are required before the opt out should clean up everything -- offshore and onshore -- so that the IRS would, in most cases, waste audit resources by chasing after potential onshore adjustments.

    Somewhat the same consideration would apply to quiet disclosure audits. The quiet disclosure should have filed good amended returns for the years involved. It could not have qualified as a quiet disclosure if good amended returns were not filed. So, how far the IRS will want to dig into onshore stuff is not certain.

    Go-forward audits can put everything on the table and be subject to audit. The truth is, though, that the IRS is likely to spend most of its time focusing on the offshore stuff. In the one I have, they seem to be focusing on the offshore stuff. But, that may be skewed because virtually everything is offshore.



    Jack Townsend

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  8. Good day Jack i am wondering if the audit process offshore or Tax audit are same for QD, GF and OVDP (not opting out) is the same or are they different i am trying to make a choice of what to do in this case.


    My second questions is one of the OVDP lawyer suggested that i should go with GF, The lawyer thought that the amount i have in my foreign bank account is too low for the irs to even bother looking at my returns. Just wondering ifyou have an opinion
    Thanks

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  9. I am not aware that the IRS has said that the audit results (not the process but the results) are different, depending upon whether the audit arises from QD, GF or OVDP. The inference is that, basically, the same results should apply.

    The process will, of course, be different. In OVDP, you will do most of the audit work for the IRS, except for the taxpayer interview and the preparer interview. In audits generated by the QD or GF, the IRS will have to go through the standard audit process.

    For strategic reasons, a taxpayer in a QD or GF audit might want to deliver the same type of information and documents as required by OVDP, but that is a matter to be negotiated between the IRS agent and the taxpayer's representative.

    I do not have an opinion as to whether you go with GF or one of the other alternatives. That is an important issue that can only be addressed in the context of detailed facts and circumstances.

    Best regards,

    Jack Townsend

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  10. Sorry i thought i already posted but i do not see my question.

    Jack i just joined the IRS OVDP Pre Clearance under ovdp however after getting into the Pre clearance i read your's and several other blog to come to a conclusion that ovdp is not for me is their a way i can get out of the pre clearance and just do a GF filing/

    Will their be any implications?

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  11. The only implication is that you do not get the benefits of being in OVDI/P. These are no criminal prosecution and a cap on the monetary penalties. So, you should not drop out of OVDI/P if you have material criminal exposure. Assuming you do not, the only risk you are subject to is an audit risk where the tax and penalties are at issue. If you are comfortable that, on audit, you can do better, then you might take that risk.

    Seek counsel before doing so, however.

    Jack Townsend

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  12. Jack just to be sure i am not talking about Opting out. I just want to exit the pre clearance. My question is would i get special attention if i did once into Pre Clearence or no?
    thanks

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  13. I understood that you are asking about stopping after receipt of the preclearance letter. In my mind, you would do so only if, had you completed the OVDI/P process, you would opt out. To answer your numbered questions:

    1) You can do nothing after the preclearance and the IRS will kick you out. I suppose that you could notify the IRS that you will not complete.

    2) I don't know if you will get special attention. I think your chances of some inquiry, perhaps leading to a full audit will increase significantly. But I have no experience from which to draw and, so far as I know, the IRS has not said that.

    Jack Townsend

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  14. Hello Jack,
    Did you in one of your comments below say that you know of case(s) where a "Go forward" strategy triggered an audit?

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  15. RajNIL,


    I don't recall that I said a go forward triggered an audit. The go forward per se would not trigger an audit. To trigger an audit, the IRS would have to focus on earlier years (years prior to the go forward implementation years). I suppose that the FBAR required in the go forward might trigger an FBAR audit, because the IRS (as managers of the FBAR system for Treasury) might pick up the first time filing. But my clients implementing the strategy have had no audits -- yet -- from the implementation of a go forward strategy.


    I will not comment as to which strategy you should adopt other than to say that nothing you say would be inconsistent with a go forward. But I caution that there are other facts that should be considered before choosing the strategy that is best for you. The facts that should be considered are myriad and subtle, so just be careful.


    And, for analyzing whether go forward is best, you should assume that you will be audited and think about the result that would apply if you are audited.


    Best,and good luck.


    Jack Townsend

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  16. Thanks. In case one receives an audit after a GF, how much time would one have to figure out strategy with an attorney/cpa & reply back? Just curious about the time frame generally speaking for minnows. Will it be few months available to get back or only few weeks or few days? Also is it easy for irs to start automatically start putting their hands on one's US bank account/401k/home etc to suck penalty money/fines.

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  17. The time period for the audit will usually be driven by the IRS. Your responsibility will be to cooperate in the audit -- at least not hamper the audit.


    Of course, as you may know, if the audit starts with the possibility of a foreign account, the agent is likely to ask for the foreign account statements. One question is whether you should have already gathered the statements so that, upon inquiry, you could timely produce them. I think probably the better part of wisdom is to do so. As you probably know, failure to maintain the statements is itself a criminal offense, so getting them will at least preclude the problem (probably more theoretical than real).


    Then you should timely set about making your penalty mitigation arguments.


    But to loop back to your question, from the date that you are notified of the audit, you will have perhaps 30 days to start responding. That should be sufficient time. You should already have the underlying facts and documents and, even if a tax professional must be engaged to present them to the IRS, he or she should have sufficient time with the facts and documents to present them and start effectively making the case for penalty mitigation.


    Jack Townsend

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  18. Hello Jack,
    The paid two hour strategic consultation that you offer, in the outcome:

    1. Would you be able to determine & advice what strategy is best(or worst) (GF/QD/OVDI)? (I read in your one of your other posts, that one aspect in determining the choice of strategy will depend whether or not the person has a.) reasonable risk of criminal prosecution & b.) reasonable
    risk of the willful FBAR penalty. Is this evaluation part of your 2 hr consult?)


    2. Just curious if this consultation with you can happen before Jun30 or is that too short a notice? Just trying to decide if I should file 2013fbar and subsequent 2013 tax return (filed for extension earlier this yr).

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  19. First, let me say that, whatever your strategy, it should include full and proper compliance with 2013 FBAR and income tax filings.


    Second, the only issue you should address is what, if anything, you do about the past (GF only/QD/OVDP (with possible opt out).


    The 2 hour strategic consultation will deal with all aspects of the facts that bear upon the decision. Obviously, determining whether or not there is material criminal exposure will be a threshold issue, because if there is material criminal exposure, the only realistic option is OVDP. There may be other reasons to join OVDP, depending upon the facts.


    I probably could do the consultation in time for you to file the 2013 FBAR, but as I note above, whether or not to file the 2013 FBAR is not optional, so whether the consultation is before or after 6/30/14 will not affect that imperative to file the FBAR.


    I do require some predicate information before the consultation, so if you are interested, please contact my assistant, Merry Davis.


    Jack Townsend

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  20. Michael J. MillerJune 15, 2014 at 4:36 PM

    Jack, I've encountered advisors who consider GF unethical or illegal, because, in their view, there is a continuing legal obligation to file a past-due FBAR. Are you aware of any support for such a proposition?

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  21. We know it is illegal not to file an FBAR, if one of due, on 6/30 of the succeeding year. It is illegal because the law attaches civil and criminal consequences to the act of not filing the timely FBAR. There are no civil and criminal consequences for the act of not filing on, say, 7/1 of the succeeding year or any day thereafter. Could the Government allege in a civil or criminal case that penalties apply for the failure on 7/1 or any day thereafter? I don't think so. And, of course, the civil and criminal statutes of limitation run from the applicable 6/30 for year succeeding the year for which an FBAR is due. So, all the standard indications of legality and illegality point to that 6/30 as the key date. Filing a late FBAR, like filing a delinquent tax return, does not cure the failure to file timely. So, I would argue that there is no continuing legal obligation to file the FBAR once the key date has passed.


    Let me use an example. Suppose a person with very large Swiss accounts was in a coma on 6/30/2008 through 6/20/2014. That person comes out of the coma on 6/20/14, fully competent and with excellent memory of his Swiss account and his FBAR obligation on 6/20/14. Does that person have the legal obligation to file 6 years of delinquent FBARs.(for years 2007 through 2012) or just his 2013 FBAR due 6/30/14? I would argue that his or her only legal obligation is to file for 2013 because that is the only obligation that has legal consequences to failure to file during the period 6/20/14 through 7/1/14.


    Of course, like the failure to file income tax returns, there may be some prudential reasons to file, but I don't think there is a legal obligation to file.


    The key point in the example is that the client has no criminal exposure or civil penalty exposure by his failures to file on 6/30/08 though 6/30/13. The Government cannot argue, I think, that his her failure to file those FBARs when he awakes from the coma is an act subject to criminal or civil penalties. Now, in the real world, the example posited is extreme and unlikely to happen. But, in many cases, seasoned practitioners can make similar but less certain judgments that the client is not exposed to material risk of criminal prosecution and that the client is unlikely to be liable for the draconian FBAR willful penalty. In those cases, like the extreme example, there may not be even a prudential reason to file delinquent FBARs.


    I hope readers will share their views on this.


    Jack Townsend

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  22. Michael J. MillerJune 15, 2014 at 8:16 PM

    Thanks Jack. I am in complete agreement, and I greatly appreciate your taking the time.

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  23. Been in US for around 12+ years.. still on VISA which itself is a torture.. been sending to native country for all these years .. heard about requirement of declaration of Foreign accounts/FBAR only this year.. one of these foreign banks used to send me 1099 and i reported them under regular schedule B (not under foreign account as i never checked on it), the other bank never sent me 1099 and i didn't bother to report it.. for the most part it also taxed me heavily in my native country..

    my total federal tax liability for all these years adds up to around 5k - 8K.. what's my best option? if i go under OVDI, my entire balance will be probably gone..

    Past 3-4 months has been a real torture for me.. almost daily i think of ending my life out of fear of financial security for my family.. however think about my 2 small kids.. i postpone it.. not sure how long i can hold it.. i am on XANAX (anti-depressants) and my wife constantly reminds me of my kids whenever i head out..

    Please HELP!!.. This issue is so sensitive that i am not able to share it with anyone too.. i had no criminal intentions.. all i did was transfer after tax money to my home country bank.. never brought any of it back to USA.. and the total tax liability for all these years would come to a max of around 8K..

    Please HELP !!.. what's my best option here?

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  24. Been in US for around 12+ years.. still on VISA which itself is a torture.. been sending to native country for all these years.. heard about requirement of declaration of Foreign accounts/FBAR only this year.. one of these foreign banks used to send me 1099 and i reported them under regular schedule B (not under foreign account as i never checked on it), the other bank never sent me 1099 and i didn't bother to report it.. for the most part it also taxed me heavily in my native country..

    my total federal tax liability for all these years adds up to around 5k - 8K.. what's my best option? if i go under OVDI, my entire balance will be probably gone..

    Past 3-4 months has been a real torture for me.. almost daily i think of ending my life out of fear of financial security for my family.. however think about my 2 small kids.. i postpone it.. not sure how long i can hold it.. i am on XANAX (anti-depressants) and my wife constantly reminds me of my kids whenever i head out..

    Please HELP!!.. This issue is so sensitive that i am not able to share it with anyone too.. i had no criminal intentions.. all i did was transfer after tax money to my home country bank.. never brought any of it back to USA.. and the total tax liability for all these years would come to a max of around 8K..

    Please HELP!!.. what's my best option here?

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  25. Desi b:



    I feel your pain, but cannot consistent with my ethical obligations make a response. Perhaps others can.


    You might take a look at the list of attorneys in the right hand column of the blog and visit with one near you to get the right strategy in the context of all the facts that bear on the strategy considerations.


    Best,


    Jack Townsend

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  26. Thank you Jack!


    I tried calling some of the attorneys and they all seem to be inconstent.. majority wanted me to take "advantage" of ODVI..


    few suggested a GF while others suggested 2 years Amendments.. My highest balance for the unreported account is around $110K..


    This incident has left a deep scar in my whole family and we are planning to return for good to our home country by next year as we are leaving in constant fear now of losing everything and being felt like a tax evading criminal... i always had tax software and always thought that the foreign account was for some business or something...maybe i should have checked.. however always thought once the money goes out of country, its no longer a US unless you try to bring it back like black money ... didn't know about the concept of US taxing on global income..


    if i return back to my home country next year, will the IRS still try to contact me if they don't get in touch with me by then? i do have substantial financial holdings in US....

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  27. Desi b:


    I can't say what the IRS would do in the future.


    However, I wonder whether you are making this a bigger deal that it appears to be. At your high account balance for the noncompliant account, the miscellaneous penalty will be around $30,000 without an opt out. Hence, you know you can get out for a cost of the tax and 20$ penalty (with interest on both) and $30,000 for the miscellaneous penalty. It seems to me that you are considering drastic action over a relatively small quantifiable amount.


    If you leave the U.S. the IRS would still have the authority to investigate and assert appropriate tax, penalties and interest. That would include the FBAR penalty. Moreoever, if you have U.S. assets, the IRS could levy on those assets directly by IRS levy or pursuant to an FBAR judgment.


    So, I am having some difficulty understanding why you would consider such drastic action about a relatively small amount.


    Jack Townsend

    ReplyDelete

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