IRS Commissioner Shulman has invited persons with unreported foreign accounts to
\ncome forward and avail themselves of the IRS\u2019s Voluntary Disclosure Practice. That
\npractice is described in the Internal Revenue Manual 9.5.11.9. The Practice has a bearing upon whether\u00a0 the IRS will conduct a criminal investigation and recommend that the Department of Justice\u00a0 should commence a criminal prosecution. The Practice is not designed to address the IRS\u2019s\u00a0 discretion whether to impose civil tax or FBAR penalties.<\/p>\n
The Internal Revenue Manual states that a voluntary disclosure made by a taxpayer will be\u00a0 considered by the IRS along with all other factors in the investigation in determining whether a\u00a0 criminal prosecution will be recommended to the Department of Justice. The Internal Revenue\u00a0 Manual is quick to add that the Practice creates no substantive or procedural rights as it is\u00a0 simply a matter of internal IRS practice, provided solely for the guidance of IRS personnel.\u00a0 Voluntary Disclosure does not apply to taxpayers with illegal source income. A Voluntary\u00a0 Disclosure occurs when the taxpayer\u2019s disclosure of the unreported liability is truthful, timely,\u00a0complete, and when (a) the taxpayer has shown a willingness to cooperate (and does cooperate)\u00a0with the IRS in determining her correct tax liability and (b) the taxpayer makes good faith\u00a0 arrangements to pay in full to the IRS the tax, interest, and any penalties determined to be\u00a0applicable.<\/p>\n
Importantly, a disclosure is considered to be timely if it is received at a time when the IRS has\u00a0 not yet received information from a third party alerting the IRS to the specific taxpayer\u2019s\u00a0 noncompliance or has initiated a civil examination or criminal investigation which is directly\u00a0 related to the specific liability of the taxpayer.<\/p>\n
Navigating the Voluntary Disclosure Practice:
\nGiven the aggressiveness of the IRS\u2019s enforcement efforts and the severity of the potential\u00a0 criminal and civil penalties involved, participation in the IRS\u2019s Voluntary Disclosure Practice\u00a0 should be carefully considered by any non-compliant taxpayer. Before advising such a client\u00a0 regarding this program, any practitioner would be well-served to take the following steps:<\/p>\n
\u2022 Conduct Thorough Due Diligence: The potential stakes and the fact-sensitive nature of the\u00a0 inquiry dictate that the practitioner obtain a complete and accurate understanding of the\u00a0facts. First, it is important to determine the scope of the problem \u2013 the number of years\u00a0involved, the size of assets, the number of taxable events and whether acts of concealment,\u00a0 falsification of documents, or other potential badges of fraud are involved. All of these\u00a0issues are critical to assessing potential criminal and civil exposure. Second, it is critical to\u00a0pressure-test the client\u2019s story. Participation in the Voluntary Disclosure Practice will most\u00a0likely require responding to IDRs, producing documents, and submitting to interviews. Not\u00a0only can such subsequent fact-finding interfere with your goals when making the Voluntary\u00a0Disclosure, but misstatements during this phase can, and often are, the grounds for\u00a0subsequent criminal prosecution. You cannot take your client\u2019s word; you need to obtain\u00a0records from the bank, examine passports, and talk to the tax preparer. If, for example, your client has made frequent and regular trips to Switzerland, the IRS\u00a0may be less likely to accept his or her story of careless neglect. Third, you need to keep\u00a0abreast of the quickly evolving legal landscape involving the interplay between the privacy\u00a0laws of other jurisdictions and U.S. laws. A significant IRS victory on any of these issues\u00a0will make the IRS less likely to agree that your client satisfied the \u201ctimely\u201d element of the\u00a0voluntary disclosure program. No one has a crystal ball, but if your client is inclined to\u00a0participate, delay could have serious costs.<\/p>\n
\u2022 Carefully Analyze Potential Criminal and Civil Liability: In many scenarios, particularly\u00a0those involving inherited accounts, the potential tax liability and civil penalties is a far more\u00a0realistic and onerous threat than criminal prosecution. As noted above, however, a taxpayer\u00a0has to agree to pay all tax, interest, and penalties to take advantage of the Voluntary\u00a0Disclosure Practice. The potential civil penalties could be draconian and could, in fact, far\u00a0exceed the total value of the assets held in the undisclosed account. That is particularly true\u00a0if your client failed to file the required FBAR for a number of years, or is potentially\u00a0subject to civil fraud penalties, which are not bound by any statutes of limitation. There is\u00a0no point in rushing in to negotiate a tax liability and penalty package that your client cannot\u00a0or will not pay, particularly when the risk of criminal prosecution is low. The IRS believes\u00a0there are hundreds of thousands of taxpayers who have failed to disclose foreign accounts,\u00a0many thousands of whom did so willfully. The IRS does not have the resources to prosecute every willful evader, and the risks of prosecution, even in cases of willfulness,\u00a0will vary depending on such factors as the scope and duration of criminal conduct, the amount of the delinquent taxes, the deterrent value, and the prosecuting district.<\/p>\n
\u2022 Evaluate Disclosure Options: There are two ways to disclose the existence of foreign
\naccounts and income: \u201cquiet disclosure\u201d or \u201cnoisy disclosure.\u201d Quiet disclosure involves\u00a0simply filing amended returns with the appropriate IRS service center and filing in Detroit\u00a0the necessary FBAR forms that disclose the account and state the reason for the prior nondisclosure.\u00a0An amended return will typically be examined by CID for potential prosecution\u00a0and\/or participation in the Voluntary Disclosure Practice. If CID is not interested in\u00a0pursuing a criminal investigation, the matter will be referred to IRS Exam for a civil audit.\u00a0On the other hand, a \u201cnoisy disclosure\u201d involves contacting someone responsible for\u00a0making a decision on prosecution \u2013 i.e., a senior representative of CID or a responsible\u00a0person in the local U.S. Attorney\u2019s office — to explore, on an anonymous basis, the\u00a0potential applicability of the Voluntary Disclosure Practice. This noisy approach should be\u00a0through an attorney who will gauge the chances that the client will be allowed to participate\u00a0in the disclosure program before any identifying information is provided. If accepted for Voluntary Disclosure, the taxpayer will cooperate with Exam representatives to determine\u00a0all liabilities for taxes, interest, and civil penalties, which liability will then be memorialized in an issue-specific IRS closing agreement.<\/p>\n
\u2022 Balance Delayed Closure Against Intangibles Such as Peace of Mind: Perhaps the most\u00a0prominent advantage of noisy disclosure is that it has the potential to bring closure.\u00a0Although neither the DOJ or IRS will grant amnesty or immunity as part of this program,\u00a0taxpayers can be assured that issues covered in the closing agreement with the IRS will not\u00a0be subject to criminal prosecution. The quiet disclosure route, however, provides less\u00a0immediate feedback and less certainty. It is possible a case will get hung up in CID, and\u00a0the taxpayer will hear nothing. Or the return could have fallen through the cracks, or on a\u00a0back burner. However, the risks of any disclosure are not insignificant, and are accelerated\u00a0and magnified with noisy disclosure. You are putting your client squarely in the IRS\u2019s\u00a0sights, and any inconsistencies or false statements can be fatal to an effort to avoid\u00a0prosecution. What is worse, they can provide an independent ground for criminal\u00a0prosecution. In addition, disclosure provides no protection of on-going or unrelated tax\u00a0issues that could arise during the subsequent examination. On the other hand, doing a\u00a0correct current filing (which a non-filer is obliged to do if the non-filer’s accounts had an\u00a0aggregate maximum balance of more than 10,000 dollars in 2011) may raise a red flag if\u00a0corrective back filings are not also done — perhaps prompting the IRS to view all past nonfilings as willful for FBAR penalty purposes.<\/p>\n
\u2022 Minimize Risk: To the extent possible, an attorney needs to carefully control the disclosure\u00a0process and his or her client to minimize these risks. Disclosure statements should be kept\u00a0as brief as possible, and the attorney needs to be diligent to ensure that every statement is\u00a0accurate and supported by documents, if possible. The attorney-client privilege should also\u00a0be carefully protected. If an accountant is to be involved in the process, that process needs\u00a0to be cloaked with protections designed to comply with the Kovel case, which allows for the\u00a0protection of accountant work product designed to assist an attorney.<\/p>\n","protected":false},"excerpt":{"rendered":"
IRS Commissioner Shulman has invited persons with unreported foreign accounts to come forward and avail themselves of the IRS\u2019s Voluntary Disclosure Practice. That practice is described in the Internal Revenue Manual 9.5.11.9. The Practice has a bearing upon whether\u00a0 the IRS will conduct a criminal investigation and recommend that the Department of Justice\u00a0 should commence […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[19,24,16,54,63,56,27],"class_list":["post-1265","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization","tag-amnesty","tag-foreign-account","tag-nj-estate-tax-2009","tag-offshore-accounts","tag-ovdi","tag-tax-crime","tag-voluntary-disclosure"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1265","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=1265"}],"version-history":[{"count":0,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1265\/revisions"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=1265"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=1265"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=1265"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}