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Tax Amnesty; Now What?

By Michael B. Nelson, Esq. - Email Editor

Date : October 20, 2009

The Internal Revenue Service’s Voluntary Disclosure Program proffering amnesty is now officially over as of midnight, 15th October 2009. This Program was held out by the IRS as a way for individuals with previously undisclosed income to contact the IRS and resolve their tax matters.

There exist huge exceptions for the Voluntary Disclosure Program as it relates to people who applied in good-faith for the protection of the Program. So, although you may think that you have embraced the Program and are now safely under the umbrella protection from massive civil and criminal penalties, think again.

Here is a list, although not exhaustive, of exceptions for coverage to individuals who came forward under the Program. People who will ultimately be denied the protection of the Program, but who will have voluntarily disclosed private and confidential itemized details of their particular and damaging situation to the IRS are truly at civil and criminal risk. Please carefully read the following exceptions that the Program has within its agreement that allows the IRS to not be bound by the terms of their own Program’s agreement either immediately or as each person’s individual case proceeds through the scrutiny within the U.S. Treasury.

The following individuals will not be afforded the protection of the Voluntary Disclosure Program:

1. Individuals whose income is derived from illegal activities; or

2. Individuals who provided information that is deemed to be determined by the IRS as not truthful; and

3. Individuals who provided information that is deemed to be determined by the IRS as not timely; and

4. Individuals who provide information that is deemed to be determined by the IRS as not complete; or

5. Individuals who do not fully cooperate with the IRS in determining their correct tax liability and make arrangements to pay the IRS in full;

6. Individuals who submitted a timely application for the Program, but;

a. The IRS had issued a prior civil or criminal investigation of the Individual.
b. The IRS had “notified” the individual prior of an intention to begin an examination or investigation.
c. The IRS received information from a third party (e.g., informant, a governmental agency, or the media) alerting the IRS to the individual’s noncompliance with the Federal tax laws.
d. The IRS had initiated a civil examination or criminal investigation which is directly related to the specific liability of the individual.
e. The IRS has acquired information directly related to the specific liability of the individual from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

ANALYSIS:

1. What is an illegal activity?

An illegal activity may be illegal in your State or Federally. Generally, illegal activities are reported by banks to the IRS as a Suspicious Activity Reports (SARs). These reports are sent to the U.S. Treasury, Department of Justice and the Federal Bureau of Investigation. These reports are issued when there is suspicion of an attempt to conceal an illegal activity. I am sure you can all relate to the bank tellers asking you what you do for a living or what are you going to do with this large withdrawal. Well, here is the answer; these bank questions with your innocent responses may lead the bank to issue SARs naming you. This is a major tool used by the IRS to seek out individuals involved in illegal activities; such as

a. Individuals laundering money to conceal illegal activity, such as drug trafficking, health insurance fraud, and tax evasion.
b. Individuals using financial institutions, referred to as Money Services Businesses, that issue, sell or redeem traveler’s checks or money orders, transmit money, or exchange currency.
c. Funds coming from illegal activity or disguise funds from illegal activity.
d. Transactions structured to evade Bank Secrecy Act requirements or appears to serve no known business or apparent lawful purpose.

The IRS gives examples of suspicious activities:

• The customer pays for products/services using mosty bills having an unusual or chemical-like odor.
• A 16-year-old, riding a bicycle, brings bags of cash to a money transmitter to transfer from New York City to Miami.
• A customer, a retired CPA, frequently sends and receives money transfers of more than $2,000 to and from many different people.
• A customer conducting an $11,000 cash transaction attempts to bribe an MSB employee not to file a Currency Transaction Report.

2, 3 & 4. Truthful, Timely or Complete.

The IRS may at anytime within the Program process determine, unilaterally, that the individual is not truthful, not offering information and documentation timely OR not all information or documentation is complete in their view. This is a high standard of fulfillment for the individual to achieve throughout the Program process which may last for several years. I am confident that the IRS agents conducting this Program will have the individual sign several Form 872 allowing the IRS to extend the Statute of Limitations in conducting their investigation. Normally, the IRS has three years from the filing of the tax return to examine the return. Once the three years pass, the opportunity to commence an examination ceases under the bar to opening up the year(s) since the Statute has now passed. An exception to this rule is the signing of the Extension Request by the individual allowing the IRS to continue to investigate years past the initial expiration of the Statute.

5. Failure to Fully Cooperate.

If you fail to fully cooperate with the IRS in determining the correct tax liability and make arrangements to pay the IRS in full, the protection of the Program agreement can and will be revoked. By this time, you may have given in earnest all of your information to the IRS, but they may unilaterally and subjectively determine that you should be able to provide more information or documentation. At this or any point in the Program process, the IRS can and may revoke your protection for any of the aforementioned reasons. According to the IRS, if you truly do not have the ability to pay in full, you will be given an opportunity to seek other payment arrangements acceptable to the IRS. Of course, the burden of proving your inability to make full payment is on you. If you can not satisfy this burden of proof to the specific IRS agent by full disclosure of all assets and income sources, domestic and offshore, under your control and you are still unable to work out an acceptable financial arrangement, then you will become ineligible for the Program from the outset which may have spanned several years. Not only will your protection be revoked, but any potentially damaging information you have already supplied to the IRS during the course of your cooperation will remain information of the IRS that they could pass on to the State if they so choose. Consequently, an individual who has disclosed damaging information under the assumption he/she is “safe” under the umbrella protection of the Program is truly at civil and criminal risk. Remember, even if you do manage to overcome all of these high hurdles presented by the IRS, you still may not be able to agree with the terms and conditions of the Closing Agreement with the IRS. You are not allowed to mediate your case before the Appeals Division of the U.S. Treasury; a very valuable option generally afforded the individual! This means that the initial structure of examining the most recent 6 tax years under the Program is voided by the IRS and your case will be examined and all applicable penalties may be imposed upon you. Although any of these heavy tax and penalties now imposed by the IRS during examination may be appealed, the critical decision by the IRS as to the terms and conditions of the Closing Agreement can not be appealed!

CONCLUSION:

At this point, you may be feeling uneasy or even ill at what you believed to be an innocent decision to volunteer for the Program in a timely manner and seek to be an American in compliance with tax laws and get on with your life. This, however, for many individuals will not be the case. Even if you are fortunate enough to successfully work your case through the IRS for an acceptable Closing Agreement; you will still be facing the taxing authorities in your particular State of residence and/or domicile. The IRS has disclosure agreements with all 50 States and the information obtained by the IRS under this Program will be sent to your State of Residence or Domicile for the years involved. At this time, there are NO States offering Amnesty Programs to individuals participating in the IRS Program. Please see my earlier article on IRS disclosure of information to the 50 States.

Whether you participated in the Program’s filing deadline of 15 October 2009 or not, I believe that you should seek immediate legal guidance from independent legal tax counsel to assess your level of exposure and risk. You should also be prepared for a Notice Letter from your own State.

If you have questions, please email us at info@trustmakers.com.

By Michael B. Nelson
TrustMakers.com

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