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Think You Are Out Of Trouble With Filing A Timely Voluntary Disclosure? Think Again

By Michael B. Nelson, Esq. - Email Editor

Date : December 3, 2009

On September 24, 2009, Trustmakers published my article on Foreign Bank Account Voluntary Disclosure titled “One More Go On Voluntary Disclosure”. One response to the article was in the form of a question asking why I was trying to cause mass panic to the public with the issue of Voluntary Disclosure to the Internal Revenue Service. I found this question to be quite odd, since the IRS has, openly and internally, published its intent to first give each person’s Disclosure to the Criminal Investigation Division, CID, and if CID determines preliminary acceptance into the voluntary disclosure program, the person’s case will be referred to the civil side of IRS for examination and resolution of taxes and penalties. Please note that the Disclosure will first go the CID and there are no guarantees that they will then pass it on to IRS for civil examination. At the date of this writing, CID has not provided any procedure or itemization of how the Disclosure will be processed or what will be deemed a satisfactory Disclosure to allow closure of any criminal prosecution and movement on to the civil area of the Service.

The IRS Manual which provides guidance for the IRS states the following:

The Service has publically stated that: “Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.” If you closely read the above statement, you will clearly see that participating in the voluntary disclosure program will “generally eliminate the risk of criminal prosecution”(my emphasis). There is no absolute guarantee in the Service’s statement that the filing of the Disclosure will absolutely eliminate any government criminal prosecution. Remember that this Disclosure information can be obtained by other courts directly from you, such as in Family Court and Bankruptcy Court, as well as potential exchange of information with the state in which you reside for their own determination of proceeding with criminal prosecution against you.

The following are some of the criminal penalties that you may be facing whether you file the Disclosure, and it is not accepted by CID for civil examination, or you have not made a timely Disclosure:

Possible criminal charges related to tax returns include:

1. Tax evasion;

If you are convicted of tax evasion the penalty is a prison term of up to five years and a fine of up to $250,000.

2. Filing a false return;

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.

3. Failure to file an income tax return;

A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.

4. Failure to file an FBAR;

Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

5. Filing of a false FBAR.

Filing a false FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Of course, the above 5 items are only related to criminal penalties, not the civil penalties that will follow and are quite substantial.

Even if you do file a successful Disclosure and a civil examiner determines that you have been honest and fully disclosed all information to their subjective intentions, the payment of the taxes, penalties and interest must still be overcome in order to have any guarantee of the Service in relation to criminal penalties:

The March 23, 2009 guidance requires the taxpayer to fully pay all taxes and interest for all years covered, and the Voluntary Disclosure penalty, as well as all other unpaid, previously assessed liabilities, when the signed closing agreement is returned to the Service. However, it is possible for a taxpayer who is unable to make full payment at that time to submit a request that includes other payment arrangements acceptable to the IRS.

The burden will be on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and offshore, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements, acceptable to the IRS, to resolve all outstanding liabilities, in order to be entitled to the penalty relief set forth in the March 23, 2009 guidance.

As noted above, the burden is squarely on the taxpayer. However, there is also a burden on the tax advisor who helped inform the clients as they determined whether to participate in the timely Disclosure. Tax Practitioners are licensed before the Service and must abide with its rules and regulations in a publication called Circular 230. The Service makes specific reference to those Practitioners that give advice to taxpayers:

The IRS expects taxpayers to seek qualified legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks the advice of a tax practitioner but nonetheless decides not to make a voluntary disclosure despite the taxpayer’s noncompliance with Untied States tax laws, Circular 230, section 10.21, requires the practitioner to advise the client of the fact of the client’s noncompliance and the consequences of the client’s noncompliance as provided under the Code and regulations.

As practitioners, we know that it was difficult to inform their clientele on the ramifications of filing as well as not filing a timely Disclosure. A huge amount of information has to be communicated to the clients to ensure that the clients know their options and then make an informed decision of whether to file the Disclosure. I suspect that most Practitioners who provided clients with the necessary information are not completely comfortable that the knowledge that they provided clientele would be considered full and accurate information to answer all of their clients’questions and concerns.

The Service has recently issued an internal Memorandum discussing those examination procedures for receipt of Disclosures. Interesting to note that even if the CID agrees to forward the Disclosures on for civil examination the Disclosure will be forwarded to CID Philadelphia for civil processing. This is a radical departure from the normal examination procedure of being placed in the usual area/industry civil examination units, see the attached Memorandum dated March 23, 2009. Another interesting point to note regarding communication from the Service, is that they state that "If the taxpayer and the IRS cannot agree to the terms of the closing agreement..." there will be no appeal rights.

To provide a framework for my prior article and an update, I, as I would expect most of my colleagues, do not have true comfort on the guidelines and communications issued by the Service on Disclosures as of October 15, 2009. Now that the deadline has passed for timely Disclosures, I will present future articles on what to do if you missed, intentionally or unintentionally, the October 15, 2009 deadline.

The Statistics of Income (SOI) Division’s study of 2006 foreign trust information returns, Forms 3520 and 3520-A, is consistent with substantial and increasing interest in foreign investment by U.S. taxpayers. Between tax years 1990 and 2006, the number of Form 3520 returns reporting foreign trust transactions and certain foreign gifts increased by almost 5,900 percent, while the number of Form 3520-A foreign grantor trust returns increased by more than 1,200 percent.

The total value of property transferred, as reported on Form 3520, increased from $273 million for 1990 to $1,642 million for 2006. During the same period, net income reported by foreign grantor trusts increased from $3 million to $1,941 million, while total assets in these trusts increased from $154 million to $31,888 million. U.S. persons also reported $2,878 million in distributions from foreign nongrantor trusts and $2,891 million in foreign gifts and bequests for 2006.

As you can see from the Government’s own information released November 23, 2009, there are massive increases in the utilization of foreign Grantor and Non-Grantor Trusts. These increases are expected to continue to grow even more dramatically and the responsibilities and burdens that go with these Trusts are expected to increase at an equally rapid rate.

Feel free to email us at info@trustmakers.com or call to discuss your options.

Taking Action If you have a company, foundation or trust outside the US borders and want to know if you have correctly set it up for structural and/or tax purposes our advisors are now handling these cases. Please reply to info@trustmakers.com.

By John Dietz, CWPP™, CAPP™- Senior Advisor
TrustMakers.com

 

 

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