Unfortunately for the above immigrant who joined OVDP in 2012 it is too late to make some meaningful changes to his approach/strategy with regards to his case. He should have done the right due diligence before pulling out his check book. Nevertheless I would like to use his example to point out a few things that one can and should avoid when dealing with the Tax Bermuda Triangle that is IRS,CPA and tax lawyer.
I have written a blog post before about this subject which explains a few of the problems (http://federaltaxandformcrimes.blogspot.com/2014/06/are-tax-lawyers-part-of-problem.html)
For a taxpayer to engage CPAs or tax lawyers is by definition nothing bad or foolish but the assumption that these "professionals" are your ally and friend is a naive and costly one. By definition - even incl. Circular 230 - these professionals are independent IRS subcontractors. The profit motive is an economic concept which posits that the ultimate goal of a business is to make money. The majority of criticisms against the profit motive center on the idea that profits should not supersede the needs of people and it is believed to encourage selfishness and greed. CPAs and tax lawyers fall into the same category, some more - some less. A taxpayer has to make an important decision at the beginning of his due diligence journey : Does he care how much his defense costs ? Does he want to be involved ?
If the answer is NO than obviously the discussion stops and I wish him all the best but if the answer would be yes than I have a few suggestions to make his life easier.
1. What can I do to make the right decision which way to go with regards to my options ?
Whether or not the taxpayer should have joined OVDP to start with requires many nuanced considerations of all the facts. That is the single most important and biggest issue in this area and only if that a conclusion can be reached that the risk of criminal prosecution is low, should one not enter into OVDI/P. But reaching that conclusion with a certain level of certainty requires a lot of digging into the facts and a lot of judgment once all relevant facts are known.
- $500 initial consultation : many tax lawyers would like you to spend 1 hour or so with them so they can outline your rough options with regards to your facts and circumstances . The problem with this approach is that if you have spend 3-4 hours already on this blog or a few qualified others you will learn nothing, zero, zilch, nada new and besides having wasted $500 are not any closer to make a smart decision regarding your case. Depending on how complex and complicated your facts are the best approach is to pay a qualified tax attorney $1,500 to $3,000 for a detailed evaluation and not a representation of all your possible options with regards to :
- OVDP
- OVDP and Opt-out
- Streamlined Process for taxpayers residing outside of the U.S.
- Streamlined Process for taxpayers residing in the U.S.
- Transitional Rules for those who’ve mailed their OVDP Letter before July 1, 2014.
- Quiet Disclosure.
- Qualified Quiet Disclosure.
- Filing forward or GF.
- Do nothing since Statutes of Limitations have run.
- Traditional Voluntary Disclosure for those with domestic unreported income.
- Traditional Voluntary Disclosure for those duals or green card holders residing outside the US with "offshore" unreported accounts/income or non filers.
- Optional compliance procedures for those with unfiled FBARs but no unreported income.
- Optional Compliance Procedures for those with unfiled information returns but no unreported income.
Now you are armed with a pretty good outline of your options and possible consequences and your personal risk tolerance now determines the next steps. The risk level may rise if any of the following are present:
•If any of the returns submitted claim a refund;
•If there is material economic activity in the United States;
•If the taxpayer has not declared all of his/her income in his/her country of residence or former residence;
•If the taxpayer is under audit or investigation by the IRS;
•If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
•If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
•If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
•If there is U.S. source income; or
•If there are indications of sophisticated tax planning or avoidance.
- tax resolution firm: Normally I am not a fan of fixed cost representations (all-inclusive so to speak… it never is) instead of the retainer – hourly billing procedure. Make sure in your “letter of engagement” you are as specific and detailed as possible with regards to the expected scope of your lawyers involvement. Obviously in certain cases this can be the right approach as well especially when combined with the engagement of a Strategic Consultation by a different tax attorney regarding offshore accounts and related matters. Expect a price tag of $15-$30K incl. Opt-out in case of OVDP and work from an in-house CPA. There are not many quality tax resolution firms in the US that specialize in offshore matters, so be careful and patient when you pick one.
- always do a cost/benefit analysis when you ask your tax lawyer to do anything - when in doubt get an estimate first :
The average hourly rate is currently $558 for a US based tax lawyer and believe me they will start billing you the moment they have to pull your file or read your e-mails. It is important that you let your practitioner know from day 1 that you are cost conscious and would like to know upfront how he uses his billable hours/time. Under no circumstances start the action-reaction vicious circle which means IRS examiner acts (correct or incorrect) through a CP Notice (called Soft Notices) and your tax lawyer reacts with a response.
If you let this happen than your legal cost will skyrocket soon - most of these Notices are straightforward and not hard to answer or respond to with a confirmation, protest or rejection because of factual errors (do not expect your tax lawyer to give you this hint).
If the error in question from the IRS examiner is $500 but your cost in dealing with it $500 or more - get an estimate from your counselor but leave it alone. Always write a letter (certified mail) stating your arguments with regards to his errors.... establishing a paper trail. Document and save it for appeals or TAS or when you protest to the examiners manager about these errors.
- the IRS is patting themselves on the back with their policy to be unpredictable and inconsistent when it comes to the issuances of different notices and how they deal with offshore matters (interview,audit, etc.) :
it is important to understand how to use this policy to your advantage and try not to follow the usual path your examiner is expecting from you or your tax lawyer and call their bluff.
- do not grant a further 1 year SOL extension when your case is already 2 years in the system butA valid 872 extension will protect the statute of limitations for refund of income tax, penalties and interest (2 years from the date of payment) . The problem is that the Form 872 is not valid for years that were closed when the Form 872 was signed. Hence, you will need to file a protective claim for refund to guard against the possibility of opt out. This is not important if you stay in OVDP or accept Streamlined, but it is important if you are in OVDP and may opt out. Also, if the income tax payments for the earlier years were actually posted to a year that was open when the Form 872 was executed by the IRS, then the refund year would be open.
The bottom line is to remember that YOU the taxpayer is pretty much alone in his quest for fairness and justice against the Tax Bermuda Triangle. Do expect errors, actually from your CPA and tax lawyer as well as from the IRS examiner.
Always have a Plan B when this happens.........."My lawyers spend more time correcting his understanding of the law and the OVDP, then actually getting our case settled." ......
In the above example the best strategy for the immigrant would have been to not interfere with the learning curve of this obviously inexperienced and biased examiner and wait for Form 906 and afterwards in the opt-out or post-assessment appeal raise all these errors to the front to disqualify this examiner and turn it around into a positive, sympathetic argument for his case (see "Humanize your Case").
It is my opinion - especially with larger accounts - to submit amended returns through a QQD. Let the IRS (initially your low level examiner) do the work and develop the facts and circumstances themselves - give them a chance to make errors but you keep your powder dry for appeals or litigation with the correct facts.
The focus should be on the facts rather than the "law." During possible appeals or litigation you will be dealing with a different caliber of the IRS and they know the law. What the IRS does not know are the facts and the factual nuances of your case.
What is the point of spending $30K+ on CPAs and tax attorneys when you know you will most likely not be happy with Form 906 the closing agreement and end up in litigation !? This is a chess game and you need to always think 2 moves ahead.
As a general rule, I think entering OVDP/I when you know from the start you'll opt out is undesirable and counterproductive if the determination has been made that there's no material criminal exposure or only very little because you will not achieve the principal benefit of the OVDP/I programs. What it does it will guarantee substantial legal and accounting fees plus an audit, which might not otherwise occur.
Ask yourself : If I feel confident that I can demonstrate non-willfulness in an opt-out audit, I will probably feel roughly as confident that I can demonstrate non-willfulness if I'm audited following a QD.
Of course, it is also possible that the IRS looks at you in a someone more favorable light if you join OVDP/I and opt out (who knows? We're talking psychology here), but in principle the IRS should consider all of the facts surrounding the noncompliance at the time of the noncompliance. Those facts are whatever they are, and shouldn't be affected by subsequent events, such as the taxpayers choice to not join OVDP or OVDI (which ought not be held against anyone, as there is no legal,moral or ethical obligation to do so).
And finally keep in mind that the amended return is an actual return and everything for which there is a not a reportable position needs to be corrected on the amended returns. So, at least by the time the CPA is through, you have really in some ways already done the audit work for the IRS. So the IRS's spending much time routinely on all submissions would be a huge waste of resources.
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