OVDP Case Study Example – Going Streamlined When you Were Willful

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OVDP Case Study Example – Going Streamlined When you Were Willful by Golding & Golding

OVDP Case Study Example – Going Streamlined When you Were Willful by Golding & Golding

If you were Willful and want to get into IRS Offshore Voluntary Compliance, your only option is OVDP. If you were willful, then you should never submit to the IRS Streamlined Program.

If you do, you may find yourself subject to excessively high fines and penalties.

The following case study is a cautionary tale of how one person can end up on the receiving end of an IRS Criminal investigation.

The OVDP Trek

You may be calling different law firms trying to get a feel for what your options are, which is a good strategy. But, please be careful of law firms that are trying to artificially sell you into the streamlined program when you know you are willful. In all actuality, you are probably in a vulnerable state — how can you not be? It is a big decision, especially when you think you were willful.

Most of these firms are sole practitioners and newer attorneys. They usually do not have any litigation or trial experience, are not licensed CPAs or IRS Enrolled Agents, do not have advanced Master’s of Tax Law degrees (or have these people on staff), and are trying to make a quick buck at your expense.

Willful

As we have mentioned before in many prior blogs — if you are willful, then you have no alternative but to go OVDP – presuming you are going to get compliant. While the IRS analysis of what constitutes willful may be a big “secret,” it is actually not that gray of an area — if you knew you should have reported the information to your CPA or Accountant (or otherwise knew it should have been included on your tax return), it is willful. It does not matter if you never heard of FATCA or haven’t the foggiest idea what an FBAR is.

But Remember, the Programs are Voluntary

In other words, please keep in mind that IRS Offshore Disclosure is called Offshore Voluntary Disclosure for a reason.

The choice is up to you as to whether you want to get into compliance or not. And, by letting an inexperienced or unethical attorney convince you (when you know otherwise) that you are non-willful when you know you are willful, you are only setting yourself up for a potential catastrophe in future years.

Typical Example

Here’s how it works (and no, you’re not alone on this journey). An individual knows he is willful and knowingly didn’t tell his CPA that he had foreign accounts. This is usually because the person is scared. In more extreme situations when dealing with some of the big four accounting firms, the firm may have even sent you a questionnaire or binder asking you to complete the necessary information so they can complete your tax return.

These questions are not confusing: they will ask you (normally multiple different ways and in simple terms) whether you have foreign, accounts, accounts in other countries earning income, and/or any other type of investment from abroad (these questionnaires typically steer clear of the term “offshore” since it connotes someone sipping margaritas in the Bahamas and not the reality of foreign account reporting). 

If this person proactively answered “No” in writing for all of these questions, this sets up a very difficult case to defend a Streamlined program audit. Sure, the chances of getting audited are slim but if you do, the IRS Auditor will assume you were willful based on these responses alone. Unlike the Schedule B, there is nothing confusing about a basic questionnaire (and in writing), and it is especially difficult to defend when you answered all of the other questions in the Questionnaire! 

Worse Yet, Multi-Country Tax Reporting

Continuing with the example above (regarding a CPA questionnaire), you may be in a more complicated scenario where you have not reported foreign income in other countries as well, in which you may also have a tax responsibility. For example, you earned consulting income in country A that you did not report on your Tax Return in country A. Or, you own securities/stock in country B, sold it, and did not report the income to country B. If you did not report either of these income sources to the U.S. under the United States worldwide income taxation rules, you have now committed tax fraud in multiple countries.

Why? Because the CPA’s questions/questionnaire are typically relatively clear (e.g., “did you earn any money outside the U.S.?”)

Alternatively, a person may have completed TurboTax or another program themselves and did not include the necessary information on the form. Yes, simply because you did not mark off yes to question seven on Schedule B is not fatal – but if you knew you were supposed to do so, then it could definitely be a problem.

You Contacted Experienced OVDP Attorneys

We know we are not the only game in town. We take offshore voluntary disclosure passionately, but with that said, we have worked alongside other firms who also focus primarily in this area of law and there are many solid attorneys out there.

We know when a potential client has spoken with one of these more experienced OVDP attorneys. Why? Because we can hear it in their voice. A good, experienced attorney will vet the client out properly to determine if the individual was willful and will not sell them on a false bill of goods that they can simply enter the Streamlined Program because the IRS is understaffed and the amount of income they have unreported is minimal (see below).

Typically in these situations, we agree with other experienced OVDP Attorneys as to willful versus non-willful. While core strategies amongst and between different experienced firms will vary, the basic advice will be consistent.

You Contacted Inexperienced OVDP Attorneys

These calls are just as obvious. A client will contact us after speaking with an inexperienced attorney who probably handles five different types of tax law, is not a CPA/EA, and really has no trial, legal, or criminal tax experience.

In these types of situations, the potential client will tell us that they essentially knew they were willful. They’ve done the research, they have a solid understanding of the law, and realize that maybe they were scared, or thought they would not be in the United States for very long, but they knew there was something they were supposed to report. Sometimes the client may get it wrong, and is not actually willful, but 99% of the time, when the client truly believes he or she was willful, they are — and are still scared and are not comfortable yet telling us the full story.

At that point, we explain that the individual can no longer go Streamlined. And, if they go Streamlined, (not with us since we would no longer be willing to represent them for that program) they would actually be committing a crime by intentionally misrepresenting their non-willfulness to the IRS under penalty of perjury – which down the line may subject themselves to excessively high fines and penalties and even a criminal investigation. Again, sure, the chances of getting audited might be low (depending on your income level, how much is in your foreign accounts, etc.), so ultimately, it is up to you whether you are willing to take on that risk. With that said, our firm will NEVER take on a client when the client fully admits to willfulness.

You Contacted Unethical, Inexperienced OVDP Attorneys

An unethical OVDP Attorney is more focused on selling their services than helping a client. They couch their sales technique with the fact that they are going to significantly reduce their fees because the client can easily go Streamlined and nothing is going to happen because the IRS is understaffed and they only prosecute a few thousand individuals in a year. They want to help the client and there is no reason to go OVDP since it is a just a little bit of unreported foreign money and you’ll never get caught.

At best, this is terrible advice; at worst, it is an ethical bar violation that may subject the attorney to the loss of his or her bar license. The attorney charges an absurdly low-fee to bait the client in and the client is in a much worse position than if he had never started this trek in the first place.

Here’s how they are setting you up for a potential criminal investigation in the future:

The Amount of Unreported Income is Low

So what. The IRS does not have any de minimis rules involving the reporting of foreign income once a person is required to file a tax return. Therefore, if you have $200 of unreported for income but you were willful, you have to enter OVDP. You have no other option, if you’re going to disclose.

If you submit a Reasonable Cause Statement or Streamlined Submission instead of OVDP when you are willful, you are making an affirmative misrepresentation to the IRS that you had reasonable cause or were non-willful, when you knew you were willful.

Congratulations, you have just committed multiple crimes.

  • Offshore Tax Fraud
  • Offshore Tax Evasion
  • Perjury

If you knew you were willful, do not enter the Streamlined Program and do not make a Reasonable Cause Submission. But, these attorneys want to sell you, so against your better judgment they convince you Streamlined or Reasonable Cause is still a viable option.

The IRS is understaffed

This is true, but again – so what. Even though the IRS only prosecutes a few thousand individuals a year, hundreds of thousands of individuals get caught with extremely high fines and penalties due to two (2) main situations:

The IRS only goes after “Big Fish”

This is an absolute lie. Why? Usually because “Big Fish” come armed with “Big Attorneys.” Experienced attorneys would take the IRS to task around each corner, costing the IRS incredible amounts of time and money. Chances are, if you are considering offshore disclosure and you are looking to get into compliance before the IRS finds you, then this is not the type of cat and mouse game you want to play with the IRS.

Big fish typically remain out at sea until they are contacted by the IRS, and by the time they are contacted, they have already developed and implemented a multifaceted plan to avoid detection. Even if they are audited, they have prepared for it; you, on the other hand, have not.

The chances of getting caught are low

This is true. So the question is — are you risk-averse? Some people are willing to take that chance because they are risk-takers and are willing to lie to get out of OVDP. We absolutely do not represent clients who want to lie and go Streamlined just because they believe they will not get caught with their hand in the cookie jar. If this is you, please stop reading this blog and go contact a different attorney. We are not the right firm for you.

Some people are cautious. They remember that one time that something absolutely odd/random happened to them and realize that these things DO happen. Like the one time you leave the house sloppily dressed because it’s an odd hour or you’re going someplace secluded, and of course, that is the day you bump into someone you know. Chances of this occurring? Very low. Did it happen? Yes. 

In addition, many people commonly are audited for issues completely unrelated to the Streamlined/Reasonable Cause Submission (such as charity donations, home office deductions, self-employment expenses, mileage, changes in income, etc.). Unfortunately, this can automatically lead to questions about your Streamlined/Reasonable Cause Submission. 

What Happens When you Get Caught Lying to the IRS?

Here is the reality: Not everybody is going to get caught. You may be willful, make a Streamlined Submission, and get away with it (at least for now). Thereafter, down the line you may be audited. And, you are obviously somewhat risk-averse to start with…since you are considering proactively making an Offshore Disclosure in the first place.

Why Would I be Audited?

It could be as simple as you started making more money, you opened your own business, or other small red flags that lead to a harmless audit that has nothing to do with your Streamlined/Reasonable Cause submission. But, here’s the problem: the IRS will ask you about the Streamlined or Reasonable Cause submission since it is still in the Statutory Period of the audit.

And, if you made false representations to your original/prior CPA and your Streamlined Certification/Reasonable Cause Statement was flagged by the IRS – you are going to have to provide significant facts to the IRS to support your statement.

Let’s say you misrepresented your account statuses to a CPA. Worse yet, let’s say you did it in writing. If the IRS auditor wants to, he or she can request copies of any documents submitted to the CPA. Moreover, the IRS can directly ask the CPA firm for the documents as well – and if necessary, subpoena them. There is no attorney-client privilege with the CPA.

Worse yet, since the original returns were prepared by a CPA that predates representation by your inexperienced OVDP Attorney for the Streamlined/Reasonable Cause submission, the former CPA will have little to no basis for refusing to provide the requested documentation to the IRS

What Now?

Picture it: You are sitting in an audit with an attorney who probably has no trial, litigation or criminal tax experience (if they did, they would have never sold a willful individual into the Streamlined Program). And, the IRS Agent notices the following:

  • You speak English well
  • The questionnaire from the CPA firm is in English
  • Your CPA speaks English
  • You provided answers to many different questions on the questionnaire, so obviously you read it
  • When it comes to the foreign account questions, you marked off no.
  • When it comes to foreign income questions, you marked off no.
  • When it comes to foreign investment questions, you marked off no.

The auditor is now sitting across from you staring at your answers. What are you going to tell the IRS Agent as to why you marked off no for all these different questions? You didn’t understand what the CPA meant by income from outside the United States?

Don’t Dig an Even Deeper Hole…

You are sitting across from the IRS Auditor either at his/her office or at your Attorney’s virtual office he rented for the day, and wondering how to explain that even though you speak English, the questionnaire is in English, and your CPA speaks English – that somehow you didn’t understand these particular sets of questions about foreign accounts, income, investments, real estate, etc. — but you understood the rest of the questionnaire enough to answer the other non-foreign account related questions.

So, what do you say now when the IRS agent asks you how you were non-willful… “(Gulp!) Because… my attorney said I could still go Streamlined because the chances of you finding me were low.” Hmm… It will be hard for your Attorney to represent you while he or she is facing an ethical inquiry from the State Bar.

Moreover, when the IRS Agent delves further and realizes you are also out of compliance for filing taxes in a foreign jurisdiction as well, you have got a bigger problem. The IRS agent is going to assume that you knowingly didn’t report information to other countries, which may cause him to follow-up with the foreign tax authorities — since now they are going to question the values you used for the Streamlined/FBAR/FATCA submission you made.

This may lead the IRS Agent to report you to the criminal investigation unit of the IRS (IRS Special Agents), which may lead the IRS to contacting other country tax authorities – and since many countries enforce criminal tax jail time and only have limited voluntary disclosure programs, you have a real problem.

All the while, your attorney is charging you for this, per hour.

If the IRS believes you are lying, they may issue immediate enforcement activities such as Levy/Seizure or Passport Revocation.

OVDP

Instead of letting an inexperienced OVDP attorney take you astray and sell you on reduced fees by submitting into the Streamlined Program (when you are willful), think long-term. Consider the options. While only a few thousand individuals actually get indicted or investigated, hundreds of thousands get stuck in the matrix.

Even if you enter OVDP, you may be able to opt out, you may be able to take better tax positions (MTM Elections), and/or you may be able to reduce penalties for retirement/pension funds.

In this particular scenario, had the individual simply entered OVDP (whether he had one year, 5 years, or 10 years of unreported income), chances are – the case would have just closed out with no concern of the IRS contacting the foreign country tax jurisdictions (and potential criminal liability under foreign country tax laws).

Why? Because typically when a person makes a full disclosure under OVDP, provides sufficient foreign bank/financial documents, and signs the 906 closing letter — the IRS is satisfied and the case resolves with no chance of audit or criminal investigation. That means no further inquiry into what the person did or did not comply with involving the foreign jurisdiction.

Penalties

If you are found to be willful and intentionally misrepresented your case to the IRS, you may be subject to extremely high fines and penalties beyond what you may have already paid.

The following is a summary of penalties as published by the IRS on their own website:

FBAR

A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 3520

A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Form 3520-A

A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

Form 5471

A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 5472

A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

Form 926

A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

Form 8865

A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Underpayment & Fraud Penalties

Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

Even Criminal Charges are Possible…

Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. 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. 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.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

Golding & Golding, A PLC

We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.