Streamlined Disclosure Audit & Risk of Triggering an IRS Examination

IRS Examinations of Streamlined Submissions

IRS Examinations of Streamlined Submissions

IRS Examinations of Streamlined Submissions: We have recently learned of some unscrupulous international tax lawyers and firms perpetuating the spread of false information across the internet about how the streamlined procedures work, what the chances are of being audited, and how their hourly-fee structure works. They claim that nobody ever gets audited under the IRS streamlined program or for FBAR — and that they have 100% “success rate.” They fail to mention that the stand-alone streamlined procedures were only introduced in 2014, and that since most Taxpayers are subject to a six year (6) statute of limitations for streamlined audit or examination, a majority of submissions are still subject to audit.  Today’s post will summarize the increased in IRS Examinations of Streamlined Submissions.

IRS Streamlined Filing Audits Gain Momentum

In the past few weeks alone, we have been contacted by clients from other attorneys who are now under audit and feel as though they were misled or misrepresented by their attorney about how the process works, the chance of streamlined filing audit, and of course — and what the attorney/tax fees were supposed to cover.

What is the Streamlined Procedure?

The IRS streamlined procedure refers to an offshoot of the prior OVDP (Offshore Voluntary Disclosure Program). OVDP was closed in 2018 (and VDP was expanded).

Unlike OVDP, the IRS Streamlined Procedure does not issue a form 906 closing letter — although SDOP usually results in a “confirmation letter” where the IRS acknowledges receipt.

With unreported foreign income, a taxpayer is usually subject to audit under IRC 6501 — which extends the 3-year statute of limitations to six (6) years.

As any experienced tax lawyer will tell you, it is impossible to know who will get audited, or what additional post-submission services a taxpayer will need at the outset of the submission. Working with the IRS is time-consuming, and hourly bills can mount into the tens of thousands of dollars — if not more.

This is why taxpayers are best off retaining an expereinced law firm on a flat-fee basis (tax and legal) for them to handle both tax preparation and legal representation in-house — and it avoids any surprise by counsel when the IRS comes knocking.

Types of Streamlined Filing Examinations

The streamlined procedure may result in many different types of IRS tax audits — it is not always about willful vs. non-willful. Inexperienced counsel often misrepresent to potential clients that the chance of the audit is low or never happens — which is a dangerous misrepresentation to make.

The IRS moves slow.

It can take the IRS a few years before the IRS catches up with the taxpayer, and when they do they will issue the examination or audit notice at that time.

In addition, not all audits are the same.

There are many different types of tax audits that may stem from a streamlined procedure submission, which are ancillary to the non-willful certification aspect of the submission. For example:

• Foreign Tax Credit
• Foreign Earned Income Exclusion
• Foreign Gifts and Trusts
• Expanded Audit of Taxpayer from other income sources.

Streamlined Filing Hourly Fee Bait & Switch

Recently, we happened upon the hourly bait and switch scam that some attorneys are using on clients. These attorneys bait you in with low hourly fees and they tell you the chance of audit is minimal — so why would you pay a flat-fee?

Sure, the initial hourly fees seem low. But, throughout the process the fees start to add up as the Attorney burns through, and replenishes the retainer.

Recently, with the devastation that is COVID, the IRS is moving much slower than normal (which is already slow). Many agents work from home and only infrequently visit the office to check the mail — which has led to many issues with CP15, CDP, CAP, liens, levies and much more.

Attorney Example 1

One attorney we’ve heard of is literally billing attorney time ($450 an hour) for the Attorney to call the IRS on behalf of the client to check the status of some issues involving the streamlined disclosure.

The attorney was unable to get through to the IRS and literally charged the client for 8-9 hours of attorney time…to make telephone calls to the IRS, noting:

• they never got through to the IRS
• they never resolved the issue
• they still charged the client nearly $5,000

Attorney Example 2

This a much more dangerous and costly example.

Another attorney claims they have 100% success record and no one ever gets audited. One of the Attorney’s clients recently received an examination notice, and the Attorney wants additional fees to represent them in the audit. Recognizing that the attorney is much less experienced then the firm had led on during the consultation, the client no longer wants to use the original attorney.

Problem 1 (Kovel)

The attorney used a Kovel Letter for tax representation and referred the client out to a CPA for representation under false pretenses.

The Kovel Letter was used incorrectly as the Attorney purported that all communications with the CPA were covered under the Attorney-Client Privilege — which is never the case. Presuming Kovel would even work (it is not statutory law and can be rejected by courts), much of the communications that occured in this case between the client and CPA would not be covered under Kovel anyway.

Now, not only does the attorney want additional fees, but the CPA also wants additional fees as well for representation during the audit. The attorney and CPA tell the client they both are needed for the audit.

That will cost the client $700 per hour for representation in the audit.

Depending on how far the audit expands, we’re talking tens of thousands of dollars in additional fees.

Problem 2 (CPA Refusal to Honor Kovel)

To add insult to injury, the CPA refused to work with anyone but the original attorney under the false pretense of Kovel — even the new attorney the client preferred. Presumably because the attorney and CPA want to continue their “cross-referral relationship,” even if the client wants to use a different attorney.

The CPA claims unless the original attorney stays on the case, they are terminating the Kovel Letter.

When the client tells the original attorney, the attorney claims, “there is nothing they can do about it. Their hands are tied since that is an issue between the client and CPA.”

How Low Up-Front Hourly Fee Bait-and-Switch Works

When an attorney is too inexperienced in Streamlined Offshore cases, they will utilize hourly fees to puff up the bill and charge you for services that should be bundled into a flat-fee model. They charge a low up-front retainer to entice you, but ultimately, you end up paying more in the long-run as the attorney keeps burning through and replenishing the retainer.

When it comes to Streamlined Cases, Tax Specialists will always utilize a flat-fee, full-service model.

For example: You are preparing to speak with your attorney who is charging you hourly.

Here is how the hourly attorneys charge you:

• Review the case (charge)
• Prepare for the call (charge)
• Speak with you (charge)
• “Discuss” with their staff, if they have any staff (charge)
• Write up a file summary (charge)
• Send you an email summary (charge)
• They think about the matter again on the drive home (charge)
• And they prepare an updated summary (charge)
• Review new correspondence from the IRS (charge)
• Prepare & “analyze” correspondence before calling the IRS (charge)
• Waiting on hold for an hour with the IRS (charge)
• Email you to say they couldn’t get through (charge)
• Call the IRS again the next day, on hold for another hour (charge)
• Email you to say the call was unsuccessful (charge)
• Now, you are concerned so you call them to discuss. Leave a voicemail because you can’t get through, and you also email a follow-up.
• Listen to your voicemail and read your email (charge)
• Re-review your file to prepare before calling you (charge)
• And the cycle repeats (charge, replenish retainer, repeat)

Then, after paying this inexperienced attorney thousands of dollars, you start losing confidence and realize you need to hire someone else and start all over again. It is better (for your peace of mind and also your wallet) to just go to an experienced lawyer right from the start, to take care of the matter for you.

Our Streamlined Filing Offshore Lawyers have developed a highly-effective representation fee model that is used by other experienced law firms across the globe.

We have successfully resolved more than 1,000 Streamlined Domestic and Streamlined Foreign offshore cases.

Benefits of Flat-Fee Streamlined Filing Lawyers

All Streamlined tax and legal preparation (and other offshore compliance matters) should be handled in-house by a Board-Certified Tax Lawyer Specialist and their team.

The entire matter from beginning-to-end should be flat-fee, full-service, and all-inclusive. Each client has a unique story, with their own specific facts and circumstances. No two Streamlined cases are the same and fees should be representative of that specific client’s case.

Fees should only be determined after the Attorney has spoken in detail with the client — and not some prefabricated fee.

And, to protect the attorney-client privilege (and avoid a court rejecting Kovel), the full case (Tax and Legal) should be handled in-house.

International Tax Lawyer Specialist Team: Golding & Golding

Our attorneys specialize in International Tax and Streamlined Cases.

Contact our firm today for assistance.