The Role of the Attorney in the Voluntary Disclosure Process
by Asher Rubinstein, Esq.

Many people wonder if they need an attorney to represent them in connection with a voluntary disclosure to the IRS. They wonder if they can, or should, make a disclosure to the IRS themselves. Perhaps they believe that the process is simple: contact the IRS, tell the IRS about the account, pay some back taxes and they’re done. Other people reason that if the IRS is going to impose a penalty based on a percentage of the value of the foreign account, and the penalty will apply whether or not the taxpayer is represented by legal counsel, then why go through the additional expense of paying a lawyer?

There are various reasons why representation by an attorney is important in making a voluntary disclosure.

First and foremost, a non-compliant foreign account can have criminal consequences. For that reason alone, representation by legal counsel is important in order to minimize the criminal implications.

The lawyer should first gather the facts related to the foreign account: at what bank, in what country? What is the source of funds in the account? Is there an entity involved, such as a foreign trust, corporation or foundation? Has the client received communication that the foreign account is being disclosed? Has the bank requested the client to sign a W-9? Were illegal funds deposited into the account? Was money laundering involved? These questions and others will frame the possibilities of discovery of the account, help determine whether the client will or will not be accepted into the Voluntary Disclosure Program and what are the risks of criminal prosecution. The lawyer should assess the risk of criminal consequences, or whether the implications are confined to the civil realm. If anything, this initial assessment could, at a minimum, comfort the client that he or she may not be going to jail.

The lawyer should also provide the client with a roadmap of possible courses of action with respect to the offshore account. For instance, what happens if the client doesn’t disclose the account? What are the possibilities of IRS discovery of the account, and what would be the consequences in that event?

One possible course of action might be to convert the foreign account into a tax-compliant structure. The attorney may counsel the client with regard to transforming a non-compliant offshore account into one that complies with current US law. Although the attorney cannot erase a noncompliant past, the attorney can ensure compliance going forward. Converting a non-compliant foreign account into a compliant structure is often done in tandem with a voluntary disclosure. In other words, make amends for past non-compliance, and ensure ongoing future compliance.

The attorney should also explore the possibility of filing the proper reporting documents (e.g., the FBAR forms), while not formally applying for the voluntary disclosure program. This avenue may be appropriate, for example, for accounts that did not earn US taxable income and only earned de minimis income, or for clients who did not own a foreign account but had signatory authority over the account of a family member. If no US tax returns need to be amended, penalties may be entirely avoided. Such determination requires the expertise of experienced tax attorneys.

All of these possible courses of action will vary depending on the client’s specific situation. Clients and their foreign accounts all have different histories and family situations. The nature of the client’s strategy will of course depend on the client’s unique facts and circumstances, and the attorney is the proper advisor to assess the background and the facts and recommend how to proceed.

In one case that we handled, a US client inherited a complex web of foreign corporations owned by foreign trusts established by a non-US parent. As attorneys, we had to first untangle issues of international corporate taxation and liaise with the foreign trustees before giving our US client proper guidance on how to proceed.

We’ve also seen many instances of foreign accounts established by parents who are deceased. We’ve thus had to address issues of estate taxation and probate in order to properly guide the clients on foreign account compliance. We represented a brother who was in litigation with his sister over their inheritance. The parents had foreign accounts, and we were called upon to advise regarding inheritance of the accounts and making them compliant, within the context of the siblings’ litigation.

One client had a foreign account, but was in the midst of a bitter divorce. This led to issues of whether the foreign account might be marital property, as well as strategic issues of disclosure of the account in the context of a contest over the couple’s assets.

Many foreign account matters also involve foreign taxation issues. In one case, a client had to decide whether to disclose an account to the IRS or to the German tax authorities, or both, and we addressed the application of international tax treaties to the income earned in the account.

Thus, the role of the attorney often involves not only the client’s unique situation, but also the intersection of other areas of law: domestic and international taxation, corporate, marital, family, estate, and international law, among others. While addressing the client’s micro issues, the lawyer must also consider a broader, more global context.

Of course, closer to home, representing the client before the IRS is the threshold concern, and the attorney becomes the client’s advocate for the essential purpose of becoming tax compliant and avoiding criminal consequences. Even if a client will ultimately avoid criminal prosecution by making a voluntary disclosure, the client must still pass the Criminal Investigations Division (CID) of the IRS. A CID agent will be assigned to the client’s matter, and this agent will require specific information about the client, the account, the source of funds and other details. A qualified lawyer will assist the client in answering these questions and passing the CID investigation.

Legal counsel is necessary in interaction with the IRS in order to protect the client from making incriminating statements, or giving the IRS documents that may be prejudicial. Someone representing himself may reveal too much to the IRS, and should have the benefit of legal counsel to determine what to say, how and when to say it, what not to say, what documents to give the IRS, etc.

In many cases, the role of the attorney is to identify and respond to hidden dangers. We represented a family who left their home country after a military coup, and feared religious persecution. The family placed their family savings in a Swiss account not to hide funds from taxation, but because of reasons of safety and stability. When we noticed that a sister’s name was on the account years ago, we had to address the issue of the brother disclosing the account to the IRS, but the sister not wanting to join in disclosing. The brother’s disclosure alone would have pointed the IRS directly at the sister. We counseled the family in their difficult choice of brother and sister both coming forward, or neither coming forward and both assuming certain risks.

Attorneys also have experience in dealing with the IRS and with IRS procedures. Experienced attorneys may have pre-existing, professional relationships with IRS agents, which may benefit the client. A good tax lawyer is well versed in the administrative mechanisms of the IRS, and how to navigate the bureaucracy, saving the client time and aggravation.

A good attorney works to obtain the best results for the client. Thus, the attorney should serve the client’s interests by framing the facts in the best light possible for the client. The attorney will advance arguments in favor of the client’s interests, pointing out the positive and minimizing the negative, in order to arrive at the best results possible for the client. While IRS agents may not have much discretion in assessing penalties, a good attorney will argue on behalf of the client in order to achieve the best results possible. In the event that the client is unhappy with the IRS agent’s assessment of penalties, the attorney can advise regarding appeal procedures and challenging the IRS determination.

Thus, the role of the attorney in a voluntary disclosure is multi-faceted. We minimize the criminal implications. We are family advisors. We bring non-compliant foreign accounts into tax compliance. We identify issues and give clarity where multiple areas of domestic and international law intersect. We advance the client’s interests before the IRS and guide the client through the administrative, bureaucratic process as smoothly as possible. Yes, at the end of the process, the client may pay the same back taxes, interest and penalties as if the client was not represented by counsel. However, along the way, the client benefits from the lawyer’s mitigation of criminal consequences, identification and response to unseen dangers and risks, legal analysis, strategic guidance and experience with the IRS.