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“The Role of the Attorney in the Voluntary Disclosure Process” by Asher Rubinstein, published in Tax Notes International

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The Role of the Attorney in the Voluntary Disclosure Process
by Asher Rubinstein, published in Tax Notes International – Vol. 60, No. 8, November 22, 2010

Many people wonder if they need an attorney to represent them in connection with a voluntary disclosure of a foreign account 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?

The Importance of Representation

There are various reasons why representation by an attorney is important in making a voluntary disclosure. First, a noncompliant foreign account can have criminal consequences. For that reason alone, representation by legal counsel is important to minimize the criminal implications (that is, criminal charges, potential fines, penalties, and incarceration).

The lawyer should first gather the facts regarding 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 asked the client to sign a Form 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 be accepted into the voluntary disclosure program, and determine the risks of criminal prosecution.

The lawyer should assess the risk of criminal consequences or whether the facts will confine the situation to the civil realm. If anything, this initial assessment could, at a minimum, comfort the client that he may not be going to jail.

The lawyer should also provide the client with a roadmap of possible courses of action regarding 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 course of action might be to convert the foreign account into a tax-compliant structure. The attorney may counsel the client on transforming a noncompliant offshore account into one that complies with current U.S. law. Although the attorney cannot erase a noncompliant past, the attorney can ensure current and future compliance. Converting a noncompliant foreign account into a compliant structure is often done in tandem with a voluntary disclosure. In other words, make amends for past noncompliance, and ensure ongoing compliance.

The attorney should also explore the possibility of filing the proper reporting documents while not formally applying for the voluntary disclosure program. This avenue may be appropriate, for example, for accounts that did not earn U.S. taxable income and earned only 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 U.S. tax returns have to be amended, penalties may be entirely avoided. That determination requires the expertise of experienced tax attorneys.

All 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 depend on the client’s unique facts and circumstances, and the attorney is the proper adviser to assess the background facts and recommend how to proceed.

Examples of Previous Cases

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

We have also seen many instances of foreign accounts established by parents who are now deceased. We have 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 on to provide advice regarding inheritance of the accounts and making them compliant.

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 because of the 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, to the German tax authorities, or to both, and we addressed the application of 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, including domestic and international taxation and corporate, marital, family, estate, and international law. While addressing the client’s micro issues, the lawyer must also consider a broader, more global context.

Representation Before the IRS

Of course, closer to home, representing the client before the IRS is the threshold concern, and the attorney is the client’s advocate for 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 submit to the scrutiny of the IRS Criminal Investigation division. A CI agent will be assigned to the client’s case, and this agent will require specific information about the client, the account, the source of funds, and other details. A qualified lawyer should assist the client during the CI investigation.

Legal counsel is necessary when interacting 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 he should have the benefit of legal counsel to determine what to say, how and when to say it, and what documents to give to the IRS.

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 because they feared religious persecution. The family placed their savings in a Swiss account – not to hide funds from taxation, but for safety and security. When we noticed that a sister’s name was on the account years ago, we had to address the issue of the brother wanting to disclose the account to the IRS, but the sister not wanting to disclose. The brother’s disclosure alone would have pointed the IRS directly at the sister. We counseled the family in their difficult choice of either both coming forward or neither coming forward and both assuming certain risks.

Attorneys also have experience in dealing with the IRS and its procedures. Experienced attorneys may have preexisting, professional relationships with IRS agents that 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.

Serving the Client’s Interests

While IRS agents may not have much discretion in assessing penalties, a good attorney will argue on behalf of the client to achieve the best results possible. If the client is unhappy with the IRS agent’s assessment of penalties, the attorney can advise the client on whether to appeal and challenge the IRS determination.

Thus, the role of the attorney in a voluntary disclosure is multifaceted. Attorneys:

  • minimize the criminal exposure;
  • are family advisers;
  • bring noncompliant foreign accounts into tax compliance;
  • identify issues and risks;
  • give clarity when multiple areas of domestic and international law intersect;
  • advance the client’s interests before the IRS; and
  • guide the client through the administrative 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 were 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.

Newsflash: IRS Hints to a New Voluntary Disclosure Program for Foreign Bank Accounts

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Newsflash: IRS Hints to a New Voluntary Disclosure Program for Foreign Bank Accounts
by Asher Rubinstein

IRS Commissioner Doug Shulman yesterday hinted that the IRS may offer another voluntary disclosure program for US taxpayers with non-compliant offshore accounts.

The IRS has long maintained a general voluntary disclosure policy, whereby US taxpayers can correct tax errors and non-compliance (e.g., undeclared income, improper deductions, etc.), so long as the IRS did not already know about the non-compliance.  The benefits of such a voluntary disclosure are lower fines and penalties and avoidance of criminal prosecution.

In addition to this long-running voluntary disclosure policy, the IRS offered a specific Voluntary Disclosure Program (VDP) for undeclared foreign accounts, offering a penalty cap of 20% of the highest account balance over the past six years.  However, that specific VDP ended on October 15, 2009.

Taxpayers who came forward after October 15, 2009 made their disclosure under the IRS general disclosure policy, rather than the specific VDP and its 20% penalty.  Thus, for disclosures made after October 15, 2009, the big unknown is what the penalty would be.  As IRS Commissioner Shulman noted, “we understand [taxpayers’] anxiety and are actively considering another predictable voluntary disclosure program, although with higher penalties than for the first group.”

What can we make of the IRS hinting at a new voluntary disclosure program for foreign accounts?

First, we welcome a new offshore voluntary disclosure program as an opportunity for people to bring their foreign accounts into compliance, lower their potential fines and penalties, and avoid criminal prosecution for tax fraud.

Second, we look forward to clarity as to the penalties that will apply to new disclosures.  Ever since expiration of the VDP in October 2009, the penalty remains the big unknown.  Even IRS agents with whom we speak are flummoxed at the lack of guidance as to what the penalty will be.  20%?  Unlikely, because it would reward late filers with the same benefit as if they had enrolled into the VDP before it expired last October.  By law, the IRS can take 50% of the value of the account for each year.  But in its tax fraud prosecutions, the government has been imposing a 50% penalty for a single year (the year with the highest aggregate account balance).  So it seems reasonable that the government would not exceed 50%/single year as a voluntary disclosure penalty, when that seems to be the standard for a criminal defendant.  However, there has not been official guidance from the IRS thus far.  We expect that a new voluntary disclosure program will provide some explicit guidance.  Otherwise, it is unlikely that additional taxpayers will come forward and make disclosure, relying on a leap of faith that the IRS will be lenient in its penalty regime.

What is certain, however, is that the IRS will continue and expand its offensive against those US taxpayers who still maintain non-compliant foreign accounts.  A new VDP would be a welcome means for such taxpayers who missed the first VDP to now come forward, correct their non-compliance, avoid criminal prosecution and be able to sleep at night.  At the same time that the IRS hinted to the possibility of a new offshore voluntary disclosure program, the IRS also spoke about its plans to move beyond UBS and target other banks, in other countries, and US taxpayers who have undeclared accounts.  “We have additional cases and banks in our sights,” said IRS Commissioner Shulman.  In an ominous threat to US owners of undisclosed foreign accounts, Shulman stressed that “this has never been about one bank or one country.  We’ve produced results and will continue to produce results.”   In fact, this firm has information that the IRS investigation has already spread to banks in India and Israel, including HSBC, Bank Leumi and others.  A “second chance” for people who still have undeclared offshore accounts would be welcome.

We will be monitoring any developments on these issues.  Please contact us for more information about bringing your account into tax compliance.

Please also see the following related articles:

The Role of the Attorney in the Voluntary Disclosure Process

The Death of Bank Secrecy

After UBS Deal, Does Offshore Banking Have a Future?

Feeling Heat from Foreign Account Disclosure

Update:  Changes in the Offshore Banking World

Are you Protected from Whistle Blowers?

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New laws are generous to whistle blowers, who are now incentivized to turn you in, in return for a payout.  The IRS is authorized by law (Section 7623 of the Internal Revenue Code, the “Informant Claims Program”) to reward whistle blowers who report tax violators.  If the information provided by the whistle blower is used by the IRS, the whistle blower may receive up to 30 percent of the additional tax, penalty and other amounts collected by the IRS.  In addition, the identity of the whistle blower is protected by the IRS (at least until the whistle blower becomes a necessary witness in a tax prosecution).  Reports to the IRS can also be made anonymously.

In addition, under Section 922(a) of the new Dodd-Frank Act, whistle blowers are now empowered to report information to the SEC. If the whistle blower report leads to enforcement action resulting in sanctions greater than $1 million, the whistle blower may receive a payment of 10 to 30 percent of the sanctions.

Recent examples directly relevant to our legal practice highlight the power of whistle blowers.  First, the recent IRS success against UBS and the significant erosion of Swiss banking secrecy would not have come about without Bradley Birkenfeld, a UBS banker turned whistle blower, who came forward and exposed internal UBS policies and practices that were designed to facilitate non-reporting of offshore assets by US taxpayers.  Although Birkenfeld is currently in jail because of his own role in facilitating tax fraud, he stands to reap millions of dollars as a result of the nearly $1 billion paid by UBS to the government when it admitted its role in aiding offshore tax fraud.

In addition, bank employees have stolen internal banking documents from HSBC and LGT Bank in Liechtenstein, and have sold this information to foreign tax authorities, resulting in tax fraud investigations and prosecutions in the US, Germany, UK and other countries.

 As we wrote a year ago:
Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.

The threat of whistle blowers is not limited to the offshore realm.  If you have a non-compliant foreign bank account, it is vulnerable to a bank employee giving bank account information to the IRS, or to a foreign tax authority which later shares information with the IRS.  The tax authorities of various governments all cooperate with each other.  For instance, the German government shared the LGT information with multiple governments as far as India and New Zealand.  But whistle blowers may also pose a threat much closer to home.

When should you be concerned?  If threats exists from, e.g., a spouse, business associate, employee, etc. who may feel motivated to contact a government authority such as the IRS or SEC, and share potentially damaging information about you, your business, your assets or your finances, you should take preemptive action to mitigate the potential consequences.

What can you do? Make sure your house is in order.

    1. Run a self-tax audit.  Is there reason to go back and alter past tax returns to disclose previously unreported income, foreign accounts, improper deductions taken, etc.?  Should you file tax forms or reports that should have been filed but were not, e.g., for involvement in foreign accounts, ownership of foreign trusts or offshore corporations?  Preemptively addressing these issues before they are brought to the attention of the IRS could result in lower fines and penalties and avoidance of criminal prosecution.  As we have long-counseled, any of these threats  – whether from weakening bank secrecy laws, exchange of information by governments, from renegade bank employees, or an angry business partner or former spouse – are harmless if you are tax-compliant.  Correcting past tax non-compliance would serve multiple purposes: make good with the IRS, lower potential penalties and punishment, and eliminate the tax blackmail card that a nasty creditor might play.  If you bring your tax matters into compliance, a whistle blower or creditor would not be able to threaten to report you.

 

  1. Protect your assets.  Don’t leave your assets exposed to potential claimants and litigants.  Protect your assets proactively, before legal action against you, rather than defensively, in response to an action already commenced, when your asset protection options may be limited.

We must acknowledge the good that some whistle blowers do.  When corporate abuses and criminals are brought to the attention of authorities, we all benefit.  Yet when “telling the government on you” becomes a tactic for harassment or blackmail, we must stand up to the threat by rectifying any non-compliance, eliminating the threat and protecting assets from further vulnerability.

Asher Rubinstein interviewed and quoted in Entrepreneur magazine and the Atlanta Post.

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Asher Rubinstein interviewed and quoted in Entrepreneur magazine and the Atlanta Post.
 
Asher was interviewed on the issue of Asset Protection for business owners, and discussed the distinction between personal and business assets.
 
“Establish the business as a corporation or limited liability company rather than operate as a partnership or sole proprietorship, says Asher Rubinstein, a New York City asset protection attorney. “However, don’t assume setting up a separate entity automatically protects you,” he says. If you’re using the business as your personal piggy bank–paying for groceries out of the business checking account, for example–someone who sues your business may be able to establish that you and your business are one and the same, and that could make things of value like your home and your investments fair game. Also, respect the formality of the entity you establish by keeping proper books and, in the case of corporations, holding annual meetings.”

Ken Rubinstein interviewed on WebCPA regarding tax and estate planning strategies for high net worth clients

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Ken Rubinstein interviewed on WebCPA regarding tax and estate planning strategies for high net worth clients

http://www.webcpa.com/podcasts/Tax-Advice-High-Net-Worth-Clients-55819-1.html

WebCPA requires registration, which is free.

Ken discusses various topics, including estate tax planning, capital gains tax planning, captive insurance, the benefits of foreign tax treaties, and the IRS Voluntary Disclosure for offshore bank accounts.

The Role of the Attorney in the Voluntary Disclosure Process

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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.