Author: Ron Cohen
Source: ezinearticles.com
The world is changing. A tax evader should seriously consider what may be the only way to stop an illegal bad situation from becoming a life-destroying criminal prosecution. Consider a Voluntary Disclosure to clean-up the past.
Based on tax law precedent going back to the 1940s, the I.R.S. and many state tax authorities have a standing polciy that, generally, they will NOT pursue criminal prosecution of tax evasion in cases where the tax evading taxpayer comes forward BEFORE they are contacted by the tax authority.
As an I.R.S. District Counsel (prosecuting attorney) once told me after a 13 week course on I.R.S. internal procedures as part of my Masters Degree program in Taxation: "If you learn nothing else in this class, remember this: If your client is in tax trouble, you need to find me before I find you."
He went on to explain that the I.R.S. wants people to be able to come back from the non-filing and non-paying underworld and get clean without fear of criminal prosecution...otherwise, tax evaders have no way to re-enter the tax system without the threat of losing not only large sums of money but also lose their liberty and living standard if they suffer criminal prosecution, versus civil (money) penalties.
Alternatively, if the I.R.S. finds or contacts a taxpayer via an audit, non-filing notices, the Form 1099 Matching Program, referrals from other non-tax prosecutions or otherwise becomes aware of significant criminal tax violations, then, their frame of mind changes. They often try to make a public example of the taxpayer and pursue criminal prosecution and jail sentences to the extent allowed by law.
It is my experience that taxpayers have to almost force the I.R.S. (by repeated bad behavior) to prosecute, as the I.R.S. has a lack of resources. They would much rather use civil penalties, liens, levies and wage garnishments which can quickly be triggered by the I.R.S. computer system to collect unpaid tax and force the taxpayer back into filing returns. But when the taxpayer ignores I.R.S. letters, disappears or is non-responsive, is under other criminal prosecution (like an arrested drug dealer) or argues the tax system is illegal or unconstitutional, the case gets elevated to where I.R.S. lawyers and criminal investigators are assigned.
At that point, the I.R.S. people involved, like all of us, want to be successful in their work; and success for them is often a criminal prosecution and a conviction. A taxpayer in that situation needs the immediate help of qualified legal counsel specializing in tax cases.
Specifically, regarding unreported offshore Income, in my opinion, you are running out of time.
Technology, the Federal and State deficits and the political winds are now all working against tax evasion with regards to unreported offshore income.
The technology is improving to catch tax evaders who often establish an offshore bank account in a country that does not share account information with the I.R.S. An A.T.M. card is often used allowing access to the funds at any A.T.M. machine in the U.S. that is in the offshore bank's A.T.M. network. The U.S. bank through which the A.T.M. withdrawal is processed becomes a legal party to the transaction. The I.R.S. has a significant project underway to drill-through the U.S. bank and find the offshore account and the U.S. taxpayer/evader.
Banks are being required to increase internal audit controls to stop inadvertently assisting tax evaders.
Recently in the news, the I.R.S. is pressuring Liechtenstein and Swiss banks to provide information on U.S. taxpayers suspected of tax evasion. Banks in the Cayman Islands and Bermuda continue to come under pressure from U.S. and European tax authorities.
Now, with the economic crisis of the last 6 months, the U.S. President and Congress and the tax authority of many countries and states see unreported income of tax evaders as "low-hanging fruit." As voters have no sympathy for offshore tax evaders, it is clear more laws and resources will be applied to pursue this unreported income.
As a result, the world is changing. A tax evader should seriously consider what may be the only way to stop an illegal bad situation from becoming a life-destroying criminal prosecution. Consider a Voluntary Disclosure to clean-up the past.
How Does A Taxpayer make a "Voluntary Disclosure?"
With regards to the I.R.S., a specific process exists for taxpayers who approach the I.R.S. with the intent to clean-up old returns. I provide five comments:
It will take many months to resolve unfiled, unreported income. Be patient!
Use complete honesty and complete disclosure in every contact with the I.R.S. or any tax authority. Remember, you are trying to avoid CRIMINAL PROSECUTION. This is not a game. Don't try playing games with partial disclosures. The worst thing you can do is hold back information at this point and be accused of lying. They have seen it all before, and they know what you are thinking, often before you do. You are coming to them for help, so provide complete cooperation. They are usually very cooperative with people who take this approach.
Keep a copy of everything you give the I.R.S. and keep a written record of every telephone conversation.
Consider getting assistance from a C.P.A., Enrolled Agent or Tax Attorney.
Don't forget the state taxes that might be involved. The I.R.S. WILL communicate the information you provide to the state tax authorities.
The starting point for a Voluntary Disclosure is no surprise. Put together your tax information for each taxable year just as if you would to originally file your tax return. Again, consider consulting with a C.P.A., and Enrolled Agent and/or a bookkeeper if you need help to get your information together.
If you can't find records, then call banks, or businesses, etc. to collect as much documentation as you can. YOU DON'T NEED TO BE PERFECT OR HAVE EVERYTHING IF IT DOES NOT EXIST. The I.R.S. understands that records from years ago may be unavailable. Reasonable estimates are fine if there is no alternative. Don't get caught in the mental trap of not filing, or waiting longer just because you can't find every record, Form 1099, receipt, bank statement or invoice.
If your return was originally filed, however, offshore (or any other type of income) was not reported, an amended tax return needs to be prepared. That is I.R.S. Form 1040X for individual taxpayers.
When you are as ready as you can be (and sooner is always better than later) to contact the I.R.S., mail everything to the I.R.S. Service Center, just as if you were filing a normal tax return, but with a cover letter. Absolutely mail it certified mail, return receipt requested and keep copies of everything and all postmarked documents (seriously) for the rest of your life. I'll skip explaining why, here.
Under Internal Revenue Manual Sec. 9.5.3.3.1.2.1, a voluntary disclosure occurs when:
The communication (tax return and/or related letter) is truthful, timely and complete. This includes:
the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
At this point, the I.R.S.sends the tax return[s] to a special unit that deals with amended or late returns. Over two months may pass before the taxpayer receives any reply. Pay in as much of the estimated tax, interest and penalties as possible with the returns. Make sure to indicate what year each payment should be applied to. Otherwise, it will be applied to the current tax year - which is a hassle to correct.
The I.R.S. has additional triggers they consider when evaluating the situation.
How many tax years are involved?
What is the amount involved? Clearly, a $1 million unreported amount may get a different response than a $10,000 unreported amount.
What prior filing history does the taxpayer have? Is this the first issue, or part of a long history of problems?
Often, if no special issues come up, the taxpayer will receive a straightforward letter simply saying the return was received and the following tax, interest and penalties is owed. In all my experiences, if the taxpayer pays any amount due within the 30 days allowed after receiving that letter, it is very normal to never again hear from the I.R.S. with regards to that tax return for that particular year. However, nothing in this article guarantees this result.
The moral to this story is that I.R.S. policy and case law clearly MOVES TO THE SIDE OF THE TAXPAYER toward avoiding criminal prosecution the moment the taxpayer mails the unfiled or amended tax returns and pay as much of the unpaid balance due as possible.
NOTE: The Voluntary Disclosure policy does NOT apply to illegal source income. For example, unreported drug trafficking income will not qualify for the Voluntary Disclosure procedure, as that type of income is illegal under other (non-tax) laws. In contrast, there is nothing illegal about earning interest income from a Swiss bank account, so it is not illegal "source" income. However, the failure to report such income on your tax return can be a tax crime. Therefore, the Voluntary Disclosure policy can apply to the Swiss interest income.
WHEN IS THE VOLUNTARY DISCLOSURE POLICY NOT AVAILABLE?
It is important to note when a taxpayer is considered "contacted" by the I.R.S.: Again from Internal Revenue Manual Sec. 9.5.3.3.1.2.1
A disclosure is timely if it is received before:
the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer's noncompliance; the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
If the above has occurred, please consult a tax attorney. You may actually do more harm than good by sending in a tax return (or amended return) to the IRS Service Center at this point, as the I.R.S. may consider that an attempt to work around the tax examiner who contacted you, to gain a legal advantage.
A tax evader never knows when a, b, c, or d above may occur or when an I.R.S. letter will show up in their mail box. At that moment, the opportunity to avoid criminal prosecution may be lost forever. It is an "on/off" switch for which there is precedent in I.R.S. policy and case law.
So please, if you are in this situation, get to them before they get to you, and please consider seeking competent tax advice before doing so.
The policy of most state, local and European tax authorities is similar, although you should seek advice competent in the policy of each tax authority before taking any action.
Also, assuming you have legally avoided criminal prosecution, many people try to negotiate unpaid taxes, interest and penalties. Please be very skeptical of companies that promise to negotiate your tax liability. In reality, only the bankrupt or near bankrupt qualify for these programs, and many, many people have given me feedback on how some firms take an upfront fee and then do nothing, or even make matters worse. Please be careful.
With regard to penalties to be assessed, a complete review is beyond the scope of this article except to say, they will be very significant.
Please see the attached from Doug Shulman, Commissioner of the IRS, from 3/26/09: http://www.irs.treas.gov/newsroom/article/0,,id=206014,00.html.
I am always available for questions and comments at 510 797 8661 x237.
Ron Cohen is a Partner at a top Bay Area CPA Firm, Greenstein, Rogoff, Olsen & Co. He has more than 25 years experience in public accounting and related industry work. He earned an undergraduate accounting degree from the University of Illinois, Chicago, and then a Masters in Taxation from Golden Gate University. Ron has extensive knowledge in International Tax and has traveled extensively throughout Europe and Asia handling tax issues.
