| The world is changing. A tax evader should seriously | | | | waiting longer just because you can’t find every |
| consider what may be the only way to stop an illegal | | | | record, Form 1099, receipt, bank statement or invoice. |
| bad situation from becoming a life-destroying criminal | | | | If your return was originally filed, however, offshore (or |
| prosecution. Consider a Voluntary Disclosure to | | | | any other type of income) was not reported, an |
| clean-up the past. | | | | amended tax return needs to be prepared. That is |
| Based on tax law precedent going back to the 1940s, | | | | I.R.S. Form 1040X for individual taxpayers. |
| the I.R.S. and many state tax authorities have a | | | | When you are as ready as you can be (and sooner is |
| standing policy that, generally, they will NOT pursue | | | | always better than later) to contact the I.R.S., mail |
| criminal prosecution of tax evasion in cases where the | | | | everything to the I.R.S. Service Center, just as if you |
| tax evading taxpayer comes forward BEFORE they | | | | were filing a normal tax return, but with a cover |
| are contacted by the tax authority. | | | | letter. Absolutely mail it certified mail, return receipt |
| As an I.R.S. District Counsel (prosecuting attorney) | | | | requested and keep copies of everything and all |
| once told me after a 13 week course on I.R.S. internal | | | | postmarked documents (seriously) for the rest of your |
| procedures as part of my Masters Degree program in | | | | life. I’ll skip explaining why, here. |
| Taxation: “If you learn nothing else in this class, | | | | Under Internal Revenue Manual Sec. 9.5.3.3.1.2.1, a |
| remember this: If your client is in tax trouble, you | | | | voluntary disclosure occurs when: |
| need to find me before I find you.” | | | | The communication (tax return and/or related letter) is |
| He went on to explain that the I.R.S. wants people to | | | | truthful, timely and complete. This includes: |
| be able to come back from the non-filing and | | | | 1.the taxpayer shows a willingness to cooperate (and |
| non-paying underworld and get clean without fear of | | | | does in fact cooperate) with the IRS in determining his |
| criminal prosecution…otherwise, tax evaders have no | | | | or her correct tax liability; and |
| way to re-enter the tax system without the threat of | | | | 2.the taxpayer makes good faith arrangements with |
| losing not only large sums of money but also lose their | | | | the IRS to pay in full, the tax, interest, and any penalties |
| liberty and living standard if they suffer criminal | | | | determined by the IRS to be applicable. |
| prosecution, versus civil (money) penalties. | | | | You can read more about this at: |
| Alternatively, if the I.R.S. finds or contacts a taxpayer | | | | At this point, the I.R.S.sends the tax return[s] to a |
| via an audit, non-filing notices, the Form 1099 Matching | | | | special unit that deals with amended or late returns. |
| Program, referrals from other non-tax prosecutions or | | | | Over two months may pass before the taxpayer |
| otherwise becomes aware of significant criminal tax | | | | receives any reply. Pay in as much of the estimated |
| violations, then, their frame of mind changes. They | | | | tax, interest and penalties as possible with the |
| often try to make a public example of the taxpayer | | | | returns. Make sure to indicate what year each |
| and pursue criminal prosecution and jail sentences to | | | | payment should be applied to. Otherwise, it will be |
| the extent allowed by law. | | | | applied to the current tax year – which is a hassle |
| It is my experience that taxpayers have to almost | | | | to correct. |
| force the I.R.S. (by repeated bad behavior) to | | | | The I.R.S. has additional triggers they consider when |
| prosecute, as the I.R.S. has a lack of resources. | | | | evaluating the situation. |
| They would much rather use civil penalties, liens, levies | | | | 1. How many tax years are involved? |
| and wage garnishments which can quickly be triggered | | | | 2. What is the amount involved? Clearly, a $1 million |
| by the I.R.S. computer system to collect unpaid tax and | | | | unreported amount may get a different response than |
| force the taxpayer back into filing returns. But when | | | | a $10,000 unreported amount. |
| the taxpayer ignores I.R.S. letters, disappears or is | | | | 3. What prior filing history does the taxpayer have? |
| non-responsive, is under other criminal prosecution (like | | | | Is this the first issue, or part of a long history of |
| an arrested drug dealer) or argues the tax system is | | | | problems? |
| illegal or unconstitutional, the case gets elevated to | | | | Often, if no special issues come up, the taxpayer will |
| where I.R.S. lawyers and criminal investigators are | | | | receive a straightforward letter simply saying the |
| assigned. | | | | return was received and the following tax, interest and |
| At that point, the I.R.S. people involved, like all of us, | | | | penalties is owed. In all my experiences, if the |
| want to be successful in their work; and success for | | | | taxpayer pays any amount due within the 30 days |
| them is often a criminal prosecution and a conviction. | | | | allowed after receiving that letter, it is very normal to |
| A taxpayer in that situation needs the immediate help | | | | never again hear from the I.R.S. with regards to that |
| of qualified legal counsel specializing in tax cases. | | | | tax return for that particular year. However, nothing in |
| Specifically, regarding unreported offshore Income, in | | | | this article guarantees this result. |
| my opinion, you are running out of time. | | | | The moral to this story is that I.R.S. policy and case law |
| Technology, the Federal and State deficits and the | | | | clearly MOVES TO THE SIDE OF THE TAXPAYER |
| political winds are now all working against tax evasion | | | | toward avoiding criminal prosecution the moment the |
| with regards to unreported offshore income. | | | | taxpayer mails the unfiled or amended tax returns and |
| The technology is improving to catch tax evaders who | | | | pay as much of the unpaid balance due as possible. |
| often establish an offshore bank account in a country | | | | NOTE: The Voluntary Disclosure policy does NOT |
| that does not share account information with the | | | | apply to illegal source income. For example, |
| I.R.S. An A.T.M. card is often used allowing access to | | | | unreported drug trafficking income will not qualify for |
| the funds at any A.T.M. machine in the U.S. that is in | | | | the Voluntary Disclosure procedure, as that type of |
| the offshore bank’s A.T.M. network. The U.S. | | | | income is illegal under other (non-tax) laws. In contrast, |
| bank through which the A.T.M. withdrawal is processed | | | | there is nothing illegal about earning interest income |
| becomes a legal party to the transaction. The I.R.S. has | | | | from a Swiss bank account, so it is not illegal |
| a significant project underway to drill-through the U.S. | | | | “source” income. However, the failure to |
| bank and find the offshore account and the U.S. | | | | report such income on your tax return can be a tax |
| taxpayer/evader. | | | | crime. Therefore, the Voluntary Disclosure policy can |
| Banks are being required to increase internal audit | | | | apply to the Swiss interest income. |
| controls to stop inadvertently assisting tax evaders. | | | | WHEN IS THE VOLUNTARY DISCLOSURE POLICY |
| Recently in the news, the I.R.S. is pressuring | | | | NOT AVAILABLE? |
| Liechtenstein and Swiss banks to provide information | | | | It is important to note when a taxpayer is considered |
| on U.S. taxpayers suspected of tax evasion. Banks | | | | “contacted” by the I.R.S.: Again from Internal |
| in the Cayman Islands and Bermuda continue to come | | | | Revenue Manual Sec. 9.5.3.3.1.2.1 |
| under pressure from U.S. and European tax authorities. | | | | A disclosure is timely if it is received before: |
| Now, with the economic crisis of the last 6 months, the | | | | 1.the IRS has initiated a civil examination or criminal |
| U.S. President and Congress and the tax authority of | | | | investigation of the taxpayer, or has notified the |
| many countries and states see unreported income of | | | | taxpayer that it intends to commence such an |
| tax evaders as “low-hanging fruit.” As voters | | | | examination or investigation; |
| have no sympathy for offshore tax evaders, it is clear | | | | 2.the IRS has received information from a third party |
| more laws and resources will be applied to pursue this | | | | (e.g., informant, other governmental agency, or the |
| unreported income. | | | | media) alerting the IRS to the specific taxpayer’s |
| As a result, the world is changing. A tax evader | | | | noncompliance; |
| should seriously consider what may be the only way | | | | 3. the IRS has initiated a civil examination or criminal |
| to stop an illegal bad situation from becoming a | | | | investigation which is directly related to the specific |
| life-destroying criminal prosecution. Consider a | | | | liability of the taxpayer; or |
| Voluntary Disclosure to clean-up the past. | | | | 4. the IRS has acquired information directly related to |
| How Does A Taxpayer make a “Voluntary | | | | the specific liability of the taxpayer from a criminal |
| Disclosure?” | | | | enforcement action (e.g., search warrant, grand jury |
| With regards to the I.R.S., a specific process exists for | | | | subpoena). |
| taxpayers who approach the I.R.S. with the intent to | | | | If the above has occurred, please consult a tax |
| clean-up old returns. I provide five comments: | | | | attorney. You may actually do more harm than good |
| 1. It will take many months to resolve unfiled, | | | | by sending in a tax return (or amended return) to the |
| unreported income. Be patient! | | | | IRS Service Center at this point, as the I.R.S. may |
| 2. Use complete honesty and complete disclosure in | | | | consider that an attempt to work around the tax |
| every contact with the I.R.S. or any tax authority. | | | | examiner who contacted you, to gain a legal |
| Remember, you are trying to avoid CRIMINAL | | | | advantage. |
| PROSECUTION. This is not a game. Don’t try | | | | A tax evader never knows when a, b, c, or d above |
| playing games with partial disclosures. The worst | | | | may occur or when an I.R.S. letter will show up in their |
| thing you can do is hold back information at this point | | | | mail box. At that moment, the opportunity to avoid |
| and be accused of lying. They have seen it all | | | | criminal prosecution may be lost forever. It is an |
| before, and they know what you are thinking, often | | | | “on/off” switch for which there is precedent in |
| before you do. You are coming to them for help, so | | | | I.R.S. policy and case law. |
| provide complete cooperation. They are usually very | | | | So please, if you are in this situation, get to them |
| cooperative with people who take this approach. | | | | before they get to you, and please consider seeking |
| 3. Keep a copy of everything you give the I.R.S. and | | | | competent tax advice before doing so. |
| keep a written record of every telephone | | | | The policy of most state, local and European tax |
| conversation. | | | | authorities is similar, although you should seek |
| 4. Consider getting assistance from a C.P.A., Enrolled | | | | competent advice in the policy of each tax authority |
| Agent or Tax Attorney. | | | | before taking any action. |
| 5. Don’t forget the state taxes that might be | | | | Also, assuming you have legally avoided criminal |
| involved. The I.R.S. WILL communicate the | | | | prosecution, many people try to negotiate unpaid |
| information you provide to the state tax authorities. | | | | taxes, interest and penalties. Please be very |
| The starting point for a Voluntary Disclosure is no | | | | skeptical of companies that promise to negotiate your |
| surprise. Put together your tax information for each | | | | tax liability. In reality, only the bankrupt or near bankrupt |
| taxable year just as if you would to originally file your | | | | qualify for these programs, and many, many people |
| tax return. Again, consider consulting with a C.P.A., | | | | have given me feedback on how some firms take an |
| and Enrolled Agent and/or a bookkeeper if you need | | | | upfront fee and then do nothing, or even make |
| help to get your information together. | | | | matters worse. Please be careful. |
| If you can’t find records, then call banks, or | | | | With regard to penalties to be assessed, a complete |
| businesses, etc. to collect as much documentation as | | | | review is beyond the scope of this article except to |
| you can. YOU DON’T NEED TO BE PERFECT | | | | say, they will be very significant. |
| OR HAVE EVERYTHING IF IT DOES NOT | | | | Please see the attached from Doug Shulman, |
| EXIST. The I.R.S. understands that records from | | | | Commissioner of the IRS, from 3/26/09: |
| years ago may be unavailable. Reasonable | | | | I am always available for questions and comments at |
| estimates are fine if there is no alternative. | | | | 510 797 8661 x237. |
| Don’t get caught in the mental trap of not filing, or | | | | |