The Role of the Attorney in the Voluntary Disclosure Process11/23/2010 | Tax Notes International, Vol. 60, No. 8
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.