Archive for August, 2014|Monthly archive page
Confidentiality, Privilege, and Taxes
Filed under: Foreign Reporting, General | Tags: accountant, accountant-client privilege, Attorney, attorney-client privilege, confidentiality, confidentiality privilege, disclosure, evidentiary privilege, IRC 7525, IRS, Kovel letter, privilege, professional standards, tax evasion, tax shelters, third-party
Leave a comment Originally published in the Cedar Street Times
August 22, 2014
Pretty much anybody that watches crime shows on television knows about attorney-client privilege. This is how murderers can admit the details of their crimes to their attorneys and the communication is protected from discovery by the courts.
But what about tax related communications with your accountant? Unfortunately, there are not a lot of television shows featuring taxpayers admitting the gory details to their accountants on how they swindled the IRS. That said, prime time dramas are probably not the best place to learn about the legal and accounting world anyway!
Misinformed people will sometimes think they can sit down with their CPA and contrive ways to scheme the IRS, or that they can openly discuss all the income they took in under the table and did not report. Communications with a CPA are confidential due to professional standards, but they usually do not qualify for evidentiary confidentiality privilege in a court of law. This means the CPA should not disclose the information to other parties without your permission, but if questioned in a court of law, the information would have to be disclosed. The other problem a CPA would have knowing the skeletons in your closet, is that a CPA (or any preparer) cannot knowingly file a false return.
So you may think you should hire a tax attorney to prepare your returns in order to get privilege. That actually won’t work either. One of the main tenets of attorney-client privilege is that if you do not treat the information as confidential and you disclose it to a third-party other than your attorney and his or her associates, then you have lost your privilege. Since tax returns are inherently a third-party communication for disclosure to the taxing authorities, it has been ruled that tax preparation services are not afforded attorney-client privilege. In fact, there have been interesting cases where attorneys have lost their attorney-client privilege because they included estate tax preparation as part of their engagement with the client.
Tax advice, however, is a different story. For engagements that strictly involve tax advice, and not tax preparation, attorney-client and accountant-client privilege is extended. Accountant-client privilege has more limitations than attorney-client privilege as defined in Internal Revenue Code section 7525. Most notably is that accountant-client privilege does not extend to criminal matters before the IRS or Federal courts, nor does it apply to tax shelters designed for tax evasion.
As previously discussed, the disclosure of information to a third-party generally waives the attorney-client privilege. An exception to this rule is if the attorney needs the assistance of another professional (such as an accountant) in order to render legal advice to the client. A Kovel letter (based on the 1961 case) can be drafted and signed by the accountant and attorney which essentially extends the attorney-client privilege to the accountant. The accountant is then, in essence, working for the attorney and not the ultimate client. This does provide additional protections, but it still would not provide protections for tax return preparation.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
New, Friendlier Option for Foreign Bank Account Disclosure
Filed under: Foreign Reporting | Tags: $10000, $100000, affidavit, FBAR, FinCen 114, Foreign Bank Account Reporting, Offshore Voluntary Disclosure Program, OVDP, privilege, resident, Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, tax returns, U.S. Treasury Department
Leave a comment Originally published in the Cedar Street Times
August 8, 2014
In July, a few new and more attractive options became available for taxpayers that have accounts in foreign countries that they have not reported. Taxpayers with over $10,000 in aggregate in bank or financial securities accounts (or even just signature authority on someone else’s account) established outside the United States have a requirement to report these accounts to the United States Treasury Department by electronically filing Financial Bank Account Reporting (FBAR) Form FinCen 114 by June 30th each year. In addition, there is a requirement to report any related income on your tax returns and possibly file another reporting form (Form 8938) with your tax returns as well.
These requirements do not just apply to rich people that establish accounts overseas to “hide” money and not pay taxes. If you are simply residing in the U.S. as defined by U.S. tax law and file tax returns as a resident, these requirements apply to you. Many foreigners residing in the U.S., or people with roots in foreign countries from years ago that still maintain bank accounts in another country do not realize this applies to them. It also applies to U.S. taxpayers residing outside the United States – such as U.S. citizens or green card holders.
The mission, as stated by the Financial Crimes Enforcement Network in the Treasury Department is, “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”
The stated penalties for failure to comply are massive by most people’s standards. If you are caught before coming forward on you own, and it becomes apparent you were aware of the requirement but specifically chose not to report, or even if you were not aware, but it is apparent you purposely did not take reasonable steps given your circumstances to find out (willful blindness), the penalty is the greater of $100,000 or 50 percent of the account balance and possible criminal prosecution. Even a truly non-willful situation (i.e. I had no idea I had to file) carries a $10,000 PER violation penalty if caught.
The IRS has had several voluntary disclosure programs over the past few years to help people come clean. The most recent program (2012 Offshore Voluntary Disclosure Program – OVDP), carried with it a hefty penalty – conceding 27.5 percent of the account balance on top of filing eight years of amended tax returns and paying past due tax, interest, and penalties on any income generated for those years. Besides having minimum tax liabilities that would keep many people out of the program, it just seemed like the punishment far exceeded the crime for those who were non-willful violators.
The all new Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures provide a much more palatable avenue for those who have non-willful violations. The new domestic program requires three years of amended tax returns, six years of FBARs, signed affidavits attesting to the non-willful nature, and only a five percent penalty. The five percent is calculated on the highest aggregate year-end balance of your accounts during the past six years. For U.S. taxpayers living abroad the foreign program is similar but does not even have a five percent penalty! For situations that could be deemed willful, the 2012 OVDP program is still available as well.
I have been involved with both the 2012 Offshore Voluntary Disclosure Program and now the new Streamlined Domestic Offshore Procedures program with clients, and it definitely feels like this new program is a good option for people with non-willful violations who want a greater sense of closure. For people who still cannot stomach the idea of giving up five percent, there are other possible options to discuss which are better than doing nothing and continuing to be non-compliant. If there is any chance that a willful case could be made, I would also advise you to keep conversations with your accountant hypothetical and broad until you are connected with the right attorney that specializes in this area. Communications with attorneys are privileged, whereas communications with accountants, although confidential, are not generally privileged until the attorney hires the accountant directly. In two weeks I will discuss this concept in more detail.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 