Accountants commonly send an “organizer” to a client with instructions to complete and sign it and return it to the accountant. The completed organizer then serves as the starting point for preparation of the client’s annual income tax returns. The problem is that there is no accountant-client privilege in Federal court, and a completed organizer signed by the client can hand the government a criminal case against client with a ribbon on it.
That is exactly what happened in the recent Indictment of Donald Trump’s one-time campaign manager Paul J. Manafort, Jr. and Manafort’s assistant, Richard W. Gates III. Federal prosecutors subpoenaed organizers from Manafort’s accountant. A “No” box was allegedly checked on the organizers to a question about whether Manafort had a [financial] interest in, or signature authority over, one or more foreign financial accounts during the year. The organizers resulted in charges in the Indictment against Manafort for willful failure to file FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”), and against Manafort and Gates for conspiracy to evade income tax on millions of dollars of income allegedly received by Manafort but not disclosed in the organizers.
The Manafort case highlights the peril of using an accountant or other non-attorney advisor to handle a foreign accounts compliance case. Although such non-attorney advisors often attempt to handle foreign accounts compliance cases, there is no privilege in Federal court protecting communications between them and their client. As a result, such advisors can be compelled to appear before a grand jury or at trial and testify under oath about their client, over the client’s objection.
An individual who has failed to report foreign financial accounts on Forms 8938, Statement of Specified Foreign Financial Assets, or on FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”), but who has not failed to report income realized from the foreign accounts, can comply with the law by simply filing amended U.S. income tax returns including the Forms 8938, and filing the delinquent FBARs.
If the individual does owe income tax with respect to foreign accounts not previously reported on Forms 8938 or FBARs, and the individual’s noncompliance was non-willful, then the individual can become compliant by means of a submission under the Internal Revenue Service’s Streamlined Offshore Compliance Procedures (“Streamlined Procedures”). But if such individual’s noncompliance was willful, a submission under the IRS’ Offshore Voluntary Disclosure Procedures (“OVDP”) is the individual’s route to compliance.
In a Streamlined Procedures submission by a U.S. resident, the taxpayer (1) files a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, certifying the taxpayer’s non-willfulness, and computing the taxpayer’s “miscellaneous Title 26 offshore penalty;” (2) files three years of amended U.S. income tax returns, as needed; (3) files six years of delinquent FBARs, as needed; (4) pays tax due on the amended income tax returns, and interest on the tax; and (5) pays the miscellaneous Title 26 offshore penalty. The miscellaneous Title 26 offshore penalty in a Streamlined Procedures submission by a U.S. resident is five percent of the taxpayer’s high year-end balance of foreign financial accounts over the six-year reporting period.
In a Streamlined Procedures submission by a nonresident of the U.S., the taxpayer (1) files a Form 14653, Certification by U.S. Person Residing Outside the United States for Streamlined Foreign Offshore Procedures, certifying the taxpayer’s non-willfulness; (2) files three years of amended U.S. income tax returns, as needed; (3) files six years of delinquent FBARs, as needed; and (4) pays tax due on the amended income tax returns, and interest on the tax. There is no miscellaneous Title 26 offshore penalty in a Streamlined Procedures submission by a non-resident of the U.S. A taxpayer is a “nonresident of the U.S.” for this purpose if the taxpayer was outside of the U.S. for at least 330 full days in any one of the last three tax years for which the Form 1040 filing deadline (as properly extended) has passed.
In a Streamlined Procedures case, whether for a resident or a nonresident of the U.S., the IRS sends the taxpayer a notice for each amended income tax return filed in the case stating whether the taxpayer owes a balance or is due a refund for that year. In our cases, the taxpayer is typically due a refund on each of the amended income tax returns, as we have the taxpayer pay interest on the balance due for 30 days beyond the date we submit the case.
Also, in a Streamlined Procedures case for a U.S. resident, the IRS sends the taxpayer a notice charging the taxpayer the miscellaneous Title 26 penalty computed on the taxpayer’s Form 14654. In a Streamlined Procedures case for a nonresident of the U.S., there is no such penalty, and the IRS sends no such notice.
In an OVDP case, the taxpayer (1) files eight years of amended U.S. income tax returns, as needed; (2) files eight years of delinquent FBARs, as needed; (3) waives the statute of limitations on assessment of income tax; (4) waives the statute of limitations on assessment on civil penalty for failure to file an FBAR; (5) pays tax due on the amended income tax returns, and interest on the tax; (6) pays an “accuracy-related” (negligence) penalty equal to 20 percent of the tax; and (7) pays a miscellaneous Title 26 offshore penalty equal to 27.5 percent of the taxpayer’s high year-end balance of foreign financial accounts over the eight-year reporting period.
The IRS assigns a revenue agent to review an OVDP case. The revenue agent contacts the taxpayer’s representative with questions and to request documents as needed. After the revenue agent’s review, the IRS proposes a Form 906, Closing Agreement, for the taxpayer and the IRS to sign concluding the case.
A Streamlined Procedures submission is much less costly, in tax, interest, penalties, and professional fees, than an OVDP filing. But a taxpayer qualifies for the Streamlined Procedures only if the taxpayer’s noncompliance was non-willful. Noncompliance is willful if it was for the purpose of evading U.S. income tax with respect to foreign financial accounts.
A client must be candidly interviewed to determine whether the taxpayer’s noncompliance was willful. The client’s answers could incriminate the client, for tax evasion, as well as for willful failure to file an FBAR—both felonies. But there is no privilege in Federal court for communications between a client and a non-attorney advisor. Such an advisor could be compelled to testify and produce files concerning a client, as apparently happened in the Manafort case.
We are in charge of our foreign accounts cases. We refer preparation of tax returns needed by the client to an accountant. The tax returns once prepared and signed are included with our submission to the IRS on behalf of the client. Only we interview the client, and we do not allow the use of organizers with respect to the client.
Other posts of interest:
U.S. Persons’ Reporting Obligations Regarding Foreign Financial Assets
OVDP Often a Bad Choice for Foreign Accounts Compliance
You May Only Need to File Delinquent FBARs
Reporting Horrors of Foreign Mutual Funds (“PFICs”)
Compliance Required of U.S. Persons Concerning Foreign Financial Accounts
Beneficial Ownership, Income Tax, and FBARs
Foreign Accounts? Here’s What You Need to Know
OVDP Often a Bad Choice for Foreign Accounts Compliance
Our Approach to Foreign Accounts Cases
Conflicts of Interest in Handling Foreign Financial Accounts Cases
Disclosure of Indian Financial Accounts to the U.S. Government
Passive Foreign Investment Companies: U.S. Clients Should Consider Compliance
Status of Intergovernmental Information Sharing Concerning U.S. Persons’ Foreign Financial Accounts
The Use of John Doe Summonses in Identifying U.S. Persons’ Accounts