Posted by: Taxlitigator.com | July 2, 2014

OVDP & Streamlined Procedures: Expect the Unexpected!

The IRS recently announced an expansion of the streamlined filing compliance procedures announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP).

For eligible taxpayers residing outside the U.S., the revised Streamlined Filing Compliance Procedures provide that all penalties will be waived. For eligible taxpayers residing in the U.S., the revised Streamlined Filing Compliance Procedures provide that the only penalties will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

Changes to the OVDP include requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application. Further, the offshore penalty increases from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that the financial institution where the underlying financial account is maintained is under investigation by the IRS or the Department of Justice. Further, beginning on August 4, 2014, any taxpayer having an undisclosed interest in an account maintained at certain listed foreign financial institutions  listed at irs.gov will be subject to a 50% miscellaneous offshore penalty if they submit a pre-clearance letter to the IRS Criminal Investigation.

The IRS has provided significant guidance regarding the modifications to the OVDP and the revisions to the Streamlined Filing Compliance Procedures. Important links to this information include:

IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000 Taxpayers Participate (FS-2014-6, June 2014). IRS offshore voluntary disclosure programs are designed to encourage taxpayers with undisclosed offshore assets to become current with their tax liabilities. The latest series of voluntary programs began in 2009. Overall, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties. Highlights of the different variations of the IRS offshore efforts since 2009 are discussed at http://www.irs.gov/uac/Newsroom/IRS-Offshore-Voluntary-Disclosure-Efforts-Produce-$6.5-Billion;-45,000-Taxpayers-Participate

IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance (IR-2014-73, June 18, 2014). On June 18, 2014, the IRS announced major changes in its OVDP, providing new options to help both taxpayers residing overseas and those residing in the United States. The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and important modifications to the 2012 OVDP. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was “non-willful.” http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance

Offshore Income and Filing Information for Taxpayers with Offshore Accounts (FS-2014-7, June 2014). U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign accounts and pay taxes on income from those accounts at their individual rates. Taxpayers with undisclosed accounts should consider options available under the expanded streamlined filing process or the Offshore Voluntary Disclosure program. Filing and reporting requirements are generally discussed at http://www.irs.gov/uac/Newsroom/Offshore-Income-and-Filing-Information-for-Taxpayers-with-Offshore-Accounts

Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets. The implementation of FATCA and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments.  Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS describes various options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those investments. http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S–Taxpayers-with-Undisclosed-Foreign-Financial-Assets

 

  1. STREAMLINED FILING COMPLIANCE PROCEDURES EXPLAINED

Streamline Filing Compliance Procedures. The procedures described below are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.  These procedures will be available for an indefinite period until otherwise announced.  http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

U.S. Taxpayers Residing Outside the United States. Streamlined procedures for non-residents are referred to as the Streamlined Foreign Offshore Procedures. Eligibility, description of the scope and effect of the procedures as well as submission instructions  are available at http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

Certification by U.S. Person Residing Outside of the U.S. Persons residing outside the United States applying for the new streamlined procedures must complete and submit the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertNonResidents.pdf

U.S. Taxpayers Residing in the United States. Streamlined procedures for non-residents are referred to as the Streamlined Domestic Offshore Procedures. Eligibility, description of the scope and effect of the procedures as well as submission instructions  are available at  http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

Certification by U.S. Person Residing in the U.S. Persons residing in the United States applying for the new streamlined procedures must complete and submit the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertUSResidents.pdf

 

  1. STREAMLINED FILING COMPLIANCE SUBMISSION PROCEDURES

Delinquent FBAR Submission Procedures. Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax but (1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), (2) are not under a civil examination or a criminal investigation by the IRS, and (3) have not already been contacted by the IRS about the delinquent FBARs, should follow the procedures described at http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures

Delinquent International Information Return Submission Procedures.  Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who (1) have not filed one or more required international information returns, (2) have reasonable cause for not timely filing the information returns, (3) are not under a civil examination or a criminal investigation by the IRS, and (4) have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.  As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.  If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures. Additional required information is discussed at http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

 

  1. FREQUENTLY ASKED QUESTIONS – OVDP and Transition Guidance for Eligible Taxpayers Desiring to Switch to the Streamlined Procedures

Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers. FAQs Effective for OVDP Submissions Made On or After July 1, 2014 are available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised

Transition Rules Frequently Asked Questions. FAQs regarding OVDP participants applying for the new streamlined procedures are available at http://irs.gov/Individuals/International-Taxpayers/Transition-Rules-Frequently-Asked-Questions-FAQs

 

  1. REVISED OVDP VOLUNTARY DISCLOSURE LETTER

Offshore Voluntary Disclosure Letter. Taxpayers participating in the OVDP are required to submit the Offshore Voluntary Disclosure letter available at  http://www.irs.gov/pub/irs-utl/OVDIntakeLtr.pdf

Offshore Voluntary Disclosure Letter Attachment. Taxpayers participating in the OVDP are required to submit the attachment to the Offshore Voluntary Disclosure letter available at  http://www.irs.gov/pub/irs-utl/OVDIntakeLtrAttach.pdf

 

 5.   UPDATED INFORMATION REGARDING ONGOING GOVERNMENT INVESTIGATIONS OF FOREIGN FINANCIAL INSTITUTIONS 

List of Foreign Financial Institutions or Facilitators. Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.  A list of foreign financial institutions or facilitators meeting this criteria is available at http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators

 

  1. REVISED FREQUENTLY ASKED QUESTIONS REGARDING THE MODIFIED OVDP

The Disclosure Period. For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. The eight year period does not include current years for which there has not yet been non-compliance. The years involved in an OVDP disclosure are identified in FAQ #9 available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

Requesting Pre-Clearance into the OVDP. For the OVDP, pre-clearance may be requested as follows: 1.Taxpayers or representatives send a facsimile to the IRS – Criminal Investigation Lead Development Center (LDC) with: (a) identifying information (name, date of birth, social security number and address) and  (b) an executed power of attorney (if represented) at (267) 941-1115 to request pre-clearance before making an offshore voluntary disclosure. In the case of jointly filed returns, if each spouse intends to apply for OVDP, each spouse should request pre-clearance. Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they are cleared to make an offshore voluntary disclosure. Taxpayers deemed cleared should follow the steps outlined below (FAQ 24) within 45 days from receipt of the fax notification to make an offshore voluntary disclosure. Pre-clearance does not guarantee a taxpayer acceptance into the OVDP. Taxpayers must truthfully, timely, and completely comply with all provisions of the OVDP. Taxpayers or representatives with questions regarding pre-clearance may call the IRS CI OVDP hotline at (267) 941-1607. For all other offshore voluntary disclosure questions call the IRS OVDP Hotline at (267) 941-0020. Additional information is available at FAQ #23 http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

FBAR Form to use for the OVDP. Taxpayers must file FBARs electronically.  Taxpayers who are unable to file electronically may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or (if calling from outside the United States) 1-703-905-3975 to determine possible alternative for timely reporting. Taxpayers may rely on FBAR guidance that was applicable for the calendar year that is being reported (e.g., IRS Announcement 2010-16 or IRS Notice 2010-23) in determining their FBAR reporting obligations. Additional information is available at FAQ #44 http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

Special Requirements for the OVDP Power of Attorney. In addition to being authorized to represent the taxpayer for tax years within the voluntary disclosure period, the power of attorney must specifically authorize representation of the taxpayer for income tax, civil penalties and FBARs. A sample is available at http://www.irs.gov/pub/irs-utl/f2848-ovdp.pdf

 

Posted by: Taxlitigator.com | June 24, 2014

IRS OVDP OPT OUT vs. TRANSITION TO THE NEW STREAMLINED PROCEDURES?

Posted by: Taxlitigator.com | June 22, 2014

IRS Changes Streamlined OVDP Reducing FBAR Penalty Exposure!

Posted by: Taxlitigator.com | June 19, 2014

IRS Makes Major Changes to Offshore Voluntary Disclosure Program !

Posted by: Taxlitigator.com | June 16, 2014

Reminder: 2013 FBAR Filing Due by June 30, 2014

Posted by: Taxlitigator.com | May 28, 2014

Reminder: 2013 FBAR Filing Due by June 30, 2014

U.S. persons having a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account may be required by the Bank Secrecy Act to report their interest in the account to the IRS by electronically filing by June 30, 2014, a Financial Crimes Enforcement Network Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR). This form replaces TD F 90-22.1, the previously used FBAR form. A U.S. person may have a reporting obligation even though the foreign financial account does not generate any income.

If a U.S. person had such a financial interest or signature authority at any time during calendar year 2013, the FBAR must be received by the Department of the Treasury on or before June 30, 2014. The FBAR is not filed with the federal income tax return. The granting by the IRS of an extension to file federal income tax returns does not extend the due date for filing an FBAR. The June 30th filing date may not be extended.

U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a U.S. income tax liability and a filing requirement in 2014. The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income. See IR-2014-52 for additional details available on IRS.gov.

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

FBAR filers report their foreign accounts by (1) completing boxes 7a and 7b on Form 1040 Schedule B; box 3 on the Form 1041 “Other Information” section; box 10 on Form 1065 Schedule B; or boxes 6a and 6b on Form 1120 Schedule N and filing the FBAR, satisfies the account holder’s reporting obligation. Even if all relevant information is not available, the FBAR should be filed with as much information as is available; the FBAR can be later amended (by checking the “Amended” box in the upper right corner of the first page of the FBAR) when the additional or new information becomes available. Also, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 (Revised December 2013) if the aggregate value of those assets exceeds certain thresholds. See the instructions for Form 8938 on irs.gov for details.

A United States person having a financial interest in or signature authority over a foreign financial account must file an FBAR if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. A United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U. S.; and trusts or estates formed under the laws of the United States.

The term “person” includes an individual and legal entities including, but not limited to, a limited liability company, corporation, partnership, trust, and estate. A U.S. resident includes an alien residing in the United States. To determine whether the U.S. person is a resident of the U.S., look for guidance in the residency tests set forth in 26 U.S.C. §7701(b).

A single-member LLC, which is a disregarded entity for U.S. tax purposes, is a U.S. person for FBAR filing purposes since the tax rules concerning disregarded entities do not apply with respect to the FBAR reporting requirement (FBARs are required under Title 31, not under any provisions of the Internal Revenue Code).

FINANCIAL ACCOUNT. A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

FOREIGN FINANCIAL ACCOUNT. A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account. A “foreign country” includes all geographical areas outside the United States, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

FINANCIAL INTEREST. A U.S. person has a financial interest in a foreign financial account for which:

(1) the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following: (a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the U.S. person with respect to the account; (b) A corporation in which the U.S. person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock; (c) A partnership in which the U.S. person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital; (d) A trust of which the U.S. person: (i) is the trust grantor and (ii) has an ownership interest in the trust for U.S. federal tax purposes [See 26 U.S.C. § 671-679 to determine if a grantor has an ownership interest in a trust]; (e) A trust in which the U.S. person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year, unless the trust, a trustee of the trust, or agent of the trust: (i) is a U. S. person and (ii) files an FBAR disclosing the trust’s foreign financial accounts.; or (f) Any other entity in which the U.S. person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

SIGNATURE AUTHORITY. Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

There are specified exceptions to the “signature authority only” filing requirement for officers or employees of certain types of banks and entities. FinCEN Notice 2013-1 extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2015.

ELECTRONIC FILING OF THE FBAR. On June 29, 2011, the Financial Crimes Enforcement Network (FinCEN) announced that all FinCEN forms must be filed electronically with certain exceptions. However, the FBAR was granted a general exemption from mandatory electronic filing through June 30, 2013. E-filers will receive an acknowledgement of each submission.

On September 30, 2013, FinCEN posted, on their internet site, a notice announcing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form). FinCEN Form 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the BSA E-Filing System website. The system allows the filer to enter the calendar year reported, including past years, on the online FinCEN Form 114.

The FinCEN system also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program. Information regarding and registration for e-filing of an FBAR is available at  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

VERIFICATION OF FBAR FILING. Ninety days after the date of filing, the filer can request verification that the FBAR was received. An FBAR filing verification request may be made by calling 866-270-0733 and selecting option 1. Up to five documents may be verified over the phone. There is no fee for this verification.

Alternatively, an FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number and the filing period. There is a $5 fee for verifying five or fewer FBARs and a $1 fee for each additional FBAR. A copy of the filed FBAR can be obtained at a cost of $0.15 per page. Check or money order should be made payable to the United States Treasury. The request and payment should be mailed to: IRS Enterprise Computing Center/Detroit, ATTN: Verification, P.O. Box 32063, Detroit, MI 48232

NO EXTENSION OF TIME TO FILE FBAR. There is no extension of time available for filing an FBAR. Extensions of time to file federal tax returns do NOT extend the time for filing an FBAR. If a delinquent FBAR is filed, attach a statement explaining the reason for the late filing.

FAILURE TO FILE THE FBAR. The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The civil penalties might be $10,000 per year but a willful failure to file could be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years. Penalties might be avoided if there is reasonable cause for the failure to timely file the FBAR.

RECORD KEEPING REQUIREMENTS. Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period. The records must be retained for a period of 5 years from June 30th of the year following the calendar year reported and must be available for inspection as provided by law. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements.

SEPARATE REPORTING REQUIREMENTS BY U.S. TAXPAYERS HOLDING FOREIGN FINANCIAL ASSETS (FORM 8938). Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. The Form 8938 filing requirement does not replace or otherwise affect the requirement to file FBAR. A chart providing a comparison of Form 8938 and FBAR requirements, and other information to help taxpayers determine if they are required to file Form 8938, may be accessed from the IRS Foreign Account Tax Compliance Act Web page http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements .

Assistance regarding the electronic filing of an FBAR is available at BSAEFilingHelp@fincen.gov or through the BSA E-Filing Help Desk at 866-346-9478. The E-Filing Help Desk is available Monday through Friday from 8 a.m. to 6 p.m. Eastern Time.

Help in completing an FBAR is available by telephone at 866-270-0733 (toll-free within the U.S.) or 313-234-6146 (from outside the U.S., not toll-free) from 8 a.m.—4:30 p.m. Eastern time, or by sending an e-mail to FBARquestions@irs.gov. Additional information, including Frequently Asked Questions, is available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FAQs-Regarding-Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)—Filing-Requirements#FR5

 

 

 

 

 

 

 

Posted by: Taxlitigator.com | May 17, 2014

PROTECTING PRIVILEGES DURING AN IRS EXAMINATION

A better-equipped IRS has been able to ferret out potentially sensitive issues in a manner often compromising the relationship between a taxpayer and his own tax representative.

If there are potentially sensitive issues, the taxpayer should be interviewed by counsel to determine whether there is a need to fully preserve potentially privileged information. In turn, counsel should consider engaging the accountant to coordinate the examination on behalf of the taxpayer. Under the doctrine of United States v. Kovel,1 the investigative accountant may be clothed with an extension of the attorney’s privilege.

If asked, the taxpayer will often state that he gave everything to his return preparer and that he doesn’t understand why the return preparer failed to appropriately report it. Remember, clients do not make mistakes. Better to get this cleared up between the taxpayer and counsel than to have the taxpayer make such statements(if untrue) to the government. Counsel’s engagement of the accountant should be in writing, and should indicate that the accountant is acting under the direction of counsel in connection with counsel’s rendering of legal services to the client.

Under a Kovel arrangement, communications between the accountant and the client are confidential and are made solely for purposes of enabling counsel to provide legal advice; the accountant’s work papers are held solely for counsel’s use and convenience and subject to counsel’s right to demand their return; and the accountant is to  segregate his work papers, correspondence, and other documents gathered during the course of the engagement and designate those documents as property of counsel.

The statutory privilege for civil “tax advice” to a federally authorized tax practitioner set forth in IRC section 7525 is not available when truly needed the most — when a civil tax proceeding moves into the criminal arena. It also may not be available in some state-related tax proceedings or in nontax civil litigation. However, if the accountant is appropriately engaged by  counsel under Kovel, the common-law attorney-client privilege should apply to all communications rendered in furtherance of the legal services being provided to the client, both during the investigative stages of the audit and, if necessary, during any subsequent civil or criminal litigation. This privilege does not extend to the actual return preparation. The critical inquiry is often whether counsel should retain the taxpayer’s prior accountant or a new accountant.

Some representatives prefer to engage a new accountant to avoid the necessity of delineating between non-privileged communications (communications preceding counsel’s engagement of the accountant), and privileged communications  appropriate communications following counsel’s engagement of the accountant). However, the particular facts and circumstances should be fully explored by counsel before making a determination regarding the engagement of the investigative accountant to assist counsel.

1United States v. Kovel, 292 F.2d 18 (2d Cir. 1961).

Posted by: Taxlitigator.com | April 27, 2014

IRS PROTECTIVE CLAIMS FOR REFUND by EDWARD M. ROBBINS, Jr.

Older Posts »

Categories

Follow

Get every new post delivered to your Inbox.

Join 164 other followers