- 1 How much does a streamlined case cost?
- 2 First, understand how attorneys bill
- 3 Second, understand the work that is involved in the streamlined process
- 4 Third, are the streamlined procedures appropriate?
- 5 Do I Need a Tax Lawyer, or can I use a CPA?
- 6 Can we just Forget about my past Non-Compliance and file Correctly Going Forward?
- 7 Client tips on hiring an attorney
- 8 Offshore disclosure firms to watch out for
- 9 Why previous work experience is important
How much does a streamlined case cost?
Although we’re located in Houston, Texas, the vast majority of our clients are located outside of Texas, including internationally. Many contact us for a quote. We schedule consultations but we don’t just give out quotes at the outset. Hopefully this article will explain why we cannot do that.
First, understand how attorneys bill
Fixed fees. Some attorneys charge fixed fees. You should be wary of absurdly low fixed fee quotes. An attorney who has undercharged for a fixed fee project may be pressured to cut corners. Or as we’ve seen many times – they’ll withdraw from your matter halfway into it and refund your money because they’ve found an even more lucrative engagement.
Hourly. For attorneys who use the hourly billing model, usually the tax preparation work will be fixed and the attorney’s time will be billed hourly. The tax preparation is usually handled by a CPA firm, through coordination with the attorney.
Second, understand the work that is involved in the streamlined process
Let’s take a look at some of the steps that go into working a foreign accounts compliance case. Some practitioners may cut some of these steps out to save time (and save you fees), or simply because they do not know better.
Our policy is that if you’re voluntary coming into compliance for mistakes or omissions made on your tax returns (and which can carry hefty penalties), now is not the time to cut corners.
Step 1: Initial consultations
Clients are often nervous and don’t know what to expect at the start of the process. We provide an overview and go into as much detail as possible, but there’s so much information that most clients will feel overwhelmed.
The attorney should discuss the various options for coming into compliance and you should agree on the best way to disclose your accounts. There is quite a bit of back and forth during the initial phase with clients as they begin to understand the process and feel more comfortable.
Step 2: Research
Offshore compliance is a niche area of tax law. There are thousands of different types of foreign accounts. It’s impossible to determine how your specific accounts should be reported without research.
Our challenge is understanding how each foreign account the client owns should be treated under the U.S. tax code. That is not an easy task.
The IRS does not tell you how your specific foreign investment should be reported. And it would be impossible for the IRS to do that.
If you have a U.S. brokerage account, you get a neatly organized 1099-B summary that you can just plug into Turbo Tax. That’s not the case with foreign investments. A foreign investment account can be any number of things:
Correctly reporting an account often requires an attorney to delve into the abyss of our tax code to determine how the investment should be reported and taxed. The attorney should review any applicable tax treaties. Finally, the attorney should assist you with any questions regarding the organizers that you fill out.
Tax compliance for individuals should not be this complicated, but unfortunately our laws concerning foreign accounts are onerous and the government has had a series of wins in offshore cases which makes it more important to get it right.
Step 3: Tax preparation
After the attorney has classified the accounts, determined how they should be taxed and reported, determined what forms should be filled out, and determined that you are non-willful and eligible for the streamlined procedures, the tax preparation process can begin.
If your attorney is preparing your tax returns, they should have one of the following:
- Prior experience working at an accounting firm
- A CPA license
In order to get a CPA license, an accountant must have one to two years of accounting experience and pass a rigorous exam.
I know many good enrolled agents who have prior experience at an accounting firm. By far the biggest mistakes I’ve seen are from enrolled agents with no accounting firm background.
Step 4: Certification
At first glance, the certification doesn’t look like it’s much work, but it can be time-intensive. The IRS states that:
The time needed to complete and submit the streamlined certification will vary depending on individual circumstances. The estimated average time is: 8 hours.
In our experience, that is a fairly good estimate of the average time. Some cases might take longer. The time that goes into it is more than drafting the narrative. Significant time is spent on research, gathering background and other relevant information, and calculating the penalty base. The later can take a significant amount of time where there are numerous accounts.
Apart from the detail that goes into properly reporting foreign accounts and income, an attorney should be keeping abreast of the law in this area. The dangers of hiring an attorney who seldom handles these cases is that many of the above things will be overlooked.
It could mean that you’ve over-reported your taxes and/or penalties or worse it could result in an incomplete disclosure which leaves the statute of limitations running.
Third, are the streamlined procedures appropriate?
The Traditional Voluntary Disclosure Program is for taxpayers who need protection from criminal prosecution or civil willfulness penalties. The following factors (not exclusive) are some indicators of willfulness.
- Opening an account in a jurisdiction in which the taxpayer has no other ties. Do you have legitimate business or personal ties to the jurisdiction where your foreign assets are located? Or are they located in offshore tax havens such as Switzerland, Panama, Cyprus, Liechtenstein, Luxembourg, Austria, and others where there have (or had) bank secrecy?
- A consistent pattern of under-reporting large amounts of income
- Use of bank accounts held under fictitious names
- Setting up foreign trusts or corporations to conceal sources of income
- Selectively filing some forms but not others
- Using different passports
- Requesting your bank to not send statements
- Using code words
- Only making cash deposits and withdrawals, and visiting the bank in person
- Receiving letters from the foreign bank regarding reporting requirements
- Failure to supply an accountant with accurate and complete information
- Keeping a double set of books
- Hiding, destroying, throwing away, or “losing” books and records
- Placing property or a business in the name of another (nominees)
- Use of bank accounts held under fictitious names
It is extremely rare for a client to need a traditional voluntary disclosure.
Some factors are more indicative than others of willfulness. The presence of these factors in your case does not automatically make you willful.
For instance, you may have filed your FBARs but not Forms 8938 (see #5), or you didn’t report non-bank foreign financial assets because you did not know you had to (see #5). Or perhaps you only found out about your FBAR requirements after your bank contacted you with a ‘FATCA letter’ (see #10). These can all be explained away in your certification.
On the other hand, the use of a foreign bank account held under fictitious names, on its own, could be enough to show willfulness.
Willfulness is a legal determination, not a bright line rule – which is why a CPA should never handle offshore compliance cases.
Do I Need a Tax Lawyer, or can I use a CPA?
A client should not directly reach out to a CPA in a tax matter where they may be facing significant civil or criminal penalties for a tax violation.
Can we just Forget about my past Non-Compliance and file Correctly Going Forward?
Our job is to bring clients into compliance safely and will not advise or assist you in your strategy of “going forward compliance.”
Here’s what the IRS has to say about quiet disclosures:
What if the taxpayer has already filed amended returns reporting the additional unreported offshore income, without making a voluntary disclosure (i.e. quiet disclosure)?
The IRS is aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. Taxpayers who have already made “quiet” disclosures are eligible to take advantage of the penalty framework applicable to this program by submitting an application, along with copies of their previously filed returns (original and amended) to the IRS’s Voluntary Disclosure Coordinator (see FAQ 24)…Those taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.
We’ve had to represent clients who were audited after submitting a quiet disclosure by tax professionals. It is not worth the risk.
Client tips on hiring an attorney
Be Upfront During your Initial Consultation. This means truthfully and completely answering all questions, and proffering relevant information. It is important to identify any weaknesses so that they may be addressed early on, as well as to identify the full scope of the work involved.
Be Organized. If you’re paying hourly, then obviously good organization on your part will save you money. If your attorney is charging a fixed fee and does not sense that you are organized, you can expect that your fees might be higher to reflect the additional time commitment on the attorney’s part.
Do your Tax Research. Be prepared with good questions to gauge whether the attorney has handled cases like yours before. Our clients who have done their research understand the nuances and complexity of this work, often more than some of the attorneys they end up talking to.
Offshore disclosure firms to watch out for
With offshore disclosures now a hot practice area in tax, it seems that every firm wants to accept such cases. We provide this section only because our clients have requested us to write this. While you can find many great attorneys that can assist you with your matter, here are some types of firms to watch out for.
Free Consultation Firms
When you get a free consultation you get a sales pitch. We charge for consultations and for a good reason. A consultation should be unbiased advice.
Tax law is unlike other law practices in that a practitioner does not have to be a licensed attorney to practice tax, because in tax, the line between non-legal tax work and legal tax work is often blurred. A licensed tax attorney is admitted to the highest court of their state and subject to professional and ethical standards set by their state bar. A non-licensed practitioner has no professional board to answer to.
If you want to verify that your attorney is licensed, you can Google search “State bar of [enter attorney’s state] attorney lookup.” One of the first few search result should take you to the state bar’s attorney lookup page.
Certified Offshore Disclosure Specialists
We’ve had to take over cases from another attorney claiming to be a certified offshore compliance specialist (there’s no such certification). The clients weren’t so thrilled when we reviewed the work. Please be careful. This is a niche area of tax; most tax attorneys will not understand the nuances involved unless they focus exclusively on offshore compliance.
Bundled Flat Fee Services
We’ve seen flat fee quotes that include audit representation and representation before the IRS Office of Appeals.
It’s a gimmick, as 99.9% of clients will never need those services. Of the 0.1% that will need it, it’s not in their best interest to prepay for such services.
I’ve handled hundreds of audits and appeals on both sides of the table – at the IRS and in private practice. It’s time-consuming. Paying a few hundred dollars for ‘audit defense’ would provide little incentive to adequately represent a client.
In addition to that, there could be a conflict of interest. Perhaps the attorney made a major mistake in your offshore disclosure. In that case you may want to be represented by someone else.
Why previous work experience is important
Experience in a previous accounting, law firm, or IRS setting is absolutely critical. Having experience in your own firm is great but not sufficient. You simply cannot know how the tax system works in the real world by passing some exams.
Lawyers without prior outside experience tend to have a myopic view of the tax system and tend to blow matters way out of proportion. We’ve seen that with attorneys making OVDP filings for minor tax non-compliance that could’ve been resolved alternatively.
A recent article in a tax publication emphasizes the usefulness of having prior IRS experience in any capacity:
[M]any other practitioners who worked at the IRS or Treasury Department, their experience in government gave them a deep understanding of the tax system that has served them well throughout their careers.
Another former IRS trial attorney, Adam Sweet, offered his own endorsement of government work, describing it as a promising career path for young tax professionals: “Any good tax professor is going to encourage their students . . . if they’re going to be tax attorneys, to work for the IRS in some capacity, whether straight out of school or later on,” he said.
Unsurprisingly, a stint in government will provide special insight into how the government works… To attorneys who haven’t worked for the IRS, it often seems like a mysterious black box, Sweet said. But for someone who’s worked there, it’s a “real advantage” when writing a tax opinion or responding to an audit to be able to weigh in with colleagues as a former official and point out things that the IRS might consider or challenge, he said.
Sweet said attorneys from a purely private-practice background “tend to approach the government with a war mentality,” whereas those who have worked at there have a more nuanced approach.
Sweet explained that he typically discloses upfront to a revenue agent working on a case that he has a background with the IRS, and that often makes for a better working relationship.
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.
Even if you’ve spoken to someone about your matter, we’re available for a second opinion.