July 2012 Archives

Internal Revenue Service's Office of Professional Responsibility (OPR) Censures Tax Attorney

July 19, 2012,

The IRS' Office of Professional Responsibility (OPR) recently censured a tax lawyer, who failed to disclose multiple conflicts of interest.


While having an attorney-client relationship with the benefit plan's promoter, the tax attorney wrote several opinions for prospective plan participants. These opinions pertained to a benefit plan's qualification under Internal Revenue Code section 419A. The tax lawyer later became a co-trustee of the plan, and during his tenure, he represented individual participants before the IRS concerning their tax problems. The plan's promoter was paying him throughout this time.

The tax attorney, who was not identified, never advised any of his clients of the conflicts and failed to obtain informed consents from any of the parties involved. The conflicts arose when the attorney agreed to represent multiple parties with opposing interests, to become the co-trustee of the plan and to receive compensation from the promoter. His obligations to other parties and his own self-interest limited his ability to represent each of his clients successfully. Because they were unaware of the conflicts, the clients were unable to seek alternative legal counsel.

The attorney has agreed to cooperate in the investigation, recognized his violations and will take additional continuing education ethics classes over the next two years. The IRS' OPR Director Karen L. Hawkins reminded attorneys that informing clients of conflicts of interest "is not a mere nicety." She continued, "Taxpayers who pay handsomely for tax advice and representation have a fundamental right to expect competent and diligent representation unfettered by a practitioner's responsibilities or obligations to someone else, or by the practitioner's self-interest."

Those who violate Circular 230 are subject to monetary penalties, censure, suspension and disbarment. Not just tax attorneys, but also enrolled agents, and CPAs are subject to the provisions of Circular 230, and therefore must avoid representing conflicting interests, unless appropriate conflict waivers are obtained.

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Denise Rich, Ex-wife of Marc Rich, Expatriates

July 16, 2012,

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Denise Rich, former wife of commodities trader Marc Rich who was indicted in the 1983 on charges of tax fraud, gave up her U.S. citizenship, avoiding potential future tax problems. The 68 year-old woman is a Grammy-nominated songwriter whose songs have been recorded by Aretha Franklin, Mary J. Blige and Jessica Simpson. Rich (under her maiden name, Eisenberg) appeared on the Federal Register in the April quarterly edition of people who renounce their citizenship. By giving up her U.S. passport, she will likely save millions of dollars in taxes. She will also not have to go through the expense and aggravation of filing foreign bank account reports (FBARs) with the IRS.

The songwriter joins the growing number of individuals renouncing their U.S. citizenship in order to avoid taxes. According to government figures, nearly 1,800 citizens and permanent residents expatriated last year, a record since the data was first collected in 1998.

Rich has Austrian citizenship through her father. Although both Austria and the United States tax individuals on their worldwide income, Austria provides tax breaks for citizens who spend six months or more abroad per year.

Controversy recently surrounded Rich's offshore bank account in the Cook Islands. Lee Goldberg, the former protector of the trust, alleged that Rich and Richard Kilstock, her son-in-law, moved or transferred trust assets without his permission, violating the terms of the trust. The case, filed in February, was dismissed in April.

U.S. citizens must pay taxes on their worldwide income. An intentional failure to do so could lead to criminal tax charges of tax evasion. Although Rich will no longer have to pay U.S. taxes, she is subject to an expatriation or "exit" tax. The "exit tax" calculation is based on the fair market value of an individual's worldwide property holdings the day before that person leaves the United States. However, these taxes can sometimes be reduced or avoided through careful planning.

If you or someone you know is considering expatriation, you should speak with an experienced tax attorney to reduce the exit tax. Advanced planning is necessary. It may be helpful to get a professional appraisal done before calculating the difference between your basis (what you initially paid) and what your holdings are worth now.

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IRS Provides Half-Baked Foreign Bank Account Report (FBAR) Relief for Some Offshore Account Holders Who Live Overseas

July 2, 2012,

Some FBAR (Foreign Bank Account Report) relief was announced on June 26th for offshore account holders who currently live outside of the U.S. The program will not take effect until September 1st, and the details have not yet been finalized. Taxpayers who qualify will file delinquent returns for the past three years, and FBARs for six years. Payment of any tax due, plus interest must be submitted at the same time.

Our tax attorneys see a big problem in this program because the IRS has stated that filing under this program provides no protection from possible criminal tax prosecution! All submissions will be reviewed by the IRS, but the degree of review will depend upon "level of compliance risk" as determined by the IRS. Those who are deemed to present low compliance risk will not have FBAR, tax fraud or other penalties asserted against them. However, those that are deemed to have a higher compliance risk will be subject to more thorough review, and possibly a full audit extended beyond the three year of tax returns that are filed. Of course with that tax audit may come full blown FBAR penalties, and no resort to the 27.5% ceiling available for 2012 Offshore Voluntary Disclosure Program(OVDP) filers. As regular readers of our tax problem attorney blog know maximum penalties can include willfulness penalties of up to 50% of the account balance, and civil fraud penalties of 75% of any tax due.

Compliance risk will be determined assessed based upon information provided on the returns filed, and "certain additional information" that will be required as part of the submission. According to the IRS website if there are no "high risk factors" and there is less than $1,500 in tax due in each of the three years then the taxpayer will be treated as low risk, and qualify for the non-assertion of penalties. Risk level will according to the IRS rise with the taxpayers ' income and assets, indications of "sophisticated tax planning" or tax avoidance, or if there is "material economic activity" in the U.S.

Interestingly the procedure appears to apply only to persons who did not file a tax return. Thus a person who at least filed a U.S. tax return, but failed to file FBARs, and who also did not report all offshore income would not be able to take advantage of this program.

There is no indication that the program will be retroactive. Therefore taxpayers who entered an earlier disclosure program and paid penalties of up to 25% on their offshore accounts are not entitled to a refund even though they would have qualified under the new program.

It may be that the IRS cures some of the apparent flaws before the program goes live. In any event, it means that a sophisticated analysis will need to be done to determine if one should wait until September 1, 2012 to enter the new program, or enter the 2012 Offshore Voluntary Disclosure Program immediately, or take some other action such as filing a quiet voluntary disclosure. What is increasingly clear is that no action is not an option.

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