Question 1: Analyzing the Willfulness of the Taxpayer's Reporting Actions
Taxpayer was born in France. He studied marketing in Paris. In 1990, he began working for a foreign corporation based in Switzerland that required him to open a bank account in Switzerland. He had his paycheck deposited into the Swiss account. In 2002, he immigrated to the United States and he began his own consulting company. The consulting company provided services to clients in the United States and overseas. His US based clients made payments to him in a corporate bank account in the United States. His foreign clients made payments to his foreign bank account opened in Switzerland. From time to time, Taxpayer would transfer monies from his Swiss bank account to his American bank account. Taxpayer prepares his own tax returns. From 2002 until 2014, Taxpayer reported 100% of the income he received from his United States clients; however, he only reported as income the monies that were transferred from Switzerland to the United States for his foreign clients. Taxpayer answered no on his tax return when asked if he has a bank account outside of the United States. Taxpayer also failed to file Foreign Bank Account Reports (FBARs). Taxpayer was audited in 2008 for tax years 2005 and 2006 and no changes were made to his tax return.
During the semester, you have become familiar with various laws, policies, and overall proceduresinvolved in the criminal tax world. Now, put on your two hats as a CPA in the real world: one as a return preparer and one as a forensic accountant. The first part of the question is, as a return preparer, given what you now know, what are some safeguards and procedures you will put in place in order to protect yourself from any criminal exposure? Secondly, as a forensic accountant, what are some strategies you can now employ in terms of ensuring you are value-added to a team in terms of defending a criminal tax case (working with a lawyer).
Pick a tax protester scheme/argument/program/method/etc and tell me what some of the arguments for it being legitimate are in your mind. Feel free to use one of the ones mentioned in the lecture or one not mentioned at all. No more than a few paragraphs is necessary. There is no right answer to this one. This question was added as we only had 4 graded discussion posts and the syllabus says that there will be 5 graded discussions.
It can be argued that the taxpayer acted willfully in not considering to disclose all of his foreign income as well as his foreign bank account. Many citizens of the United States and residents often receive income from foreign sources. They are required by the American Tax law to report and disclose their foreign or worldwide income, including income from foreign banks, foreign trusts and securities accounts (Fuller & Bricker, 2013). A tax payer is considered to have done a willful act when he is aware of his responsibility to disclose his foreign income and bank accounts, but he or she decides not to meet this requirement. According to this scenario, the taxpayer who is a United States resident, acted willfully by answering no on his tax return when asked if he owned a foreign bank account. According to Section 4.26.16 of the Bank Secrecy Act (BSA) on Report of Foreign Bank and Financial Accounts (FBARs), every citizen and resident in the United States is required to report on their foreign bank and investment accounts by filing a report of Foreign Bank and Financial Account (FBAR). However, in this case, the taxpayer deliberately failed to file this report, which is a sufficient evidence that he acted willfully (McNulty & Lathrope, 2012).
It can also be argued that the taxpayer in this case did not act willfully. A non-willful act can be described as that in which an individual earns some foreign income and holds foreign bank accounts but fails to disclose this due to reliance on an external accountant, mistakes or negligence and also due to other reasons which can be reasonably justified. According to the American Tax Law (Section 4.26.16 of the Bank Secrecy Act on FBARs), the form used for filing Foreign Bank Account Report (FBAR) has a threshold requirement of only ten thousand US dollars. This means that only individuals with foreign bank account balances exceeding this amount ($10,000) at any time of the year are required to file this report. Therefore, the taxpayer in this case scenario is most likely not required to make this disclosure since his foreign bank account might not have exceeded an annual amount of $10,000. This evidence can be used for affirming that the taxpayer did not act willfully by not disclosing his foreign income and bank account, since he did this based on some justifiable reasons. This is in accordance with Section 4.26.16 of the Bank Secrecy Act (Fuller & Bricker, 2013).
Question 2: Safeguards for Tax Return Preparers and Strategies for Forensic Accountants
Lastly, acting as a judge, it can be concluded that the taxpayer willfully. This argument is much stronger and is supported by the fact that the American tax law (Section 4.26.16 of the Bank Secrecy Act) requires every citizen and resident to make a disclosure of all foreign income and bank accounts. However, the taxpayer in this case violated this requirement deliberately by providing a “No” answer on the foreign bank account section of the tax return form. Additionally, he was aware of his foreign income reporting responsibility since he prepared his own tax returns and reported hundred percent of the income received from his United States clients. This clearly indicates that the taxpayer deliberately avoided reporting on his foreign income and bank account, thus acting willfully. According to IRS Title 18 USC Section 1956(h), the taxpayer is therefore liable for criminal persecution by the Internal Revenue Service (IRS) for failing to abide by the tax laws (Jurinski, 2015).
As a CPA in the real world acting as a tax return preparer, there are some safeguards and procedures that one can put in place in order to protect himself from any criminal exposure. According to circular 230 of the Internal Revenue service (IRS), a CPA engaged in preparing tax returns for clients must put in place adequate safeguards and control procedures. The department or preparing tax returns must be headed by a specific named individual and all staff are supposed to file on a timely basis, their own personal returns. In addition to this, the CPA firm should retain the client tax records for a minimum of three years. According to IRM (section 126.96.36.199), the firm should also provide to the Internal Revenue service (IRS), a report with a list of the tax preparers, their numbers of identification and work place (Pechman, 2017).
Furthermore, section 6695 of IRC requires that the tax return must be signed by the tax preparer, and his identification number should be entered. A copy of the return must be furnished to the taxpayer and another copy retained by the CPA for at least three years. Besides this, due diligence requires that tax preparers must verify the information of the taxpayer independently, and reasonably enquire if such information seems incomplete or incorrect. Also, a CPA must avoid disregarding the tax law or making a misapplication when preparing client’s tax returns in order to evade negligence penalties. The tax preparer must also create an electronic security strategy for safeguarding the data of the taxpayers. This also includes putting in place systems for preventing loss of important taxpayers’ data (Jurinski, 2015).
As a forensic accountant, one should employ certain strategies to ensure he is value-added to a tam in terms of defending a criminal tax case. For instance, the accountant should be keen not to steer the prosecutions towards other federal crimes related to tax returns such as aiding and abetting. According to IRM (Section 9.5.5), he can also prevent collateral estoppel from being imposed when making a negotiation of a plea deal in cases related to tax crimes (Pechman, 2017). For instance, during a negotiation of a plea deal in a money laundering prosecution, he should avoid agreements regarding tax intent money laundering provision. In addition to this, the forensic accountant may use the defense of insufficient evidence to defend a client who has been convicted of a tax crime. This defense provides that it must be sufficiently shown that the taxpayer committed the tax crime willfully (McNulty & Lathrope, 2012).
The conspiracy argument is one of the most famous tax protester arguments in the United States. It is considered legitimate since tax protesters have claimed that various generations of tax experts have been conspiring with an aim of concealing the deficiencies in the Federal income tax system. These experts include the employees of the Internal Revenue Service (IRS), judges of the federal court, CPA’s, lawyers and the Congress of the United States. This tax protester argument is valid since many Americans have been forced to file and pay federal taxes on their income when they are not legally supposed to do so (Pechman, 2017).
Fuller, J. P., & Bricker, W. L. (2013). The American tax law. New York, NY: Practising Law Institute.
Pechman, J. A. (2017). Federal tax policy. Washington, DC: Brookings Institution.
Jurinski, J. (2015). The American tax law: A reference handbook. Santa Barbara, CA: ABC-CLIO.
McNulty, J. K., & Lathrope, D. J. (2012). Federal income taxation of individuals. St. Paul, MN: Thomson/West.
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