DOJ Revokes Some Pre-Clearances for Bank Leumi Depositors


A recent press release should send a shudder to some voluntary disclosure participants. It should frighten some tax preparers and their clients.

“The Internal Revenue Service this week sent faxes to tax attorneys nationwide informing them that clients who were previously accepted into its criminal amnesty program for those who disclose once-secret offshore accounts, have “upon further review” been disqualified.”

The specific facts of this action are likely unique to the circumstances. According to an article in Forbes,
“there might have been an administrative foul-up within the IRS —meaning the government already had the taxpayers’ names, but the information wasn’t entered in the right computer system.” Therefore, the pre-clearances may have been issued in error. But what follows from the disqualification from the voluntary disclosure program is of general application to all U.S. taxpayers who have undisclosed offshore accounts.

The IRS will prosecute relatively few of the taxpayers who failed to file FBAR’s. But, the possibility is certainly present that that the government may seek significant civil penalties. The penalties for “willful” failure to file an FBAR is the greater of $100,000 or 50% of the highest account balance per year, per account. The penalty for “non-willful” violations is $10,000 per year per account, absent “reasonable cause”. If there is “reasonable cause” there is authority to avoid penalties altogether. Reasonable cause means, reliance on competent professional advice. The tension will come in those cases where the IRS asserts “willful” conduct and the taxpayer asserts “non-willful” or “reasonable cause” defenses.

Taxpayer’s should be aware that communications with non-lawyers, including accountants and enrolled agents, are generally not privileged and in criminal investigation definitely not privileged. Tax preparers are finding themselves having to produce all their records, including notes of communications, client papers, and client data organizers for IRS auditors and investigators. Some are being called before Grand Juries to testify against clients. If these same tax preparers also prepare the voluntary disclosure documents, as many have, the client loses the protection of the attorney-client and work product privilege. Statements made to a non-attorney adviser who prepares the voluntary disclosure may reveal information that is highly prejudicial to the client, when and if disclosed to the IRS. Tax preparers whose testimony, including document production, contributes to clients prosecution or result in “wilfullness” penalties should expect to be named as defendants in malpractice suits. Tax preparers can be hired by lawyers to assist in the attorney’s work, but this form of engagement (under a Kovel letter) needs to be done with care and deliberation.

The conclusion is that if you are a tax preparer and view offshore voluntary disclosures as another part of your revenue stream, watch-out, for there are bears hunting this stream and they have no sense of humor.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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