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Beware of Flat-Fee Lawyers Doing Streamlined Domestic Offshore Procedures

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Recently, I received a number of phone calls and emails from people who complained about incorrect filing of their Streamlined Domestic Offshore Procedures (“SDOP”) packages by lawyers who took their cases on a flat-fee basis. In this article, I would like to discuss why a flat fee is generally not well-suited for a proper SDOP preparation and why clients should critically examine all facts and circumstances before retaining flat-fee lawyers.

A small disclosure: the analysis below is my opinion and the result of my prior experience with SDOPs. Moreover, I am only describing general trends and there are certainly exceptions which may be applicable to a specific case. Hence, the readers should consider my conclusions in this article carefully and apply them only after examining all facts and circumstances related to a specific lawyer before making their final decision on whether to retain him.

Flat-Fee Lawyers versus Hourly-Rate Lawyers

The two main business models that exist in the professional tax community in the United States with respect to billing their clients are the hourly-rate model and the flat-fee model. The hourly-rate model means that an attorney’s fees will depend on the amount of time he actually worked on the case. The flat-fee model charges one fee that covers a lawyer’s work irrespective of how much time he actually spends on a case.

Both billing models have their advantages and disadvantages. Generally, the chief advantage of an hourly-rate model is potentially higher quality of work. The hourly-rate model has a built-in incentive for attorneys to do as accurate and detailed work as possible, maximizing the quality of the final work product. An hourly-rate attorney is likely to take more time to explore the documents, uncover hidden problems of the case and properly resolve them.

The disadvantage of an hourly-rate model is that it cannot make an absolutely accurate prediction of what the legal fees will ultimately be. However, this problem is usually mitigated by estimates – as long as he knows all main facts of the case, an experienced attorney can usually predict the range of his legal fees to cover the case. Only a discovery of substantial unexpected issues (that were not discussed or left unresolved during the initial consultation) will substantially alter the estimate, because more time would be needed to resolve these new issues.

The chief advantage of the flat-fee model is the certainty of the legal fee – the client knows exactly how much he will pay. A secondary advantage of this model is the built-in incentive for flat-fee lawyers to complete their cases as fast as possible.

However, this advantage is undermined by several serious disadvantages. First, the flat-fee model provides a powerful incentive for lawyers to spend the least amount of time on a client’s case in order to maximize their profits; in other words, the flat-fee model has a potential for undermining the quality of a lawyer’s work product. Of course, it does not happen in every case, but the potential for such abuse is always present in the flat-fee model.

Second, closely-related to the first problem, the flat-fee model discourages lawyers from engaging in a thorough analysis of their clients’ cases. This may later result in undiscovered issues that may later expose a client to a higher risk of an unfavorable outcome of the case. Again this does not happen in every case, but I have repeatedly seen this problem occur in voluntary disclosures handled by flat-fee lawyers and CPAs.

Finally, a client may actually over-pay for a flat-fee lawyer’s services compared to an hourly-rate attorney, because a flat-fee lawyer is likely to set his fees at a high level to make sure that he remains profitable irrespective of potential surprises contained in the case. Of course, there is a risk for flat-fee lawyers that the reverse may occur – i.e. despite being set to a high level, the fee is still too small compared to issues involved in a case.

The effective usage of either one of these billing models differs depending on where they are applied. In situations where the facts are simple and legal issues are clear, a flat-fee model may be preferable. However, where one deals with a complex legal situation and the facts cannot all be easily established during an initial consultation, the hourly-rate model with its emphasis on thoroughness and quality of legal work is likely to be the best choice.

Flat-Fee Lawyers Can Be An Inferior Choice for Streamlined Domestic Offshore Procedures

In my opinion and based on the analysis above, in the context of an SDOP voluntary disclosure, a flat-fee engagement is particularly dangerous because of the nature of offshore voluntary disclosure cases.

Voluntary disclosures are likely to deal with complex US international tax compliance issues and unclear factual patterns. It may be difficult to identify all legal issues and all US international tax reporting requirements during an initial consultation. There are too many facts that clients may simply not have at their disposal during an initial consultation. Moreover, additional issues and questions are likely to arise after the documents are processed. I once had a situation where I discovered that a client had an additional foreign corporation with millions of dollars only several months after the initial consultation – the corporation was already closed and the client forgot about it.

For these reasons, SDOP and offshore voluntary disclosures in general require an individualized, detailed and thorough approach as well as a hard-to-determine (during an initial consultation) depth of legal analysis which is generally ill-fit for a flat-fee engagement. A flat-fee lawyer is unlikely to accurately estimate how much time is required to complete a client’s case and, hence, unlikely to accurately set his flat fee for the case.

This can cause a huge conflict of interest as the case progresses. I have seen a number of cases where, in an attempt to remain profitable, flat-fee lawyers did their analysis too fast and failed to properly identify all relevant tax issues; as a result, the voluntary disclosures (including SDOP disclosures) done by them had to amended later by my firm. This caused significant additional financial costs and mental stress to my clients.

In my opinion, this potential conflict of interest makes the flat-fee model unsuitable for the vast majority of the SDOP cases.

Beware of Some Flat-Fee Lawyers Including Unnecessary Services Into the Flat Fee

This applies only to a tiny minority of flat-fee lawyers. I have observed several times where flat-fee lawyers included irrelevant services that the client never used to increase the flat fee for the case (for example, audit fees for years not included in the SDOP). My recommendation is that, if you decide to go with a flat-fee arrangement, you should make sure that it includes only the services that you will likely use.

Contact Sherayzen Law Office for Professional Help With Streamlined Domestic Offshore Procedures

Sherayzen Law Office is a leader in SDOP disclosures. We have helped clients from over 70 countries with their offshore voluntary disclosures, including SDOPs. Our firm follows an hourly-rate billing model, because we value the quality of our work above all other considerations. Of course, we make every effort to make our fees reasonable and competitive, but our priority is the peace of mind of our clients who know that they can rely on the creativity of our legal solutions and the high quality of our work.

Contact Us Today to Schedule Your Confidential Consultation!

Coronavirus & Chinese Offshore Voluntary Disclosures | SDOP Tax Law Firm

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The ongoing coronavirus pandemic has disrupted many areas of human activity around the planet. The coronavirus even affected the IRS offshore voluntary disclosures concerning US taxpayers’ unreported financial assets and income in China (“Chinese Offshore Voluntary Disclosures”). In fact, the impact of coronavirus on the Chinese Offshore Voluntary Disclosures has been severe and extremely disruptive. Let’s look at the top three ways in which coronavirus has disrupted the Chinese Offshore Voluntary Disclosures.

Coronavirus & Chinese Offshore Voluntary Disclosures: Access to Information

The first and most important disruption caused by coronavirus is reduced access to information necessary to complete offshore voluntary disclosures. As a result of the quarantine measures, many financial institutions in China are either closed or work only limited hours. Hence, it has become much harder to obtain relevant information from the Chinese financial institutions, particularly with respect to certain complex investment products and investment insurance policies.

Moreover, as a result of the suspension of travel between China and the United States, many taxpayers are unable to travel to China to obtain the necessary documents. In many cases, internet access to financial data in China is limited to only a few years, whereas taxpayers often need to go back at least six years to obtain the necessary information to accurately complete their delinquent FBARs. In most instances, a taxpayer needs to personally visit his financial institution to collect this older data. At this point, this is almost impossible.

Coronavirus & Chinese Offshore Voluntary Disclosures: Mailing of Signed Documents

With respect to US taxpayers who are currently in China, many of them have limited ability to execute the documents necessary to complete offshore voluntary disclosures and mail them to their international tax attorneys in the United States.

Coronavirus & Chinese Offshore Voluntary Disclosures: Case Schedule

As a result of the two factors above as well as the current communication disruptions in the United States, the coronavirus has caused long delays in the voluntary disclosures that involve undisclosed financial assets in China. The schedule disruptions can last from weeks to months; in fact, in some cases, it is too early to be able to fully assess the impact of coronavirus on an offshore voluntary disclosure schedule.

While Sherayzen Law Office has been able to minimize the impact of coronavirus on the Chinese Offshore Voluntary Disclosures, certain delays still exist due to clients’ inability to obtain the necessary information.

Contact Sherayzen Law Office for Help With Chinese Offshore Voluntary Disclosures

If you have undisclosed financial accounts or foreign businesses in China, contact Sherayzen Law Office for professional help as soon as possible. While the disruptions caused by coronavirus have been severe, by employing careful planning, we can still help you maximize your ability to complete your offshore voluntary disclosure in an accurate and timely manner.

We have already helped hundreds of US taxpayers like you, including in China, to successfully bring their financial and business affairs in full compliance with US tax laws. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2020 Offshore Voluntary Disclosure Options | US International Tax Lawyers

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As the new year 2020 begins, it is important for US taxpayers with undisclosed foreign assets to consider their 2020 offshore voluntary disclosure options. Unlike last year, there have not been any drastic changes to the voluntary disclosure options since 2019. In this article, I would like to generally explore the 2020 offshore voluntary disclosure options available to US taxpayers who wish to reduce their IRS penalties by voluntarily resolving their prior US tax noncompliance concerning foreign assets and foreign income.

2020 Offshore Voluntary Disclosure Options: Streamlined Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures (“SDOP”) is currently the flagship voluntary disclosure option for US taxpayers who reside in the United States. SDOP is a highly beneficial voluntary disclosure option to non-willful taxpayers: it is simple, limited (in terms of the voluntary disclosure period for which tax returns and FBARs must be filed) and mild (in terms of its penalty structure). There are some drawbacks to SDOP, such as the imposition of the Miscellaneous Offshore Penalty on income-tax compliant foreign accounts, but the benefits offered by this option outweigh its deficiencies for most taxpayers.

The main challenge of SDOP is its requirement that a taxpayer certifies under the penalty of perjury that he was non-willful with respect to his prior income tax noncompliance, FBAR noncompliance and noncompliance with any other US international information tax return (such as Form 8938, 3520, 5471, et cetera). This is a huge problem for willful taxpayers and taxpayers who are in the “gray” area between willfulness and non-willfulness. It will be up to your international tax lawyer to make the determination on whether you are able to make this certification.

2020 Offshore Voluntary Disclosure Options: Streamlined Foreign Offshore Procedures

Streamlined Foreign Offshore Procedures (“SFOP”) is very similar to SDOP (in fact, both options were created in 2014), but it is even more beneficial to taxpayers who are able to satisfy SFOP’s eligibility requirements – this is a true amnesty program, because its participants do not pay IRS penalties of any kind, even on income tax due (taxpayers only need to pay the interest on additional tax due). Moreover, SFOP preserves SDOP’s non-invasive and limited scope of voluntary disclosure.

SFOP, however, is available to a much more limited number of US taxpayers who are able to satisfy its eligibility requirements, particularly those related to non-willfulness certification and physical presence outside of the United States. Again, you should contact Sherayzen Law Office to help you determine whether you meet the eligibility requirements of SFOP.

2020 Offshore Voluntary Disclosure Options: Delinquent FBAR Submission Procedures

Delinquent FBAR Submission Procedures (“DFSP”) is another voluntary disclosure option that fully eliminates IRS penalties. This is not a new option; in fact, in one form or another, it has always existed within the IRS procedures. Prior to 2014, it was even written into the OVDP (IRS Offshore Voluntary Disclosure Program) as FAQ#17.

While DFSP is highly beneficial to noncompliant US taxpayers, it is available to even fewer number of taxpayers than those who are eligible for SDOP and SFOP. This is the case due to two factors. First, DFSP has a very narrow scope – it applies only to FBARs. Second, DFSP has extremely strict eligibility requirements; even de minimis income tax noncompliance will deprive a taxpayer of the ability to use this option.

2020 Offshore Voluntary Disclosure Options: Delinquent International Information Return Submission Procedures

Delinquent International Information Return Submission Procedures (“DIIRSP”) has a very similar history to DFSP. In fact, it was “codified” into OVDP rules as FAQ#18. Similarly to DFSP, DIIRSP also offers the possibility of escaping IRS Penalties. DIIRSP has a broader scope than DFSP and applies to international information returns other than FBAR, such as Form 8938, 3520, 5471, 8865, 926, et cetera.

Since it turned into an independent voluntary disclosure option in 2014, DIIRSP’s eligibility requirements became much harsher. US taxpayers are now required to provide a reasonable cause explanation in order to escape IRS penalties under this option. On the other hand, the fact that there may be unreported income associated with international information returns is not an impediment by itself to participation in DIIRSP.

2020 Offshore Voluntary Disclosure Options: Modified IRS Traditional Voluntary Disclosure Program

The traditional IRS Offshore Voluntary Disclosure Program (“TVDP”) has existed for a very long time. However, it faded into a complete obscurity once the IRS opened its first major OVDP option in 2009. The closure of 2014 OVDP in September of 2018 has brought TVDP back to life, but in a modified format.

On November 20, 2018, the IRS has completely revamped the TVDP’s procedural structure and clarified the penalty imposition rules. I am almost tempted to call this new version of TVDP as “2018 TVDP”!

The main benefit of TVDP is that it is now the main voluntary disclosure option for taxpayers who willfully violated their US tax obligations. If you are willful taxpayer, contact Sherayzen Law Office to explore your voluntary disclosure option under the TVDP.

2020 Offshore Voluntary Disclosure Options: Reasonable Cause Disclosure

Since 2014, the popularity of Reasonable Cause disclosure (also known as “Noisy Disclosure”) has declined substantially due to the introduction of SDOP and SFOP. Nevertheless, Reasonable Cause disclosure continues to be a highly important voluntary disclosure alternative to official IRS voluntary disclosure options. In fact, the closure of the 2014 OVDP in September of 2018 has led to some resurgence of Reasonable Cause disclosures.

Reasonable Cause disclosure is based on the actual statutory language; it is not part of any official IRS program. Special care must be taken in using this option, because this is a high-risk, high-reward option. If a taxpayer is able to satisfy his high burden of proof, then, he will be able to avoid IRS penalties. If the IRS audits the Reasonable Cause disclosure and disagrees, this taxpayer may face significant IRS penalties and, potentially, years of IRS litigation.

Contact Sherayzen Law Office for Professional Analysis of Your 2020 Offshore Voluntary Disclosure Options

If you have undisclosed foreign assets, contact Sherayzen Law Office for professional help as soon as possible. We have successfully helped hundreds of US taxpayers from over 70 countries with their voluntary disclosures of foreign assets to the IRS, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Streamlined Domestic Offshore Procedures Audits | SDOP Tax Lawyer

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The great majority of offshore voluntary disclosures are currently done through Streamlined Filing Compliance Procedures. Hence, the majority of IRS audits concerning offshore voluntary disclosures are focused on Streamlined Filing Compliance Procedures – the most common type is the Streamlined Domestic Offshore Procedures Audit. This article discusses the main stages of the Streamlined Domestic Offshore Procedures Audit and provides some suggestions to attorneys who handle this type of an IRS audit.

Streamlined Domestic Offshore Procedures Audits: SDOP Background Information

Streamlined Domestic Offshore Procedures (“SDOP”) is an offshore voluntary disclosure option that has existed since June of 2014. It is extremely popular due the fact that it is the most convenient and the least expensive voluntary disclosure option (except the Reasonable Cause/Noisy Disclosure option) for taxpayers whose prior tax noncompliance was non-willful and who otherwise meet the SDOP eligibility requirements.

Under the SDOP, a taxpayer or tax professional prepares a voluntary disclosure package and mails it to the IRS. The voluntary disclosure package usually consists of amended tax returns for the past three years, copies of e-filed FBARs for the past six years, any required international information returns which do not form part of a tax return (such as Forms 3520), the payments of additional tax with interest, the payment of the Miscellaneous Offshore Penalty and Non-Willfulness Certification form (Form 14654) with a detailed explanation. Certain additional items may need to be included in the package.

Once the package arrives to its destination, it is processed by the IRS. Assuming that all of the SDOP submission requirements are met, the IRS reserves the right to audit the taxpayer(s) at any point within three years after the submission of the original SDOP voluntary disclosure package.

The exact process of a Streamlined Domestic Offshore Procedures Audit varies from case to case, but it usually contains all of the stages listed below.

Streamlined Domestic Offshore Procedures Audits: the Initiation Stage

All Streamlined Domestic Offshore Procedures Audits start in the same way. Once an IRS revenue agent is assigned to the case, the agent will send an initial letter to the taxpayer informing the taxpayer about the fact that his SDOP is being audited. Generally, the initial audit letter will explain that the IRS decided to examine certain tax returns and ask for all worksheets and supporting documents that were used to prepare the amended returns. The letter is likely to also contain a request for the taxpayer to contact the agent to schedule the initial meeting, which would usually include an interview of the taxpayer.

At this point, you should contact an international tax lawyer who specializes in Streamlined Domestic Offshore Procedures Audits. I strongly discourage you from even trying to represent yourself or to have your accountant represent you. It is very easy to get into trouble during an IRS audit and it is very hard and expensive to get out of such a situation afterwards.

Streamlined Domestic Offshore Procedures Audits: Initial Meeting and Interview Stage

Prior to the initial meeting, the taxpayer’s attorney should review all documents to make sure that they support the information on the tax returns. All supporting documents and worksheets should be neatly organized by subject and year. If the audited tax returns are incorrect, the attorney should make the decision on whether amended tax returns should be prepared prior to the initial meeting.

Additionally, the attorney should conduct an extensive preparation of his client for the interview. Read this article for more information on the IRS audit interview preparation specifically for Streamlined Domestic Offshore Procedures Audits.

The initial meeting usually commences with the interview of the taxpayer in the presence of his attorney. It is the attorney’s job to protect his client during the interview, including by making sure that the IRS questions are clear, explaining any confusing answers of the taxpayer, correcting the record based on available evidence and so on.

After the interview, the IRS agent will want to review with the attorney (and, sometimes, the client as well) the documents supplied on a very general level – i.e. he will want to know what is being submitted to him. The attorney should discuss with the agent any confusing parts of the case and familiarize the agent with the client’s story. If a case is very small, it is possible for an agent to cover everything in the first meeting, but it is very rare.

Streamlined Domestic Offshore Procedures Audits: Follow-Up IRS Requests

After the initial meeting, the IRS agent will take some time to review submitted documents, interview third parties where relevant (for example, the accountant who prepared the original tax returns), analyze the tax returns and the Non-Willfulness Certification.

Most likely, the agent will have additional follow-up questions. It is the job of the attorney to address them. Where necessary, the attorney should secure his client’s participation in order to answer the questions. In certain cases, additional meetings with the IRS agent may be required to increase the efficiency of the audit. Continuous cooperation with the IRS while promoting the client’s position is the key to long-term success.

One of the most problematic areas for the IRS agents in Streamlined Domestic Offshore Procedures Audits are PFIC calculations. A lot of agents simply do not know how to properly do PFIC calculations. In my practice, very often I have to go through the entire PFIC calculations with the agent in order to make sure that their calculations match mine.

Streamlined Domestic Offshore Procedures Audits: Conclusion of the IRS Audit

Once the IRS agent completes his review process, he will submit the preliminary results to the taxpayer and his attorney. The attorney needs to review carefully the final results and contact the agent in case he finds mistakes in the agent’s conclusions. The taxpayers’ attorney will also need to build a strategy with respect to the taxpayer’s response to the audit results depending on whether the taxpayer agrees or disagrees with the results of the audit.

The biggest issue in the Streamlined Domestic Offshore Procedures Audits is making sure that the Non-Willfulness Certification is not challenged by the IRS, because such a challenge may result in highly unfavorable consequences to the taxpayer, including a potential referral to the Tax Division of the US Department of Justice for a criminal investigation.

It should be mentioned that, even if the taxpayer agrees with the audit results, the Audit is not immediately over. The IRS agent will need to submit his conclusions to his technical advisor, his manager and the IRS National Office in Washington D.C. for the their approval of these conclusions before the audit can be officially completed.

Contact Sherayzen Law Office for Professional Help With Streamlined Domestic Offshore Procedures Audits

An IRS audit of an offshore voluntary disclosure completed through Streamlined Domestic Offshore Procedures is one of the most important events in a taxpayer’s life. A lot is at stake during such an audit – financial stability, immigration status and, in exceptional circumstances, even personal freedom.

This is why it is so important for a taxpayer subject to an IRS audit of his Streamlined Domestic Offshore Procedures voluntary disclosure to retain the services of an experienced international tax lawyer to handle the audit professionally.

Sherayzen Law Office is a leader in the area of offshore voluntary disclosures and IRS audits of offshore voluntary disclosures. The firm’s owner, Mr. Eugene Sherayzen, is one of the most experienced international tax lawyers in this area, including IRS audits of a Streamlined Domestic Offshore Procedures submission. He can help You!

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

3 Main Streamlined Domestic Compliance Disadvantages | SDOP Lawyer

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In a previous article, I described the three main advantages of doing an offshore voluntary disclosure through Streamlined Domestic Offshore Procedures (“Streamlined Domestic Compliance”). Today, I would like to discuss three main Streamlined Domestic Compliance disadvantages.

Streamlined Domestic Compliance Disadvantages: Audit Risks

The first main disadvantage of Streamlined Domestic Compliance is the potential IRS audit within three years after the voluntary disclosure is completed. The audit is likely to include everything: FBARs, amended tax returns, Miscellaneous Offshore Penalty calculation and, most importantly, the determination of non-willfulness.

The potential IRS audit stands in a shark contrast to the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) which closed in September of 2018. At the end of a voluntary disclosure through OVDP, the taxpayer and the IRS sign the Closing Agreement, which (absent fraud or material mis-statements) effectively closes prior tax noncompliance issues forever.

The audit risks may be particularly important to taxpayers who are in the process of obtaining their US citizenship or US permanent residence.

Streamlined Domestic Compliance Disadvantages: Penalty Base Not Limited to Income Noncompliance

One of the main Streamlined Domestic Compliance disadvantages is the fact that the calculation of the penalty base (i.e. what assets are subject to the 5% penalty) includes assets that never produced any foreign income. Moreover, the penalty base includes a foreign asset even if the foreign income from this asset was timely disclosed on the taxpayer’s original tax return, but the asset itself was not reported on FBAR or any other international information return.

In other words, a taxpayer who participates in the Streamlined Domestic Compliance should be prepared to pay a 5% penalty even on assets that are compliant with the US income tax laws.

Again, this is contrary to the rules of the OVDP. In the OVDP, only assets that are tied to income tax noncompliance are included in the penalty base.

Streamlined Domestic Compliance Disadvantages: Danger of Superficial Analysis

Finally, the danger of superficial analysis concerning non-willfulness constitutes the third main disadvantage of the Streamlined Domestic Compliance. In reality, there are two dangers which should be placed at the opposite ends of the voluntary disclosure continuum.

The first danger is the natural bias in the self-assessment of non-willfulness. Oftentimes, a taxpayer may exaggerate the facts in his favor while selectively ignoring the facts that may establish willful noncompliance. This is very natural. It is difficult to find a person who will state outright that he was willful in his prior tax noncompliance.

Usually, this problem can be (and should be) fixed by retaining an international tax attorney to do an independent assessment of the taxpayer’s non-willfulness.

At the opposite end is the danger of concentrating on non-willfulness and ignoring the possibility of doing a Reasonable Cause disclosure. In most cases, this is not a problem because Streamlined Domestic Compliance would be a superior choice despite the 5% penalty. This, however, is not true in all cases and real opportunities are often lost by failure to explore this route.

I should state that the biggest problem that I found in my practice is the fact that some taxpayers do not consult an international tax attorney on this issue. Instead, they try to do everything themselves even though they have no specialized knowledge in this field. I strongly discourage this practice.

I believe that the involvement of an international tax attorney is essential to doing a proper offshore voluntary disclosure.

Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure

Choosing the correct offshore voluntary disclosure path is the most important decision for a taxpayer who wishes to remedy his past noncompliance with US tax laws. Every voluntary disclosure option has its advantages and disadvantages. All essential factors must be considered.

The failure to do proper legal analysis may have highly negative legal and tax consequences. It may even put a taxpayer in a position worse than what he was prior to his attempt to do a voluntary disclosure.

This is why you need the professional help of Sherayzen Law Office. Our experienced legal team has helped hundreds of US taxpayers to do their offshore voluntary disclosures properly. We Can Help You! Contact Us Today to Schedule Your Confidential Consultation!