Getting organized is never a bad idea, especially when tax filing season rolls around. That’s why you may be surprised to learn of the legal risks inherent in a tax organizer. For the unfamiliar, a tax organizer is a written compilation of financial questions for taxpayers, often used by CPAs to prepare tax returns. While this practice might seem innocuous, using an organizer today can haunt the taxpayer – and potentially, his or her tax preparer – tomorrow, potentially serving as harmful evidence in court. In fact, we have recently seen an example of this in the ongoing case against former Trump campaign manager Paul Manafort, who has been charged with over a dozen counts of various tax crimes involving undisclosed offshore accounts. The lesson for taxpayers? Be extremely cautious when considering the use of a tax organizer – and always work with a reputable CPA, ideally one who is dually licensed to practice as a tax attorney, which will afford you greater protection and confidentiality should you be charged with tax crimes.
What is a Tax Organizer, and Should I Use One When Filing Taxes?
We’ve written about the criminal tax charges against Paul Manafort on several occasions, most recently in April 2018. Unlike former co-defendant and associate Rick Gates (who not only pleaded guilty, but agreed to testify against Manafort), Manafort has pleaded not guilty to all charges, and as of mid-August 2018, continues to fight the allegations.
Why is this relevant to a discussion about tax organizers? Because in their effort to obtain a conviction, federal prosecutors are leaning heavily on Manafort’s tax organizer as evidence, demonstrating just how dangerous these documents can be if noncompliance is alleged.
What information does an organizer actually include? There are variations, for two reasons: (1) each accounting firm or tax preparer uses a slightly different version, and (2) there are different versions of organizers, depending on whether they relate to corporate taxes, estate taxes, gift taxes, and so forth. (The American Institute of CPAs, or AICPA, provides several of its own templates online, accessible with AICPA membership.) Generally speaking, an individual income tax organizer will ask the taxpayer to answer questions like:
- Are you self-employed?
- Do you pay interest on any student loans?
- Do you have any income from interest, dividends, partnerships, trusts, estates, property sales, IRAs, or pension plans?
- Did you make any charitable contributions?
In turn, taxpayers are asked to provide detailed financial information about each of these questions, such as amounts paid/received, dates acquired, and prices on any securities (e.g. stocks, bonds) the taxpayer might have sold.
Of particular significance to the Manafort case is one specific question, which was noted in the indictment against him:
“[O]n Oct. 4, 2011, Manafort’s tax preparer asked… in writing: ‘At any time during 2010, did you [or your family members] have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?’ On the same day, Manafort falsely responded ‘No.’ Manafort responded the same way [on] Oct. 3, 2016, when [his] tax preparer again emailed the question in connection with… Manafort’s tax returns: ‘Foreign bank accounts etc.?’ Manafort responded on or about the same day: ‘None.’”
You may have noticed that we italicized the phrase “in writing.” That is because the “writing” in question was a tax organizer – and is now a key piece of evidence in Manafort’s case. Manafort’s “No” and “None” answers, neatly preserved for prosecutors by the aforementioned organizer, could potentially be used to demonstrate that Manafort willfully claimed (not once, but twice) to have no foreign income or bank accounts, in contradiction to the facts being alleged.
Why Manafort is Being Prosecuted: Failure to File an FBAR
For those out of the legal loop, the reason Manafort is being prosecuted is that willful failure to disclose a foreign account is a mandatory tax requirement under several federal laws, notably the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA) – is a serious tax crime. For example, the BSA requires U.S. taxpayers who meet certain criteria to electronically file a document called a Foreign Bank Account Report (FBAR), or FinCEN Form 114, which Manafort allegedly failed to do for tax years 2011, 2012, 2013, and 2014 (with respective filing due dates of June 29, 2012; June 30, 2013; June 30, 2014; and June 30, 2015). Willful failure to file FBARs can subject the taxpayer to fines of up to $250,000 – not to mention up to five years in federal prison – per each offense. In some situations, these penalties can be increased to a fine of up to $500,000, and up to 10 years in prison.
The bottom line? There are two takeaways for taxpayers here:
- If you have a overseas bank account or offshore income generating assets like a business, investments or rental real estate, as a citizen, green card holder or under the substantial presence test you are required to report your worldwide income and may additionally be subject to foreign information reporting requirements that you potentially could be unaware of until now. You should consult with an experienced international tax lawyer or FBAR tax attorney to make sure you are taking appropriate measures to comply with offshore income and information reporting requirements, which are aggressively enforced by the Internal Revenue Service (IRS).
- Information you discuss with your CPA is not protected by the attorney-client privilege, which can be instrumental when defending against criminal tax charges. It is always wise to work with a dually-licensed attorney-CPA when resolving high risk tax issues, particularly if you have concerns about noncompliance or prosecution for tax crimes. You may be interested in our overview of the differences between an attorney, EA, and CPA.
International FBAR Tax Attorneys Can Help You Report Foreign Bank Accounts
Failure to file an FBAR and report your foreign income can have disastrous legal and financial consequences. If you have a bank account in another country, or previously maintained an offshore bank account at any time during the past few tax years, you should speak with an experienced tax attorney right away. At the Tax Law Office of David W. Klasing, we have more than 20 years of experience helping taxpayers report offshore income, mitigate FBAR penalties, and avoid criminal prosecution through disclosure programs like the Offshore Voluntary Disclosure Program or OVDP (which taxpayers should be advised is ending September 2018). For a reduced-rate consultation, contact our tax firm online or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
Helpful Q and A libraries:
https://klasing-associates.com/topics/ovdi-faq/
https://klasing-associates.com/topics/fbar-compliance-and-disclosure-faq/
https://klasing-associates.com/topics/foreign-audit-faq/
https://klasing-associates.com/topics/international-tax-law-faq/
https://klasing-associates.com/topics/ovdp/
