The IRS is targeting US lawyers in the Supreme Court and it’s going to have major implications for the offshore industry. The IRS has issued a “John Doe” summons to a law firm demanding the names and information on every client that has hired them for offshore tax planning… and the Supreme Court has allowed this summons to stand.
When you hire a US lawyer to plan your offshore strategy, you expect attorney-client privilege. This right no longer exists for those in the tax planning industry. The US government needs cash and they have destroyed the attorney-client privilege to get it.
The case started when an international tax client of the Taylor Lohmeyer Law firm in Dallas, Texas was audited. The IRS found that he had cheated on his taxes by saving about $2 million between 1995 and 2017 with international tax planning. The client agreed to pay the tax and penalties and the case was settled.
But that was just the beginning of the trouble for the lawyers who had set up his tax plan. The IRS issued a summons demanding the identity of every person who had hired the firm to structure their international tax plan. The IRS is asking for information on anyone for the firm to open offshore bank accounts, create structures, and/or advise on international tax matters.
The intent of the summons is obvious enough. Give us this information so we can audit all of your clients… putting the lawyers out of business and causing great expense for anyone who hired the firm.
And what of attorney-client privilege? What about the sacred relationship between a lawyer and his or her client? What about the privacy the client reasonably expected when he or she hired the firm? It all means nothing when the government needs cash.
That is to say, the client’s identity should be privileged because its disclosure would be tantamount to revealing the reason that the client sought legal advice. When that information is given to the IRS, they are certain to begin an audit on these clients, and thus the court has placed a target on each client’s back.
The appellate court rejected this reasoning, ruling that there was no privilege because there was no specific protected communication at issue. Also, the summons merely indicated who hired the firm and for what purpose. The release of this information did not prove intent or illegal activity.
Of course, the IRS will take this information and use it against the lawyers and the clients. The Supreme Court ruled against the law firm in refusing to hear the case on October 2, 2021, so let the audits begin.
What does this mean for offshore tax planning in 2021 and 2022? I think this will have a chilling effect on using the US council to plan or quarterback international tax strategy. If there is no privilege when you hire a US lawyer, and the IRS can gain access to your file without probable cause, why hire a US lawyer?
I’ve said for years that US persons should hire a US lawyer to quarterback their international tax plan. A US lawyer will always have a better understanding of US tax laws and planning than a lawyer or advisor abroad. Also, the IRS is the agency all US persons must deal with, so the lawyer leading your team should be an expert in dealing with the Service.
But, if using a US lawyer will result in your being audited, even when you follow every rule and are in compliance, your US council has become the weak link in your chain. Why pay someone $500+ an hour just so they can turn over your files 10 years after the fact?
And I do mean 10 years after the fact. Most states require lawyers to retain client files for 6 to 10 years, and most firms hold files for 10 years to cover themselves. So, a 10-year summons is likely to net all of your files.
I can already see the comments on this post: but the IRS can only audit you for 3 years in most situations, and 6 years if a major deficiency is found. So, why did the summons in the above case cover 1995 through 2017? Note that the summons was issued in 2018 and the case has been working its way through the courts since then.
Because the IRS has a trick for foreign bank accounts and structures. Yes, the IRS typically has 3 years to audit you from the day you file your return. However, if you don’t file the offshore reporting forms, then this statute never starts.
Let’s say you file your 1040 form and report all of your US-sourced income. But, you don’t report any foreign-sourced income, an offshore company, or your offshore bank account. Well, you failed to file all of your forms and the statute has not started on those items.
Specifically, let’s say that you didn’t file a foreign corporate return using IRS form 5471, an FBAR reporting your offshore bank account, didn’t check the box on Schedule D, didn’t report your offshore trust on forms 3520, and 3520-A, etc., etc. As these forms were never filed, the audit statute never started and the Service can go back as far as they wish.
But, I’ve gone off course here. My point is that the government’s need to raise money has destroyed attorney-client privilege for US lawyers that practice international tax law. Your US lawyer is now a liability.
Therefore, I recommend using a non-US tax planning firm that is not a law firm and does not have data retention requirements. It is no longer safe to have a US lawyer quarterback your international tax.
I hope this post on the IRS targeting US lawyers in the Supreme Court has been helpful. For more information on setting up a compliant international business, please contact us at firstname.lastname@example.org