IRS Wants Your Electronic Data
The Nestmann Group, Ltd.
by Mark Nestmann: Form
8938: Not a Prelude to a Wealth Tax…This Time
the crisis in Europe or Herman Cains latest mistress, what
else is happening in the world?
In case you
missed it, on October 18, the IRS issued whats called a Chief
Counsel Advice (CCA) concerning what it calls original
electronic data files. Basically, the IRS now asserts the
right to issue a summons to force a taxpayer to provide this data
within whatever statute of limitation applies for the type of examination
the agency is undertaking. And that means that you need to be careful
not to dispose of any electronic communications or records you maintain
that might concern some future tax issue. Click here
to view the October 18 CCA.
Revenue Code gives the IRS authority to review books, papers,
records or other data, to confirm the accuracy of tax or information
returns, calculate a tax liability, or collect any tax or penalty.
To enforce these provisions, the IRS may issue a summons to you
or any third party custodian of records relevant to the inquiry.
of proof necessary to enforce an IRS summons is laughably low. All
the IRS needs to demonstrate is that the investigation is legitimate,
the inquiry is relevant to that investigation, the IRS doesnt
already have the information, and that the agency has followed all
required administrative steps. This means any efforts to quash the
summons probably wont be successful.
records does the IRS want you to maintain? Essentially, its
metadata, which Google helpfully defines as a
set of data that describes and gives information about other data.
But in the context of an IRS examination, or other demand for electronic
data, metadata is information on who, when, and how electronic data
was created. For instance, the IRS could request e-mail metadata
including cc and bcc
- Date and
- Date and
relationship to original email (and metadata fields listed for
e-mails; attachment documents and files
or unfortunately, every email you send or receive probably has the
metadata associated with it automatically included. So does every
file you save on your PC. To get a sense of what information email
metadata contains, look at the Internet headers your
messages sent and received contain. Its easy to
produce this data if you save your emails or computer files without
editing them. Editing the emails or files changes the metadata.
But be careful: these changes may be recorded in the metadata!
may seem esoteric, but its not. It means that you need to
be careful when deleting emails or other files that may have even
the slightest relevance to an IRS investigation. For instance, unreported
offshore accounts currently are an IRS hot-button issue. Earlier
this month, the IRS revised the Internal Revenue Manual (IRM)
to include additional guidance to agents investigating violations
of the requirements for reporting foreign accounts on the Foreign
Bank Account Reporting Form TD F 90-22.1 (FBAR).
Any U.S. citizen
or permanent resident must file this form annually to acknowledge
a financial interest in, signature authority, or other authority
over foreign financial accounts outside the United States if the
aggregate value of those accounts exceeds $10,000. Failure to file
this form and to keep all relevant records associated with
it can subject you to both civil and criminal penalties.
The new section
of the IRM provides detailed guidelines to IRS agents for assessing
FBAR-related penalties. It also makes clear that failing to keep
the required records relating to the FBAR is a separate violation
from failing to file the FBAR itself. The civil penalty for failing
to file the FBAR is $10,000 for each violation. Now there are two
possible fines: a $10,000 fine for failure to file and an additional
$10,000 fine for failing to keep the appropriate records. You must
keep the records for at least six years after the due date of the
FBAR. For instance, for most U.S. taxpayers, the 2010 FBAR form
was due June 30, 2011. That means you need to keep the relevant
records relating to offshore accounts you held in 2010 at least
until June 30, 2017.
One way to
avoid the additional $10,000 fine for failing to keep the appropriate
records would be to turn over those records in response to an IRS
summons. But if you do so, that could give the IRS the ammunition
to prove that you willfully failed to file the FBAR.
Thats a much more serious violation punished with a maximum
sentence of five years imprisonment and a $500,000 criminal fine.
What to do?
There are no easy answers. One possible solution to the metadata
dilemma is to avoid any type of electronic communication or storage
for anything related to your taxes. Thats not realistic for
most people, so the only other alternative is to save all foreseeably
relevant electronic communications for at least three years after
the due date for your regular tax return and six years
for anything thats offshore-related. And no, its not
sufficient to print out emails, statements, etc. You need to save
the original electronic records!
It may not
make you feel any better, but the IRS isnt alone in demanding
metadata. An increasing number of lawsuits ask for metadata in discovery
requests. In one case, lawyers representing employees eliminated
in a corporate downsizing demonstrated that the corporation
involved tried to delete metadata from electronic records. The records
allegedly proved that the company had illegally targeted older employees
to positions that were eventually eliminated. The corporation eventually
settled the lawsuit with a payout of nearly $60 million.
A good rule
of thumb is never to write in an email or store in an electronic
file anything you wouldnt want published on the front page
of the National Enquirer
because thats where it
could wind up!
with permission from The
Nestmann Group, Ltd.
Nestmann [send him mail]
is a journalist with more than 20 years of investigative experience
and is a charter member of The
Sovereign Society’s Council of Experts. He has authored over
a dozen books and many additional reports on wealth preservation,
privacy and offshore investing. Mark serves as president of his
own international consulting firm, The
Nestmann Group, Ltd. The Nestmann Group provides international
wealth preservation services for high-net worth individuals. Mark
is an Associate Member of the American Bar Association (member of
subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
© 2011 Mark
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