Compliance counseling is like a box of chocolates – “You never know what your gonna get” – Circular 230 vs. the fiduciary duty to the client

Cross posted from RenounceUScitizenship.

The Isaac Brock Society is becoming a interest place to “hang out”. At least this is true for many U.S. citizens living abroad who are desperately attempting to ensure that they are in U.S. tax compliance Many people are grappling with how to be compliant on a “going forward” basis. Others are trying to figure out to deal with “past compliance issues”. There are of course a number of ways to come into compliance. What all these people have in common is a desire to be U.S. tax compliant. Yet, the IRS seems hell bent on continuing on treating U.S. citizens living abroad as though they are tax cheats. For many U.S. citizens living abroad the emotional strain is such that they are driven to renounce U.S. citizenship. This is the price of a good nights sleep.

So, what’s a poor U.S. citizen living abroad to do? Well, they consult a “cross border professional” where they get advice that comes in all shapes, sizes and perspectives. The advice is so varied that it reminds me of the line in Forrest Gump:

Life was like a box of chocolates. You never know what you’re gonna get.”

When it comes to “compliance counseling” – You never know what you’re gonna get.”

One would expect a lawyer to exercise professional judgment on the facts. That’s why one can reasonably expect advice that is – “different strokes for different folks”.

“Different strokes for different folks” is all well and good. That said, the question is, whose interests should the lawyer treat as paramount, in giving this advice? What level of  “practitioner responsibility” should be required? This issue has been the subject of a fascinating comment thread on a recent post at the Isaac Brock Society. Let’s begin with an excerpt from one comment which sets the stage for the debate:

On the issue of practitioner responsibility. You say that:

“It does seem to me, that a practitioner has a first responsibility to their client and not the IRS! They should present all the various options available for compliance and the risks associated with each, depending on their client’s facts. This doesn’t necessarily mean that they have to covertly compel the client to choose the IRS favorite route over another to reach a compliance objective. I don’t see it as an attorney’s obligation to tell the client they have to join the OVDI, as the only approved route for offshore compliance.”

You are absolutely right. Some lawyers have admitted that they feared being accused of “Circular 230″ violations if they did NOT advise clients to go into OVDI. Really? So, OVDI lawyer – let me get this straight: You are advising a client to enter OVDI, because you are believe that if you don’t, that you are in violation of IRS rules of conduct. What about the ABA rules of professional responsibility? Don’t they require you to disclose all legal options to the client? Don’t they require you to represent the interests of the client? If a client comes to you, who do you think you are representing? The client, the IRS or yourself?

Let me put it this way:

Any person with a license to practise law, who does not educate and counsel the client in terms of all legal options is NOT ACTING AS A LAWYER SHOULD!

The first post I wrote for the Isaac Brock Society was on this very point – that is specifically whether the “cross border professionals” could be trusted.

This particular post is now up to 120 comments. In focusing on the question of the OVDI vs QD issue: whose interests is the lawyer  there to protect? On the one hand, lawyers feel bound bound by Circular 230 obligations to the IRS. On the other hand,  lawyers have a fiduciary obligation to their clients. This fiduciary obligation is imposed by both the common law of agency and and the codification of these rules in codes of professional responsibility. Although a lawyer has clear obligations to both the process and the client, the question is where lies the primary obligation?

Should Circular 230 govern – in which case many lawyers believe that they must advise clients to enter OVDI?

Should the fiduciary obligation to the client govern – in which case the lawyer may or may not recommend OVDI?

These issue is canvassed in the following exchange of comments to this post.

An important question:


May 27, 2012 at 11:54 pm

Very interesting conversation. It seems the debate here is really why would a practitioner advise OVDI and opt-out vs quiet disclosure vs just go forward, for cases that they think are not criminal, but know that they’ll opt-out because of the huge in-lieu of penalty that the taxpayer will never agree to.”


I think that is part of the issue, but not the real debate here. The real debate is what kind of obligation does the lawyer have to the client to objectively explain and analyze all compliance options.

Here is the problem as I see it:

Some lawyers are interpreting circular 230 (part of he rules for practicing before the IRS) to mean that they should stream people into OVDI. I believe that this conflicts with a lawyer’s duty to the client. A lawyer’s duty to a client is a “fiduciary” duty. This means that the lawyer must have total loyalty to the client (obviously within the law). A lawyer’s loyalty to the client clearly is the primary consideration and should override most any other consideration. (Obviously the lawyer cannot condone or facilitate illegal behavior.) A lawyer is a professional who provides counseling in the law.

Bear in mind the following:

– the client is not required by law to enter OVDI
– the client is not required by law to amend tax returns
– there is no law that says that a client cannot make a quiet disclosure
– a client who now has knowledge of his tax and FBAR requirements must (at the very least) comply on a “going forward” basis

My thoughts on this:

In my opinion, a lawyer who feels that his Circular 230 obligations to the IRS should override his fiduciary obligation to his client, should NOT encourage the client to enter OVDI. The lawyer should simply say that under the circumstances he (lawyer) cannot meet his required fiduciary obligation to the client and NOT act for the client at all. But the reason communicated to the client is NOT that the client must enter OVDI. The reason is that the lawyer cannot meet his ethical obligations to the client which include exploring all legal options.

Would be interested in people’s thoughts on this aspect of this discussion.

I would also be interested in our resident lawyers answering the following question:

What is your ethical obligation to the client who consults you to help with tax compliance issues? If you believe that Circular 230 is the dominant consideration, please explain why it should override the fiduciary obligation to the client.

An interesting response:

Michael J. Miller

@Christophe, great points, I agree completely, as you might well have suspected from my prior posts. In my view, if a tax adviser honestly believes (for whatever reason) that Circular 230 precludes him from providing his client with complete guidance as to all legal options, based on the interests of the client (as opposed to the lawyer), then the correct answer is that the attorney simply ought not practice in the area. Advising a client in a way that either conceals a permissible course of action, or discourages that course of action for reasons having nothing to do with the interests of the client, ought never be an option.

You are paying huge legal fees – whose interests do you believe your lawyer should treat as paramount?


16 thoughts on “Compliance counseling is like a box of chocolates – “You never know what your gonna get” – Circular 230 vs. the fiduciary duty to the client

  1. All the US’s extraterritorial legislation will start to affect the US ecomony, but here’s a small example. Today I was speaking to a solicitor in the UK who is an expert in IT law and he mentioned that he actively advises clients not to use “the cloud” to store data on US servers. Together with the US-UK lopsided extradition treaty, FATCA, the Patriot Act, it’s simply not worth the risk of breaking US law and suddenly find your in a US court. It’s far better to keep your data outside of the US.

    What does this mean? It means all the server farms that would’ve been based in the US are now going to places like Sweden that have a friendly legal environment. Server farms create typical well paying IT jobs, but the US once again would rather some other country have the jobs because of the short sightedness of the US Congress.

    So what will Dodd-Frank, Sanbane-Oxley, the Volker Rule, and FATCA together do for the US financial services industry in future? Prediction: good paying financial jobs will leave the US to avoid this legislation as much as possible.

    What the US Congress doesn’t realise that if you allow other countries to develop better competing services just to avoid US regulations, those jobs are probably lost forever and will never come back even if the US suddenly become cheaper.

  2. We will be moving Isaac Brock off of US servers soon. That will result in lost business for WordPress. It is not so much, what we pay, but it is death by a thousand cuts.

  3. @John: What can we expect when IRS Commissioner is “a believer in relentless and myopic focus on priorities.” Unfortunately, that relentless myopic focus is on bizarre priorities. Congress can’t and won’t see the big picture.

  4. Great article on this very topic:

    An interesting excerpt from the article is:

    “Regardless of where it is stored, any data can be turned over to the government for inspection since the company that is storing the data is governed by U.S. law. Many people and companies already use cloud-based services like Facebook, Twitter, Gmail, Hotmail, etc that, despite where they live, place them within the jurisdiction of the Patriot Act because the cloud providers are all U.S. owned.”

    The U.S. is really damaging itself.

  5. @RenounceUScitizenship
    “You are paying huge legal fees – whose interests do you believe your lawyer should treat as paramount?”

    It seems the obvious answer is ours. As long as the lawyers do not encourage or advise anything that would break the law, I think they should advise on what is in their client’s best interest, even if it means that they’ll only get a couple hours worth of fees, instead of the $15k-$20k for entering OVDI.
    Also, from a pure business point of view, telling people over the phone after a 5 min conversation that OVDI is the only way to go without a formal meeting and better review of the facts is not helping the customer or the lawyer. I won’t recommend the one who scared me to death to the many people I know in my circle who are in the same situation as mine (most immigrants working in my company).

    Besides, there is another issue that Jack points out in his blog, regarding the huge legal fees, which is the economic reality of client/lawyers relationship. I can’t find the post in question, but the jist of it is that minnows will never be happy with a relationship with the expensive lawyers practising in this area. The reason is that the high fees, combined with disproportionate high penalties of the OVDI, especially for small account leave the customers with the feeling of being ripped off, by both the lawyer and the IRS. That’s why many lawyers practicing in this area are not even considering customers small accounts, and would rather work with people with whom they know they can make a bigger difference. At least with whom their client feel that hiring them was a good thing. A win win situation.

    @John, I am not sure what the relevance is regarding not advising to store data in the cloud on US servers. Are those IT law experts afraid that the US government is going to warrant access to the data? Recent history has shown that they have the power to do it regardless where the data is stored. I am thinking of the MegaUpload case. Regarding the cloud, I would be more afraid of cyberwarfare!

    @Petros, please let us know if there is a way we can contribute to the fees for IBS. This site is bringing much help to many people that it would just be fair to contribute and help pay the fees for running it.

  6. @ Christophe My company Petros Research will pay the fees and my assistant and I will maintain it. The cost is minimal, but I think that we could accept sponsors in the new site we may create a sponsor of the month box for those who wish to help–groups of individual sponsors or single corporate sponsors, and we can add logos and links. Good idea?

    We can’t do any advertising here, but once we are off we will be allowed to do some sponsorships or even advertising.

  7. I will be ready to contribute. I find it very strange that in the USA we can’t trust that CPAs and Lawyers are acting in our best interests. Working for us who pay them for their services.

  8. Fine post. It’s very troubling to think that, with all of the other problems people have to deal with, they can’t even trust their own tax advisors to give them complete, unbiased information as to all of their legal options.

  9. What is even more troubling is what Phil Hodgen wrote in this blog after meeting with the IRS regarding how to make it easier to make RRSPs compliant.

    He wrote:
    “We were asked — twice that I heard — who we could organize as a lobby to counteract the industry that would be put out of business by our proposal. Failing that, our efforts were pointless.”

    Profits from this “industry” is more important that the suffering of the middle class people that his proposal was trying to address. That really sickened me.

    I am copying his complete answers in context below, and you can find the post here:

    Phil says:
    May 9, 2012 at 12:11 pm
    Yes the people in Washington DC are COMPLETELY aware of it. They make noises of concern and of course this is a terrible thing, etc. Yet I think they are willing to accept this as collateral damage.

    You have to understand. Senator Levin (D-Michigan) is the big driver behind FATCA. Look at the political and business climate choices that Michigan politicians have made over the last 40 years and the consequences to the state. That’s point number 1.

    Then the more important point. FATCA is intimately tied to Homeland Security. If Senator Levin has a financial perspective (“All American taxpayers cheat if they can, and especially Americans abroad. And they’re all billionaires”), there is a whole other area of government that at the moment has all of the power. That’s the anti-terrorist brigade.

    They don’t give a f— about several million ordinary Americans living abroad. They are doing the Lord’s Work, don’t you know?

    The people I met with yesterday are the hired help. Even if they were personally sympathetic to the problem (I can’t tell, because they are forced to parrot the official policy), they are powerless to effect a change.

    Phil Hodgen says:
    May 10, 2012 at 8:09 am

    The people with the power to change things care about one thing: getting re-elected. That means you must come in with more votes (or more money to buy votes) than the other side.

    This is not hidden. It is explicit in the conversations. One of the proposals from the State Bar of California quite clearly was something that is sane to everyone on the planet except the affected industry. We were asked — twice that I heard — who we could organize as a lobby to counteract the industry that would be put out of business by our proposal. Failing that, our efforts were pointless. Logic and sanity rarely prevail.

    If ACA, for instance, wants to push its views, they should pitch their recommendations in terms of jobs for Americans — jobs abroad. (This was a suggestion from someone at the Senate Finance Committee who knows and seems to be sympathetic to ACA’s agenda). That is something that helps on the “get votes” side of things for a random Senator or Representative.”

  10. Many Americans move abroad in search of employment. I know, I am one of them.

    That opens up more room for those in America who are looking for work but can’t find it.

    Americans working abroad should be rewarded for NOT becoming “collectors” of unemployment benefits.

    Instead they are PUNISHED with double-taxation, mind numbing reporting obligations, and threatened with banishment for only trying to end the madness thrown upon them (from Congress) by renouncing their US citizenship.

    I wonder what Thomas Jefferson and Benjamin Franklin would have to say about all this if they were alive today.

  11. @all
    And the IRS is like a little brat!
    They want their chocolate and they want to eat it too.
    I just hope they know that we also have a great memory!!!! 🙂

  12. I had asked a cross-border tax guy where I live if he could do my taxes, but he kindly warned me that the fees would be far more than what it would be worth for my given situation. So, I’m still trying to figure out how to do it on my own.

  13. @Ben Franklin, the Feds owe me about $600+ on tax returns and a State owes me about $240+ on unemployment benefits from years ago when I fled unemployment to seek work abroad. I inquired on this a few weeks ago and was told that they refuse to pay what they owe since I wasn’t in the US to cash the check.

  14. @Daniel Kuettel;
    Recently, 2 or 3 other expats said the same thing, and found no good answer. Some were seniors – so either were living off savings, or about to retire – and didn’t have much to spare. All would have had their returns likely to = zero US tax owed.
    Another had done it on his own – but now was paying someone to correct inadvertent errors. Another found that their preparer had made errors.
    Empathize with you.

Comments are closed.