The Looters Want Every Scrap Of Your Electronic Data

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Other than the crisis in Europe or Herman Cain’s latest mistress, what else is happening in the world?

In case you missed it, on October 18, the IRS issued what’s 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.

The Internal 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.

The standard 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 doesn’t already have the information, and that the agency has followed all required administrative steps. This means any efforts to quash the summons probably won’t be successful.

What electronic records does the IRS want you to maintain? Essentially, it’s “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:

  • Author
  • Recipient(s), including cc and bcc
  • Date and time sent
  • Date and time received
  • Subject
  • Attachment relationship to original email (and metadata fields listed for e-documents)
  • Forwarded e-mails; attachment documents and files

Fortunately 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. It’s 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!

This discussion may seem esoteric, but it’s 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. That’s 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. That’s 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 that’s offshore-related. And no, it’s 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 isn’t 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 wouldn’t want published on the front page of the National Enquirer…because that’s where it could wind up!

Reprinted with permission from The Nestmann Group, Ltd.

Mark 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 Administration.

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