A Tax Fraud Update: 7 Violations that Have the IRS’ Interest

A Tax Fraud Update: 7 Violations that Have the IRS’ Interest

A (New) Tax Fraud Update

While there are many different types of tax violations that can land a taxpayer in the Internal Revenue Service’s crosshairs, tax fraud is still one of the most common types of tax violations that the IRS pursues. And, with increased enforcement of matters involving unreported foreign accounts, assets, cryptocurrency, and various listed transactions, the IRS has significantly increased the number of fraud investigations over the past several years. Since the IRS has increased enforcement of tax fraud investigations, it is also important that U.S. taxpayers across the globe understand what types of actions the IRS is focusing on and what they can do to best protect themselves from being on the receiving end of a tax fraud investigation. Let’s look at seven (7) reasons why the IRS may come after you for international tax fraud in 2023/2024:

First, What is Tax Fraud?

Tax fraud comes in all shapes and sizes. Noting, that tax fraud does not require the failure to pay tax. Rather, tax fraud may involve making false statements or omissions to the Internal Revenue Service. It may also include falsifying statements (either written or oral), and/or failing to file a tax return. Sometimes, tax fraud may overlap with tax evasion, but tax evasion is always a crime and it is a felony, whereas tax fraud may be civil or criminal and can wobble between felony and misdemeanor. For civil tax fraud, there is no statute of limitations so the IRS can go back many years to try to prove their case.

Civil vs Criminal Tax Fraud

In order to prove civil tax fraud, the IRS must meet the clear and convincing evidence standard, which is higher than the mere preponderance of the evidence standard but not as high as the beyond-a-reasonable doubt standard. Conversely, for the government to prove criminal tax fraud, they must prove their case beyond a reasonable doubt as in any criminal case — and the statute of limitations is limited and typically six years — although when that six years begins is typically up for debate depending on when the fraud was or could have/should have been detected.

Important 26 and 31 U.S.C Statutes

While there are various different criminal attacks and civil tax statutes involving fraud and fraud-related violations, some of the most common statutes include the following:

      • 26 U.S.C 7201 (Tax Evasion)

      • 26 U.S.C 7203 (Willful Failure to File a Return)

      • 26 U.S.C 7206 (Fraud and False Statements)

      • 26 U.S.C. 6663 (Imposition of Fraud Penalty)

      • 31 U.S.C. 5322 (Willfully Filing a False FBAR)

Malta Retirement Schemes

We have been writing about the Malta pension plan for many years. That is because the Internal Revenue Service has always been skeptical of this type of ‘retirement plan,’ and disapproves of how some Taxpayers are using Malta Pension Retirement Schemes as tax-free, Roth IRA equivalents. In recent months, the IRS has made a full court press against the misuse of Malta Retirement Schemes, including publishing an updated CAA and pursuing criminal and civil enforcement (subpoenas, Special Agent investigations, and more).

High Net Worth with Unfiled U.S. Returns

In general, the United States government likes to go after high net-worth taxpayers — and especially those with high income who do not file tax returns. And, while it has always been a priority for the IRS, in recent years it has become an increased priority to try to close the tax gap.

Puerto Rico Act 60

Puerto Rico Act 60 was developed previously under acts 20/22 in order to promote economic improvement in Puerto Rico. The concept behind Puerto Rico Act 60 mirrors that of many other countries (including the U.S.) that offer citizenship-by-investment and residency-by-investment opportunities (The United States offers the EB-5 visa also to promote economic growth in the United States). The problem from the IRS’ perspective with respect to PR Act 60, is that most US taxpayers who try to take advantage of Act 60 are high earners and seeking to avoid US tax on tens of millions of dollars which is why it has become an enforcement priority for the IRS.

Fraudulent Transfer of Foreign Assets

Especially with the introduction of cryptocurrency, the IRS has become more concerned that taxpayers are broad and shifting assets between US persons and non-US persons to avoid IRS detection, with a focus on circumventing reporting requirements, and their U.S. tax implications. As a result, the Internal Revenue Service and Department of Justice have increased enforcement on cracking down on fraudulent transfers of foreign assets, accounts, investments, and income.

Inaccurate Expatriation Net Worth

When a person expatriates from the United States, depending on the cross-section of their assets helps to determine whether they may be subject to an exit tax. If the taxpayer meets one of the three tests for being a covered expatriate, then they must perform a detailed calculation to determine if there is any exit tax. For many taxpayers come with the reason they are considered a covered expatriate is because they meet the net worth test period to try to avoid meeting the net worth test, some taxpayers may intentionally underestimate or undervalue their net worth. If the IRS finds a taxpayer has done this, they may pursue significant fines and penalties as what occurred in the recent case of Tinkov.

Cryptocurrency (Foreign and Domestic)

For the past several years, the Internal Revenue Service has been carving out various rules and regulations and proposed regulations involving cryptocurrency. The IRS knows that many taxpayers either do not realize that their transactions are taxable or have been intentionally not reporting the information believing that the IRS cannot find them since they believe they are anonymous. Thus, the IRS is going full steam ahead after cryptocurrency holders who have not properly reported their taxes end accounts. In addition, the IRD is also cracking down on cryptocurrency exchanges, and forcing many of them to turn over taxpayer information as recently happened with Kraken.

IRS’ New Flow-Through Department

One of the newest entries to the world of IRS enforcement is a department specifically tailored to flow-through income. Many taxpayers may form an entity type that is not double tax such as AC Corp but rather flows through or similar such as an LLC or an S Corp. As a result, taxpayers may try to move that income overseas, form their company overseas, and then use a flow-through model in the United States to run the money to the foreign company and many other planning techniques. As such, the IRS seeks to close the tax gap based on taxes lost through flow-through tax schemes.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.