CPA caught Hiding Client Foreign Accounts, Are you Next? Case Study Example
- 1 Case Study: Matthew
- 2 General U.S. Tax Reporting
- 3 Meet Peter the CPA
- 4 FATCA
- 5 Matthew Learns About FATCA
- 6 The CPA is not worried
- 7 The CPA is already on the IRS Radar
- 8 Matthew Authorizes the Quiet Disclosure
- 9 Peter is Arrested by the DOJ
- 10 Matthew is also Arrested
- 11 Go with your Gut, Get into Compliance before it is TOO LATE
- 12 OVDP May Save you from Heavy Fines and Jail
- 13 Want to Learn More? OVDP FAQ
Unfortunately, often times a client may find himself or herself in serious trouble with the U.S. government involving the failure to report foreign accounts.
What makes matters worse, is that usually the client was misinformed about the ramifications for failing to report the foreign accounts — or otherwise coerced into doing so by an unethical CPA or tax accountant.
The Internal Revenue Service and Department of Justice have ramped up efforts to investigate and prosecute CPAs and other Tax Professionals who have taken clients down this disastrous road of intentional non-compliance.
Moreover, once the CPA gets caught, more likely than not all of the clients associated with the CPA will be investigated — becoming collateral damage.
If you are found to have knowingly engaged in tax fraud or tax evasion, you may find yourself subject to criminal prosecution, fines, and jail or prison.
Case Study: Matthew
Matthew is originally from the United States. He works as an international salesperson, and as part of his job he travels to many different countries for work. He attends various trade shows around the world and has found that for countries that he visits often, it is easier to maintain local accounts in order to access local foreign-currency. He has a total of more than $300,000 in foreign accounts.
General U.S. Tax Reporting
For the most part, Matthew reports all of his income on his US tax return. Aside from his employment, Matthew also has a small consulting business in which he uses to offset some of his expenses – and although some of the expenses may be questionable, for the most part his taxes are on the up and up.
Although Matthew is fine reporting all of his expenses properly, he’s been working with the same CPA for many years and the CPA has a tendency embellish the expenses a bit. Nevertheless, while some of the expenses might be a bit outlandish – if not exaggerated – it is not fraud.
Meet Peter the CPA
Peter is a Certified Public Accountant. Peter used to work for one of the larger accounting firms earlier in his career before branching off to start his own practice. Peter represents clients around the United States, and many of them have accounts and income overseas.
Peter is fully aware that these individuals have to report the accounts on their FBAR (all of Peter’s clients with foreign accounts meet the threshold filing requirement) and report the income to the U.S. Nevertheless, Peter has never reported his client’s foreign accounts on an FBAR, since the FBAR is filed directly with the Department of Treasury and not the Internal Revenue Service. Moreover, Peter is also aware that in the 30+ years of being an accountant, he’s never had any of his clients audited due to the fact that they have unreported foreign accounts.
Peter does not report his client’s foreign income either, since most of his clients earn income in countries that do not tax passive income — and Peter knows if he recommends to this clients that they should report their foreign (untaxed) income in the U.S. — he will lose several wealthy clients. As such, Peter always marks off no for schedule B question Seven (7) – which asks whether the individual has any signature authority or ownership of foreign accounts, and does not report the foreign income.
FATCA is the Foreign Account Tax Compliance Act. It was enacted in 2010 and took effect in 2014. In accordance with FATCA, the United States has entered into intergovernmental agreements (“IGAs”) with more than 100 countries, resulting in tens of thousands of foreign financial institutions agreeing to directly report U.S. account holder information to the IRS.
While back in the day the IRS had no viable method of crosschecking or cross-referencing the tax returns against other information ( unless they were very proactive in obtaining information from foreign banks – which was not very easy), now the IRS has methods for crosschecking and cross-referencing tax returns with information they receive about foreign accounts held by US persons.
And, if the U.S. Government learns that an individual is proactively misrepresenting (or omitting) the fact that they have foreign accounts to the Internal Revenue Service, he or she may become subject to an IRS, DOT, or DOJ investigation.
Matthew Learns About FATCA
Recently, Matthew received a FATCA Letter from two of his foreign banks. Both of these foreign financial institutions require Matthew to certify that he is a US person, as well as complete either W-9 or W-8 BEN. Since Matthew is a US citizen, he is required to file a W-9 with the foreign financial institution. As a result, the foreign bank will report the account and income information to the United States on Matthew’s behalf.
Matthew is terrified and contacts the CPA.
The CPA is not worried
When Matthew speaks with his CPA, the CPA tells Matthew not to worry. He tells Matthew that there are thousands upon thousands of foreign financial institutions that will be reporting millions of taxpayers’ account information – and what are the chances of Matthew’s account information being detected by the IRS…
Matthew is nervous, but Peter reassures Matthew that nothing is going to happen, and has an idea: he recommends that Matthew quietly disclose his foreign account information. In other words, instead of pursuing one of the approved methods for offshore compliance such as OVDP or the Streamlined Program – the CPA recommends to Matthew that he simply let the CPA amend the return so that it reflects the foreign income and then file prior-year FBARs.
The CPA is already on the IRS Radar
What the CPAs not aware of, is that the IRS already has him in their crosshairs. It turns out one of Peter’s clients has a friend who is an international tax lawyer. The friend spoke with his attorney, who recommended that the client submit under OVDP (since the client was aware there was a foreign reporting requirement).
But, when it is time to pay the penalty, the attorney recommended that he explain to the IRS what happened with him and the CPA, along with the bad information he received from the CPA – and that it might help to reduce the penalty in an OVDP opt-out situation. Therefore, after entering OVDP, Peter’s prior client along with his new attorney are able to negotiate a reduced settlement by opting out of OVDP and providing detailed information regarding the CPA.
Moreover, since many of the former client’s friends also use the same CPA and also have foreign accounts, they retained their own attorneys and made their own representations to the IRS – to try and save their own hide.
Matthew Authorizes the Quiet Disclosure
The CPA prepares the quiet disclosure, but still requires Matthew to sign it. Even when an individual has a CPA, he or she is required to sign the original and/or amended Tax Returns. As such, and against his better judgment, Matthew signs the amended tax returns and authorizes Peter to submit the FBARs
Peter is Arrested by the DOJ
After performing quiet disclosures for about 10 clients, the IRS and Department of Justice swoop in and arrest Peter for tax fraud and tax evasion. Moreover, the DOJ is also pursuing a broad range of white-collar crime charges against Peter for money laundering and other secret transfers of foreign funds held in offshore tax shelters.
Matthew is also Arrested
Matthews is on his way home from the health club, when he spots three unmarked vehicles outside his home. When he exits his vehicle and approaches his home, Matthew is arrested by the FBI for tax fraud and tax evasion as well. Matthew is smart enough not to make any statement to a special agents or FBI, and instead retains an experienced criminal tax attorney to assist him.
In the end, Matthew was able to avoid jail time, although he did end up forfeiting all of his foreign money in exchange for reduced charges and probation (the individuals who made representations to the IRS via OVDP Opt-Out were penalized 10% each).
In accordance with FBAR reporting rules, if the US government finds that an individual has unreported foreign accounts – and that they were willful or knowingly failed to report these accounts – the IRS has the authority to penalize an individual upwards of 50% value of the foreign accounts ( or $100,000 whichever is higher) for each year in an audit – up to 100% value of the foreign accounts.
Go with your Gut, Get into Compliance before it is TOO LATE
From the start, Matthew was never really okay with the idea of keeping his foreign accounts and foreign income hidden. Matthew earned a very generous salary at his prior employer (he was terminated when the company learned of his arrest) and had no need to keep his foreign accounts, secret.
Sometimes, it is human nature to simply go with the flow, and not cause waves. Un this particular circumstance, having been referred to the CPA from a good friend – Matthew did not want to muddy the waters. Throughout the years, Matthew considered reporting the foreign accounts and income because he knew it was the right thing to do – and because it was weighing on his conscience, but he never did.
Moreover, Matthew really had no intent of going through with the quiet disclosure, but the CPA scared Matthew into doing so. The CPA further scared Matthew into speaking with an attorney, because the CPA told Matthew that if the attorney did not believe Matthew, that the attorney could go and speak with the IRS directly (this is a fear tactic used by CPAs and other tax professionals to avoid a client going to an attorney, learning the true nature of the situation, and taking proper action).
OVDP May Save you from Heavy Fines and Jail
OVDP is the offshore voluntary disclosure program. Is a program designed to facilitate tax compliance for individuals and businesses who were willful. In other words, the program is designed for people who attempted to evade tax.
The penalties are a bit steep, but nowhere near as bad as they would otherwise be if a willful taxpayer was investigated by the US government. Moreover, the IRS has made it known that while they do not guarantee immunity from prosecution, for the most part if a person fully discloses their offshore account and income information they will most likely be spared from any criminal prosecution.
Want to Learn More? OVDP FAQ
Golding & Golding is an International Tax Law Firm, and one of the most experienced boutique OVDP (Offshore Voluntary Disclosure Program) and International Tax Law firms in the country.
We have represented numerous businesses and individuals around the world with international tax law and OVDP submissions, with unreported assets and/or financial accounts exceeding $35,000,000.
The reason why individuals and businesses are getting into trouble with foreign reporting and OVDP is because there are so many aspects to OVDP that an inexperienced attorney, CPA or accountant would not know to look out for, and/or even warn the client about.
Over the last few years, there has been a recent increase in OVDP applications. In addition, our firm has received many referrals from clients who previously sought the help of other tax professionals who steered them in the wrong direction and nearly got them in trouble.
We Can Help.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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