DOJ Proposed Offshore Criminal Tax Evasion Task Force (2018)
DOJ Proposed Offshore Tax Evasion Task Force (2018)
While the US government will be terminating the traditional OVDP “program” as September 28, 2018, the IRS and DOJ (Department of Justice) have no intent to let up on the enforcement of offshore disclosure related issues.
OVDP Became Less Important to the IRS
OVDP has resulted in nearly $9 billion (if not more) of taxes, fines and penalties recovered by the US government. But, it appears the IRS and DOJ have other tricks up their sleeves to directly penalize individuals and businesses, instead of giving them the opportunity to voluntarily come into compliance.
In accordance with FATCA, more than 110 countries and 300,000 Foreign Financial Institutions have already agreed to proactively report US account holder information to the United States. Moreover, the U.S. Government has developed several new International Tax Enforcement Groups, designed to crack down on offshore evasion.
Offshore Tax Evasion
The Department of Justice is seeking more than a half-million dollars in order to structure a team of five (5) attorneys with the sole intent of locating and enforcing offshore compliance. DOJ has made it clear that offshore tax evasion is one of the top litigation priorities.
As specifically provided in the budget proposal: “Use of foreign tax havens by U.S. taxpayers has been on the rise, aided by increasingly sophisticated financial instruments and the ease of moving money around the globe, irrespective of national borders. While the Division’s enforcement focused initially on cross-border activities in Switzerland, it has expanded to include wrongdoing by U.S. accountholders, financial institutions, and other facilitators globally, including publicly disclosed enforcement concerning banking activities in India, Israel, Liechtenstein, Luxembourg, Belize, Hong Kong and the Caribbean.”
Several Foreign Banks Have Already Entered Guilty Pleas
The US government has already recovered several billion dollars as a result of foreign financial institutions entering into settlement agreements regarding offshore tax evasion.
– UBS AG, Switzerland’s largest financial institution, paying approximately $1.1 billion;
– Wegelin Bank, the oldest private bank in Switzerland, paying approximately $74 million to the United States; and
– Credit Suisse AG, paying a total of $2.6 billion – $1.8 billion to the Department of Justice for the U.S. Treasury (as restitution for lost tax revenue), $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services, and $196 million in disgorgement, interest and penalties to the Securities and Exchange Commission (SEC).
Among the most notable to have entered into DPAs are:
– Bank Leumi, a major Israeli international bank, paying $270 million to the United States, providing the names of more than 1,500 of its U.S. account holders, and cooperating with related ongoing investigations, marking the first time an Israeli bank admitted to such criminal conduct; and
– Bank Julius Baer & Co Ltd., headquartered in Switzerland, paying $547 million in restitution, forfeiture and penalties.
Swiss Bank Program
The Swiss bank program has already been very successful for the US government on matters involving noncompliance and observation of individuals with bank accounts and other financial accounts and Swiss banking institutions:
“[T]hrough the Swiss Bank Program, the Department entered into 78 NPAs with 80 banks that collectively paid more than $1.36 billion in penalties and are providing valuable leads concerning U.S. taxpayers maintaining secret accounts.”
“The Program encouraged Swiss banks, about which the Department had little or no information, to come forward, disclose conduct and account information related to U.S. offshore accounts, and to cooperate with ongoing offshore enforcement efforts to target U.S. accountholders and the bankers and advisers who facilitated them.”
In 2017 alone, there in several convictions of individuals involving offshore noncompliance and tax evasion, noting, that two of these major cases were right here in our own backyard in Southern California.
The budget refers to three specific cases, including
– In July 2017, Casey Padula, a Port Charlotte, Florida businessman, was sentenced to 57 months in prison for tax and bank fraud. Padula concealed approximately $2.5 million in secret accounts in Belize and fraudulently deducted the offshore transfers as business expenses on his corporate returns.
– In March 2017, Masud Sarshar, a Los Angeles, California, businessman, was sentenced to 24 months in prison for concealing more than $23.5 million in Israeli bank accounts and evading more than $8.3 million in taxes.
– In April 2017, Dan and David Kalili and David Azarian, of Orange County, California, 50, were sentenced to prison for hiding millions of dollars in secret accounts in Israel and Switzerland for more than a decade. Collectively, they also paid approximately $5.9 million in penalties and $780,000 in restitution to the IRS.
As such, “The Tax Division is requesting $500,000.00 for a Transnational Tax Evasion Unit of five attorneys and one paralegal. This unit will be responsible for criminal enforcement of transnational tax crimes.
Examples of Foreign Bank Accounts, Tax Fraud & Evasion
Matthew and His Foreign Account – Tax Fraud and Evasion
An example of a person being intentional is relatively simple: Matthew is aware that he has foreign accounts and that the foreign accounts earn income. He is also aware that he supposed to report this information to the IRS.
Matthew prepares his tax returns himself using his own software. When the software prompts him regarding foreign accounts, he marks “No” to Question Seven, Schedule B even though he is fully aware that he has foreign accounts.
In addition, even though Matthew is aware that he supposed to report the income on his US tax return, he intentionally does not do so.
This is an example of clear cut tax fraud and tax evasion. In order to prove civil tax fraud the IRS would have to show clear and convincing evidence. In order for the US government to prove criminal tax evasion, they would have to prove it beyond a reasonable doubt.
**But, in order to prove willful FBAR penalties, the IRS would only have to show preponderance of the evidence.
Dana and Her Foreign Account – Intentional Omission
An example of intentional omission is also relatively simple (but slightly more complicated). Why? Because you are proving a negative. For example, Dana has accounts scattered throughout many Asian countries. She’s has had these accounts for many years, and they have amassed substantial balances, and earn significant income.
When Dana sits down with her CPA, he asks her for a list of any income she has received from anywhere worldwide. Dana provides a list of certain selected accounts and income, but does not identify several other accounts that she knows she has, and knows earns income.
She’s careful, and chooses to omit accounts in countries in which the US does not have a bilateral tax treaty. Unfortunately, what Dana fails to realize is that there are FATCA Agreements with more than 110 countries.
Even though Dana reported some of her income and foreign accounts, she intentionally omitted other accounts.
This is an example of tax fraud and tax evasion by intentional omission. In order to prove civil tax fraud the IRS would have to show clear and convincing evidence. In order for the US government to prove criminal tax evasion, they would have to prove it beyond a reasonable doubt. But, in order to prove willful FBAR penalties, the IRS would only have to show preponderance of the evidence.
Michael and His Foreign Accounts – Willful Blindness
Willful blindness is another form of tax evasion or tax fraud. In a situation regarding willful blindness, a person intentionally avoids the knowledge that they could otherwise obtain.
For example, let’s say Michael goes to his CPA. The CPA provides a brief summary and brochure of how the IRS is focusing on foreign income, accounts, investments, or assets. Michael knows he has foreign income, accounts, and assets and therefore purposely does not read the brief brochure, believing this will absolve him of any liability…it won’t.
As you can see, willful blindness is a bit more difficult to prove, but if the IRS or US government could show the emphasis the CPA placed on the foreign money, coupled by the fact that Michael had every opportunity to know about the requirements, but chose not to, the IRS or US government may be able to show an Willful Omission.
Reckless Disregard (Civil vs. Criminal)
It should be noted that reckless disregard is a weaker version of willfulness, because it does not contain the same level of intent as the other examples provided above.
As such, reckless disregard can typically not be used to pursue a criminal indictment or other criminal prosecution against an individual. While reckless disregard can be used to seek willful FBAR penalties or civil tax fraud – it cannot be used as a basis for a criminal investigation, which requires a level of intent (aka knowledge)
IRS Offshore Penalties Can Be Very Bad
In order for the U.S. Government to issues many different international informational return Civil Penalties, which can be staggeringly high, the standard burden of proof is mere “Preponderance of the Evidence,” which is the lowest standard of proof.
Golding & Golding, A PLC
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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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