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DOJ Proposed Offshore Criminal Tax Evasion Task Force (2018)

DOJ Proposed Offshore Tax Evasion Task Force (2018)

DOJ Proposed Offshore Criminal Tax Evasion Task Force (2018) by Golding & Golding

DOJ Proposed Offshore Criminal Tax Evasion Task Force (2018) by Golding & Golding

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.

Specifically:

– 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.”

Convictions

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.

IRS Offshore Penalty List

A Penalty for failing to file FBARs

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

FATCA Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion 

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Summary of IRS Offshore Voluntary Disclosure

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

What To Look For in an OVDP Attorney?

There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure. 

You will want to make sure you use an OVDP Attorney who has:

  • Litigation Experience
  • IRS Audit Experience
  • At Least 15-20 years of Attorney Experience
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.

Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.

Alternatively, once you are in OVDP, you may want to:

  • Make an MTM Election
  • Opt-Out
  • Argue a FAQ 55 Penalty Reduction

As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.

Contact us Today, We can Help You!