Estate of Clemons Penalty Dangers for FBAR, Foreign Assets & Income

Estate of Clemons Penalty Dangers for FBAR, Foreign Assets & Income

Estate of Clemons

For many years, before Switzerland was targeted by the Internal Revenue Service for helping US citizens and other Americans hide money — they used to have an effective system in place to promote financial secrecy by utilizing numbered accounts. With numbered accounts, US Taxpayers would open bank accounts using a number instead of a name. Other methods that were used included forming a foreign entity that was only used to open and maintain the account, as well as specifically requesting the foreign banks not provide information to the taxpayers — so that the taxpayers could not even determine what their tax liability was. (aka willful blindness) Essentially, Taxpayers were paying to remain in the dark. In the recent case of Clemons, the Tax Court prepared a detailed ruling on the dangers of hiding Swiss income — and remaining intentionally non-compliant about one’s own taxable income. The opinion is rather long, so we are going to identify just some of the key aspects of taxpayers should be aware of.

False Documents & FBAR Filing

In general, if a taxpayer files false documents, it can be an indicator of tax fraud and division – and this extends to FBAR.

As provided by the Court:

      • The U.S. tax system relies on taxpayers to report their tax liabilities, and the information necessary to calculate those liabilities, via annual returns. Filing false documents indicates a taxpayer’s intent to evade income tax. See id. at *40.That includes filing an FBAR that is incomplete or filing a return that omits income or contains a false response. See id. at *39–40.

      • Mr. Clemons filed false documents. His delinquent FBARs contained false information about his Swiss accounts, and his returns omitted substantial income and contained false responses on Schedules B.Mr. Clemons failed to attach Schedules B to his 2003 through 2005 returns, even though he had an interest in a foreign account.

      • For 2006 and 2007, he attached Schedules B, but he falsely denied having any foreign bank accounts.

      • For 2008 and 2009, he attached Schedules B, but he disclosed only his foreign bank accounts in Germany and the Netherlands, omitting those in Switzerland from the disclosure. Mr. Clemons’s false statements provide evidence of fraudulent intent.

Failing to Cooperate with Tax Authorities

In addition to not filing accurate tax returns, when a taxpayer does not cooperate with the US government and seemingly seeks to divert the investigators or agents away from uncovering information sufficient to establish the accurate tax liability, it can only make matters worse for the taxpayers — and lead to a presumption of fraudulent intent.

As provided by the Court:

      • A taxpayer’s failure to cooperate with tax authorities, including his failure to cooperate with revenue agents during an examination, can indicate fraudulent intent. Grosshandler v. Commissioner, 75 T.C. 1, 19–20 (1980). “[M]isleading statements during an audit, even from an unsophisticated taxpayer, may indicate fraudulent intent.” Clark, T.C. Memo. 2021-114, at *37. Mr. Clemons failed to cooperate with tax authorities.

      • When interviewed, he lied about the attributes of his Swiss accounts and how he used those accounts.After the Commissioner issued IDRs, Mr. Clemons did not readily provide documents. Notably, the Commissioner obtained Mr. Clemons’s personal account ledger—one of few documents he possessed—only after issuing a third-party summons to his representative. Mr. Clemons attempted to misdirect the Commissioner, and his failure to cooperate provides evidence of fraudulent intent.

Implausible or Inconsistent Explanations

Moreover, if the government believes that the taxpayers’ explanations overall just do not make much sense and do not bode well together with the facts (and common sense), it may further show fraudulent intent.

As provided by the Court:

      • Implausible or inconsistent explanations for a taxpayer’s behavior can indicate fraudulent intent. Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The Court has previously addressed various situations in which taxpayers made statements about their UBS accounts that were inconsistent with documentary evidence in the record. Harrington, T.C. Memo. 2021-95, at *33–34; see Isaacson, T.C. Memo. 2020-17, at *52–53.

      • One taxpayer’s statements that UBS invested his account’s funds without his authorization was inconsistent with evidence that UBS invested the funds “following detailed conversations with him concerning the investments.” Isaacson, T.C. Memo. 2020-17, at *52. And another taxpayer’s statements that he lacked control over his account was inconsistent with evidence that “he communicated with UBS bankers— in person, over the phone, and by email—to discuss investment options.” Harrington, T.C. Memo. 2021-95, at *33–34. Mr. Clemons’s explanations are equally implausible and inconsistent.

      • He claimed ignorance of investment activity and suggested that UBS controlled his account, but he signed documents specifying limits on the investment activity and directed how his account would be invested. He claimed records were not in English, but the actual records were in English. His claimed ignorance is contradicted by documents in the record, providing strong evidence of fraudulent intent.

Inadequate Records

This is where the court really focuses on the basis of their opinion, which is that since the Taxpayer requested to not receive regular statements from the bank in Switzerland, it presupposes that the taxpayer with acting fraudulently. In other words, a taxpayer cannot intentionally avoid receiving regular statements from a foreign financial institution in order to avoid having the knowledge sufficient to accurately prepare their tax returns.

      • Taxpayers must maintain records sufficient to determine their tax liability, and a failure to do so can indicate fraudulent intent. I.R.C. § 6001; Bradford v. Commissioner, 796 F.2d at 307–08. A taxpayer’s choice not to receive regular UBS account statements may be seen as a “tax-avoidance strategy that he implemented with UBS, hoping that the absence of records, coupled with Swiss bank secrecy laws, would” shield the account from discovery. Harrington, T.C. Memo. 2021-95, at *31

      • Mr. Clemons purposely kept inadequate records to prevent discovery of his Swiss accounts. He waived his right to invest in U.S. securities and directed UBS and Dresdner to hold correspondence to ensure that records would not be sent to the United States.

      • When UBS presented his bank records to him, he authorized UBS to destroy any mail he left behind. He did not merely fail to keep records, but he took affirmative steps to see that records were destroyed.

      • This badge provides evidence of fraudulent intent.

IRS Voluntary Disclosure Program (VDP) Option

If a person believes they have committed a criminal (or civil willful) tax violation — and have not yet been contacted by the IRS — they will want to consider the IRS Voluntary Disclosure Program (VDP). Taxpayers considering this option should consult with a Board-Certified Tax Law Specialist before making any contact with the IRS.

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