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Tax Evasion Examples – 26 US Code § 7201 | IRS Criminal Tax Risk

Tax Evasion Examples - 26 US Code § 7201 | IRS Criminal Tax Risk - Golding & Golding

Tax Evasion Examples – 26 US Code § 7201 | IRS Criminal Tax Risk – Golding & Golding

Tax Evasion Examples – 26 US Code § 7201 | IRS Criminal Tax Risk

While some forms of tax evasion might be considered intricate and highly complex, not all of them are. The are numerous examples of tax evasion.

The IRS (Internal Revenue Service) investigates all types of Tax Evasion. Some tax evasion examples are complicated and sophisticated, while other forms of evading tax are relatively…simple. 

For example, simply knowing you have foreign money and intentionally not reporting it or disclosing it on your tax return is, well… Tax Evasion

Tax Evasion Examples

At Golding & Golding, we focus on international tax law. We have spoken to several thousand clients along the way, and heard every story imaginable (almost).

To that end, even though there are some pretty crafty and creative people out there, most international tax evasion seems to fall into one of five different categories.

The following are five common examples of offshore tax evasion that are regularly investigated by the IRS:

Lying to your CPA

As you may have seen recently in the Manafort case, lying to your CPA is pretty easy. The CPA sends you a questionnaire or binder and asks you whether you have any foreign income or foreign accounts… and you answer, no. This is despite the fact that you may have one or several foreign accounts, assets, income or investments overseas (presuming you speak English and understood the questionnaire).

Your tax preparer is there to help you (or at least they should be). We have worked with several high profile clients (and non-high-profile clients) who have had hidden several million dollars worth of unreported foreign income, accounts, assets or investments that were asked directly by their CPA (the person they are paying to accurately prepare their taxes) – and to which they blatantly lied, and answered no on questions regarding foreign accounts, etc.

In this sort of situation, it is important to note that even though your CPA signs the tax return along with you, if you lied or misrepresented facts to the CPA, it is not his or her butt on the line – it is yours. Moreover, you do not have an Attorney-Client privilege with a CPA.

It is also important to note that especially in accordance with FATCA reporting, more than 300,000 foreign financial institutions are actively reporting account holder information to the IRS.

If you are already out of compliance prior years and scared, that is reasonable – and we can help you (see below).

Structuring

Structuring is an odd crime, because feasibly – in certain situations – there could be a perfectly legal rational reason for doing it. By structuring, you are artificially keeping your deposits, withdrawals and transfers low (below of bank reporting requirements), so that the IRS does not get wind of your money.

Since the purpose of structuring is to avoid reporting or disclosure by the IRS, and you are purposefully and intentionally deflating the size and value of your accounts (and transfer)s in order to avoid detection, this is considered a crime – and one the IRS has been going after more seriously ever since the introduction and enforcement of FATCA.

Moving Money into Someone Else’s Account(s)

We are not talking about a gift of your money to another person. Rather, let’s say you have $3 million overseas and recently learned about FBAR and FATCA reporting. You despise financial transparency, and the last thing you want to do is report your hard-earned money to the IRS.

Therefore, you transfer your money into the foreign account of a foreign person, who does not have any US reporting requirement. Since the money is now in a foreign person’s account, and they have no reporting requirement – the money is safe, correct?

Not necessarily – especially with the introduction and enforcement of FATCA. If the foreign financial institution is already aware that you are a US person then the bank may have report that you depleted the account to the IRS. Moreover, the foreign financial institution might also provide the transfer information to the IRS.

Thereafter, when you’re called into an audit, you’re now stuck in what’s called a reverse eggshell audit – and if you are caught lying or misrepresenting (or omitting) facts to the IRS, it could lead to an IRS Special Agent criminal investigation.

Laundering the Money

Let’s say for example you have a business overseas and your vendor owes you significant amounts of money. Based on the type of corporate structure you have, you would have to report the money immediately as income to the IRS.

What do you do instead? You have the vendor purchase items for you, which are then transferred to by way of a third-party as a gift. For example, the vendor may purchase a million-dollar home, transfer it into the name of his daughter, and then transfer it to your son –who then gifts it to you.

The reason this is tax evasion is because instead of reporting the $1 million income as income, you are instead simply receiving a gift from a foreign person, which is then reported on a form 3520. Sometimes, this type of laundering can work, especially when related parties are involved — but the problem is if you are detected with this sort of in depth evasion or fraud scheme the IRS is likely to move forward with the criminal type of prosecution, since there is no basis whatsoever for a vendor to turn around and gift you a million-dollar property (no matter how much your vendor likes you).

Illegally Assigning Income

Not all instances of assigning income are considered fraud or evasion. It is typically only considered fraud or evasion when it is done to artificially and intentionally reduce your tax rate  — when you know it is improper.

For example, you earn several million dollars a year (nice work). The only problem is sometimes you’re a bit too smart for your own good. You have a vendor that owes you about $700,000. You are sick and tired of paying U.S. tax at 53+% federal/state tax rate and instead want this money tax-free.

Luckily for you, you know seven slackers who don’t earn any money. Therefore, you assign the income from each of the seven vendors, to a different slacker. As a result, the slackers (most of them who are married to other slackers) book the income as their own and therefore are paying a much more reduced tax rate. Moreover, the slackers live in Vegas, Seattle, and Texas — and therefore do not have to pay any state income tax.

Thereafter, the slackers take a small portion of the money, and gift the rest of you. While there is nothing wrong with giving people gifts (even slackers), and there’s nothing wrong with assigning people income – if you combine the two solely in order to artificially deflate your tax rate, you may find yourself on the receiving end of an IRS audit or criminal investigation.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

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

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

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

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

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

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.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC