Tax Evasion Examples
Common Examples of Tax Evasion
Our tax evasion examples are designed to help you avoid getting in trouble with the IRS. At Golding & Golding, we focus on the voluntary disclosure of unreported income, accounts, assets, and investments.
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 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.
How to Resolve Tax Evasion Issues
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.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.