FATCA Crime (2018) – How Foreign Accounts Can Lead to U.S. Prosecution
- 1 It Does Not Need to Be “Manafort” Sized Fraud
- 2 A Quick Reminder: 1040 Schedule B, Question 7
- 3 What Should the Manafort Situation Teach You?
- 4 What is Evasion?
- 5 What is IRS Tax Evasion – Tax Evasion Definition
- 6 What is Money Laundering?
- 7 Simple Example of Money Laundering
- 8 Peter is Not Money Laundering – He’s Structuring
- 9 Therefore, Peter Hatches a Plan
- 10 Peter’s Friend was a Legal Permanent Resident
- 11 One of Peter’s Friend’s had an Extended Stay in the U.S.
- 12 FATCA Reporting
- 13 Peter’s Friend Gets Divorced
- 14 Why Does Any of This Matter to Peter?
- 15 What Can You Do?
- 16 Golding & Golding, A PLC
FATCA Crime (2018) – Foreign Accounts Can Lead to U.S. Prosecution
Unfortunately, short term motives sometimes result in long-term consequences.
FATCA Crimes are on the rise, and this summary will provide you an example of how foreign accounts can lead to U.S. prosecution.
Criminal enforcement is becoming much more of a reality for individuals who may have been illegally moving money offshore into a foreign country in order to avoid reporting requirements – only to get nabbed as a result of FATCA Reporting, Structuring and AML (Anti-Money Laundering) initiatives.
It Does Not Need to Be “Manafort” Sized Fraud
By this time, many people are aware that Paul Manafort, the former campaign manager for Trump, has been indicted for international money-laundering/evasion/disclosure crimes, and as of the writing of this article has had his bail revoked for other reasons.
Nevertheless, even though Manafort had put together a very in-depth and intricate scheme to avoid disclosing or reporting foreign income, assets, investments, and accounts to the Internal Revenue Service, laundering does not always have to be that complicated.
A Quick Reminder: 1040 Schedule B, Question 7
It is very important to note that despite Manafort’s grand scheme, a simple lie to his CPA regarding his foreign accounts was a major contributing factor to what did him in.
Many of his problems stem from knowingly marking off “No” on Schedule B, Question 7 in his tax return. This is a question that asks about ownership or signature authority over foreign accounts.
If you knew you had a reporting requirement but lied to your CPA, you were willful (but there is still hope). It does not matter if you were willful for 1-year, 2-years or 10-years — you cannot go Streamlined or Reasonable Cause.
If any Attorney (typically inexperienced attorneys without any significant OVDP or Streamlined experience) recommends that you go Streamlined or Reasonable Cause when you were willful, you should take caution, and continue researching for firms who are very experienced in this area of law.
If you have mitigating factors, the proper strategy is to go OVDP, and then Opt-Out.
Click Here to read about one of Golding & Golding’s recent OVDP Opt-Out success.
What Should the Manafort Situation Teach You?
If the Manafort situation teaches you anything, it is that no matter how much power you wield, and how complicated and intricate your illegal tax scheme may be – in the end, the IRS and US government have many ways and means to find your money, regardless.
What is Evasion?
There are many different types of penalties that the IRS can issue depending on the facts and circumstances of a person’s non-compliance.
While some IRS penalties are relatively minor and can be easily abated by using a reasonable cause submission, offshore disclosure, or domestic disclosure — other tax penalties are much more serious and may result in significant fines and penalties.
What is IRS Tax Evasion – Tax Evasion Definition
Tax Evasion is when a person intentionally artificially reduces their tax liability to the IRS. A person typically commits tax evasion when they:
- Do not submit a tax return when they know they should
- Artificially reduce or omit Income
- Include false personal deductions on the tax return
- Include false business deductions on the tax return
Since the goal of the individual is to falsely reduce the tax liability, it is considered an attempt to “evade” taxes, and hence a potential criminal tax evasion charge.
What is Money Laundering?
Money laundering is typically the process of taking money that was earned illegally and trying to clean the money by investing it or using it for other means.
As provided by the IRS:
Money laundering is the process of disguising criminal proceeds and may include the movement of clean money through the United States with the intent to commit a crime in the future (e.g., terrorism). Common methods include disguising the source of the proceeds; changing the form of the proceeds; or moving the proceeds to a place where the proceeds are less likely to attract attention. The object of money laundering is ultimately to get the proceeds back to the individual who generated them.
Money laundering is a necessary consequence of almost all profit generating crimes and can occur almost anywhere in the world. Money laundering is a threat to the United States tax system in that taxable illegal source proceeds go undetected along with some taxable legal source proceeds from tax evasion schemes.
Both schemes use nominees, currency, multiple bank accounts, wire transfers, and international “tax havens” to avoid detection. This untaxed underground economy ultimately erodes public confidence in the tax system.
Simple Example of Money Laundering
Peter received illegal income from selling stolen jewelry. He wants to avoid detection and therefore transfers the money abroad to invest in legitimate investments. (aka “washing the money”) This would be considered Money Laundering. Obviously, Peter would not want to just take $1 million and deposit it to his bank without explanation…unless Peter is looking to get arrested and charged.
Peter is Not Money Laundering – He’s Structuring
In the current situation, Peter is not actually laundering money, because Peter received the money legally from selling family jewelry.
The problem is the earnings were in cash. And like most people with extravagant habits, Peter does not want to deposit his $1,000,000 of cash earnings he received into the bank, and doesn’t intend to pay income tax on it either.
Rather, he wants to avoid reporting the income and/or avoid the bank issuing either a CTR (Cash Transaction Report) or SAR (Suspicious Activity Report) as a result of depositing the money into the bank.
Therefore, Peter Hatches a Plan
Instead of depositing the money into a U.S. Bank, Peter recruits some of his friends who live overseas and asks them to deposit the money into their own accounts. These individuals are careful to avoid currency transaction (CTR) “reports” by engaging in structuring (which is also a crime, in which individuals structure transactions typically below the $10,000 reporting requirement to avoid CTR, and hopefully SAR).
Two years later, the money has been transferred to Peter. Thereafter, Peter takes the million dollars, purchases multiple homes outside of United States, and earns rental income on those properties.
In addition, Peter has his brother, a non-US person with no ties to the United States to open a Sociedad Anonima, into which Peter’s brother deposits all the money – avoiding any reporting by Peter.
Peter is in the clear, correct?
…. Not so fast.
Peter’s Friend was a Legal Permanent Resident
Even though the friends Peter use to mo ve the money when it was initially transferred from the United States abroad are citizens of the foreign country, they are actually U.S. Legal Permanent Residents as well.
They never thought to tell Peter about this, because they do not reside in the United States and do not have any ties to the United States, other than the fact that they maintain rental properties in the United States and travel to the U.S. every so often.
One of Peter’s Friend’s had an Extended Stay in the U.S.
Many years ago, one of Peter’s friends, who was tasked with smurfing about $500,000 (which he placed into his account briefly), had updated the Foreign Financial Institution at the time he received his green card (more than 15 years ago). He updated the bank at that time only because he would be staying United States for about 6-12 months in order to finish the paperwork, and purchase the rental properties — and wanted to track his families spending habits (in days before everyone could access statements online)
Peter never thought to ask his friend about U.S. Status, and his friend never thought to tell Peter because the friend has a property manager in the United States, the U.S. rental business runs on autopilot — and the friend never visits for more than 2-weeks in any given year.
Since 2017, the foreign country at issue began FATCA Reporting.
Most of the time Peter’s friends’ Accounts that he used for the structuring had relatively small amounts (they don’t trust the banks) and therefore there was never much to worry about regarding reporting.
But, in this particular year and due to the fact that he was holding nearly $500,000 of Peter’s money for more than 30-days, the Financial Institution reported the information to the United States, along with tens of thousands of its other customers.
In other words, Peter’s friends were not singled out, they were just part of the wave of reporting at that time.
Peter’s Friend Gets Divorced
As with many couples, Peter’s friend’s marriage takes a turn for the worse, and they divorce. Unfortunately, Peter’s friend is a known as a local philanderer and the wife was very upset. This is compounded by the fact that Peter’s friend was refusing to negotiate a fair marital settlement agreement (MSA).
Moreover, until recently, the wife was unaware of the significant assets that peters friend maintains in the United States.
Peter’s friend tells his soon-to-be ex-wife to go pound sand. In response, the soon to be ex-wife decides to contact the IRS and become a whistleblower against the ex husband.
Why Does Any of This Matter to Peter?
Because now, the IRS is involved. The agent that spoke with with the soon-to-be-ex-wife went through a nasty divorce herself and has some sympathy. She takes a few additional minutes out of her day to research whether there has been any FATCA reporting regarding the husband, and learns that a Foreign Bank Account of his was reported with a high balance of $500,000 in it.
The agent also notices that individual never filed an FBAR, and did report under FATCA (he filed Married Filing Separate, so he has a Form 8938 requirement).
Moreover, the agent also learns that the rental company Peter’s friend uses to hold his own properties is an Sociedad Anonima, and that Peter’s friend was not filing a form 5471.
She decides to issue an examination notice to Peter’s friend… along with an IDR (Information Document Request). And, while Peter’s friend is loyal, he is not loyal to the tune of paying a $500,000 FBAR penalty in a muiti-year audit when he could be found willful.
So Peter’s friend decides to come clean to the IRS…
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.
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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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.