Laundering Money with Foreign Bank Accounts | Criminal Tax Evasion
The offshore shell-game of moving money between multiple foreign and offshore bank accounts, under different names (or identifying numbers) is quickly coming to an end.
The IRS continues to make the enforcement of Offshore Tax laws a key priority, and this morning’s indictment against U.S. Government Officials is further proof.
This is true, whether or not the U.S. has entered into a FATCA agreement with your money laundering country of choice or not.
Even BVIs have required registration since 2009, which should have tipped off many would-be tax evaders that the end of an era would be coming near.
U.S. Government Officials Indicted
As can be seen by the recent indictments by Robert Mueller as against Paul Manafort and Robert Gates, the walls are starting to close in faster and faster against any individual who has unreported offshore money or accounts.
Recently, the above-referenced individuals were indicted with respect to a nearly 10 year money laundering crime in which these individuals were using foreign accounts to transfer money outside of the United States.
With the implementation of FATCA, along with the renewed enforcement priority of FBAR Reporting, and nearly 300,000 foreign financial institutions proactively reporting to the IRS, it is going to be much more difficult to hide money offshore.
International Tax Crimes have Serious Repercussions
It is a reality, that if you committed an international tax crime (no matter how big or small the amount of unreported income, assets or number of accounts) the IRS, DOJ, and local governments may decide to take you to task. Of course, while not everyone with unreported foreign money will be indicted, the IRS and DOJ do not limit investigations solely to the amount of money at issue – it is based on the specific facts and circumstances of your case.
But, if the IRS and DOJ decided to investigate you, they may very well show up to your house unannounced and with a search warrant in hand to perform a comprehensive search and seizure. Oftentimes, the investigation starts way before a person has any idea they are under investigation.
Example – International Criminal Tax Evasion
The investigation process usually goes as follows: An individual will have placed money overseas which was not reported to the Internal Revenue Service for any number of different reasons:
- The money was illegally sourced
- The money was never reported to the IRS as income
- The Foreign Accounts and/or Assets were not disclosed
Thereafter, either due to FATCA reporting, mismatched returns, informants or a whistleblower, the individual shows up on the IRS or DOJ radadr.
In one recent case, we had a client come to us after letting us know that there was bank manager who contacted them with respect to a recent visit by the Internal Revenue Service and a belief that “they were being tailed.”
The clients were scared, but unsure what to do. We all decided to try to submit the clients to OVDP as quickly as possible. We explained to them that under the circumstances there was probably an IRS criminal investigation happening, but it might be in the early stages.
They decided they wanted to enter into offshore voluntary disclosure (OVDP) before it was too late.
It was Too Late…
Unfortunately, later that day, they contacted us to let us know that there were eight unmarked vehicles on their driveway of their home — and at least 15 individuals waiting for the to perform a comprehensive search warrant. This of course changed the focus of representation from voluntary disclosure to international criminal tax defense.
Offshore Voluntary Disclosure
Despite what inexperienced attorneys trying to sell you on the streamlined program instead of OVDP when you are willful (especially when these attorneys tell you that the amount of unreported income was low, so you can still qualify for the Streamlined Program), is that criminal investigations are reality – especially when it involves international tax and potential international tax crimes.
Offshore enforcement is a key priority; therefore, if you know you have acted willfully, intentionally, or with reckless disregard in failing to report offshore money – it is in your best interest to consider voluntarily getting into compliance before it’s too late.
The reality is you may never really know whether you are under a criminal investigation until you are face-to-face with the IRS Special Agent – in which it is too late to submit to OVDP.
OVDP Summary of the Basics
Understanding how the OVDP process works is important to effectively navigating the pitfalls and landmines of the submission process.
In fact, when it comes to OVDP, one of the hardest parts about moving forward is just understanding the process itself, and being able to distinguish fiction from reality.
As such, the four most important aspects of understanding OVDP for our clients are the following:
- What is a preclearance letter?
- What are the penalties associated with OVDP?
- What is a closing letter?
- What is opting out?
In this article, we will provide a summary about the different aspects of OVDP as they relate to these four main issues.
The preclearance letter is the initial submission made on behalf of an applicant considering OVDP. While a person is not guaranteed entrance into OVDP, by submitting the preclearance letter, the IRS Criminal Investigation Department takes the opportunity to run a background check on the individual, estate or business.
What is the Purpose of the Background Check
The main purpose of the background check is to make sure that the individual is not already in tax trouble, or other trouble with the law. Even though the penalties associated with OVDP are high, relative to what could happen if a person was to get examined or indicted on criminal tax related issues involving offshore and foreign income, OVDP is a great deal.
A Preclearance Letter is not technically part of OVDP
This is a bit of a nuance. On the one hand, by submitting the preclearance letter you are opening yourself up to the IRS regarding your foreign accounts, assets, investments, etc. so that they can inspect, research and do their due diligence to determine whether you are authorized to apply.
On the other hand, technically, the preclearance letter is not part of the submission. In other words, feasibly you could submit an OVDP letter and then not move forward with submitting to the formal program, which is the the next step and involves submitting forms 14454 and 14457. Alternatively, if you were to submit the 14454 and 14457 and then discontinue the process, it would be considered a breach of the program and you can find yourself in some serious trouble.
OVDP penalties are broken down as follows:
Penalty on the Assets & Accounts
The penalties are relatively straightforward as follows:
– The applicant will categorize their submission down per year, within the 8-year compliance Period.
– For example, if a person is submitting for 2016 and already submitted their 2016 tax return incorrectly, they will need to amend for eight years-which would mean 2009 through 2016.
– Thereafter, the person will look at each year independently. For example, a person will look at year 2012 and assess which foreign accounts, specified foreign assets or income generating real estate they have for that year.
– Then, for that specific year only, and using the exchange rates for that particular year, the applicant will figure out the maximum balance of each account within that year. The applicant will then aggregate or add the maximum account balances together to calculate the annual aggregate total for that particular year.
– Next, the individual or other applicant will prepare the same analysis for each year within the compliance. Then, the applicant will take only the year that has the highest value and multiply it by one of two numbers:
Account and Asset (FBAR & FATCA) 27.5% Penalty
27.5% penalty is the general penalty amount. For example, as long as the individual was not associated, at all, with a “bad bank” or investor, the individual would multiply the highest balance by 27.5%. So David’s highest year had $500,000 of unreported accounts and assets, his penalty amount would be $137,500.
Account and Asset (FBAR & FATCA) 50% Penalty
The IRS publishes a list (updated periodically) of foreign financial facilitators, which includes individual investor “professionals” and foreign financial institutions. If any of the applicant’s money (even minimal) is invested with one of these “bad banks,” then the entire amount of unreported money (for all institutions, assets, etc.) is multiplied by 50% instead of 27.5%.
Therefore, continuing the example from above, if David had any money in one of these bad banks, and the penalty jumps to 50% for $250,000. It should be noted, that the IRS does not parse out the funds that are in that that bank and only expose those to the heightened penalties – rather, the full amount of unreported money is subject to the 50%.
Penalties on Taxes
Beyond the penalties associated with the undisclosed assets, accounts or investments — are the penalties on the taxes that are due. For example, let’s say David had $10,000 of unreported income in year 2012 and was subject to a nearly 40% tax rate.
In that year, in addition to the penalties identified above, David would also have to pay $4000 in taxes that are due, as well as a 20% penalty on the $4000, which is an $800 penalty. In addition, David also has to pay interest.
So if David has significant unreported income for each year and a compliance, David may have significant taxes, penalties, and interest amount due.
**In addition, if David did not file or pay his regular taxes (for example, David was required to but never filed a tax return for year 2012), David would also have to be subject to a possible failure to file and failure to pay penalty.
Closing Letter (906 Letter)
Typically, within one to three years from the beginning of the submission, this monstrosity comes to an end. As a result, the Internal Revenue Service will send the applicant a 906 closing letter.
By submitting a signed closing letter back to the Internal Revenue Service, the applicant has acknowledged the penalty, and agrees to everything the IRS has required from him or her in the submission.
Presumably, once the closing letter is signed, the IRS puts the matter to rest. This has many benefits for our clients who might’ve waffled between the streamlined program and OVDP, but had the following issues:
- Avoiding a criminal investigation
- Avoiding further audits or examinations on these international related issues
- Usually avoiding a future audit on tax matters involving the same unreported money for years prior to the year compliance period.
- IRS Acceptance of the Mark-to-Market election
- Much smaller likelihood that the IRS will contact any other foreign countries in which the taxpayer may have also failed to pay tax.
In other words, for all intents and purposes — the matter is over.
For some people, the chances of going streamlined and being taken to task on willful versus non-willful is too much to bear. At the same time, the thought of paying a 27.5% penalty or 50% penalty solely because they were risk-averse against submitting a streamlined application when the IRS still refuses to publish a clear-cut definition of the term willful is absurd.
As a result, instead of signing the closing letter the applicant agrees to opt-out. In an opt-out situation, the applicant still maintains the opportunity to stay “protected” under the program. At the same time, the taxpayer disagrees with the penalty amount and would rather allow the Internal Revenue Service to audit him or her in order to try to get the penalty reduced.
Oftentimes, the IRS may reduce the penalty depending on the facts and circumstances presented by the taxpayer. But, it has to be noted and considered that the IRS can also increase the penalty.
Nevertheless, the mere fact that the IRS may issue higher penalties (which is not common when the facts support the taxpayer’s opt out position) should not be enough to dissuade the taxpayer from an opt out when they firmly believe they can achieve a better result.
Even the IRS has published memoranda wherein the IRS provides that for some individuals the penalties are absolutely lopsided and and opt-out should not be held negatively against taxpayer.
OVDP and IRS Offshore Voluntary Disclosure
We hope this helped summarize the more pressing questions we get from new clients.
Please feel free to visit our International Tax Library to research other topics we have written about.
In addition, if you’d like to read a more comprehensive summary regarding the different programs you may find our IRS offshore voluntary disclosure program options summary helpful to you.