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Civil Fraud Penalty IRC § 6663 (2018) – 75% Penalty & Criminal Risks

Civil Fraud Penalty IRC § 6663 (2018) – 75% Penalty & Criminal Risks

Civil Fraud Penalty IRC § 6663 (2018) - 75% Penalty & Criminal Risks by Golding & Golding

Civil Fraud Penalty IRC § 6663 (2018) – 75% Penalty & Criminal Risks by Golding & Golding

IRS Tax Fraud is a big deal. That is because both the penalties and stigma, involved in civil tax fraud are enough to ruin your reputation for many years to come, as well as cripple you financially — putting you into a tough situation that can last decades.

What is Civil IRS Tax Fraud?

Tax fraud is the concept that you are intentionally deceiving the IRS by fraudulently filing tax returns, omitting income, intentionally reducing the amount of income, or falsifying deductions.

Offshore Fraud – High Stakes Poker

Tax fraud comes in all different shapes and sizes, but when it involves foreign or offshore money, the stakes are even higher.

Why? Because the IRS has a trick up its sleeve. See, in order to prove tax fraud, the IRS has to show clear and convincing evidence. This is a higher standard of proof than preponderance of the evidence.

But preponderance of the evidence is all that is needed to enforce other penalties that can far exceed monetary penalties for other related foreign or offshore issues under civil tax fraud (such as FBAR Penalties).

Therefore, if the IRS is able to show clear and convincing evidence involving your civil tax fraud, then it will be much easier for them to meet the lower standard of proof required to enforce other international informational return penalties. They know this, and they use it as leverage against you to get what they want…as much of your money as they can, with the least amount of resistance from you.

Therefore, if the IRS suspects Fraud involving Offshore or Foreign Money, the IRS will devote more time and resources to proving its claim, because then it can use that evidence to easily proof related matter such as:

  • FBAR Penalties
  • FATCA Form 8938 Penalties
  • Form 5471 Penalties
  • Form 8865 Penalties
  • Form 8865 Penalties

Understanding IRS Civil Tax Fraud

Civil tax fraud is a comprehensive subject. In order to make it palpable to you (while keeping you awake), will break it down into various topics as provided in the IRS IRM (Internal Revenue Manual)

When Does the IRS Issue Civil Tax Fraud Penalties?

As provided by the IRS:  “Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness.

In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c) . The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.”

Breaking Down the Elements of Civil Tax Fraud

It is important to understand the words being used to establish civil tax fraud. These are called “elements,” and the elements to civil tax fraud are as follows:

– Underpayment of Tax

– Due to Fraud (aka the IRS must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing)

– Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness

– In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c).

The fraud of one spouse cannot be used to impute fraud by the other spouse.

– Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.”

More than Negligence

The IRS has a heavy burden when it comes to proving fraud. If the IRS can merely prove mistake or inadvertence, that alone is insufficient to find you liable for IRS Civil Tax Fraud.

Evidence of Fraud

As provided by the IRS:

Since direct proof of fraudulent intent is rarely available, fraud must be proven by circumstantial evidence and reasonable inferences. Fraud generally involves one or more of the following elements:

– Deception

– Misrepresentation of material facts

– False or altered documents

– Evasion (i.e., diversion or omission)

Badges of Fraud

As provided by the IRS:

The courts focus on key badges of fraud in determining whether there was an “intent to evade” tax.

A determination of fraud is based on the taxpayer’s entire course of conduct, with each badge of fraud given the weight appropriate to a particular case. An evaluation of fraud is based on the weight of the evidence rather than the quantity of the factors. Some of the common “first indicators (or badges) of fraud” include:

– Understatement of income (e.g., omissions of specific items or entire sources of income, failure to report substantial amounts of income received)

– Fictitious or improper deductions (e.g., overstatement of deductions, personal items deducted as business expenses)

– Accounting irregularities (e.g., two sets of books, false entries on documents)

– Obstructive actions of the taxpayer (e.g., false statements, destruction of records, transfer of assets, failure to cooperate with the examiner, concealment of assets)

– A consistent pattern over several years of underreporting taxable income

– Implausible or inconsistent explanations of behavior

– Engaging in illegal activities (e.g., drug dealing), or attempting to conceal illegal activities

– Inadequate records

– Dealing in cash

– Failure to file returns, and

– Education and experience

Civil Code Section 6663 – Imposition of Fraud Penalty

Internal Revenue Code Section 6663 can be broken down as follows:

(a) Imposition of penalty

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.

(b) Determination of portion attributable to fraud

If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

(c) Special rule for joint returns

In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

Clear and Convincing Evidence

The IRS has summarized its take on Clear and Convincing Evidence as follows: “ evidence showing that the assertion made is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.”

FBAR Willfulness – Lower Standard of Proof

As we’ve written about recently in a blog post you can find here, in order for the IRS to prove FBAR willfulness penalties – which can be extreme and weigh higher than civil tax fraud penalties, the IRS only must show preponderance of the evidence.

The requirements to prove the preponderance of the evidence are significantly lower than the requirements to prove clear and convincing evidence. Therefore, if the IRS is able to show that you acted fraudulently with clear and convincing evidence, and they are using effective counsel, then chances are they will be able to make a play for willfulness penalties regarding any foreign accounts involved in any of the transactions involving the civil tax fraud.

FBAR Willful Penalties

FBAR Willful penalties can range as high as $100,000 or 50% of the Max balance of the account – whichever is higher. For individuals or businesses stuck in a multiyear audit in which the examiner believes a person acted willfully, chances are the IRS can issue a 100% penalty and a multiyear penalty computation.

**Previously, the IRS could issue 300% penalties according to 50% per year, for each of six years but this was reduced to 100%,

Were You Willful, or Acted with Reckless Disregard?

Here’s the deal: if you have unreported foreign accounts, along with having committed civil tax fraud and you believe that the IRS will be able to get to you – you are an incredibly tough spot. That is because the penalties can be extreme.

With that said, by entering the traditional OVDP ‘Program’ you may be able to limit the penalties. That is because under traditional OVDP, the IRS is limited to penalizing you 27.5% (or 50% if you’re in one of the identified that banks). But, in exchange the IRS will rarely if ever pursue a criminal investigation, audit or examination of the international related issues.

If you know you acted willfully or with reckless disregard, OVDP is your best (and only) option.

OVDP is Set to Terminate on September 28, 2018

The IRS Offshore Voluntary Disclosure Program is coming to an end, and set to terminate on September 28, 2018. Technically, that means you must have submitted your “Phase 1” documents before the September date (See FAQ 24).

What Happened to OVDP?

The IRS is taking the position that OVDP is just not as popular as it used to be. And that is probably true. That is because of a misconception (perpetuated by unethical attorneys and CPAs) that individuals think they can enter into the streamlined program even if they are willful because the chance of getting caught is relatively low.

In reality, the main behind the IRS terminating the OVDP Program is because there is a good chance the IRS already has your information, thanks to the more than 300,000 Foreign Financial Institutions already reporting your information to the IRS in accordance with FATCA.

In addition, the IRS has launched many new International Tax Enforcement Groups designed to identify, analyze, and uncover international tax related issues.

So, while the IRS is doing away with the OVDP, the chance of getting caught and penalized by the IRS has increased significantly.

Consider Your Options

Over the next six months, you have some decisions to make:

  • Do you want to enter the traditional program and still avoid any criminal liability?
  • Is it better to enter the program without a preclearance letter to make sure that you get into compliance before the time expires?
  • Has Your Foreign Bank Warned You that it intends on reporting to the IRS.
  • What are you prepared to do about it?

Use Experienced Counsel

It is very important to keep in mind that if you are willful, you cannot enter the streamlined program. If you do, and the IRS catches you, you’re going to be in a heap of trouble.

One of the main reasons is the following: if you are audited under the streamlined program and you were willful, you may not know how much information the IRS already has about you.

You will not have the full knowledge of whether any foreign financial institution has already reported you to the IRS. Technically, in legal jargon, it is referred to as a “Reverse Eggshell Audit.”

OVDP Attorneys

Experienced IRS Offshore Disclosure Representation by an OVDP Attorney is crucial for a successful offshore voluntary disclosure. OVDP Attorneys handle all aspects of:

  • FATCA 
  • FBAR 
  • PFIC Disclosure
  • Foreign Businesses Reporting
  • Foreign Partnership Reporting
  • OVDP Opt-Out

OVDP Attorney 

There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure. 

You will want to make sure you use an OVDP Attorney who has:

  • Litigation Experience
  • IRS Audit Experience
  • At Least 15-20 years of Attorney Experience
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.

Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.

Alternatively, once you are in OVDP, you may want to:

  • Make an MTM Election
  • Opt-Out
  • Argue a FAQ 55 Penalty Reduction

As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.

Ready to Hire an OVDP Attorney?

Once you are ready to hire an OVDP Attorney, it is very important to separate fact from fiction. Here is a recent article involving the different pitfalls, scams and sales pitches you need to watch out for: Attorney Fees for OVDP – Separating Fact From Fiction.

OVDP Attorney Fees – How Much?

If you receive an OVDP Fee Quote from a CPA or Attorney that seems too Low…you should be careful. Usually, it is because the Attorney or CPA does not have the necessary experience to even know what questions they should ask to properly vet out your case, or what the potential risks and hazards may be for you to have a successful submission.

That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”

They will provide artificially low fee quotes to bait you in, only to request more money down-the-line. Most of the these Attorneys do not have real experience, and do not understand the comprehensive nature of an OVDP.  Attorney’s Fees should be a “flat-fee” based on your specific facts and circumstances.

Golding & Golding, A PLC 

At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.

We Take OVDP Representation Very Seriously

We are passionate about representing individuals in offshore voluntary disclosure matters, and feel horrible when a client calls us after having hired an inexperienced Attorney or CPA who either did a sloppy job, charged them more money than they agreed upon, and/or is overall not providing the level of representation a person deserves.

Contact Us Today, We Can Help You!