Tax Audits with Criminal Exposure - Stay Aware | IRS Criminal Tax Audit (Golding & Golding)

Tax Audits with Criminal Exposure – Stay Aware | IRS Criminal Tax Audit (Golding & Golding)

Tax Audits with Criminal Exposure – Stay Aware | IRS Criminal Tax Audit

An IRS Eggshell Audit occurs in situations in which there may be some potential criminal liability.

One the one hand, you cannot make any affirmative misrepresentations or omissions to the IRS, but on the other hand you have the right against self-incrimination.

Moreover, you do not want to plead the 5th prematurely — and all but admit to the IRS in a Civil Examination that you committed a Criminal Tax Crime.

As you can see, the Eggshell Audit is a very tight line to walk.

Criminal Tax Audit Exposure

On the one hand, a person does not want to make any intentional misrepresentations or willful omissions during the audit our examination. If they do, it could result in the IRS agent closing down the audit and referring the matter to the IRS Special Agents for criminal prosecution.

On the other hand, the individual does not want to volunteer any unnecessary information to the auditor or examiner to put him or her on notice the taxpayer may have some underlying criminal liability.

This goes double in situations in which there offshore or foreign account reporting issue, which has two main problems:

– First, it is a current enforcement priority for the Internal Revenue Service to catch individuals who knowingly, willfully or recklessly have unreported and undisclosed money and accounts abroad.

– Second, are the sheer penalties that the IRS can issue (see below) against individuals who may have willfully, intentionally or recklessly failed to report foreign accounts, income, investments, etc.

If you have been audited, and you are aware that you have these potential criminal issues looming, it is crucial that you use a highly experienced international offshore attorney who has both litigation and criminal tax experience to represent you. The Attorney should be able to recognize potential landmines before you step to close to them, and work towards closing out the audit without provoking any additional questions and/or minimizing any damage.

Criminal Investigation vs. Criminal Prosecution

The difference between an Eggshell Audit, Criminal Investigation and Criminal Prosecution is the stage of the examination. Thus, even though the IRS may only recommend a few thousand cases for prosecution, there are numerous audits/eggshell audits in which a person who has offshore or foreign assets are at great risk for significant fines and penalties (see below)

At Golding & Golding, our primary focus is on international tax law. It goes by many different names, such as offshore disclosure, foreign income reporting, income from abroad, overseas income or assets, etc. While we also represent individuals with domestic related issues, it is only in situations in which the primary cause is offshore non-reporting, with additional domestic disclosure issues tacked on.

Criminal Tax Defense Lawyers

Criminal Tax Defense Lawyers represent clients who have committed Criminal Tax Crimes. While Criminal Tax Investigations by the IRS are not common, they are more common than people think.

That is because oftentimes the IRS Agent will recognize an Indicator of Fraud, and it is Criminal Tax Defense Lawyer’s job to diffuse the situation…quickly.

In fact, while there are only a few thousand prosecutions each year, there are hundreds of thousands of individuals if not more they get stuck in the IRS matrix and could possibly be facing a criminal investigation.

International Tax Evasion and Fraud

To better understand tax evasion and r tax fraud, it is important to put it into perspective. Not everybody with unreported foreign income, assets or investments has committed a crime. One of the most important key aspects of determining whether somebody is fraudulent or committed tax evasion is to determine why they did not report the money, income, assets, etc.

The IRS typically has the burden of proof “to prove” a person was fraudulent or that the person committed tax evasion. It is not as simple as an agent does not like you and determines, “you know what I’m going to pursue tax fraud charges against Joe or Jane.” There must be evidence, and the IRS must prove with that evidence that a person knowingly, or with intent or reckless disregard failed to include income or other assets on their tax return.

How does the IRS Pursue Offshore Criminal Tax Charges?

Unless somebody “sold you out,” or you out or you are at the receiving end of a whistleblower case, the IRS does not typically initiate a criminal tax evasion or fraud claim from the beginning. It typically starts as a typical IRS Audit involving omitted foreign income.

The typical scenario go something like this: David has unreported income of roughly $250,000 a year from a business he owns in a foreign country. David is aware he is supposed to report this might, but chose not to. To avoid detection, David prepares his own taxes. Unfortunately, David over embellished his expenses on his US income and now he is being taken to task and audited by the IRS.

David Appears at the Audit

When David appears at the audit, he does so with an attorney. But, against his attorneys wishes, David refuses to turn down the swagger. He walks in knowing more than everybody else, and not concerned about the auditor.

The auditor begins asking David questions, like if David is only reporting $300,000 a year in income — how does he live in a $3,000,000  house? The IRS agent is also interested in the fact that David has multi-million dollars spread across multiple accounts.

When David is unable to provide a significant response, the IRS agent asked David whether he has any other income that has not been reported. What David doesn’t know, is that the IRS agent is already aware of wire transfers that if, through from overseas.

How does the IRS agent know this? Because as a result of some routine FATCA reporting, David’s accounts were reported by the Foreign Financial Institution. Since David is a US citizen, with a Social Security number that he used to open the foreign account — the bank automatically reported him (David thought he would have received a FATCA Letter first).

Indicators of Fraud

Even before David sat down at the audit, the IRS agent was investigating what is referred to as Badges of Fraud. It’s a fancy way of saying “What in David’s history or background will show me that he has acted fraudulently or willfully”

The following is a list of the Indicators of Fraud as provided by the IRS:

Listed below are categories of fraud indicators. Each category list is not intended to be all-inclusive, instead citing examples of actions taxpayers may take to deceive or defraud.

Indicators of Fraud—Income

  1. Omitting specific items where similar items are included.
  2. Omitting entire sources of income.
  3. Failing to report or explain substantial amounts of income identified as received.
  4. Inability to explain substantial increases in net worth, especially over a period of years.
  5. Substantial personal expenditures exceeding reported resources.
  6. Inability to explain sources of bank deposits substantially exceeding reported income.
  7. Concealing bank accounts, brokerage accounts, and other property.
  8. Inadequately explaining dealings in large sums of currency, or the unexplained expenditure of currency.
  9. Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.
  10. Failing to deposit receipts in a business account, contrary to established practices.
  11. Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.
  12. Cashing checks, representing income, at check cashing services and at banks where the taxpayer does not maintain an account.
  13. Concealing sources of receipts by false description of the source(s) of disclosed income, and/or nontaxable receipts.

Indicators of Fraud—Expenses or Deductions

  1. Claiming fictitious or substantially overstated deductions.
  2. Claiming substantial business expense deductions for personal expenditures.
  3. Claiming dependency exemptions for nonexistent, deceased, or self-supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.
  4. Disguising trust fund loans as expenses or deductions.

Indicators of Fraud—Books and Records

  1. Multiple sets of books or no records.
  2. Failure to keep adequate records, concealment of records, or refusal to make records available.
  3. False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices, false applications, false statements, or other false documents or applications.
  4. Invoices are irregularly numbered, unnumbered or altered.
  5. Checks made payable to third parties that are endorsed back to the taxpayer. Checks made payable to vendors and other business payees that are cashed by the taxpayer.
  6. Variances between treatment of questionable items as reflected on the tax return, and representations within the books.
  7. Intentional under- or over-footing of columns in journal or ledger.
  8. Amounts on tax return not in agreement with amounts in books.
  9. Amounts posted to ledger accounts not in agreement with source books or records.
  10. Journalizing questionable items out of correct account.
  11. Recording income items in suspense or asset accounts.
  12. False receipts to donors by exempt organizations.

Indicators of Fraud—Allocations of Income

  1. Distribution of profits to fictitious partners.
  2. Inclusion of income or deductions in the tax return of a related taxpayer, when tax rate differences are a factor.

Indicators of Fraud—Conduct of Taxpayer

  1. False statement about a material fact pertaining to the examination.
  2. Attempt to hinder or obstruct the examination. For example, failure to answer questions; repeated cancelled or rescheduled appointments; refusal to provide records; threatening potential witnesses, including the examiner; or assaulting the examiner.
  3. Failure to follow the advice of accountant, attorney or return preparer.
  4. Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.
  5. The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.
  6. Testimony of employees concerning irregular business practices by the taxpayer.
  7. Destruction of books and records, especially if just after examination was started.
  8. Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.
  9. Pattern of consistent failure over several years to report income fully.
  10. Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
  11. Payment of improper expenses by or for officials or trustees.
  12. Willful and intentional failure to execute pension plan amendments.
  13. Backdated applications and related documents.
  14. False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.
  15. Use of false social security numbers.
  16. Submission of false Form W-4.
  17. Submission of a false affidavit.
  18. Attempt to bribe the examiner.
  19. Submission of tax returns with false claims of withholding resulting in a substantial refund.
  20. Intentional submission of a bad check resulting in erroneous refunds and releases of liens.
  21. Submission of false Form W-7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.

Indicators of Fraud—Methods of Concealment

  1. Inadequacy of consideration.
  2. Insolvency of transferor.
  3. Asset ownership placed in other names.
  4. Transfer of all or nearly all of debtor’s property.
  5. Close relationship between parties to the transfer.
  6. Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
  7. Reservation of any interest in the property transferred.
  8. Transaction not in the usual course of business.
  9. Retention of possession or continued use of asset.
  10. Transactions surrounded by secrecy.
  11. False entries in books of transferor or transferee.
  12. Unusual disposition of the consideration received for the property.
  13. Use of secret bank accounts for income.
  14. Deposits into bank accounts under nominee names.
  15. Conduct of business transactions in false names.

As you can see, there are a lot of different factors the IRS refers to when deciding whether a person should be subject to Tax Fraud or Tax Evasion.

Why Does the IRS Care so Much?

When it comes to international tax, the Internal Revenue Service has made it an offshore enforcement priority. So much so, that not only are the penalties for willfulness and non-reporting reaching upwards of 100% value of the maximum balance of the account in a multiyear audit, but the IRS can asses criminal-sized penalties without meeting the requirement of criminal liability.

In other words, by limiting the penalties to monetary penalties, the IRS can essentially issue criminal-sized penalties for individuals but enforce them in a civil setting, with the benefit of having the IRS’s burden reduced to that of a civil case — even though the penalties are criminal.

David’s Criminal Tax Investigation Dilemma 

Once the IRS Agent realizes the extent of David’s lies – coupled with his overall arrogance – the IRS agent ceases the audit. David believes the audit is complete and that the IRS is none the wiser. Meanwhile, David’s counsel is not too sure but why argue with David —  he knows more than everybody else.

The IRS Special Agents

About four months later, David is returning home from the health club when he sees two cars parked near his house. Out on the driveway he sees four individuals dressed in suits waiting for David, holding a search warrant. 

Before David exits the car he does one smart thing, which is that he contacts his attorney. David exits the car and is greeted by the IRS special agents who want to speak with David.

David informs the IRS agents that he’s waiting for his attorney to arrive. At this point, David is now subject to a criminal investigation. While he’s not arrested, he is read his Miranda rights, and the agents are going to investigate and question him in great detail.

Avoided Criminal Investigations with IRS Offshore Disclosure

All the while, David could have avoided this even after he was out of compliance by getting into compliance through the IRS offshore voluntary disclosure program. Until David was audited/examined, he could have applied for OVDP, and brought himself current.

At this time, due to the amount that David owes, coupled by the overall attitude David displayed toward the IRS, chances are David is going to be subject to extensively high fines and penalties as provided below:


The reason why is so important is because the IRS has taken to issuing gargantuan penalties against individuals whose issues seem relatively minor (Read: is the world going to explode because Marty didn’t report his foreign account?)

When it comes to penalties, the IRS has extreme leeway. On the one hand, if a person can show reasonable cause then often times penalties will be waived. On the other hand, the IRS has the right to issue penalties which can reach 100% value of the foreign account in a multiyear audits scenario (noting, that up until recently the IRS issued 300% penalties for unreported FBARs, when a person was found to be willful).

The following is a summary of penalties as published by the IRS:


A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. 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.

Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. 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.

Form 3520

A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. 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.

Form 3520-A

A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). 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.

Form 5471

A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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.

Form 5472

A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. 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.

Form 926

A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. 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.

Form 8865

A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. 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.

Underpayment & Fraud Penalties

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.

Even Criminal Charges are Possible…

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 is subject to a prison term of up to five years and a fine of up to $250,000. 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.

Golding & Golding, A PLC

We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.