How IRS Uncovers Overseas Tax & Account Violations: We explain how the IRS uncovers overseas tax and account violations, with a case study example. In recent years, the Internal Revenue Service has made foreign accounts compliance and unreported foreign income key enforcement priorities. With the introduction of FATCA reporting for Individuals and other tax filers, along with renewed interest in FBAR — the IRS has many tools at its disposal. And, just be cause a person resides overseas does not make them safe or immune from the long-arm of the IRS and offshore penalties.
How IRS Uncovers Overseas Tax & Account Violations
The following is a case study example (we find using examples is the best way to learn) of how an individual would get caught by the IRS and possibly subject to very high fines and penalties…and even criminal prosecution for failure to file U.S. taxes and report foreign accounts.
Case Study Example – Pamela
Pamela is a U.S. Citizen, originally from the United States but relocated to Asia many years ago. While Pamela resided in the United States she always filed her U.S. tax returns timely, and paid any any tax liability as required. About 20 years ago Pamela received the offer of a lifetime to work overseas as a journalist.
Over time, Pamela developed an exceptional reputation for her writing skills, and began earning significant income as the lead editor of an international newspaper. In addition, Pamela operates a restaurant alongside her foreign national husband; together Pamela earns upwards of $400,000 per year after taxes.
Pamela Pays Foreign Tax Overseas
Pamela has multiple residences, with the majority of her residence being split between Singapore and Hong Kong. As such, Pamela and her husband file the appropriate taxes necessary in each country they earn income; neither Pamela nor her husband earn any money in the United States.
Nevertheless, Pamela knows that she is required to file US taxes. Her father is a CPA and admonished her that if she does not file the requisite tax documents each year, she could be facing serious consequences. Pamela never worried about US tax consequences, because she has no intent of ever returning to the United States — aside from visiting her parents.
Pamela has a U.S. based CPA Overseas
When Pamela first arrived overseas, she only spoke English. As such, she initially retained an English-speaking CPA who is also an ex-pat originally from Washington state. Pamela and her CPA have been working together for the better of 20 years. The CPA Is aware that Pamela is a U.S. person with a U.S. tax reporting requirement. Nevertheless, the CPA helps Pamela forge documentation early on in their relationship with both the local banks/financial institutions and the tax authority –so that neither of them are aware of Pamela’s U.S. status.
At this time, in 2016, Pamela has a net worth of upwards of $3 million in foreign accounts, along with millions of dollars of assets, including a foreign business, foreign real estate, and antiques.
FATCA is the Foreign Account Tax Compliance Act. It was written into law back in 2010 and began being enforced in 2014. In accordance with FATCA ,more than 100 foreign countries and tens of thousands of foreign financial institutions/foreign banks are actively reporting US taxpayer information to the IRS.
Pamela’s CPA becomes aware of this law in 2014. She explains to Pamela that there’s going to be in heightened scrutiny regarding unreported for accounts, but she still believes Pamela can fly below the radar, and not worry about reporting these accounts to the US authorities and/or filing US tax returns.
In fact, Pamela’s CPA gives the same advice to all of her clients…along with an increase in her fees to prepare tax returns. Pamela does not file any requisite U.S. Tax Returns, FBARs, 5471s, etc. to report her income and accounts to the U.S.
Foreign Banks Begin Reporting to the IRS
Pamela has her foreign accounts in five different financial institutions. Unfortunately for Pamela, two of these institutions are reporting information to the IRS. While they do not have Pamela’s Social Security number they do have families maiden name.
Moreover, what Pamela and her CPA failed to recognize was that as part of the bank account application they completed many years ago, it asked when the individual first arrived in the country of residence – and Pamela mentioned it was 1990. Since Pamela’s birthday shows a birthday of 1957, the bank was aware that Pamela is not originally from Hong Kong (where the majority of the money sits).
The bank also took note that Pamela speaks fluent English and when she opened the account, she did not speak any other languages – with the CPA doing most of the “talking.” As such, the bank presumes Pamela is from the United States and therefore sends the information regarding Pamela to the IRS and U.S. government.
Pamela’s CPA Gets Caught
Unfortunately, one of the CPA’s clients gets caught in a tax situation, which resulted in the U.S. Department of Justice filing charges against him. This occurred when the client was trying to relocate from Singapore back to the United States — only to get intercepted by the special agents at the airport, subject to a customs hold – and later indicted for criminal tax fraud and tax evasion.
In order to save himself from doing 20 years in a federal penitentiary, the client quickly rolled over on the CPA and explained how the CPA goes about facilitating compliance for US ex-pats and non-citizens otherwise subject to U.S. tax, by opening accounts under false names and/or using false local businesses or fake identification numbers.
The CPA is Indicted
The CPA gets into trouble with local law, and is arrested in South Korea while she is on vacation from the Philippines. The CPAs files are taken and turned over to the United States, so that the United States can analyze the files to determine if any U.S. Citizens, Legal Permanent Residents, or anybody else subject to US tax has been working with the CPA.
Unfortunately for Pamela, her name pops up and as a US citizen who is not filed a tax return in more than 20 years. The United States sends a document/information request to the various foreign institutions that Pamela banks with.
Pamela is Indicted by a Grand Jury
United States Department of Justice has enough information to charge Pamela with tax fraud and tax evasion. It is not lost upon the IRS that Pamela’s father was a CPA, and therefore presumes he must have at least told her about the international reporting and tax requirements.
Pamela is Detained at the Bank
At this time, Pamela was unaware that there was any investigation, or that anything was wrong. Pamela does not communicate much with her CPA until it is time to file local taxes, and therefore was unaware that the CPA had been arrested.
When Pamela goes to her local bank to deposit the income earned from the restaurant for the week, she is arrested and detained. Thereafter, Pamela becomes aware of the indictment and is sent back to the United States to face her crime.
Never filed a U.S. Tax Return or FBAR?
If so, you are not alone; we have represented hundreds of individuals with International Tax problems, who are in the same situation as you. While you may be scared and feeling alone, there is help. Although the above-referenced case study is an example of how noncompliance can turn criminal, there are several situations in which you may be able to remedy the situation before any serious repercussions occur.
Golding & Golding (Board-Certified Tax Law Specialist)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
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- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
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