Manafort & Gates FBAR Fraud – Could OVDP Have Changed the Outcome?
The same way Al Capone got did in by taxes, is the same way taxes and FBAR related activities may bring down several high-ranking members of the U.S. government (current and former).
FBAR Fraud Crime
Even though there are numerous allegations being alleged against Messrs. Manafort and Gates, we are going to focus on one specific allegation, which is the primary area of law we focus on at our firm – IRS Offshore Voluntary Disclosure, which also includes FBAR & FATCA.
Summary of FBAR Allegations
As you can imagine, government complaints are technical and boring. Therefore, we are going to do our best to summarize each paragraph of the FBAR allegation in order to bring you a better understanding of what the government alleges as to these two individuals — and what the penalties may possibly entail.
**Links in this article to prior articles we have previously authored on the related topic.
U.S. Citizens with Authority over Foreign Bank Accounts
U.S. Citizens (as well as Legal Permanent Residents and Non-Legal Permanent Residents who meet the Substantial Presence Test) have a responsibility to update the U.S. government regarding certain foreign accounts that they may have.
A few things to keep in mind is that U.S. Citizen also includes U.S Persons, and the term “Accounts” is far more detailed than just bank accounts. It may include investment accounts, pensions, mutual funds, etc.
When a person has an annual aggregate total of more than $10,000 over foreign accounts (either as the owner, joint owner, or signatory) they are required to file the FBAR annually online (electronically) – detailing all of the requisite foreign account information.
It does not matter if the money is one account with $500,000, or eight accounts with $1,500 each – once the $10,000 threshold is exceeded, all accounts must be reported.
What is the Purpose of the FBAR?
While most individuals would tell you that the main purpose of the FBAR is as a ways and means for the IRS and U.S. government as a whole to hassle people, the technical rationale for having to file the form is: “The [FBAR] reports filed by individuals and businesses are used by law enforcement to identify, detect, and deter money laundering that furthers criminal enterprise activity, tax evasion, and other unlawful activities.”
Obligated to report information to the IRS (Schedule B)
Schedule B is a relatively common schedule that is filed along with a 1040 tax return.
There are two main purpose is to the form:
-The first purpose is when a person has more than $1,500 in interest or dividends (but no foreign account authority). When a person has less than $1,500 they are not required to identify each specific institution or the amount of the interest/dividend from each institution. But, once a person exceeds the threshold, they are required to parse the total aggregate into an itemized list, detailing the institution, the amount of the passive income, and whether it was interest or dividend.
– The second situation is when a person has ownership or signature authority over foreign accounts during the tax year. It does not matter if the person has ownership of the funds, or mere signature authority — they still must file Schedule B. This is true, even if the person does not have any interest or dividends from U.S. or Foreign Sources.
No FBARs were Filed
Neither Defendant in this indictment filed the FBAR detailing the amount of money they had overseas. Based on the fact that it appears they each had several million dollars abroad, each defendant would have been required to file his own separate FBAR Report for each year his annual aggregate total in the accounts exceeded $10,000.
Schedule B (Foreign Account Ownership) was Misrepresented
In addition, Manafort specifically marked off “No” on schedule B, which asked him whether the person filing the return had any ownership or signature authority over any foreign accounts abroad.
Manafort’s Tax Preparer Asked Him Directly
As you may find from several other blog postings we have prepared, question seven and willfulness are two very important issues when it involves international tax crimes. Sometimes these issues will hinge on whether the Tax Preparer/CPA ever asked the client whether he had or she had foreign Accounts.
Once a person is asked whether they had foreign accounts (especially if asked in writing) and say no, chances are they are going to be found willful (aka criminal). We recently posted a comprehensive article on this very same issue due to the fact that there are many inexperienced offshore disclosure attorneys wrongfully recommending their clients to enter Streamlined instead of OVDP, even if they marked no on a questionnaire from their accountant CPA – because the attorneys are trying to make a quick buck.
As you can see, there is not much wiggle room when a person asks whether you had foreign accounts in a language you understand, and you answer…no.
As a result of these apparent intentional misrepresentations on the part of defendants, the government is bringing a criminal indictment against them. The penalties against a person who is found willful of these crimes can range upwards to several years in prison as, well as a complete forfeiture of the foreign money. The penalties are less severe when someone is found to be non-willful.
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.
OVDP May have Changed Manafort’s Outcome
Presuming the money was legally sourced, Manafort may have warded off any potential criminal charges by entering the traditional OVDP (Offshore Voluntary Disclosure Program) and significantly reduced any fines and penalties – and almost completely avoid a criminal investigation.
OVDP is Ending
OVDP ends on September 28, 2018, but the last day to submit an OVDP Preclearance Letter is August 24, 2018 (this Friday).
There is currently no substitute OVDP ‘program’ being put into place following the termination of OVDP.
Use Experienced Counsel
This is not the time to risk your future and freedom.
We Specialize in OVDP
We have successfully handled a diverse range of OVDP cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Go OVDP
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
Offshore does not mean you should be conjuring up visions of resting easy in the Bahamas, or stashing millions in the Caymans. Essentially, from an international IRS tax perspective, it simply means you have money overseas. Whether the money is in a foreign account, overseas, or abroad — it is being held “offshore.”
Therefore, in order to qualify for OVDP you must have unreported assets, income or investments abroad. If you do have offshore assets, income or investments, then you can report them with OVDP — and you can include domestic undisclosed money as well.
But, it is important to keep in mind that you do not get the same protection for your domestic undisclosed money that you receive for your offshore undisclosed money. Moreover, if you do not have any undisclosed offshore money, and all of your unreported money is domestic (located in the United States), you can submit to the IRS Domestic Voluntary Disclosure Program, but not OVDP.
Unfortunately, the IRS Domestic Voluntary Disclosure Program does not provide the same protections and reduced penalty structure as the Offshore Voluntary Disclosure Program.
Voluntary means you are entering the program on your own volition.
Usually, it means that you are not under audit or under examination with the IRS. That is because if you are already under IRS audit or examination and then submit to the program, you are not technically doing so voluntarily. Rather, you are entering the program in response to being audited or examined.
The reason the IRS does not allow you to enter OVDP once you are under audit is because you have a proactive responsibility during an audit or examination to bring these issues to the forefront and explain them to the auditor — even if the auditor did not ask about offshore accounts specifically – but assuming he or she asks about additional income, assets, etc.
When you are under audit or examination you can be subject to excessively high fines and penalties which are mitigated through traditional OVDP. The IRS will not let you out of those penalties (if you are audited) by submitting to OVDP at that time.
By disclosure, the IRS is referring to full disclosure. If you want to voluntarily disclose offshore money, then you have to do a full disclosure and report all of the information you have regarding all of your offshore money abroad.
It does not matter if the money was held in an account within a branch or institution that went out of business. It also does not matter that your money is being held in an anonymous account that you firmly and wholeheartedly believe can never be discovered.
Rather, from the IRS’ perspective, when it is time to disclose – you must perform a full disclosure and report all of the information — no matter how low the chances that the IRS could ever discover the information, account information, investments or income otherwise.
OVDP is an approved IRS program. There are specific time requirements and reporting disclosures that must be done according to OVDP milestones. If you fail to meet these milestones timely, the IRS can remove you from the program, which now means the IRS has at least some specific information regarding your offshore finances, and can now enforce incredibly high fines and penalties against you.
Worse yet, you no longer have the protection of OVDP.
How Does an OVDP Case Work?
OVDP Phase 1
The person submits a preclearance letter. It typically takes the IRS 30 to 45 days to respond to the letter. After around 45 day you will learn whether you have been accepted or rejected into OVDP. Despite what some inexperienced attorneys will tell you online, not everyone gets accepted. And if an attorney has told you that everyone always gets accepted, than they have not been practicing in this area of law long enough – especially with the introduction of FATCA.
OVDP Phase 2
The applicant has 45 days to submit the initial disclosure to the IRS. It is a relatively detailed breakdown of the different accounts, transfers, opening and closing of the accounts, and related information. It is not as detailed as preparing and submitting IRS forms and schedules such as general FATCA Reporting, FBAR, 3520, 5471, 8621, 8865, 8938 — but it is still relatively comprehensive, and more detailed than it had been in years past, especially pre-FATCA.
OVDP Phase 3
Presuming that the applicant is accepted, the applicant then has 90 days to submit the full disclosure, including all necessary FBARs, schedules, penalty competitions, legal arguments for mitigation of penalties, etc. Depending on the specific facts and circumstances of your case (numerous PFICs, Foreign Mutual Funds, ETFs, etc.), it may take longer for you to compile the information or prepare the necessary documents. The IRS routinely grants extensions to file.
We know…it seems nuts to acquiesce to the IRS before they have even found you, audited you, or examined you — and allow the IRS to issue penalties against. You may instead also consider submitting an IRS Quiet Disclosure in hopes that you can fly below the radar without getting caught.
Quiet Disclosure is a horrible idea, and here’s why:
First, a quiet disclosure may lead you to jail or prison. For a comprehensive case study on how IRS required disclosure of offshore money can go wrong, please refer to our prior blog page on Quiet Disclosure, Criminal Investigations & Prison.
Second, if the IRS audits or examines you before you enter the program, you may be subject to incredibly high fines and penalties, which are detailed below:
The reason why it is so important to disclose before the IRS finds you, 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 multi-year audit scenario (noting, that up until recently the IRS issued 300% penalties for unreported FBARs, when a person was found to be willful and penalized at 50% within the 6-year SOL).
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.
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.
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.
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.
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.
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.
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.
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.
Who Do We Represent?
While each fact pattern and set of circumstances are different and unique, there are many types of individuals who fall into different categories of individuals who we represent often for OVDP.
Some of the more common examples include:
- Individuals who knowingly did not report their foreign accounts;
- Individuals who did not tell their CPA about their foreign accounts;
- Individuals or businesses that stash income overseas;
- Individuals who knowingly did not file a requisite FBAR or 8938; or
- Individuals or Foreign Businesses that are otherwise out of compliance
Golding & Golding – Experienced OVDP Attorneys
There is a lot of mis-information and fear mongering online regarding offshore disclosure. There are also several “newbie attorneys” who do not have any real experience with offshore disclosure, and simply regurgitate information they find on the IRS website, claim it as their own — and try to sell clients with artificially reduced fees when they have no real experience.
We know this because many OVDP clients have come to us after having a horrible experience with one of these other Attorneys.