Oftentimes, even the most intricate crimes fall apart because of relatively small issues. In this case, Mr. Manafort specifically has three major strikes against him.

– He told his CPA directly that he did not have foreign accounts.

– He marked “No” on Schedule B regarding ownership or signature authority over foreign bank accounts.

– He never filed an FBAR.

Manafort Used a CPA

One of the biggest hurdles Mr. Manafort will have to overcome when it comes to willfulness (an element required for Criminal Tax Liability) is the fact that he had a CPA prepare his taxes and this CPA issued him a Questionnaire, asking him to complete the necessary information so they can complete his tax return.

These questions are not confusing. The questionnaire will ask you (normally multiple different ways and in simple terms) whether you have foreign accounts, accounts in other countries earning income, and/or any other type of investments from abroad (these questionnaires typically steer clear of the term “offshore” since it connotes someone sipping margaritas in the Bahamas and not the reality of foreign account reporting). 

If this person proactively answered “No” in writing for all of these questions, this sets up a very difficult case to defend a claim of willfulness.

Manafort Misrepresented His Accounts on 1040 Schedule B

Schedule B is a relatively common schedule that is filed along with a 1040 tax return.

There are two main purposes for filing this form:

Manafort - Unreported Foreign Accounts, Schedule B & Willfulness by Golding & Golding

Manafort – Unreported Foreign Accounts, Schedule B & Willfulness by Golding & Golding

-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.

Manafort Never Filed the Annual FBAR

In fact, 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.

Was Manafort Willful?

Despite the fact that the IRS can levy obscene-level penalties against you, it is also good to know that the IRS has not established a set, bright-line rule (clearly defined test) that you can use to determine whether you are willful or non-willful.

There are not as many cases as you would think that have referenced Willful/Non-Willful with respect to FBARs, but there are some guidelines to keep in mind:

Willful does NOT mean Intent or Knowledge

In other words, in order for the IRS to prove willfulness, the IRS does not need to show that you knew you were required to file the FBAR. That would make it too difficult for the IRS. Therefore, the IRS has essentially lowered the threshold for themselves to prove Willfulness. This begs the question — what else qualifies as Willful?

Willfulness Can Mean Willful Blindness

What does Willful Blindness even mean? It means that if you knew that you should have known you were required to file an FBAR, then you could be held to a willful standard. 

Here is an example of Willful Blindness:

* Let’s say you were minding your own business and an individual walked up to you and told you they will give you $1 million if you drove their vehicle past a known DEA drug point. Without any question as to why they are offering to pay you this much money to essentially drive a car, you accept the offer and drive the vehicle up-to the checkpoint. Unfortunately, you are unlucky and the car is checked and the cops discover 200 pounds of uncut cocaine in the car. You could not argue that you did not know there were drugs in the car (no knowledge), because who pays another person $1,000,000 to drive their car past a drug checkpoint? In other words, you should’ve known there was something amiss… and by not asking, you are willfully blind.

Reckless Disregard

Unlike willful blindness, reckless disregard appears to be an even lower standard of willfulness. At least with willful blindness, you should’ve known to ask but you knowingly didn’t ask…because you didn’t want to know. With reckless disregard, according to the IRS, while you may have believed you didn’t have a filing requirement, your belief was so “stupid” that the IRS would never believe you are so stupid. Talk about a walking contradiction…

In a recent California District Court decision (which could still go up on appeal — U.S. vs. Bohanecs), the court relied upon the reckless disregard standard in making its decision – which can be found here. It is important to note that in Bohanecs, the facts reflected that the Bohanecs were pretty sophisticated…in addition to stupid.

**One very important thing to takeaway from the Bohanecs case, is not just that the threshold to prove willfulness does not require “actual knowledge,” but just as important is that even though willful FBAR penalties are essentially criminal in nature, since they are not being enforced in a criminal setting, the government was not required to meet the criminal standard of beyond a reasonable doubt.

In other words, if the IRS wants to issue you criminal level penalties in a civil setting, they do not have to reach the level or burden of proof required in a criminal setting — and the standard essentially boils down to someone being…stupid.

Put it this way: With the way the IRS is always increasing enforcement of international tax related matters, it is safe to say that if the IRS believes in any way, shape, or form that you knew, should’ve known, were intentionally blind-to-the-fact, or were just stupid to the fact that you should have been reporting the FBAR, you are probably in for a dogfight with the IRS — because they will presumably try to enforce willful penalties against you.

Criminal Tax Charges

As provided by the IRS, 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.

How to avoid a Criminal Investigation?

Even when a person is willful and acted intentionally in failing to report foreign accounts, there is a way out. There is a government program called OVDP, which is the Offshore Voluntary Disclosure Program. A person may qualify for OVDP as long as they submit to the program before they are contacted by the IRS.

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 fact from fiction.

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.

Preclearance Letter

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 preclearance 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.

Penalties

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 for example, if David’s highest year had $500,000 of unreported accounts and assets, then 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% penalty instead of 27.5%.

Therefore, continuing the example from above, if David had any money in one of these bad banks, then his penalty jumps to 50% which is $250,000. It should be noted that the IRS does not parse out the funds that are in that bad bank and only expose those to the heightened penalties – rather, the full amount of his unreported money (even those in “good” banks) 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 $4,000 in taxes that are due, as well as a 20% penalty on the $4,000, which is an $800 penalty. In addition, David also has to pay interest.

So if David has significant unreported income for each year of non-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:

In other words, for all intents and purposes — the matter is over.

Opt-Out

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 an opt-out should not be held negatively against taxpayer.

OVDP and IRS Offshore Voluntary Disclosure

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.