Navigating a Criminal Offshore Tax Exam, Audit or Investigation

Navigating Criminal International Tax Pitfalls

Navigating Criminal International Tax Pitfalls

When U.S. taxpayers fail to comply with their international tax and reporting requirements, they may become subject to IRS civil fines and penalties. However, these penalties can be avoided or minimized by submitting to one of the offshore disclosure amnesty programs. However, sometimes when a taxpayer commits a tax violation, it may become a criminal issue — although this is not common since most violations are civil in nature and not criminal. Still, for taxpayers who are out of compliance and trying to navigate the IRS penalty maze, there are different options to consider for getting into compliance. For taxpayers who may be at risk of an international criminal tax investigation, it is important to understand some of the pitfalls and landmines.

Let’s take a look —

Is the Tax Violation Willful or Non-Willful

The first, most important issue to determine is whether the international tax violation is willful or non-willful. Most of the time, the violation will be non-willful, which means the taxpayer would not be at risk of a criminal investigation. That is because a non-willful violation cannot lead to a criminal investigation. Thus, the IRS must determine that it believes the taxpayer acted willfully or with intent/willful blindness before launching a criminal investigation.

Criminal Willful or Civil Willful

Criminally willfulness is not the same as civil willfulness. In the latter situation, the taxpayer may have acted with reckless disregard or willful blindness, but not behavior sufficient to be considered a willful criminal violation. Ultimately, for the IRS to successfully prosecute a taxpayer for a criminal tax violation, the IRS must prove beyond a reasonable doubt, usually to a jury of their peers, that the taxpayer acted with criminal willful intent.

Stated another way, just because the taxpayer violates a civil willful statute does not mean they are automatically subject to a criminal investigation on the same matter.

Foreign Income Tax Fraud

Tax fraud for unreported foreign income is one of the most common types of international criminal violations that U.S. taxpayers can become subject to. A tax fraud violation comes in all shapes and sizes, and unlike tax evasion, it does not require the filing of a false tax return (not all tax evasion violations require the filing of a false tax return either, but it is the most common form of tax evasion).

For example, if a taxpayer knowingly fails to file a U.S. return because they do not want to report their foreign income, that is a type of international tax fraud. Likewise, if the taxpayer intentionally transfers assets offshore to avoid detection by the IRS, that could be considered an international type of tax fraud as well.

Intentionally Unreported Foreign Assets

When a taxpayer fails to report foreign assets and accounts on forms such as the FBAR or Form 8938, it can become a criminal willful violation depending on the specific facts and circumstances.

For example, if a taxpayer is aware that they are supposed to file their foreign accounts and the taxpayer knows that they have a significant number of foreign accounts, so they transfer the accounts to third parties or to nominee corporations and do not file the FBAR form because they are trying to hide that information from the IRS, that could be considered a criminal type of violation.

Avoid Making an Intentional Quiet Disclosure

One situation that has become more common in recent years is the ‘quiet disclosure.’ With a quiet disclosure, the taxpayer intentionally fails to go back and properly fix their prior tax and reporting issues before filing in the current year. For taxpayers who knowingly commit a quiet disclosure with the intent of avoiding a fine or penalty, there is the potential situation in which the IRS would consider this to be a criminal willful violation.

Alternatively, if the taxpayer filed an unintentional required disclosure because they were simply unaware that they were required to go back and fix the prior year reporting before filing in the current year, then generally that is more of a mistake and not going to be considered a willful criminal violation — and this can be fixed.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.