Offshore Tax Fraud – Reduce Your Chances of an IRS Criminal Investigation
Offshore Tax Fraud
Offshore Tax Fraud is the process of knowingly or willfully (including reckless disregard) illegal reducing your tax liability by not reporting your offshore or foreign income, or falsifying deductions and expenses.
IRS Definition of Offshore
When people think of offshore, their mind immediately takes them to a beach in the Cayman Islands or a Villa in the Bahamas, but this is not accurate (at least from the IRS’ perspective)
When the IRS speaks of the term offshore, they are essentially referring to any country that is outside of the United States (aka Foreign, Overseas, Abroad, etc.)
The IRS estimates that it loses several billions dollars annually as a result of people who have hidden or otherwise not reported money their foreign money, and the IRS has made the collection of these monies and prosecution of these individuals and businesses and enforcement priority.
What Was Your Intent?
One of the most important aspects of determining whether a person is guilty of tax evasion or fraud is the intent of the individual. It is very important that you understand that there must be some intent or Mens Rea (absent willful blindness or reckless disregard) to commit a crime such as, offshore tax fraud or tax evasion.
Unfortunately, depending on which website you land on in your quest to understand international tax law, you may draw the incorrect conclusion that you are guilty of some sort of tax crime solely because you have unreported foreign money.
Examples of Unreported Tax and Income
We typically prefer to provide examples in our writing to give you a better factual understanding of more complex issues, such as this. For example:
– David just moved to the United States a few years ago. Before moving here, he had several accounts in his home country of Hong Kong, which he did not know he was supposed to report in the United States. While David could be subject to certain penalties (and they might be unnecessarily high), it does not mean David is guilty of any crime.
– Michelle opened a few foreign life insurance policies in case of an emergency, because her parents still live in the UK. The life insurance policy has an investment component to it, but Michelle had no idea, and was also completely unaware that she is required to report the information to the IRS. Like David, Michelle may be subject to significant penalties, but would presumably not be subject to a criminal investigation.
– Finally, Peter worked in Australia for many years and was a Highly Compensated Employee (“HCE”). His Australian Superannuation Fund is worth a few million dollars, but Peter neither reported the account nor contributions — as well as did not book the increase in value as income. Peter could get hit with significant penalties and fines — but presumably nothing criminal.
Don’t Try to Fool Yourself…
On one side of the coin, there are the individuals who are very risk-averse and would never do anything to put themselves in harms way. For these individuals, the moment they read about IRS international tax penalties, they are convinced they will be heading to prison – even though nothing could be further from the truth.
On the other side of the coin, are the individuals who like to walk the line — as well as those who cross over that line into criminal territory — because they feel bulletproof. But fast-forward to 2017 and the enforcement priority by the IRS to find individuals and penalize them extensively under FBAR, FATCA, and other bothersome acronyms — and suddenly the chances of getting caught increase exponentially.
Since many of these types of individuals are risk takers, they may believe they could sneak by the IRS by entering the Streamlined Program (even though they are willful) or even riskier (and illegal) by submitting a Quiet Disclosure.
Why you should not presume you are necessarily going to prison, you should not underestimate the IRS either. The reality is, while they are overworked and understaffed — if you are one of the unlucky ones that gets stuck in their crosshairs, you could be subject to 100% penalty and seizure of both your domestic and foreign accounts. Moreover, if the matters is referred to the Criminal Investigation Department (CID, Special Agents) or Department of Justice (DOJ) you could find yourself potentially sitting in a prison cell for tax fraud or tax evasion.
Foreign Banks are Reporting
These days, with more than 100 countries and tens of thousands of foreign financial institutions entering into intergovernmental agreements (IGAs) with the United States for the enforcement and reporting of US account holders, it is a much riskier move to try to hide your money offshore.
Even using cash alternatives such as Bitcoin is no longer fail-safe. All one would have to do is see what happens to silk Road which thought it was full and operated on the underbelly of the Internet, to realize that even if you have Bitcoin, if the IRS wants to find it, they’ll find it.
Aside from the banks that are enforcing FATCA and proactively reporting your information the Internal Revenue Service, there’s also the issue of whistleblowers. These are individuals who approach the Internal Revenue Service with information about your accounts – you may know the name of the Whistleblower (Upset Business Partner, Scorned-Ex) or you many not.
For example, if a bank employee at your Swiss Bank in which you maintain a number account decides that he or she wants to try to make some money from the IRS, the person may report all the account information of all individuals who were considered US account holders, to the IRS – aka “blow the whistle on the Account Holders”
It would be unfortunate to get hit with such high fines and penalties due to a third-party you probably never met.
How to Avoid a Criminal Investigation with OVDP
While it may be a hard pill to swallow for many, one of the best alternatives for avoiding a criminal investigation by the IRS to proactively enter the IRS Offshore Voluntary Disclosure Program (aka OVDP). If you are willful, willfully blind, or acted with reckless disregard, you should submit to the traditional OVDP.
If you try to submit to the more lenient program or reasonable cause statement, and the IRS catches you, you will be in deep trouble. The IRS is made known that for individuals who were willful, they will pursue full penalties allowable to the extent of the law, including criminal enforcement.
Want to learn more about Offshore Voluntary Disclosure?
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
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