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.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.