Quiet Disclosures are Illegal – Criminal Tax Investigation and Jail
- 1 Quiet Disclosure vs. Streamlined
- 2 Intentional Non-reporting and Non-Disclosure is Criminal
- 3 Case Study: Scott from Hong Kong
- 4 Tax Crime – Tax Evasion and Tax Fraud
- 5 Fast Forward to 2015 – FATCA Letter
- 6 Problem 1: Not going OVDP
- 7 Problem 2: Denying U.S. Citizenship to the Foreign Bank
- 8 Problem 3: The Foreign Bank Reports him to the IRS
- 9 Problem 4: Scott Performs a Quiet Disclosure
- 10 Problem 5: Scott is Audited by the IRS
- 11 Problem 6: Scott Lied to the IRS Agent
- 12 Problem 7: A Criminal Investigation is Launched
- 13 Problem 8: A Grand Jury Indicts Scott for Tax Fraud
- 14 Scott Could have Fixed this Problem
After weeks and weeks of Google searches, you have come to the sobering conclusion that you should have been disclosing your offshore/foreign accounts to the U.S. Government and paid U.S. tax on your foreign income (even though it was not subject to tax overseas)
You never filed an FBAR (Report of Foreign Bank and Financial Accounts) aka (FinCEN 114) and you have never reported your foreign interest, foreign dividends, or foreign capital gain on your U.S. tax return (FATCA Form 8938 and Schedule B).
Quiet Disclosure vs. Streamlined
After visiting numerous websites and speaking with different attorneys you decide that you think you know better. Against your better judgment, you convince yourself that you are going to submit a Quiet Disclosure.
A Quiet Disclosure/Silent Disclosure is when you “sneak amend” your prior tax returns to include previously unreported foreign accounts and foreign income. You also file FBARs for previous years without taking responsibility through an Offshore Voluntary Disclosure Program or Reasonable Cause Statement.
No matter what anybody tells you about the risks, and serious repercussions if you are caught (read: financial devastation and loss of freedom) committing these tax crimes, you are convinced that the IRS is not going to find you.
Presumably, you are making this decision because you are unfamiliar with the criminal process.
In other words:
- You have never been in trouble with the law;
- You have never been arrested;
- You have never had a search warrant executed at your residence;
- You have never been confronted by IRS Special Agents (aka Criminal Investigators);
- You never spent time in a Holding Cell;
- You have never been sentenced to, or spent time in jail or prison with real criminals.
Intentional Non-reporting and Non-Disclosure is Criminal
Once you learned that you were supposed to be filing certain reports with the US government, as well as reporting your accounts on your tax return, you have knowledge of the IRS and DOT reporting/disclosure requirements.
From here forward, if you make the fateful decision to quietly disclose your information to the US government, then you are intentionally avoiding paying taxes, interest, fines and penalties. Therefore, you have committed a crime.
If you believe your quiet disclosure cannot get you investigated, arrested, and prosecuted — you are mistaken. The following is a case study of how one individual’s failure to report their foreign accounts went from IRS Audit to Search Warrant… and ultimately to arrest and prosecution.
Case Study: Scott from Hong Kong
Scott is citizen of the United States and China, and previously had permanent residency in Hong Kong. Scott works in investment banking and did a stint in Hong Kong for a few years. During his time in Hong Kong, Scott had opened up local bank accounts, which is perfectly normal as Scott was residing in Hong Kong.
Scott relocated back to the United States but never closed his foreign accounts in Hong Kong. The reason why is because after Scott learned he could earn significant interest income from this account (4% – 8% ROI), which not taxed by the Hong Kong government, Scott padded his accounts – upwards of $2M.
Scott is using the interest to purchase multiple rental properties both abroad and in the United States. It should be noted that Scott opened the account way before FATCA (foreign account tax compliance act) was put into law. Therefore, Scott was never worried about the foreign government reporting his account information to the United States.
Tax Crime – Tax Evasion and Tax Fraud
Since Scott earned significant money offshore that he has intentionally and knowingly failed to report on his tax return, he has committed textbook Tax Evasion and Tax Fraud. Moreover, since he is “cleaning” the money, if the Feds got creative, he could also be looking at Money Laundering charges as well.
Fast Forward to 2015 – FATCA Letter
Scott received a FATCA Letter from his foreign bank requesting that he certify his U.S. status. In other words, they wanted him to submit either a W-9 or W-8 BEN. When Scott opened the foreign accounts, he did so using his Chinese citizenship. As such, the Hong Kong Bank did not actually know Scott was a U.S. Citizen. Rather, the Bank sent him this certification form solely because he had a U.S. address.
Scott had done some research on FATCA and realized that several foreign countries and thousands upon thousands of foreign financial institutions would be reporting account holder information to the United States. Up until this point, Scott had not done anything necessarily wrong overseas. The mere fact that he had given the foreign bank his Chinese citizenship is not a lie (although failing to report the earnings on the U.S. Return was a lie.) It’s what he does next which is the catalyst for his future problems with the US government.
Problem 1: Not going OVDP
Scott was clearly willful in his failure to report foreign accounts and foreign income to the U.S. Government. Since Scott had not yet been contacted by the IRS (e.g., he was not under examination) he is eligible to submit to OVDP (Offshore Voluntary Disclosure Program). In accordance with OVDP, Scott would amend his returns, pay a penalty – but almost always would avoid criminal charges without the U.S. Government initiating a criminal investigation.
Problem 2: Denying U.S. Citizenship to the Foreign Bank
In response to the FATCA Letter, Scott decides he is not going to disclose his U.S. Citizenship Status to the Foreign Bank. Rather, he represents to the foreign bank that he is not a US citizen. Scott believes if he is caught by the United States he will simply hop on a plane and travel overseas using his Chinese passport, but does not realize that the US can issue customs holds on US citizens and Permanent Residents to prevent them from traveling internationally.
Problem 3: The Foreign Bank Reports him to the IRS
When the Hong Kong bank is reconciling their accounts, they realize that they actually have a U.S. Social Security number for Scott. Scott did not realize but at some point during his relationship with the bank, he considered purchasing a home in Hong Kong and was also considering taking a loan from the bank. This is more than 10 years ago, but at that time he provided his US information to the foreign bank.
The foreign bank reports the information to the IRS.
Problem 4: Scott Performs a Quiet Disclosure
Before Scott is contacted by the U.S. government, he believes the foreign bank accepted his certification that he is not a U.S. Citizen or Legal Permanent Resident (Green Card Holder) and the U.S. none the wiser. As such, Scott fatefully submits his quiet disclosure.
Scott files prior year tax returns to report previously unreported interest income. He also files past-due FBARs to report undisclosed foreign accounts — but does not elaborate at all in his submission as to why the reports were late, and does not submit via OVDP.
*Since Scott was Willful, he is ineligible for the Streamlined Offshore Disclosure Program alternative.
Problem 5: Scott is Audited by the IRS
Unbeknownst to Scott, the Internal Revenue Service had received the information from the foreign bank. Moreover, the IRS also realized that Scott has amended his last three tax returns, but did not do so in accordance with proper IRS policies and procedures (aka OVDP or Streamlined Offshore Procedures). Scott received a Notice of Audit by the IRS but before Scott received any notice that his amended returns and FBARs are processed.
During the audit, Scott is self-represented, because Scott is a little too smart for his own good. Scott notices that the tax returns the auditor brings with him are the original returns and not be amended returns. When asked if he ever amended his return (Standard Question during and audit) – Scott gets nervous, and says…no.
What Scott does not realize is that the auditor is already aware that Scott has foreign accounts. He knows this, because the foreign bank reported Scott to the IRS, which is what led Scott’s Tax Returns being investigated in the first place.
The IRS Agent does not directly ask Scott about the foreign accounts and does not reference the fact that he knows amended returns were filed quietly. Rather, he asks Scott roundabout questions in which Scott answers make it clear that he does not have foreign accounts and that he had no idea that there was any reporting requirement. At this time, the audit ends and Scott believes that everything is fine.
Problem 6: Scott Lied to the IRS Agent
Making intentional misrepresentations (or omissions) to the Internal Revenue Service is a crime, which may result in criminal penalties and prison. The Internal Revenue Service takes these matters very seriously and since Scott made intentional misrepresentations to the auditor regarding his foreign accounts, the auditor refers the matter to the IRS Special Agent division for Criminal Investigation.
Problem 7: A Criminal Investigation is Launched
The Special Agents of the Internal Revenue Service begin a criminal investigation. They investigate his bank, financial records, bank accounts, etc. The IRS quickly learns that Scott has been moving more and more money offshore intermittently over the last few months. They also realize that Scott purchased a plane ticket to fly to Vietnam. The IRS is concerned that Scott is going to leave the country and knows he can travel internationally by using his Chinese passport.
As a result, the special agents obtain a search warrant and descend upon his home early the next morning. Scott does not want to allow them to enter his home, but since the agents are armed with a search warrant, Scott must let them enter and search the home in accordance with the parameters of the warrant. The special agencies seize Scott’s computers, telephones, and passport.
Problem 8: A Grand Jury Indicts Scott for Tax Fraud
Due to the fact that Scott made intentionally false representations to the IRS, as well as the fact that he intentionally lied on his tax returns, it was not difficult to convince a grand jury to indict Scott on tax fraud. Scott will now have to defend himself against the IRS, which has a nearly perfect conviction rate when it comes to tax matters (they only pick the cases they know they can win)
Scott Could have Fixed this Problem
Scott had several opportunities along the way to resolve the tax issue without the government filing criminal charges. Sometimes, it is better to simply hire an experienced international tax lawyer from the start to assess your tax situation, and put you in the best position to resolve your tax issues without fear of criminal prosecution.
Scott could have safely avoided this result by submitting to IRS Offshore Voluntary Disclosure.
Click Here to Learn More about Offshore Voluntary Disclosure (Streamlined, OVDP or Reasonable Cause)