Understanding Tax Evasion – When is Avoiding U.S. Tax A Crime?

Understanding Tax Evasion – When is Avoiding U.S. Tax A Crime?

Examples of Tax Evasion (2018) – 5 IRS International Tax Crimes by Golding & Golding

Examples of Tax Evasion (2018) – 5 IRS International Tax Crimes by Golding & Golding

Oftentimes, when a person believes they are just “omitting some income” or “not being 100% truthful” on their tax return, they are actually committing tax evasion.

That is because when a person knows they are not being completely truthful on a tax return, and intentionally omits income or artificially increases deductions in order to reduce tax liability, it is by definition…tax evasion.

That is not to say everyone gets caught – they don’t, not by a longshot. But, if you get stuck on the receiving end of an Egghsell Audit, Reverse Eggshell Audit, or IRS Criminal Investigation (Courtesy of the IRS Special Agents), it could be a dangerous position for you to be in.

International Tax Evasion

At Golding & Golding, we focus our entire tax law firm exclusively on international tax law. We have spoken to several thousand clients along the way, and heard every story imaginable (almost).

To that end, even though there are some pretty crafty and creative people out there, most international tax evasion seems to fall into one of five different categories.

The following are five common examples of offshore tax evasion that are regularly investigated by the IRS:

Lying to your CPA

As you may have seen recently in the Manafort case, lying to your CPA is pretty easy. The CPA sends you a questionnaire or binder and asks you whether you have any foreign income or foreign accounts… and you answer, no. This is despite the fact that you may have one or several foreign accounts, assets, income or investments overseas (presuming you speak English and understood the questionnaire).

Your tax preparer is there to help you (or at least they should be). We have worked with several high profile clients (and non-high-profile clients) who have had hidden several million dollars worth of unreported foreign income, accounts, assets or investments that were asked directly by their CPA (the person they are paying to accurately prepare their taxes) – and to which they blatantly lied, and answered no on questions regarding foreign accounts, etc.

In this sort of situation, it is important to note that even though your CPA signs the tax return, if you lied or misrepresented facts to the CPA, it is not his or her butt on the line – it is yours. Moreover, you do not have an Attorney-Client privilege with a CPA.

It is also important to note that especially in accordance with FATCA reporting, more than 300,000 foreign financial institutions are actively reporting account holder information to the IRS.

If you are already out of compliance prior years and scared, that is reasonable – and we can help you (see below).


Structuring is an odd crime, because feasibly in certain situations there could be a perfectly rational reason for doing it. By structuring, you are artificially keeping your foreign accounts and transfers low (below the reporting requirement), so that the IRS does not get wind of your foreign money.

Since the purpose of structuring is to avoid reporting or disclosure by the IRS, and you are purposefully and intentionally deflating the size and value of your accounts and transfers in order to avoid detection, this is considered a crime – and one the IRS has been going after more seriously ever since the introduction and enforcement of FATCA.

Moving Money into Someone Else’s Account(s)

We are not talking about a gift of your money to another person. Rather, let’s say you have $3 million overseas and recently learned about FBAR and FATCA reporting. You despise financial transparency, and the last thing you want to do is report your hard-earned money to the IRS.

Therefore, you transfer your money into the foreign account of a foreign person, who does not have any US reporting requirement. Since the money is now in a foreign person’s account, and they have no reporting requirement – the money is safe, correct?

Not necessarily – especially with the introduction and enforcement of FATCA. If the foreign financial institution is already aware that you are a US person then the bank may have report that you depleted the account to the IRS. Moreover, the foreign financial institution might also provide the transfer information to the IRS.

Thereafter, when you’re called into an audit, you’re now stuck in what’s called a reverse eggshell audit – and if you are caught lying or misrepresenting (or omitting) facts to the IRS, it could lead to an IRS Special Agent criminal investigation.

Laundering the Money

Let’s say for example you have a business overseas and your vendor owes you significant amounts of money. Based on the type of corporate structure you have, you would have to report the money immediately as income to the IRS.

What do you do instead? You have the vendor purchase items for you, which are then transferred to by way of a third-party as a gift. For example, the vendor may purchase a million-dollar home, transfer it into the name of his daughter, and then transfer it to your son –who then gifts it to you.

The reason this is tax evasion is because instead of reporting the $1 million income as income, you are instead simply receiving a gift from a foreign person, which is then reported on a form 3520. Sometimes, this type of laundering can work, especially when related parties are involved — but the problem is if you are detected with this sort of in depth evasion or fraud scheme the IRS is likely to move forward with the criminal type of prosecution, since there is no basis whatsoever for a vendor to turn around and gift you a million-dollar property (no matter how much your vendor likes you).

Illegally Assigning Income

Not all instances of assigning income are considered fraud or evasion. It is typically only considered fraud or evasion when it is done to artificially and intentionally reduce your tax rate  — when you know it is improper.

For example, you earn several million dollars a year (nice work). The only problem is sometimes you’re a bit too smart for your own good. You have a vendor that owes you about $700,000. You are sick and tired of paying U.S. tax at 53+% federal/state tax rate and instead want this money tax-free.

Luckily for you, you know seven slackers who don’t earn any money. Therefore, you assign the income from each of the seven vendors, to a different slacker. As a result, the slackers (most of them who are married to other slackers) book the income as their own and therefore are paying a much more reduced tax rate. Moreover, the slackers live in Vegas, Seattle, and Texas — and therefore do not have to pay any state income tax.

Thereafter, the slackers take a small portion of the money, and gift the rest of you. While there is nothing wrong with giving people gifts (even slackers), and there’s nothing wrong with assigning people income – if you combine the two solely in order to artificially deflate your tax rate, you may find yourself on the receiving end of an IRS audit or criminal investigation.

Want to Get Into Compliance?

If you are already out of tax compliance with the IRS for prior years involving foreign and offshore accounts, assets, investments, income, etc., one of the best methods for safely getting into compliance is through the IRS offshore voluntary disclosure programs.

Experienced Offshore Disclosure Attorneys

Experienced IRS Offshore Disclosure Representation is crucial for a successful OVDP disclosure. There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them!). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure. 

You will want to make sure you use an OVDP Attorney who has:

  • Litigation Experience
  • IRS Audit Experience
  • At Least 15-20 years of Attorney Experience
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.

Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experienced mentioned above) flubbed their submission and made numerous mistakes in the submission process.

Alternatively, once you are in OVDP, you may want to:

  • Make an MTM Election
  • Opt-Out
  • Argue FAQ 55 Penalty Reductions

As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.

OVDP Attorney Fees 

If you receive an OVDP Fee Quote from a CPA or Attorney that seems too Low…you should be careful.

That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”

They will provide artificially low fee quotes to bait you in, only to request more money down-the-line. Most of the these Attorneys do not have real experience, and do not understand the comprehensive nature of an OVDP.

Golding & Golding, A PLC 

At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.

In order to assist you to better understand the distinction between the two different IRS offshore/foreign account disclosure programs, we are providing the following summary for your reference.

We Take OVDP Representation Very Seriously

The main takeaway from this article is that you understand the risks and pitfalls of entering either over OVDP or the Streamlined Offshore Disclosure Program unprepared.

We are passionate about representing individuals in offshore voluntary disclosure matters, and feel horrible when a client calls us after having hired an inexperienced Attorney or CPA who either did a sloppy job, charged them more money than they agreed upon, and/or is overall not providing the level of representation a person deserves.

IRS Offshore Voluntary Disclosure

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.

5 IRS Methods for Offshore Compliance

  • OVDP
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Reasonable Cause
  • Quiet Disclosure (Illegal)

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.

1. OVDP 

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 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).

OVDP Penalties

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!


2. Streamlined Domestic Offshore Disclosure

The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.

What am I supposed to Report?

There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.

In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.

Reporting Specified Foreign Assets – FATCA Form 8938

Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.

The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.

The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.

Other Forms – Foreign Business

While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:

  • If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
  • If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
  • If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
  • And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.

Reporting Foreign Income

If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.

It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.

In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.


3. Streamlined Foreign Offshore Disclosure

What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.

Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)

*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.


4. Reasonable Cause

Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.

Contact us Today, Let us Help.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC