Warning Signs an IRS Foreign Account Audit Turned Criminal

Warning Signs an IRS Foreign Account Audit Turned Criminal

Warning Signs Your IRS Foreign Account Audit Turned Criminal

When a U.S. Taxpayer is audited by the Internal Revenue Service and placed under examination, it is a civil tax matter. In other words, there are no criminal implications for being in a civil tax audit. While the taxpayer may be subject to fines and penalties (and potential enforcement actions such as liens and levies), this is not a criminal investigation, and there is no risk of incarceration from the audit. However, if during the audit the examiner believes that the taxpayer may have committed a criminal violation, they are required to stop the audit and refer the matter to their supervisor, who will then determine what steps to take. Here are a few warning signs to consider if you believe your foreign account audit is turning criminal.

The Examination Abruptly Stops

If you are under audit for failing to report your foreign accounts, or it is part of a bigger type of audit, and then questions arise about your foreign accounts in which the examiner believes you are intentionally misrepresenting the facts, the Examiner may abruptly stop the audit. Depending on how much experience the examiner has, they will help determine what steps they take to stop the audit — but typically, if the Taxpayer stated something during the audit that made it clear that the Taxpayer intentionally violated a tax law, then the examiner may abruptly stop the audit. Thereafter, in the next few weeks to a few months, the Taxpayer may be visited by the IRS Special Agents.

Is the Examiner Focusing on ‘Intent’

Most of the time, a taxpayer is audited because a mistake was made with their taxes. For example, maybe the taxpayer did not report certain income because they did not know it was reportable, or they claimed deductions that may no longer be valid, but the taxpayer believed they were valid at the time they took the deductions. When questions begin to arise about foreign accounts and the taxpayer’s answers make the agent believe that the taxpayer knew they had an FBAR reporting requirement but failed to do so — and the examiner focuses on the knowledge component instead of moving on to the next topic, this could be a warning sign that the agent believes the taxpayer was willful and then potentially criminally liable.

Did You Get Caught in a Lie?

There are two types of very dangerous IRS audits the taxpayer should be aware of: the eggshell audit and the reverse eggshell audit. If either one of these types of scenarios comes up (either the IRS agent or the taxpayer has information they do not want to share with the other person), it could lead to the IRS determining the U.S. person is lying. If it is a reverse eggshell audit, and the IRS agent knows information about the foreign accounts and catches the Taxpayer in a lie during the audit, the agent may believe a crime was committed and refer the matter to their supervisor, who may ultimately refer it to the IRS Special Agents, who then determine whether or not to pursue a criminal investigation.

What Should You Do Next?

If you are a taxpayer under audit, in which the audit stops, but you did not receive any resolution, and believe you might have said something to incriminate yourself, you should consider speaking with a criminal lawyer. You should at least interview different board-certified criminal lawyers so that if you are approached by the IRS Special Agents, then you will have a lawyer at that time to represent you, so that you do not directly answer questions to the special agents outside of the presence of your counsel.

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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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.