New Offshore Tax Evasion 2023 (An IRS Enforcement Priority)

Offshore Tax Evasion & the IRS

Offshore Tax Evasion

With the increased US Government enforcement of evasion of overseas income, assets, investments, and accounts — offshore tax evasion is a key priority. In fact, there are few international tax crimes more serious than Tax Evasion. That is because unlike other types of international violations — Tax Evasion is a crime and not a civil violation (such as Fraud, which the US Government can pursue as both a civil and criminal violation). With Tax Evasion, the Taxpayer has willfully committed a proactive act — usually requires more than just not filing a tax return, which technically is an “omission” and not an “affirmative act.” For decades, the IRS has been actively pursuing matters involving offshore non-compliance. But in the past few years, the number of offshore criminal investigations has been steadily rising, including FATCA criminal indictments and FBAR criminal indictments —  traditionally these were civil violations. When it comes to offshore and international tax-related matters, evasion typically involves money laundering and/or structuring in addition to foreign account, asset, and investment reporting non-compliance — and not just missing the FBAR filing requirement.  When a person is willful, neither the Streamlined, Delinquency nor Reasonable Cause options are available. Rather, the person submits to the traditional Voluntary Disclosure to try to avoid an offshore tax evasion investigation.

Is Offshore Tax Evasion a Crime?

Yes. Unlike other violations, offshore tax evasion is a crime that is codified under 26 USC 7201.

26 USC 7201

• • • “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

What is Tax Evasion (26 USC 7201)

The statute for tax evasion (technically, attempt to evade or defeat tax) is founded in 26 USC section 7201.

26 USC 7201

The code provides the following definition of tax evasion:

• • • • Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

How is Tax Evasion Defined?

As provided in the Criminal Tax Manual (located on the Justice.gov website):

• • • “Tax evasion” is a shorthand phrase that many people use for all manner of tax fraud.

    • But the charge of tax evasion, in violation of 26 U.S.C. § 7201, is not necessarily the best one to bring against individuals defrauding the IRS.

    • Defendants frequently seek to exploit the fact that, in order to establish the crime of tax evasion, the government must prove the existence of a tax due and owing and willfulness. Prosecutors therefore should consider other charges, such as conspiring to defraud the United States, 18 U.S.C. § 371; filing false returns, 26 U.S.C. § 7206; or endeavoring to obstruct the IRS, 26 U.S.C. § 7212(a), as alternatives or supplements to the charge of tax evasion. 

What does this Mean?

It means that while there is a general concept of the word tax evasion — that tends to encompass several different types of actual tax violations beyond just actual tax evasion — the actual code section for tax evasion is 26 USC 7201 — and not all tax crimes amount to tax evasion. Depending on the facts and circumstances, the US Government may want to consider alternatives to a tax evasion charge.

Willful Attempt to Evade or Defeat the Assessment of Tax

There are many different ways a Taxpayer may attempt to evade or defeat the assessment of tax. But, is the idea that there must be an affirmative act — therefore, merely not filing a tax return without any other action would generally not meet the requirement to pursue an offshore tax evasion case.

As provided by the Criminal Tax Manual:

• • • The means by which defendants can attempt to evade are virtually unlimited.

    • As noted above, Section 7201 expressly prohibits attempts to evade tax “in any manner.” In order to violate Section 7201, the taxpayer generally must take some affirmative action with an intent to evade tax.

    • The general rule is that omissions to act will not satisfy the affirmative act requirement.

    • For example, a mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes. See Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011) (“To be liable under § 7201, a defendant must do more than passively fail to file a tax return”); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986).

Thus, in order for the government to prove Taxpayer willfully attempted to evade or defeat the assessment tax, there must be an affirmative act. The most common form of evasion is typically filing a false tax return and/or keeping a double set of books — the latter which can take the Taxpayer down the path of a Spies evasion investigation — which makes it easier for the government to bring a criminal indictment/complaint involving tax evasion.

Examples of a Willful Attempt to Evade or Defeat the Assessment of Tax:

• • • • Establishing stock accounts for his children into which [the defendant] had his investment banking income redirected). United States v. Beall, 970 F.2d 343, 346-47 (7th Cir. 1992)

      • Using a warehouse bank and instructing an employer to pay one’s income to a warehouse bank constitutes an affirmative act of evasion);6 United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000)

      • Opening and using bank accounts with false social security numbers and incorrect dates and places of birth could easily have misled or concealed information from the IRS); United States v. Valenti, 121 F.3d 327, 333 (7th Cir. 1997)

      • Use of cash, not keeping business records, paying employees in cash and not reporting their wages to the IRS, advising employees they did not have to pay taxes); United States v. Jungles, 903 F.2d 468, 472- 74 (7th Cir. 1990) (employee’s use of “independent contractor” agreement to eliminate withholding and warehouse bank to evade income tax were affirmative acts).

Attempt To Defeat or Evade Payment is Also Tax Evasion

Unlike a Taxpayer’s attempt to evade the Assessment of Tax, the attempt to evade Payment of Tax is different. Many cases have held that merely not paying taxes is insufficient to carry a charge for tax evasion. But, since the government typically only has to show a single affirmative act per count of offshore tax evasion, Taxpayers need to be careful not to commit any affirmative act if they have already been assessed tax and are simply seeking to evade payment.

Examples of Willful Attempt to Evade or Defeat the Assessment of Tax

• • • Examples of affirmative acts of evasion of payment include:

      • [P]lacing assets in the names of others, dealing in currency, using nominees to conduct business, buy and sell assets, or conduct other financial transactions, or providing false information about assets or income to the IRS. See Cohen v. United States, 297 F.2d 760, 762, 770 (9th Cir. 1962); see also United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000)

      • Opening and using bank accounts with false social security numbers, incorrect places of birth, and incorrect dates of birth could easily have misled or concealed information from the IRS); United States v. Gonzalez, 58 F.3d 506, 509 (10th Cir. 1995) (signing and submitting false financial statements to the IRS); United States v. Pollen, 978 F.2d 78, 88 (3d Cir. 1992);

      • Defendant placed assets out of the reach of the United States Government by maintaining more than $350,000.00 in gold bars and coins, platinum, jewelry, and gems in safety deposit boxes at bank, in a fictitious name); United States v. Beall, 970 F.2d 343, 345-47 (7th Cir. 1992)

      • Defendant instructed employer to pay income to a tax protest organization; United States v. McGill, 964 F.2d 222, 227-29, 232-33 (3d Cir. 1992)

      • Defendant concealed assets by using bank accounts in names of family members and coworkers; United States v. Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992)

      • Defendant falsely told IRS agent that she did not own real estate and that she had no other assets with which to pay tax); United States v. Daniel, 956 F.2d 540, 542-43 (6th Cir. 1992)

      • Defendant used other persons’ credit cards, used cash extensively, placed assets in other persons’ names); United States v. Conley, 826 F.2d 551, 553 (7th Cir. 1987)

      • Defendant concealed “nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record”); United States v. Shorter, 809 F.2d 54, 57 (D.C. Cir. 1987)

Proving an Intent to Evade Tax For Income Offshore

When it comes to the US government seeking to pursue an offshore tax evasion case, the quintessential requirement is that the government can show that there was an affirmative act — and that that act was made with the intent to evade tax.

As provided by the Criminal Tax Manual:

• • • It is crucial that the affirmative act be committed with an intent to evade tax. The mere fact that there was a non-payment or understatement of taxes is insufficient; the government must prove that the defendant committed an affirmative act with the specific intent to evade tax. See United States v. Slutsky, 487 F.2d 832, 844 (2d Cir. 1973); United States v. Coblentz, 453 F.2d 503, 505 (2d Cir. 1972).

    • That said, “[i]f the tax evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime.” Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Voigt, 89 F.3d 1050, 1090 (3d Cir. 1996); United States v. Nolen, 472 F.3d 362, 379 (5th Cir. 2006); United States v. King, 126 F.3d 987, 989-90 (7th Cir. 1997).

    • Evidence proving that a defendant has engaged in “any conduct, the likely effect of which would be to mislead or to conceal,” including “keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind” (Spies, 317 U.S. at 499), can establish intent to evade assessment or payment of tax.

Offshore Tax Crimes

Offshore tax crimes come in all different flavors. It is important to note that not all tax violations are criminal. Oftentimes taxpayers contact us after being fear-mongered into believing that every violation of FBAR, FATCA, etc. will land them behind in prison —

Standard of Proof

It is important to remember that since offshore tax evasion is a crime, the U.S. government must prove their case by beyond a reasonable doubt, and not merely preponderance of the evidence (Civil FBAR) or clear and convincing evidence (Tax Fraud).

Examples of Offshore Tax Evasion

Here are some of the more common (potential) offshore tax evasion scenarios:

• • • David earns significant money from selling and exchanging cryptocurrency held overseas. David knows he is supposed to report the income, but he knowingly and intentionally does not include it on his U.S. tax return.

    • Michelle opened several investment accounts in her name in different countries to escape detection (pre-FATCA). Michelle is a U.S. Person and is aware that she is required to include the income on her tax return, but she knowingly and intentionally excludes it from her tax return.

    • Scott operates a business overseas. He has significant profits, but instead of distributing the income, he has the company pay all of his (lavish) personal expenses and writes them off as business expenses. He knows they are not proper deductions, but thinks he will not get caught.

Examples of Non-Offshore Tax Evasion

• • • David was unaware he had to report his foreign accounts or the income associated with it. His CPA never asked him about it, and he only recently learned of the reporting and tax requirements.

    • Michelle never reported her foreign income, because she was unaware that her tax exempt interest in Taiwan was reportable and taxable in the U.S.

    • Scott never disclosed his foreign pension income from a non-treaty country on his tax return, because he sincerely misunderstood the reporting requirements and sincerely believed it was not reportable in the U.S.

Offshore Tax Amnesty: We All Have 20/20 Hindsight

One of the most important aspects of determining whether a person is guilty of offshore tax evasion or fraud is the intent of the individual.  And, whether a person is willful (criminal vs civil) or non-willful will impact which IRS Disclosure program they should submit to.

Here are a few things to keep in mind:

Are You Very Risk Averse?

Some individuals are by nature, very risk-averse.

They would never do anything to put themselves in harm’s way.

For these individuals, the moment they even read about IRS international tax penalties, they are convinced they will be heading to prison, even when it is clearly not the case based on their own specific facts and circumstances.

Do You Like to Walk the Line?

Other individuals tend to like to walk the line, for better or worse.

Since these types of individuals are inherent 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.

Analyze YOUR Facts, Not Someone Else’s Facts

Be sure to take a step back and make sure you are assessing the situation using your own fact pattern, and not one you may have read online.

Foreign Banks ARE Reporting

These days, with more than 110 countries and hundreds of thousands of foreign financial institutions entering into intergovernmental agreements (IGAs) with the United States for the enforcement and reporting of U.S. account holders, it is a much riskier move to try to hide your money offshore.

Whistleblowers & Informants are Everywhere

Unfortunately, this is a fact of life.  Now more than ever, the U.S. government is able to track taxpayers through social media and other media outlets. Once a person gets caught, it is not uncommon for them to turn on anyone they can, to save their own hide.

Offshore Tax Evasion is a Serious Tax Crime

Unlike other types of tax violations, the crime of offshore tax evasion is a very serious tax crime that may result in significant incarceration and monetary fines. Tax evasion is a felony and when charges are brought against the Defendant, the Government must show as it all crimes that they are guilty — beyond a reasonable doubt. But, it is also important for Taxpayers who may have violated the Tax Code to take stock of the situation — and realize that oftentimes merely being out of compliance with the IRS is not tax evasion.

Golding & Golding: International Tax Lawyers Representing Clients Worldwide

Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure, including representation in VDP matters for Taxpayers who are willful.

Contact our firm for assistance.