FBAR Criminal Penalties

FBAR Criminal Penalties

How Tax Pros & Clients Find Themselves in FBAR Trouble

Most tax violations are civil and not criminal. That means while a taxpayer may become subject to IRS fines and penalties, they are not at risk for a potential loss of liberty such as jail or prison. However, sometimes a violation may become criminal such as tax fraud, tax evasion, FBAR, FATCA, and other offshore noncompliance issues.  It can be very disconcerting for taxpayers to find themselves on the receiving end of a criminal investigation by the Department of Justice or IRS. Likewise, it is equally uncomfortable for tax professionals to be investigated by professional responsibility (OPR) or the DOJ for participating in or facilitating a tax crime. When a tax professional assists a taxpayer with committing a tax crime or commits a criminal violation of the tax code, the tax professional too may find themselves in as much trouble as the taxpayer. The amount of prison time that a tax professional can receive for committing tax crimes can reach upwards of more than 15 years — which occurred in a recent case involving international and offshore tax fraud matters. Let’s walk through some common examples of how taxpayers and tax professionals land themselves in hot water for potential criminal violations.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, Taxpayers and Tax Professionals Can Both Get into Trouble 

There is a common misconception that if a tax professional tells the taxpayer to commit a tax crime ultimately the taxpayer will not be in any trouble because they listened to the tax professional. Unfortunately, this is not true and the IRS can pursue criminal charges against the Taxpayer and the Tax Professional. Therefore, especially in situations in which a taxpayer is being goaded on by a tax professional to commit a potential tax crime such as a quiet disclosure, they must be aware that at the end of the day, they too will become subject to the fines and penalties and possibly a criminal investigation.

IRS and FBAR Quiet Disclosure

A quiet disclosure can take a situation that may not be very serious to begin with and morph it into something much worse which could result in a criminal investigation:

• • • Example: Adam is a U.S. citizen who has foreign bank accounts. Only recently did he learn that he was required to report these bank accounts to the IRS/FinCEN. He tells his CPA that he has foreign accounts but was never aware they were reportable (the CPA had never asked him before). The CPA tells him that he should just file the FBARs and Form 8938s ‘going forward’ — even though Adam has had the accounts for several years. Adam files the current year FBAR and Form 8938 but tries to throw the IRS off his tail by identifying on Form 8938 that the accounts were ‘opened in the current year’ so to try to conceal the fact that he should have filed in prior years. Adam’s account information from the Foreign Financial Institution where his accounts are held is forwarded to the IRS by way of FATCA. Adam is audited on an unrelated matter, where he doubles down and tells an IRS agent under penalty of perjury that he did not have the foreign accounts until the current year. This could potentially lead to a civil and criminal fraud investigation for knowingly making false statements to the IRS both on the tax return and in the audit.

    • Example: Adrian is a lawful permanent resident who came to the United States 10 years ago. When he first came to the United States he learned about FBAR reporting but he did not want to report the accounts, so he intentionally did not report them — even though he knew he was supposed to. He also does not include any of the income from his foreign accounts. After retaining a new CPA, the CPA told them that he should not submit to the voluntary disclosure program (due to the large penalty) but would not qualify for the Streamlined Procedures since he was willful. Instead, the CPA tells Adrian to file several tax returns, but not to worry about reporting the foreign income to minimize the audit risk. Unfortunately, one of Adrian’s partner submits to the voluntary disclosure program and identifies Adrian as someone who has had foreign accounts for many years and always knew he was supposed to report them and the associted income. Adrian finds himself under criminal investigation for fraud and the CPA finds himself under investigation as well.

False Streamlined Offshore Statement

The Streamlined Procedures are for taxpayers who non-willfully failed to report foreign accounts, assets, investments, and income to the IRS. Taxpayers must certify under penalty of perjury that they are non-willful which is a very serious statement to make to the IRS. Willful Taxpayers do not qualify for the streamlined procedures — and in recent years the IRS has pursued criminal investigations against taxpayers who they believe knowingly filed a false statement:

• • • Example: Brent is a U.S. resident who has had foreign accounts for several years. He did not want to report the information about his foreign accounts and income to the U.S. government, so he did not do so in prior years and he did not tell his CPA he had foreign accounts even though the CPA had asked about it. Brent completes the Streamline Certification and falsely provides that he was unaware that there was any reporting requirement or that his prior CPA ever asked him about the foreign accounts. The IRS reaches out to the prior CPA who confirms that he did ask Brent if he had foreign accounts and has an organizer that Brent submitted to him in which Brent identified ‘no’ to the foreign accounts question – even though Brent had seven figures worth of bank accounts that he was actively using. This leads the IRS to initiating a criminal investigation against Brent for tax fraud.

    • Example: Brian is a U.S. citizen who has several foreign accounts overseas. He and his spouse were recently divorced but during the time they were together Brian and his former spouse agreed not to report the foreign accounts. Now that Brian is filing single, he decided he wanted to report the foreign accounts but does not want to pay a large penalty so he files under the Streamlined Procedures and certifies under penalty of perjury that he was non-willful. Meanwhile, his ex-spouse files under the voluntary disclosure program and during the submission process explains that her ex-spouse absolutely knew there was a reporting requirement but chose not to report because he did not think his foreign financial institutions would report him to the IRS. This leads the IRS to initiating a criminal investigation against Brian, which puts him in a very difficult defensive position because his ex-spouse filed under VDP and admitted under penalty of perjury that they had committed tax fraud together – and she is willing to pay the large VDP penalty, so she has less incentive to lie.

Offshore Tax Fraud and Evasion

There are many different types of offshore tax fraud and offshore evasion taxpayers and tax professionals must be aware that the IRS has significantly increased enforcement of offshore tax fraud evasion matters:

• • • Example: Charlie is a lawful permanent resident who has a large amount of income generating assets in a foreign country that is not a treaty country. Charlie knows he is supposed to report his worldwide income but does not report any of this foreign income because he believes the foreign financial institution would never report him to the IRS. Recently, the IRS decided to go after taxpayers from that particular institution who they believe have been hiding assets. The IRS issues a John Doe Summons and learns that Charlie has had foreign accounts there for several years but always states on his tax return that he does not have foreign accounts. He has also not reported the foreign income, and has not reported the FBAR form 8938. The IRS may pursue a criminal investigation for tax fraud and tax evasion because Charlie filed a false tax return.

    • Example: Chris is a U.S. person who is currently working overseas. He is a citizen of a foreign country and when he opens his foreign account, he opens it under his foreign residency card and not his U.S. driver’s license. When he completes the initial paperwork with the bank, he certifies under penalty of perjury with the foreign financial institution that he is not a U.S. citizen or a lawful permanent resident — even though Chris is a lawful permanent resident. In addition, Chris does not tell his current tax professional that he has any foreign accounts and does not report any of the income to the CPA even though the CPA’s organizer clearly asks for whether the taxpayer has foreign accounts or foreign income. Chris knowingly does not include any of this information on the organizer even though he knows he is required to, because he does not want to report this income as he does not have to pay foreign taxes on the income. The IRS may pursue a criminal investigation for tax fraud and tax evasion because Charlie filed a false tax return.

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.

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.

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.