How False Statements Increase Criminal Tax Audit Risks

Oftentimes, when U.S. taxpayers are audited by the IRS, it is for civil-related matters. For example, a taxpayer may be under examination for certain deductions that they claimed on their tax return, or possibly the Internal Revenue Service has information about foreign accounts and assets that were not properly reported by the taxpayer on their tax return. Nevertheless, while these types of audits can be intrusive and overwhelming to the Taxpayer — they are still civil and not criminal, and thus the taxpayer is not staring down the barrel of a potential criminal tax investigation. Sometimes, during a tax audit, a taxpayer may make false representations to the IRS which then leads the IRS to believe that the taxpayer is willful and possibly violated criminal tax statutes. This is common in situations in which the IRS may be aware of certain income that the taxpayer has that they did not report, or the taxpayer has various foreign accounts and investments that were reported to the IRS per FATCA requirements, but which the Taxpayer did not report. Making false statements to the IRS agent is never a good move. Oftentimes, what happens is that the taxpayer may be involved in eggshell audits or reverse eggshell audits and not be aware that the IRS not only has the information but that by doubling down and making false statements to the IRS agents they are helping the IRS establish a potential criminal tax audit.

Let’s look at some common types of false statements that increase the risk of a criminal tax audit.

Not Disclosing Foreign Accounts and Assets

To comply with FATCA (Foreign Account Tax Compliance Act), hundreds of thousands of Foreign Financial Institutions scattered across more than 110 countries proactively report U.S. account holder information to the IRS. Therefore, the Internal Revenue Service may have information about your foreign accounts that you did not know that they had. When the taxpayer is audited and the IRS agent asks whether the taxpayer has foreign accounts or foreign sources of income and the taxpayer falsely states that they do not have any foreign accounts or foreign income — this increases the chance of a criminal tax audit.

Not Disclosing Foreign Income

Sometimes, taxpayers may have foreign sources of income from foreign financial institutions and other investments that the taxpayer never thought would report to the U.S. government. But, oftentimes once these foreign financial institutions have a significant amount of us investors, they realize that they have to comply to avoid the wrath of the U.S. government — and therefore they begin reporting U.S. account holders and the income that is being generated without telling the U.S. taxpayers that they are being reported. Then during an audit, when the taxpayers are asked whether they have any foreign sources of income and they say that they do not, this too increases the chance of a criminal tax audit.

Misrepresentations to the Foreign Bank About U.S. Status

There are three primary categories of individuals who are considered U.S. persons for tax purposes and have to report their worldwide income unless an exception, exclusion, or limitation applies. That includes U.S. citizens, lawful permanent residents, and foreign nationals who meet the substantial presence test. Oftentimes, foreign financial institutions will require the taxpayer to identify whether they are a US person or not. Sometimes, taxpayers may mistakenly misinterpret what the question means, but if a taxpayer intentionally falsifies their U.S. person tax status to a foreign financial institution and then the U.S. government gets wind of it, it could increase the chance of a criminal tax audit.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.

How False Statements Increase Criminal Tax Audit Risks, 3 Examples