Common Offshore Tax Fraud and Evasion Risks (Examples)

Over the past 10 to 15 years, the Internal Revenue Service and Department of Justice have significantly increased enforcement of international and offshore tax-related matters. The focus of offshore tax evasion has primarily been on U.S. Taxpayers worldwide who may be hiding money offshore in various trusts and other entities; earning income in foreign jurisdictions and not reporting that income to the U.S. government; transferring cryptocurrency to foreign jurisdictions; and taxpayers who intentionally underestimated their expatriation value to try to avoid covered expatriate status, and/or Artificially reduced the potential exit tax implications at the time they terminated their U.S. person status. Let’s take an introductory look at offshore tax evasion and whether you may be at risk. * 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, Willful or Non-Willful?

It is very important to note, that under most circumstances, the failure to properly report foreign accounts or income (or making some errors in an expatriation application) is almost always a non-willful violation. And, if the Taxpayer is non-willful, they cannot be subject to offshore tax fraud or evasion. Only taxpayers who may have engaged in willful behavior (including reckless disregard or willful blindness) can commit fraud or evasion. Moreover, specifically, with tax fraud (not evasion) the violation may not be considered criminal because tax fraud can be either civil and/or criminal (Evasion is a Felonious Tax Crime).

Avoid Fear-Mongering, Free Consultations & False Claims of Being ‘Board-Certified’

Several times each month, our international tax law specialist team is contacted by Taxpayers who were fear-mongered into believing that they would be going to prison or even deported for failing to report their foreign income or assets. They are oftentimes also misled by the attorney they were speaking to that the attorney was a Board-Certified Tax Law Specialist when they are not. Here are a few tips:

1. 1. Make sure your antenna is up when speaking on a ‘free offshore disclosure consultation’ because these attorneys will oftentimes claim to be ‘experts’ and employ fear-mongering tactics designed to unnecessarily scare Taxpayers with examples that have no relation to the caller’s facts and circumstances.
  2. Just because the attorney claims to be board-certified, does not make it so. Some unethical attorneys falsely claim to be board certified as a tax law specialist. If the attorney claims to be a Board-Certified Tax Attorney, ask them which state they are certified in so you can confirm. Any attorney who is board-certified, even if all they practice is federal law, must be Board-Certified by at least one State Bar association. Also, just having a CPA on staff does not make a firm a ‘Board-Certified Tax Lawyer Specialist.’

Foreign Accounts, Assets, and Income

The most common way that a taxpayer is investigated for tax fraud or evasion is by intentionally failing to disclose foreign accounts, assets, and income.

- - Example: Brian is a U.S. citizen who maintains foreign accounts overseas. His accounts generate a significant amount of income each year and he knows that the income is reportable to the U.S. government but his foreign bank assured him that they would not report his information to the IRS. Therefore, Brian does not report this information on his US tax return or FBAR/Form 8938. Brian May be subject to tax fraud or evasion charges.
  - Example: Brett is a lawful permanent resident who has family members overseas. He is a 25% owner of a foreign business that generates a significant amount of income for him each year. Instead of reporting the income on his U.S. tax return he has his sister transfer the income into her account and then she gives him the money. The money is income brought earned but he is using a third party to try to avoid income reporting to the U.S. government. Brett may be subject to tax fraud or evasion charges.
  - Example: Blaine is a U.S. citizen who has a significant amount of money in his U.S. accounts. Blaine decides to intentionally open a numbered account in Switzerland for the sole purpose of avoiding reporting the income on his US tax return periosteal forms a foreign entity to open the foreign account does not report the entity or disclose the account or income on his U.S. tax return. Brian May be subject to tax fraud or evasion charges.

John Doe Summons

Taxpayers need to be aware that if they use other facilitators to transfer money and avoid detection by the IRS or Department of Justice the government may issue a John Doe Summons to discover the Taxpayer’s information. This has been recently used in many cases including recent allegations against a large Trust and several cryptocurrency matters as well.

- - Example: Charlie is a U.S. citizen who wants to transfer money overseas. He is aware that the banks have currency transaction reporting in suspicious activity reporting requirements so he decides to draft cashier’s checks and uses FedEx to send the money to family members overseas who will then deposit it into a numbered account. The Department of Justice may be able to request a John Doe summons from FedEx in order to discover the names of taxpayers who are using the service to commit crime.
  - Example: Chris is a U.S. citizen who has a significant amount of cryptocurrency. He does not want to report the income, so he decides to commingle his cryptocurrency on the dark web to launder it — so that Chris receives different cryptocurrency, which makes it harder for the government to track. The U.S. government may issue a John Doe Summons to the cryptocurrency company to discover the information of its clients so the U.S. government can determine if crimes are being committed.

Expatriation Tax Crime

Certain taxpayers who expatriate from the United States may be subject to tax implications at the time they expatriate and in the future if they are considered to be covered expatriates. The IRS has been cracking down on taxpayers who artificially reduced their net worth to avoid covered expatriate status.

- - Example: Frank is a U.S. citizen who wants to expatriate from the United states. He has a very successful business and the company is private and was never taken public. Frank intentionally and artificially reduces the value of the business significantly to make it seem that his net worth is under $2,000,000 — so that he is not a covered expatriate (he would only qualify as a covered ex patriot under the net worth test). Frank may become subject to tax fraud or evasion investigations.
  - Example: Fred is a long term lawful permanent resident who has a significant amount of net worth. The assets are in a foreign institution where the majority of his family lives. Before expatriating, he transfers all of the assets to his family members without going through the proper protocols, and with the understanding with his family members that he is still the owner of these assets he just wants to avoid being a covered expatriate. Frank may become subject to tax fraud or evasion investigations.
  - Example: Fran is a U.S. citizen who is a covered expatriate because she met the net income average tax liability test. In order to avoid covered expatriate status, she intentionally under reports income on her last two tax returns so that the average tax liability falls below the threshold requirements. Fran may become subject to tax fraud or evasion investigations.

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.