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How To Avoid Criminal Prosecution for Failure to Disclose Offshore Assets and Failure to Report Offshore Taxable Income

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How To Avoid Criminal Prosecution for Failure to Disclose Offshore Assets and Failure to Report Offshore Taxable Income

 

The IRS continues to aggressively target taxpayers that have failed to disclose offshore financial assets and accounts and failed to report offshore taxable income as one of its top priorities and for the foreseeable near future. In addition, the IRS has indicated and continues to focus on compliance with the Foreign Account Tax Compliance Act (FATCA), which includes the requirement to report most offshore financial accounts to the IRS. In addition, the IRS Criminal Investigation Department continues to prioritize criminal investigations of violations of required offshore information reporting, with a heavy focus on violation of the Foreign Bank Account Reporting (FBAR) filing requirement, and prosecuting income tax evasion surrounding unreported taxable sources of offshore income.

OFFSHORE VOLUNTARY DISCLOSURE WHERE YOUR NONCOMPLIANCE IS LIKELY TO BE SEEN AS WILLFUL

Various versions of the IRS’s, first domestic and later offshore, voluntary disclosure programs have been a staple underlying the IRS’s tax enforcement policy for several decades. While in writing not much comfort can be drawn by an IRS commitment to considering a voluntary disclosure as one fact among many that the Criminal Investigation Division weighs in deciding whether to recommend criminal prosecution. When you consider the IRS’s historical actions and not their words, there are very few known cases where criminal prosecution was pursued even though the taxpayer engaged in a domestic or offshore voluntary disclosure. In those cases, the taxpayer was caught cheating in the process of trying to come clean. For example, a taxpayer knowing that his account with UBS had been discovered via John Doe summons made a voluntary disclosure to report his Swiss account but failed to report other foreign accounts he wrongfully assumed the IRS was not able to locate and that they did not know about. When it was discovered that the taxpayer’s voluntary disclosure did not include similarly situated accounts to the UBS account, the taxpayer was criminally prosecuted for cheating in the process of getting clean. 

Voluntary disclosure is the only avenue to nearly guarantee you will not face criminal tax prosecution if you have willfully committed tax related domestic or international tax and information reporting crimes or may have criminal exposure due to the failure to follow the law. For many people, they unknowingly, fall into the trap of not disclosing foreign assets and accounts or taxable sources of offshore income to the IRS. However, once you become aware of this obligation, it is best to voluntarily seek to get back into compliance. Even if you have a long history of blatantly willful failures to comply and thus have criminal tax and information reporting exposure, you will be able to satisfy your obligations under the law and in 99%+ of cases avoid being prosecuted criminally and limit the tax penalties and interest you face to the applicable domestic or offshore voluntary disclosure program terms.

AVOIDING CRIMINAL PROSECUTION IS THE WHOLE POINT, RIGHT?

Failure, even unwittingly, to disclose required international or foreign financial assets, or accounts to the IRS, could carry with it not only draconian monetary penalties, but it can also potentially carry criminal tax and information reporting charges. These include most relevant to this post, criminal failure to file, willful failure to file an FBAR, as well as fraud and false statements. Although the IRS indicates in writing that there is no immunity or guarantee of not being criminally prosecuted, experience shows that a taxpayer who makes a complete timely and accurate voluntary disclosure as part of the IRS’s Voluntary Disclosure Program will not face prosecution, followed by deportation if not a citizen. i.e., on a temporary visa or green card holder. The spirit and purpose of the program is to provide an avenue to avoid the harshest of the potential civil and criminal tax consequences and to provide an avenue to voluntary compliance by the gone astray taxpayer.

NON-WILLFUL OFFSHORE INFORMATION AND TAXABLE SOURCES OF INCOME REPORTING FAILURES.

In some instances, it may not be simple to determine if you have foreign financial assets or accounts that are required to be disclosed. For instance, a majority ownership interest by a U.S. person or persons, in an offshore Corporation or Partnership that owns Foreign Real Estate, may require both the individuals that owns an interest in the offshore entity, and the offshore entity itself, to disclose reportable foreign financial accounts or assets. Moreover, ownership of Foreign Real Estate through a foreign trust also carries with it the obligation to disclose foreign financial accounts, assets and income and provide 3520a reporting.

Gifts or inheritances from nonresident aliens of foreign real estate, ownership interests in foreign entities or of cash also trigger requirements to disclose the foreign assets or accounts and pay taxes on any associated offshore taxable income and to provide foreign entity and 3520 information reporting where the fair market value of such gifts received from nonresident aliens exceed $100,000 in value in a calendar year.

Where you have inadvertently fallen out of compliance with offshore information reporting requirements but have not failed to report the related offshore taxable income, the offshore information reporting noncompliance can be cured without penalty if there was reasonable cause for the reporting failure through the delinquent FBAR or foreign information reporting programs.

Where you have inadvertently fallen out of compliance with offshore information reporting reequipments and additionally failed to report (even small amounts) of offshore taxable income, a domestic or expat streamlined voluntary disclosure can help.

WHAT IS A VOLUNTARY DISCLOSURE?

The IRS voluntary disclosure program requires that you provide a truthful, timely and complete disclosure to the Criminal Investigation Division of the IRS. This includes cooperating with the IRS to determine the correct tax liability due as well as making a good faith arrangement to pay the associated tax, penalties, and interest owed. The key is that you must make a voluntary disclosure BEFORE the IRS has started a civil audit or criminal tax investigation against you, has received incriminating information from a third party, or acquired information indicating your noncompliance through criminal tax enforcement action against you or a third party.

WILL YOUR OFFSHORE TAX AND INFORMATION REPORTING NONCOMPLIANCE BE VIEWED BY THE IRS AS WILLFUL?

Unlike in other areas of law, a taxpayer’s offshore tax and information reporting noncompliance can be considered willful, even if they did not act intentionally, or deliberately, as long as they are deemed to have acted recklessly or blindly. Non-willful conduct must be conduct that is negligent, or mistaken, or that is due to a misunderstanding of the law that was made in good faith. If the taxpayer is found to be willful, they can still be subject to the draconian civil and criminal penalties available to the IRS. If the taxpayer has acted willfully, they will be in incredible danger if they attempt to certify that they acted non-willfully under other IRS programs to be discussed later in this post. Therefore, none of the avenues to return to offshore income tax and information reporting compliance that are available should be attempted without first obtaining competent and experience legal counsel from a dually licensed International Tax Attorney and CPA.

THE AVAILABLE OPTIONS TO RETURN TO OFFSHORE TAX AND INFORMATION REPORTING COMPLIANCE HAVE CHANGED MULTIPLE TIMES TO DATE 

The Offshore Voluntary Disclosure Program (OVDP), which is currently closed, originally launched in 2009, allowed over 50,000 taxpayers to comply voluntarily with offshore tax and information reporting requirements. This program, along with its less harsh program terms than are currently available, was implemented primarily because many taxpayers were not aware of their offshore tax and information reporting obligations. Under this program, taxpayers were able to bring their offshore tax and information reporting back into compliance, and although the penalties may have been higher than with other IRS programs available in the past, it carried with it the ability for taxpayers to avoid possible criminal offshore tax and information prosecution by disclosing their foreign accounts sooner rather than later. The program required full voluntary disclosure meaning that the taxpayer must disclose all undisclosed foreign accounts, assets, or income sources, no matter the likelihood that the IRS will discover the undisclosed accounts. Full and complete disclosure was necessary. Moreover, the disclosure period was 8 years. Also, under this program, a taxpayer was required to have at least some international or foreign income to apply, even if they also had some domestic income. Also, the penalties due to taxpayers under this program were 20% annually on the unreported taxes due, plus interest for all eight years. For bank account balances, the IRS levied a 27.5% FBAR penalty on the combined highest balance that was unreported over an eight-year period of time. Also, the IRS did not provide any special treatment of Information returns.

The IRS ended this program effective September 28, 2018, partially based on the IRS’s opinion that the level of awareness that taxpayers have for their offshore reporting obligations is on the rise and therefore steeper penalties are warranted. As a result, it is imperative that taxpayers who may have undisclosed offshore accounts, assets, or taxable income, seek a pathway back into compliance sooner rather than later because of the harsher and harsher program terms that have evolved over time.

OFFSHORE VOLUNTARY DISCLOSURE PROGRAM CURRENTLY AVAILABLE

In light of the closure of the Offshore Voluntary Disclosure Program (OVDP), the IRS revised its traditional voluntary disclosure program to allow for offshore disclosure of assets in foreign accounts. Currently, a taxpayer must apply for voluntary disclosure through Form 14457 via mail or fax and obtain a pre-clearance letter. Afterwards, taxpayers must make the application within 45 days after receiving preclearance. The taxpayer’s period of disclosure is generally reduced to six years. Currently, the FBAR penalty is $100,000 or 50% of the combined offshore maximum value of the offshore account over the six-year reporting period, whichever is greater. We have seen the IRS hit both husband and wife with a $100,000 or 50% penalty where they each had their own FBAR filing requirement even where they filed married filing joint.

In addition, there could be other potential penalties, such as civil penalty or fraudulently failing to file tax returns may carry penalties of up to 75% penalty on the amount of tax due. However, if applicants fail to file informational returns, the IRS will not automatically issue penalties in these instances. These include informational returns such as Form 5471 or 5472 for Corporations, Form 8865 for partnerships, or Form 3520-A for Trusts. Instead, the Agent will consider all of the facts and circumstances involved with the Taxpayer. Thus, a taxpayer could receive a break on informational return penalties. In addition, other penalties can be addressed and handled also based upon the facts involved. Like other areas, taxpayers may also appeal to the Office of Appeals.

THERE ARE PLENTY OF OPTIONS AVAILABLE

In addition to voluntary disclosure programs, there are other options available to the taxpayer. This includes, streamlined procedures allow a taxpayer that has not been willful in their failure to disclose foreign financial assets, to come into compliance through filing the necessary returns, and paying the associated tax and penalties due. To participate in streamlined procedures, the taxpayer must be able to certify that their conduct was not willful, the IRS must not have already started an audit or criminal investigation of the taxpayer, and the taxpayer must have a valid taxpayer identification number. If a taxpayer does not have a social security number (SSN), or a valid Individual Taxpayer Identification Number (ITIN), they can still use the streamlined procedures, but must include an application for an ITIN. It should be noted that a taxpayer cannot utilize the voluntary disclosure practice discussed below if they have already made a submission under the Streamlined Procedures. The domestic version of the streamlined program carries with it a 5% FBAR penalty and the expat version does not include an FBAR penalty.

In addition to Streamlined Procedures for Filing and Compliance, there are procedures for Delinquent International Information Return Submission and Delinquent FBAR Submission Procedures available to taxpayers to deal with failure of compliance penalties and actions. Each of these procedures carry with them specific requirements and taxpayers are encouraged to seek competent legal and tax counsel to advise if these procedures or others are right for them.

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BEST OPTION IS TO SEEK QUALIFIED LEGAL HELP

Of the options listed in this post, the most important and best option for taxpayers is to not go it alone. Anytime there are potential criminal tax and offshore information reporting penalties involved, it is not recommended that taxpayers attempt to navigate the complex system of disclosure of foreign financial assets or accounts alone or with any professional that does not specialize in international tax and is an Attorney. Many of the various programs may be difficult to understand and the costs could be extremely high. The best thing that you can do is to contact a dually licensed Tax Attorney and CPA with extensive experience and success with the various Offshore Voluntary Disclosure Programs offered by the IRS. A trusted legal advisor can help navigate the rules of the programs and help to limit or even eliminate your exposure to criminal tax and offshore information reporting prosecution. Regardless of what category you may fall into, or even if you are unsure if you have a disclosure requirement, it is still a good idea to consult a qualified legal and tax professional to be sure that you do not find yourself being exposed to criminal liability. It is best to hire a dually licensed Tax Attorney and CPA like those found at the Tax Law Offices of David W. Klasing who is experienced in all facets of the domestic and offshore Voluntary Disclosure Programs and has decades of success in helping clients avoid criminal tax and information reporting prosecution through this and other programs.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

See our 2011 OVDI Q and A Library

See our FBAR Compliance and Disclosure Q and A Library

See our Foreign Audit Q and A Library

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