Domestic Tax Fraud: An Even Bigger Problem than Offshore Tax Evasion?

If you visit our tax blog regularly, you may have seen our recent article discussing a bombshell New York Times report accusing the Trump family, including Donald Trump, of engaging in widespread tax fraud during the 1990s. According to the article, published on October 2, Trump took at least three actions to unlawfully further his family’s wealth: (1) “helping his father take improper tax deductions worth millions”; (2) creating a sham corporation, All County Building Supply & Maintenance, for the purpose of “concealing gifts received from his parents,” also valued at millions of dollars; and (3) devising “a strategy to undervalue his parents’ real estate holdings by hundreds of millions of dollars on tax returns,” resulting in substantially lower tax liabilities than the family would otherwise have incurred. (Specifically, there is a discrepancy of approximately $500 million between the family’s estimated $550 million in tax bills and $52.5 million in tax payments.) While the allegations remain under journalistic investigation (with some politicians, like Senator Ron Wyden of Oregon, calling on new IRS Commissioner Charles Rettig to launch a government investigation), they paint a portrait of tax evasion tactics among America’s wealthiest citizens – particularly when viewed alongside scandals like the Panama Papers of 2016, the following year’s Paradise Papers, and most recently, allegations that Trump son-in-law Jared maneuvered to avoid paying federal income taxes. Just how pervasive is this problem? And how often does tax evasion reach overseas, compared to fraud within U.S. borders?

How and Where Do U.S. Citizens Commit Tax Evasion?

In discussions of tax evasion, the emphasis frequently falls on offshore bank accounts, which are utilized – and concealed – by thousands of U.S. taxpayers annually. (According to the Internal Revenue Service’s own data, more than 56,000 taxpayers made voluntary disclosures of foreign accounts through the IRS’ now-discontinued Offshore Voluntary Disclosure Program, which ran from 2009 through September 2018.) There are two reasons that can explain this emphasis:

  1. Enforcement of compliance with offshore reporting laws has been a top priority for the IRS in recent years. Here is just one recent example.
  2. The penalties for failing to report offshore accounts can be devastating, even in civil cases. For a detailed breakdown, refer to our discussion of FBAR penalties. (For context, the “FBAR” is a mandatory tax document certain taxpayers file to report foreign bank accounts, though further action may also be required of some individuals.)

With these points in mind, it is extremely dangerous for any taxpayer to assume they are “safe” from investigation solely because their accounts are located in the United States, or because they have formed a U.S. entity instead of opening a business abroad. While most of us tend to think of “tax havens” as being exotic, faraway places like Hong Kong, Singapore, or the Cayman Islands, the truth is that, with its often dauntingly intricate tax laws – the same laws that allowed the Trump family’s alleged maneuvering – the United States has its own appeal for money-launderers and other non-compliant taxpayers. As our tax evasion lawyers noted when the Panama Papers emerged, the U.S. is frequently chosen by taxpayers seeking to conceal wealth with anonymous shell companies.

According to Alex Cobham, chief executive of the Tax Justice Network – an advocacy group focused on affecting “systemic change” throughout “a wide range of issues related to tax [and] tax havens” – the problem is widespread. “In effect,” he stated in one interview, “the U.S. is its own tax haven for many wealthy people,” with Trump as merely one example.

“The U.S. has among the lowest relative use of Swiss financial institutions, for example,” he continued, “because it’s so easy to hide your money in different states of the U.S. And while Swiss financial institutions have to report bank data to the IRS” – here Cobham is likely referring to the Foreign Account Tax Compliance Act (FATCA), which requires foreign banks to report American accounts to the U.S. government, or the now-terminated Swiss Bank Program – “a simple anonymous company structure in Delaware or Wyoming can solve the issue for a U.S. citizen – and without any money leaving the country.”

Just how often does this happen? Frequently enough that, according to one IRS analysis released in 2016, U.S. taxpayers caused a staggering tax gap of $264 billion for the 2008-2010 period by underreporting individual income taxes. Out of the $264 billion, $64 billion was categorized as by the IRS as “non-business income”, while $125 billion, nearly twice as much, was “business income.” Tax credits, income offsets, and other issues accounted for smaller portions. (For a full visual map of the 2008-2010 tax gap, see page three of the IRS analysis linked above.)

“As to which problem is ‘bigger,’” says professor Bridget Crawford, who teaches tax law at Pace University Law School, “it is difficult to say without further research, but in terms of sheer number of people involved, I think one would find more non-compliant taxpayers right under the nose of Uncle Sam than basking in a tax haven like the Cayman Islands.”

Irvine Tax Evasion Lawyers Serving Northern and Southern California

It does not matter whether a U.S. citizen seeks to evade his or her tax liabilities by parking income offshore, or by hiding wealth right here in the United States: he or she is almost guaranteed to face eventual detection, auditing, and potentially, prosecution. While it is true that the IRS places special emphasis on curbing offshore tax evasion, fraudsters are up against highly sophisticated technology – and harsh penalties – no matter where they attempt to hide.

If you are facing an IRS criminal investigation for tax evasion or related crimes, talk to an experienced tax attorney as soon as possible to discuss your rights and potential options. For a confidential, reduced-rate tax consultation, contact the Tax Law Office of David W. Klasing online, or call our tax office at (800) 681-1295. We serve taxpayers throughout California and beyond.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan Jose, San FranciscoOakland and Sacramento.

 

Helpful Q and A libraries

https://klasing-associates.com/topics/audit-representation-faq/

https://klasing-associates.com/topics/assisting-cpas-with-client-criminal-tax-exposure-faq/

https://klasing-associates.com/topics/criminal-tax-representation-faq/

https://klasing-associates.com/topics/ovdi-faq/

https://klasing-associates.com/topics/fbar-compliance-and-disclosure-faq/

https://klasing-associates.com/topics/foreign-audit-faq/

https://klasing-associates.com/topics/international-tax-law-faq/

https://klasing-associates.com/topics/ovdp/