If you’ve been to our tax blog before, you may recall a recent article in which our criminal tax defense lawyers debated the prevalence of domestic tax evasion versus offshore tax fraud, such as willful failures to file the FBAR (Foreign Bank Account Report) and report offshore taxable income. However, this is not the only distinction to be made among tax and financial or “white collar” crimes. Another major dividing line is that which separates cash-based offenses, like bank robbery, from crimes that are carried out against the government digitally, often using stolen or falsified information. One might argue that paper cash would be the best vehicle for would-be tax criminals, since transactions are discreet and seemingly impossible to trace. However, many financial and tax experts have made the opposite argument, explaining that digital technologies – particularly in the forms of shell companies, offshore banking accounts, and cryptocurrencies like Bitcoin – actually offer greater protection from interception and prosecution, pointing, in the process, to some telling statistics on cyber crimes versus “traditional” offenses.
In April 2017, CNBC published an article discussing the role of cash in “rising financial crime,” in which Kenneth Rogoff, Professor of Economics at Harvard University, was quoted as stating, “Cash plays a big role in crime. I think there’s a reason cash is king. Even though we have bitcoin, gold coins, uncut diamonds… you still find cash playing a major role [in crime], because it’s basically government-licensed, anonymous currency.”
Rogoff, of course, is correct to assert that cash was and remains a major player in the world of white collar (and all types of) crime. The question is, has the rise of our digital era – the advent of debit and credit cards, mobile and online banking, international transactions that can be conducted instantaneously from thousands of miles away – made it easier than cash to commit tax and financial crimes?
Some experts think so. “One of the challenges that we’re seeing this year,” IBM Security vice president of threat intelligence Caleb Barlow said in 2018, “is that as tax professionals and the IRS have become more and more sophisticated, so too have the adversaries.”
To just what extent? You might be surprised. According to an ominously-titled February 2018 report from computer security company McAfee (“Economic Impact of Cybercrime – No Slowing Down”), “In 2014, taking into account the full range of costs, [the Center for Strategic and International Studies, or CSIS] estimated that cybercrime cost the world between $345 billion and $445 billion.”
Numbers that large can be hard to put into context. However, as the same report explains, “One way to get a sense of the effect of cybercrime is to compare it to the internet economy, the fastest growing segment of the global economy, rather than total global GDP. Recent estimates put the internet economy at $4.2 trillion in 2016. Using this figure, we can see cybercrime as a 14% tax on growth.” Some of the countries hit hardest, which were each profiled in the report, include Australia, Canada, Germany, Mexico, Japan, and the United Kingdom.
According to Brian Krebson, an expert on financial security, “Organized cybercriminals stole more than $25 million from small to mid-sized businesses in… e-banking heists in the third quarter of 2009 alone,” compared to the approximately $9.5 million “hauled… out of U.S. banks over that same time period last year.” To present this data another way, out of approximately $34.5 million stolen, 72.5% of those funds were lost to cybercrime, whereas only 27.5% were physically stolen.
So why is this happening now? The reasons are likely myriad. For instance, experts note that unlike “conventional” robbery, which is often conducted at knifepoint or gunpoint, cybercrime requires no need for physical violence, lessening the legal risk for the criminal if he or she is apprehended later. Experts have also pointed to various laws restricting the international transport of physical currency – laws which may be easier to circumvent digitally than physically, particularly in an age of heightened airport security.
The digital realm also opens an avenue into tax crime that cash does not: the opportunity for sophisticated criminals to hack or impersonate CPAs and other tax professionals.
“We had about 75 tax professionals report that they had been victims of some sort of a taxpayer breach,” said IRS spokesperson Cecilia Barreda in 2018, noting that represented a 60% increase over the same period during the previous year.
As IBM’s Barlow explains, this is dangerous because, once a cybercriminal gains access to the target account, “the private information of that tax professional’s clients… can be used to file tax returns on their behalf. And in addition to that,” he warned, “they can use the IP address and the computer of the tax professional to actually do the filing with the IRS.”
This type of scam, which relies predominantly on phishing and identity theft, is different from tax preparer fraud, in which the tax preparer knowingly engages in the fraud, rather than having his or her data accidentally compromised.
Technology grows more powerful and widespread every day. The result is an ongoing “arms race” between tax offenders and the IRS – a race in which the latter is often one step ahead. Simply look to our tax blog, which is full of accounts of taxpayers who used technologically sophisticated methods to engage in serious tax crimes. While some evaded detection for years, a great deal were eventually caught, and, of those, most were sentenced to federal prison – in addition to receiving fines, restitution orders, interest charges, and civil penalties.
From cash skimmers (“zappers”) to stolen identities purchased on the “dark web,” the IRS is adept at recognizing the badges of tax fraud – and the methods and technologies that enable it. If you are under investigation for tax fraud, or if you or your business have been chosen for a tax audit, it is urgent that you discuss your situation with an experienced tax evasion defense attorney immediately. For a confidential, reduced-rate consultation concerning a tax audit or IRS criminal investigation, contact us online right away, or call the Tax Law Office of David W. Klasing at (800) 681-1295. We provide aggressive criminal tax defense representation and assist taxpayers with compliance issues like unfiled returns, undisclosed offshore accounts and non-reported offshore income, domestic and international voluntary disclosures to cure previously fraudulent tax returns, and delinquent returns.
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