Appearing in court with co-defendant and fellow political consultant Richard “Rick” Gates, former Trump campaign manager and veteran political operative Paul Manafort was charged in October 2017 with 12 counts of various crimes, including making false statements, conspiring to launder money, and conspiring against the United States. The charges revolve around the allegedly willful nondisclosure of offshore accounts located in three countries known as tax havens: the Caribbean nation of St. Vincent and the Grenadines, the East African nation of Seychelles, and the Mediterranean island nation of Cyprus. The publicity surrounding Manafort’s case has led many taxpayers to ask questions about tax havens, which our international tax attorneys will answer in this article: what tax havens are, where tax havens are located, and most importantly, whether tax havens are legal.
According to the indictment charging Gates and Manafort, “Between at least 2006 and 2015, Manafort and Gates acted as unregistered agents of the Government of Ukraine… In order to hide Ukraine payments from United States authorities, from approximately 2006 through at least 2016, Manafort and Gates laundered the money through scores of United States and foreign corporations, partnerships, and bank accounts.”
The indictment continued, “In furtherance of the scheme, Manafort and Gates funneled millions of dollars in payments into foreign nominee companies and bank accounts, opened by them and their accomplices in nominee names and in various foreign countries, including Cyprus, Saint Vincent, the Grenadines… and the Seychelles. Manafort and Gates hid the existence of the foreign companies and bank accounts, falsely and repeatedly reporting to their tax preparers and to the United States that they had no foreign bank accounts.”
According to the indictment, “In total, more than $75,000,000 flowed through the offshore accounts. Manafort laundered more than $18,000,000, which was used by him to buy property, goods, and services in the United States, income that he concealed from the United States Treasury, the Department of Justice, and others. Gates transferred more than $3,000,000 from the offshore accounts to other accounts that he controlled.”
For the curious, the full indictment against Manafort and Gates can be viewed here.
The Internal Revenue Code (IRC) contains no shortage of legal definitions, dozens of which are enumerated under various sections of 26 U.S. Code § 7701 (IRC § 7701). Seemingly self-explanatory terms are methodically assigned strict definitions – for example, 26 U.S. Code § 7701(a)(9) goes through the trouble of defining the term “United States” – which makes the conspicuous omission of the term “tax haven” all the more surprising. Odd though it seems, the U.S. Tax Code simply doesn’t contain a formal definition for tax havens.
Generally speaking, however, a “tax haven” is considered to be any country, located anywhere in the world, where low tax rates create a favorable financial climate for individuals and/or businesses. Depending on the tax haven, certain types of taxes may not be imposed at all. For example, in the Cayman Islands, no tax is imposed on capital gains, nor is there an estate tax, corporate tax, or inheritance tax.
It is not inherently illegal for a business owner to start a company, or for a U.S. citizen to open a bank account, on Cyprus, the Seychelles, or any other tax haven. What is illegal is deliberately concealing, or attempting to conceal, foreign income and assets from the federal government in order to avoid being taxed on said income, which constitutes tax evasion. Gates and Manafort are accused of willfully failing to disclose their offshore accounts by (1) failing to file an FBAR (Report of Foreign Bank and Financial Accounts) for certain tax years, and (2) failing to truthfully answer the questions contained on Form 1040 (U.S. Individual Income Tax Return), Schedule B (Interest and Ordinary Dividends), Part III (Foreign Accounts and Trusts), which require taxpayers to indicate whether they had “a financial interest in or signature authority over a financial account” exceeding $10,000, in which case it would be mandatory for the taxpayer to timely file an FBAR, otherwise known as FinCEN Form 114.
Numerous countries are considered tax havens, though different sources inevitably produce slightly different lists. To use just one example, as recently as December 5, 2017, the European Union (EU) released its “first-ever” list of tax havens, or, as the EU refers to them, “non-cooperative tax jurisdictions,” naming the following 17 nations:
According to the European Commission, Taxation and Customs Union, these countries earned their spots on the list above by “refusing” to engage with the EU or to address tax good governance shortcomings.”
Foreign income must be diligently and meticulously reported to the Internal Revenue Service and U.S. Treasury. Unfortunately for taxpayers, the government’s current reporting requirements can be very confusing, as considerable overlap exists between various laws and tax forms meant for disclosure. To make matters worse for taxpayers, harsh penalties can result from small errors – even those which are purely accidental.
Due to the difficulty of making the proper disclosures, and the serious consequences that can result from mistakes, taxpayers are strongly advised to seek step-by-step legal guidance from an experienced FBAR attorney or tax preparation lawyer, like the trusted accounting and tax professionals at the Tax Law Office of David W. Klasing. Our tax attorneys have more than 20 years of legal experience, and are ready to provide the zealous, detail-oriented guidance you need to effectively avoid penalties and confidently comply with the law. To set up a reduced-rate consultation concerning offshore income reporting requirements, contact us online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
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 in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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Foreign income and information non-compliance
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