Even folks that don’t have any higher level tax or legal education are likely to be aware of the concept of a statute of limitations. It is the basic idea that there is a limit placed on those trying to bring an action in court. Statutes of limitations govern the timing of both civil and criminal matters and can vary from one year to being non-existent, meaning that an action will never be time barred. In the realm of tax law, the statute of limitations serves as a helpful constant for tax professionals to advise their taxpayers. But a new development regarding the statute of limitations for criminal tax enforcement and Foreign Bank Account Reporting laws have some tax experts and taxpayers concerned.
The FBAR Statute of Limitations is six years, but that doesn’t mean that you can’t still get in trouble—even years later. In general, the government has six years to bring a criminal action against a taxpayer who is being accused of committing a tax crime. For example, if a taxpayer were to file a false tax return, the statute of limitations begins to run when the return is filed and will expire six years later. Thus, the government has six years to discover the illegal activity and bring an action against the taxpayer without running afoul of the time bar. Though according to a federal court in New York, this isn’t always the case. In U.S. v. Canale, the United States District Court for the Southern District of New York ruled that a conspiracy to defraud the United States charge was not time-barred because the original offense occurred more than six years before the charges were brought.
According to a press release by the Department of Justice, Peter Canale, along with his brother Michael and others conspired to defraud the United States when they attempted to conceal inherited monies that had been kept by a relative in an undeclared foreign bank account. The inheritance occurred in the year 2000 and in 2005; Canale and his brother caused others in Switzerland to set up secret bank accounts with the intent to hide the inherited funds from the United States. Finally, each year that Canale filed his tax returns, he declared that he did not have ownership or signature authority in any foreign bank accounts.
What is ironic is that foreign inheritances are not ordinarily even taxable in the U.S. as the U.S. cannot legally assert taxing jurisdiction (Nexus) over a nonresident alien (foreigner). All that is required as long as the inheritance is not of U.S. real estate or U.S. situs assets, is a form 3520 reporting where the inheritance is greater than $100,000 dollars in a given tax year. If Mr. Canale would have complied with the income tax reporting and information laws they never would have had a problem.
When the IRS Criminal Investigations Division caught up to Canale, they investigated the matter and referred him to the Department of Justice for prosecution. When he he was facing a myriad of federal charges including the conspiracy charge, Canale’s defensive argument was simple: the statute of limitations on the conspiracy to defraud the United States should have began running when he caused the foreign bank accounts to be established. But the District Court ruled otherwise. In their ruling, the court stated that when dealing with conspiracy, the statute of limitations begins to run at the last overt act in furtherance of the conspiracy and that when Canale declared that he had no interest in a foreign bank account on his taxes each year, he was performing such an additional overt act.
For taxpayers like Canale that have monies in undeclared foreign bank accounts, this news should not be taken lightly. Individuals who set up foreign accounts that are meant to hide money from the IRS can no longer rely on the six-year statute of limitations. Each year that a taxpayer declares that they don’t have ownership interests in a foreign bank account; he or she is extending the statute of limitations on the underlying crime.
In the end, the ruling in Canale provides the government with more muscle that will be used to bring down the hammer on taxpayers that continue to maintain undeclared bank accounts overseas. The Department of Justice has no qualms with seeking lengthy prison sentences or crippling fines and penalties where offshore income tax evasion is concerned but for taxpayers that want to avoid some of the harshest of the consequences associated with being caught with an undisclosed foreign bank account, the IRS has established the Offshore Voluntary Disclosure Program. Under its terms, a taxpayer can avoid prison or hefty monetary repercussions by coming clean and paying a reduced penalty, back taxes, and interest. But the OVDP is only available to those taxpayers who are currently not under investigation or audit for any tax matter.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have years of experience in assisting taxpayers with a myriad of tax matters including participation in the OVDP. As we mentioned before, once the IRS opens an inquiry into your affairs, there is little that can be done to avoid the threat of criminal prosecution. Ensure that you have the most experienced tax professionals on your side when you step into the ring with the IRS: contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.