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Tax Fraud is Going Virtual

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    US officials are targeting virtual currencies due to fears that Americans are using them to evade taxes, opening a new front in the crackdown on tax fraud.

    Virtual currencies such as Bitcoin and the exchanges where they trade have come under increased scrutiny since last month’s arrest of five individuals associated with Liberty Reserve, a Costa Rican-based digital currency business, on charges of running a 6-billion-dollar money laundering scheme.

    Authorities alleged Liberty Reserve was the “bank of choice” for drug traffickers, computer hackers, and identity thieves.

    Now U.S. authorities believe that virtual currencies – which can be traded anonymously – are being used improperly in other ways, such as to evade tax.

    The globalization and digitalization of our currencies has become a significant emerging threat to the Treasury’s revenue collection efforts.

    Eventually, the IRS could demand that taxpayers say whether they are doing any business using non-traditional methods such as using PayPal accounts that allow for the virtual transfer of money. That’s actually one of the things on the horizon, according to Victor Lessoff, the director of the IRS in charge of cyber threats.

    The targeting of virtual currencies follows an aggressive crackdown by the IRS and U.S. Department of Justice on citizens who evade taxes by stashing money in offshore bank accounts.

    Around 70 individuals have been criminally charged in connection with schemes to evade taxes and an investigation is still ongoing. More than $5billion in unpaid taxes has been collected from the offshore voluntary disclosure program (OVDP).

    Now, foreign banks are turning over the names of US clients to the Department of Justice. Switzerland is in talks to resolve a long-running dispute concerning its famously strict bank secrecy laws.

    As people around the globe use computers to access bank accounts and move money it has heightened the need for global cooperation.


    Swiss employees and agents are being thrown under the bus by their Swiss bank employers, who have an incentive to serve them up to prosecutors. The corporations and senior management are protected by a new proposed agreement requiring the corporation to pay a fine, while their agents could be subject to U.S. criminal prosecution.

    The Chamber of Swiss Tax Advisors immediately condemned the political deal, rushed through by the Swiss government last week to assuage growing US impatience. The Swiss Association of Asset Managers said its members would be treated like “second-class citizens” compared to bank executives, who will escape penalty, and lower bank employees who will receive at least some legal protection from the Swiss authorities.

    One lawyer, however, was indicted for working hand-in-hand with a series of Swiss bankers to hide the assets of wealthy U.S. tax dodgers. He set up trusts and sham companies in Liechtenstein, Panama, and the British Virgin Islands to conceal the identity of his client. He is also accused of using secretive constructs to move assets from banks under U.S. investigation to other Swiss banks that were thought to be safer.


    Any United States person who has financial interest in or signatory authority over financial accounts located outside the United States with an aggregate value of $10,000 or more at any time during the calendar year must submit an FBAR report to the IRS. A United States person is defined as:

    • A U.S. citizen
    • A resident of the United States, including green card holders
    • Any corporation organized in the U.S.
    • Any partnership organized in the U.S.
    • Any LLC organized in the U.S.
    • Estates & trusts organized in the U.S.

    It’s important to note that a U.S. person may be required to file an FBAR even though an account did not earn any income during the tax year. The FBAR report must be received by the IRS by June 30 of the year following the reporting year (June 28 this year since June 30 falls on a Sunday). There are no extensions or exceptions. The civil penalty for failure-to-file could reach $10,000. Willful failure-to-file penalties start at $100,000.

    Many taxpayers are surprised to find out that the IRS requires more than traditional savings accounts to be reported. In addition, the following account types are also required to be reported including brokerage accounts (including investment accounts), checking accounts, securities, mutual funds, annuities, insurance policies (with a cash surrender value) or ANY other type of foreign financial account.

    If you own foreign financial accounts or have a stake in other foreign assets such as pensions, retirement plans, or foreign partnerships, and the aggregate value is at least $50,000, you may have additional filing requirements on Form 8938 – Statement of Foreign Financial Assets.

    There are certain circumstances where a U.S. person is not required to file a FBAR with the IRS. Some common situations include:

    • Accounts owned by a governmental entity
    • Accounts owned by an international financial institution
    • Participants in and beneficiaries of tax-qualified retirement plans
    • Certain individuals with signature authority over but no financial interest in a foreign financial account
    • Trust beneficiaries
    • Foreign accounts maintained by a U.S. military bank.

    Do you have a foreign bank account? If you are looking for assistance filing an initial or ongoing foreign bank account report,let our team of experienced attorneys at the Tax Law Office of David W. Klasing help you take advantage of the 2012 Offshore Voluntary Disclosure Program and come into compliance with FBAR regulations. Our attorneys can assess your current situation and provide guidance on your FBAR filing responsibilities.

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