Taxpayers who are facing a tax audit are often concerned about how much money they may end up owing the IRS or the state taxing authority. These taxpayers are often hyper-focused on the potential “damage” to their bottom-line. In many cases, the concern over potentially unpaid taxes or erroneous deductions can cause the taxpayer to fail to realize that he or she may have committed significantly more serious tax crimes or that these seemingly commonplace errors may be used to support a criminal tax prosecution.

In some cases, concern over the final bill that may come from a tax audit causes the taxpayer to have something akin to tunnel-vision. They may forget that they hold or control foreign accounts that may not have been properly disclosed. Even worse, the taxpayer may fail to remember that he or she made statements or signed his or her income tax return indicating that he or she did not have foreign accounts when this was not true. In any case, even non-criminal offshore tax situations can lead to high fines and penalties. Furthermore, they are unfortunately well-suited for criminal prosecutions when a pattern of offshore noncompliance combines with unexplained behavior or badges of fraud.

Civil Auditors Will Always Ask Taxpayers in an Audit, “Any foreign accounts?”

Taxpayers facing an audit frequently want to know, “Why me?” Typically they feel like their audit was caused by a single act or a single factor. In some cases, the IRS will indeed request information for a limited, single issue. However, mishandling a limited audit can expand the scope of the agent’s investigation. Furthermore,  in other instances, the taxpayer may be selected for an audit due to having certain characteristics like a high gross income, ownership of a small business, or claiming $0 in income. These audits may require the taxpayer to engage in a far more wide-ranging inquiry. As part of an audit, the civil auditor is highly likely, if not guaranteed, to ask the taxpayer whether he or she has any foreign accounts or assets.

Unless a taxpayer plans for this eventuality and takes appropriate action, such as entering into Offshore Voluntary Disclosure Program (OVDP), he or she will seemingly face a situation without a clear good choice. If, on one hand, the taxpayer admits to his or her failure to disclose foreign accounts and assets through FBAR, FATCA, or both he or she has just admitted to a Bank Secrecy Act violation and a tax violation, respectively. For the FBAR violation, assuming the conduct was not willful, the taxpayer could face a $10,000 penalty for each year where foreign accounts were improperly not disclosed. A $10,000 penalty also applies for FATCA violations and an additional $50,000 penalty can also be imposed if the taxpayer continues to be noncompliant.

Clearly, most taxpayers would prefer to avoid the imposition of fines and penalties. In many cases these penalties can be mitigated through voluntary disclosure.  However, if the taxpayer lies about his or her failure to file FBAR or other offshore noncompliance, the consequences may become even more serious.

Taxpayers Who Lie About Foreign or Offshore Accounts Can Face Criminal Tax Charges

To begin with, a taxpayer who has failed to file FBAR and/or FATCA may have also made errors on his or her income tax filing. Schedule B of a taxpayer’s income tax return asks whether the taxpayer holds or controls any foreign accounts. Additionally, since a tax return is certified by the taxpayer and made under the penalty of perjury, providing false information is a tax crime and is punishable by law. However, the government must also prove that you willfully filed the false return. Lying about the foreign accounts would be evidence of further and continuing concealment of the activities. It may result in criminal tax charges for filing a false return under Section 7206(1) of the U.S. Tax Code.

Furthermore, failure to file one’s FBAR when an obligation to do so exists is an offense even when the failure is inadvertent or mistaken. However, the penalties become significantly harsher when the noncompliance is the result of a “voluntary or intentional disregard of a known legal duty.” Furthermore, lying to an auditor about the existence of foreign accounts under this context would also evidence willfulness and a desire to conceal.

What this adds up to is that, for many cases centered on unreported assets and accounts, the indicators of willfulness or voluntary conduct – sometimes called badges of fraud – can easily combine to give the appearance of criminal tax fraud. Consider that an IRS agent or DOJ prosecutor would interpret the client as having lied and showing badges of fraud when he or she:

  • Certified the tax return falsely
  • Intentionally or voluntarily failed to file FBAR
  • Intentionally disregarded the obligation to file FBAR set forth in Schedule B
  • Failed to indicate the existence of foreign accounts of Schedule B by checking the box indicating the negative
  • Failed to list the foreign accounts he or she actually held
  • Failed to seek legal advice regarding the proper handling of foreign accounts.

In short, when a pattern of offshore compliance failures appear in tandem with badges of fraud, the risk of facing criminal tax fraud charges increases significantly. This type of case is appealing to prosecutors and represents a high level of legal risk for the taxpayer.

OVDP Can Provide a Way Out For High-Risk Offshore Tax Situations

For taxpayers facing a high risk of criminal prosecution, engaging in OVDP may provide a solution and protect you from the worst case scenario. The OVDP program can provide taxpayers protection from facing criminal charges if the individual comes forward voluntarily and makes a full and complete disclosure of past wrongdoing and pays an offshore penalty. While no taxpayer wants to pay any penalty, this represents a significant discount over even civil penalties for offshore tax issues and is obviously preferable over serving a prison sentence. Taxpayers with concerns regarding offshore tax issues and the potential for criminal liability should immediately contact the Tax Law Offices of David W. Klasing by calling 800-681-1295 today or by contacting us online.