Date: 05/16/12

Topic: Foreign Accounts

This blog entry discusses the “tax gap” caused, in part, by taxpayers with undisclosed foreign accounts, and what the IRS’s Criminal Investigation Division (CID) is doing about it.

The Tax Gap. The IRS’s criminal investigation division (otherwise called the “CID”) has a “mission.” Its mission is to close the “tax gap”–and what is that? The IRS states that the tax gap is “the amount of tax liability faced by taxpayers that is not paid on time.” In other words, it is the amount the IRS loses because taxpayers fail, for one reason or another, to pay their liabilities. With more austere language, the CID’s mission is

to foster voluntary compliance and ensure public confidence through effective enforcement of criminal statutes relative to tax administration and financial crimes….

Non-Filers & Tax Evaders Widen Tax Gap. Now, it is true that the tax gap cannot be closed entirely (achieving 100% compliance is unrealistic). But what has become clear is that a significant portion of the tax gap is due to individual and corporate nonfilers and tax evaders–and this includes those with undisclosed foreign accounts. See Comisky, Feld, and Harris, Tax Fraud & Evasion ¶ 1.03 Undeclared Foreign Accounts and Offshore Tax Fraud (2012). The remainder of this blog entry discusses some of the CID’s efforts and some recent convictions.

CID’s Efforts. In seeking to eliminate the tax gap, the CID has a number of programs, including those that relate to examination, collection, and “computer-matching programs.” For more on the CID’s methods, see IRS Criminal Investigations.

The CID is quite successful with its programs and efforts. Indeed, in the IRS’s words:

[s]ince [CID’s] inception in 1919 to the present, the conviction rate for Federal tax prosecutions has never fallen below 90 percent. This is a record of success that is unmatched in Federal law enforcement.

90 percent conviction rate! That is truly extraordinary–and it should cause concern for the person with an undisclosed account.

Undisclosed Foreign Accounts. The US loses close to $100 billion in tax revenues from offshore tax abuses. See Comisky, Feld, and Harris, Tax Fraud & Evasion ¶ 1.07 Undeclared Foreign Accounts and Offshore Tax Fraud (2012)(citing Senate subcommittee findings). The last few years we were surprised to learn that a number of financial institutions have been facilitating international tax evasion by creating prohibited tax havens.

For example, on Feb. 18, 2009, the DOJ implicated USB, Switzerland’s largest bank, on charges of conspiracy to defraud the U.S. because it impeded the IRS in the ascertaining, computing, assessing, and collecting of income tax for 5 years (from 2002 until 2007). The Wall Street Journal ran a story on it.

USB entered into a settlement agreement to pay a sum of $780 million in fines, penalties, interest, and also restitution. Some of USB’s bankers were also charged. See, e.g., United States v. Birkenfeld, Dkt. No. 08-CR-60099 (Zloch) (SD Fla., Apr. 10, 2008).

What is most significant, however, is not the fact that USB or its bankers were charged, but the extent to which USB accountholders were liable. Thus, for example, in April of 2009, the government filed a criminal complaint against Steven Michael Rubinstein, a USB accountholder who had dual citizenship in the U.S. and South Africa. He was charged with filing a false income tax return, thus violating IRC §7206(1).

The IRS caught up to him after two years after the event. The lesson? Once you commit tax fraud, you can never feel “safe”; you will always be looking over your shoulder. In part, this stems from the unlimited statute of limitations that exists for tax fraud.

Mr. Rubenstein was later sentenced to three years probation, twelve months of home confinement, and a $40,000 criminal fine.

Similarly, in August of 2009, one John McCarthy was charged with one count of willfully failing to file an FBAR. He had an undisclosed USB account, and that resulted in a violation of 31 USC §§5314; 5322(a).

How, exactly, did he do this? Well, he was the owner of a USB account, yes, but it was held in the name of a Hong Kong corporation and he used that to conceal more than $1 million from his U.S.-based business. He was eventually sentenced to 6 months home confinement, a criminal fine of $25,000, restitution in excess of $485,000, and 300 hours of community service.

The solution: voluntary disclosure. If you have undisclosed foreign account, you have some legal options open to you. One of those is to make a voluntary disclosure. A voluntary disclosure is where you reveal to the IRS your foreign accounts before they find them. It often results in substantially lesser penalties, and no jail time.

It is sometimes said that fighting the IRS alone a bit like walking into a firestorm. Our Firm offers a robust defense for taxpayers facing criminal tax accusations. We can help if you’ve found your way into tax problems.