IRS Targeting Taxpayers With Unreported Foreign Income And Undisclosed Foreign Bank Accounts

Since 2009 when the IRS first came out with the Offshore Voluntary Disclosure Program, it warned taxpayers that with the vast amount of information coming in from foreign financial institutions, it will have the capability to identify non-compliant taxpayers.  Well that time has finally come.

The Investigation Process Used By IRS

Once potential non-compliant taxpayers have been identified through the data analytics applied by the IRS computers, these lists are then circulated to IRS field offices for assignment to Revenue Agents.  The Revenue Agent usually then makes the initial contact by sending a letter to the taxpayer notifying that the taxpayer has been selected for examination with a specific inquiry into transactions involving foreign accounts.  If you receive such a contact, do not think that by signing a certification under penalties of perjury that you never had any involvement with foreign accounts you will be off the hook and the IRS will not pursue this further.

Keep in mind that for the IRS to first start this inquiry, the IRS must have some credible information which got you on this list and if this information the IRS has collected does infer non-compliance the IRS not only will continue with the investigation but also use that certification as a basis to show that the taxpayer made a false statement to an IRS agent.

It Is A Crime To Lie To IRS

18 U.S.C. § 1001 makes it a felony to “knowingly and willfully make any materially false, fictitious or fraudulent statement or representation in any matter within the jurisdiction of the executive, legislative or judicial branch of the United States.”

IRC § 7206 extends this consequence to any person who—

(1) Declaration under penalties of perjury

Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

(2) Aid or assistance

Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

(3) Fraudulent execution

Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or

(4) Removal or concealment with intent to defraud

Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

(5) Compromises and closing agreements

In connection with any compromise under IRC § 7122, or offer of such compromise, or in connection with any closing agreement under IRC § 7121, or offer to enter into any such agreement, willfully—

(A) Concealment of property

Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

(B) Withholding, falsifying, and destroying rec­ords

Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax.

A conviction under IRC § 7026 can land you a fine of up to $100,000 ($500,000 in the case of a corporation), and/or imprisonment of up to 3 years, together with the costs of prosecution.

Is The False Certification You Provided To The IRS Agent Likely To Land You In Jail?

It is possible.  A number of courts have held that if a taxpayer makes false statements to an IRS agent relating to the fraud in question it helps prove the “attempt” element of attempted tax evasion, which requires an “affirmative act” by the taxpayer. For example, the 11th Circuit explained that “an affirmative act constituting an evasion or attempted evasion of [a] tax occurs when false statements are made to the IRS after the tax was due, and an allegation to that effect satisfies the affirmative act element of the crime.” U.S. v. Winfield, 960 F.2d 970, 973 (11th Cir. 1992).  The IRS knows this and for this reason will have the taxpayer reiterate on separate occasions the taxpayer’s position essentially giving the taxpayer multiple opportunities to “recant” his statement.  The IRS is also aware that taxpayers can plead the Fifth Amendment to avoid self-incrimination making it more difficult for the government to meet its burden of proof. How a taxpayer should respond will vary on a case by case basis but what should be apparent is the importance to have qualified tax counsel involved to preserve a taxpayer’s rights and come up with the best possible solution.

For Those Non-compliant Taxpayers Who Have Yet Heard From The IRS … There is still time to come forward.

The Offshore Voluntary Disclosure Program (“OVDP”) offers taxpayers with undisclosed income from foreign financial accounts and assets an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign financial accounts and assets now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.  The IRS has announced that OVDP is expiring September 28, 2018.

The IRS also developed the Streamlined Filing Compliance Procedures to accommodate taxpayers with non-willful compliance issues. Submissions have been made by taxpayers residing in the U.S. and from those residing in countries around the globe. The streamlined procedures have resulted in the submission of more than 96,000 delinquent and amended income tax returns from the 48,000 taxpayers using these procedures. A separate process exists for those taxpayers who have paid their income taxes but omitted certain other information returns, such as the Report of Foreign Bank and Financial Accounts (“FBAR”).

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5% and 10 times more than the 5% rate offered in the expanded streamlined procedures.

What Should You Do?

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.

Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets and unreported foreign income.