If your name was mentioned in the same sentence as Raoul Weil, Carl Zwerner, or Ty Warner, you can rest assured that you haven’t been nominated for an academy award or a Pulitzer Prize. Nor did you win the Publisher’s Clearinghouse Award. Instead, you’d have joined a disgraced group of taxpayers who have had the misfortune of being targeted by the U.S. government in their crusade to stamp out offshore tax evasion.
In stark comparison is John Doe, a conflicted taxpayer who recently entered the Offshore Voluntary Disclosure Program (OVDP). Neighbors and friends who run into John are a captive audience for him as he wallows in his self-pity. John regrets the decision to enter OVDP and tells his tale of woe to anyone who will listen: “I don’t know what I’m doing in this program. I know 500 people with foreign accounts like mine, and they’re not coming in.” These “good Samaritans” have come to know the true meaning of the expression, “misery loves company.”
Obviously, John was exaggerating. However, he likely knows fifty people like him who have chosen not to enter the OVDP, deciding instead to wait it out. Who is making the right decision? In this article, I attempt to provide some clarity, not to mention some practical and sound advice, to a real-world dilemma faced by taxpayers who have failed to report their offshore accounts: “Can I be prosecuted for failing to report my foreign bank account such that I have no other choice but to seek shelter in the OVDP bunker?” This question is so pivotal that it cuts right to the heart of a taxpayer’s decision to enter OVDP.
I. Tax Crimes That The Government Relies Upon in offshore Bank Tax prosecutions
The government has used one or more of the following tax crimes to prosecute over one hundred offshore bank tax cases. The elements of each can be found in the jury instructions for these crimes:
a. FBAR Requirements
A brief history of the FBAR is in order. A once obscure Bank Secrecy Act form, the FBAR is not technically required by the tax code. It was first instituted as a reporting requirement for U.S. persons with overseas accounts. Today, the IRS has breathed new life into the FBAR as a tax enforcement and revenue-raising tool. The IRS has administered and enforced the FBAR since 2003.
Who must file an FBAR? Any U.S. person, including individuals, corporations and trusts, who hold more than $10,000 (USD) in a foreign account at any point during the calendar year must file annually an FBAR. An FBAR must be filed for a range of accounts, including savings and checking accounts, brokerage and securities accounts, certain types of insurance policies and non-cash assets like gold.
The maximum value of an account is defined as the largest amount of currency – and non-monetary assets – that appear on any quarterly or more frequent account statement issued for the year.
b. Willful Failure to File an FBAR (31 USC §§ 5314 and 5322(a) and 31 CFR § 1010.350)
Willfully failing to file an FBAR is a felony that is subject to criminal penalties under 31 U.S.C. § 5322. A person convicted of failing to file an FBAR faces a prison term of up to ten years and criminal penalties of up to $ 500,000. In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:
(1) First, the defendant was a United States person;
(2) Second, the defendant had a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign county;
(3) Third, the aggregate value of these financial accounts exceeded $ 10,000 at any time during the calendar year; and
(4) Fourth, the defendant willfully failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).
Those who keep their finger on the pulse of the criminal tax enforcement system know all too well that not every case involving the failure to report an offshore bank account is prosecuted. Instead, the Department of Justice (Tax Division) is very selective when it comes to deciding which cases to bring. As should come as no surprise, it prefers to cultivate “winners” and not “losers.” Indeed, a conviction helps the DOJ maximize the deterrent effect of the criminal tax enforcement system while an acquittal might suggest that the taxpayer could “get off” with the “right” attorney standing by his side.
As a result, the Department of Justice tends to prosecute only those cases where the taxpayer’s conduct was particularly egregious. The most important question faced by every taxpayer with an unreported offshore account is, “How likely is it that I will be prosecuted?” In other words, is the taxpayer’s risk of prosecution material?
That question turns on a pestilent word called, willfulness. Willfulness is such a critical element of a tax crime that its very presence often answers this vexing question. The more evidence there is of willfulness, the greater the likelihood of criminal prosecution. The less evidence there is of willfulness, the lesser the likelihood of criminal prosecution.
When dealing with willfulness, it is helpful to think of an electromagnet spectrum, with short-wavelength radiation at one extreme pole (i.e., gamma radiation) and long-wavelength radiation at the opposite pole. Focusing on these extreme poles, let’s substitute “Not willful” for the “short-wavelength” pole and “Definite willfulness” for the “long-wavelength” pole.
Sometimes, the needle is pointing so far in the direction of one of the extreme poles that determining the likelihood of prosecution is all but certain. These are what might be considered “slam dunk” cases for a specific type of disclosure. For example, a taxpayer who falls on the “Definite willfulness” end of the spectrum should not think twice about applying to the Offshore Voluntary Disclosure Program. On the other hand, a taxpayer who falls on the “Not willful” end of the spectrum might consider making a “quiet disclosure” or a streamlined submission.
Determining willfulness is not always so black and white. Instead, it can be as ambiguous as deciphering hieroglyphics. This is analogous to when the needle on the willfulness spectrum is not pointing at one of the extreme poles, but instead is vacillating in the middle. In these cases, assessing willfulness, not to mention the corresponding risk of prosecution becomes exceedingly difficult, requiring nothing short of a careful balancing of the facts both for and against. Needless to say, it should be left to the professionals.
In dealing with these gray areas, one should never forget that there will always be risk. Indeed, a taxpayer not at material risk for prosecution is not the same as a taxpayer at “no risk” of prosecution. This implies that any person for whom this question is relevant must be willing to assume some risk.
c. Filing a False Tax Return (IRC § 7206(1))
The tax charge most commonly used by the government to prosecute offshore bank tax cases is Filing a False Tax Return. And for good reason. Filing a False Tax Return requires nothing more than proof of a false item on the return and proof that the false item was material. In other words, the jury must decide whether the item was false and, if so, whether it was material.
Proving materiality is not as difficult as you might expect. Under the law, a statement on a tax return is deemed material if at least one of the following conditions exists: (1) it is necessary to correctly calculate the tax due or (2) it has a direct impact on the IRS’s ability to verify the tax declared or to audit the taxpayer’s returns.
In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:
(1) First, the defendant made and signed a tax return for the year [ ] that he knew contained false information as a to a material matter;
(2) Second, the return contained a written declaration that it was being signed subject to the penalties of perjury; and
(3) Third, in filing the false tax return, the defendant acted willfully.
d. Failure to File a Tax Return
Failure to file a tax return is a misdemeanor that carries a maximum sentence of one year in prison for each tax year.
As far as information reporting crimes go, the government’s burden to prove failure to file a return is very light. The government must, of course, prove the minimal amount of income required to invoke the duty to file. However, it need not unleash its holy wrath on the taxpayer by calling to arms a cavalry of Special Agents and Assistant United States prosecutors as would be required to guarantee a tax evasion conviction. The government must prove three essential elements beyond a reasonable doubt:
1. Defendant was a person required to file a return;
2. Defendant failed to file at the time required by law; and,
3. The failure to file was willful.
There is no requirement that a tax be due. In theory, the failure to file timely would be satisfied by any delinquency – even one day. However, the government will not prosecute for a minor delay.
e. Klein Conspiracy (18 USC § 371)
The defendant is charged in the indictment with conspiracy to defraud the IRS. In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:
(1) First, there was an agreement between two or more persons to defraud the United States by impeding, impairing, obstructing, and defeating the lawful government functions of the IRS of the Treasury Department, by deceit, craft, trickery, or means that are dishonest, in the ascertainment, computation, assessment, and collection of the revenue: to wit, income taxes;
(2) Second, the defendant became a member of the conspiracy knowing of at least one of its objects and intending to help accomplish it; and
(3) Third, one of the members of the conspiracy performed at least one overt act for the purpose of carrying out the conspiracy, with all of the members agreeing on a particular overt act that was, in fact, committed.