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How To Avoid Becoming The Next “Cooked Goose” Gracing The IRS’s Offshore Tax Evasion Table This Thanksgiving – Part III



III. Shorthand Formula for a Criminal Offshore Bank Account Tax Case

At the end of the day, an offshore account tax fraud case comes down to proving two key elements:

(1) A substantial tax deficiency, and

(2) Badges of fraud (i.e., acts of concealment concerning the non-reporting of the offshore bank account).

The larger the tax deficiency and the more badges of fraud it can prove, the stronger the government’s case becomes.

IV. Government’s Standard of Review for a Criminal Tax Case

The U.S. Department of Justice, Tax Division must authorize the prosecution of any and all tax offenses. Before doing so, it must satisfy the following conditions:

(1) There must be evidence supporting a prima facie case; and

(2) There must be a reasonable probability of conviction.

This is a trial standard. The entire case is “investigated, reviewed, and processed” with an eye toward how likely a conviction would be if the case proceeded to trial. Assuming the government has a prima facie case, that is, the slightest bit of evidence needed to support each element of the crime, then the case will survive a taxpayer’s motion to dismiss and proceed to trial. Then, if there is a “reasonable probability” that the prosecutor will obtain a guilty verdict, “the prosecution will be authorized.”

V. A Hypothetical Involving a Typical Offshore Bank Case

This hypothetical is based on the one presented in the article entitled, “What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account,” with a few modifications. John is a U.S. citizen. He is a successful businessman with a history of filing individual income tax returns. John is also the owner of an undisclosed foreign bank account which he inherited from his father ten years ago. The account is with Grosser Schweizer Bank, a Swiss bank.

The account was funded with pre-taxed foreign assets that John’s father liquidated over a number of years. Presently, the account contains a balance of $ 1 million and earns interest at the average rate of two percent per year.

John has never deposited or withdrawn any significant amounts of money from the account. He does not receive statements, as per his father’s arrangement with the Swiss bank, but he visits the bank when he is on vacation in Switzerland. During his last visit, he reviewed account statements and withdrew small amounts of spending money for dinner, wine, and a three-night stay at a five-star hotel.

While John has timely filed his individual income tax returns for the last ten years, he has withheld all information pertaining to his Swiss bank account from the IRS. Specifically, he never disclosed the bank or the interest earned on the account on Schedule B. In fact, he consistently checked the “no” box on Schedule B, which asks the taxpayer if he has a foreign bank account. Nor has John ever filed an FBAR. Finally, John never disclosed his foreign account to his tax return preparer or sought independent legal advice about how to properly report the foreign account.

The IRS subsequently learned about John’s undisclosed foreign account. Suspecting that there was some tax “hanky panky” going on, it issued Grosser Schweizer Bank a summons, requesting all of John’s account statements for the last ten years. The bank obliged, turning everything over. After reviewing it, the revenue agent referred the matter to CI. CI, in turn, conducted an independent investigation. That investigation culminated in a Criminal Reference Letter being sent to the Department of Justice – Tax Division, with a recommendation for prosecution.

The issue is, “How likely is the Department of Justice to prosecute this case?” As a preliminary matter, this case involves inherited funds in a foreign financial account. Generally, having inherited funds in a foreign financial account, without more, is not deserving of willful status by the IRS.

But, as should be obvious, this case involves a lot more than just inherited funds.
Very simply, it is just the type of case that is likely to result in a referral to the Department of Justice – Tax for prosecution. The potential charges include the following:

• Filing a False Tax Return (IRC § 7206(1)); and

• Willful Failure to File an FBAR (31 USC §§ 5314 and 5322(a) and 31 CFR § 1010.350).

The government’s case would be built around the two essential elements of these crimes:

Substantial Tax Deficiency: The government is likely to satisfy this element. The account statements prove two percent unreported interest income every year on a $ 1 million deposit. That translates into $ 20,000 per year. Over ten years, that is a total of $ 200,000 of unreported income. At a tax rate of 35%, John’s tax deficiency is $ 70,000 (.35 x $ 200,000). That is more than enough to satisfy the element of a substantial tax deficiency. Unfortunately for John, that number could grow even larger. Why? In states having a state income tax, if the prosecutor wanted to go for the jugular, he could increase this tax deficiency with the state tax loss. As if that was not bad enough, the sentencing guidelines provide for a two-point enhancement whenever foreign bank accounts are used to perpetuate tax fraud. These two points have the effect of driving the criminal offense level, not to mention the actual sentence itself, into the sentencing stratosphere. What this means is that it is all but certain that John will become a guest of Club Fed.

Badges of Fraud: Turning to the second and last factor, the government appears to easily satisfy this element too. The government will argue the following:

• “John lied when he signed his return under penalty of perjury that it was true and correct.”

• “John lied when he checked the box ‘no’ on Schedule B, failing to disclose that he had a foreign bank account.”

• “John lied when he failed to disclose on Schedule B, the country where his foreign bank account was located.”

• “John lied when he failed to report on Schedule B that he had interest income from a foreign bank account.”

• “John knew he was required to file an FBAR by virtue of the fact that he had been alerted to the FBAR requirement by the information on Schedule B.”

• “John intentionally failed to file the FBAR.”

• “John concealed $ 1 million in income producing assets and over $ 70,000 in unreported income from the IRS by hiding the assets and the income in an undisclosed offshore bank account.”

• “John never told his tax preparer about his ‘secret’ Swiss bank account.”

• “John never sought any independent legal advice about how to handle his “secrete” foreign bank account.”

Of the badges of fraud listed above, none bears on the issue of willfulness more significantly than the size of the account. As one prominent tax attorney has said,

“The amount of money at stake is critical. In the real world, the biggest factor determining willfulness is the size of the account. If a person has a $10 million account, I don’t want to hear he was nonwillful, and neither does the government.”

To understand how the above badges of fraud could be introduced at trial and how damaging they can be, imagine John taking the stand and being subjected to a relentless “cross-examination by a skilled prosecutor.” To say that it would be the equivalent of placing an infant in the middle of a highway at rush hour would be an understatement.

So what is the answer to the rhetorical question, “How do you know when there is criminal tax ‘hanky panky’ going on in an undisclosed foreign bank case?” Very simply, when the badges of fraud are such that the prosecutor can look the jury in the eye convincingly and with all of the confidence – or should I say, “cockiness” – of a NASCAR driver who just won the Daytona 500, and state the following: “The only reason why John did not report his Swiss account was so that he could fleece the government out of paying his fair share of taxes.” The last sentence of the prosecutor’s closing argument would be the coup de grace: “Ladies and gentlemen, if this wasn’t willful, then I don’t know what is.”

As bad as this case might be for John, it could get a lot worse with just a few more bad facts. The following badges of fraud are just as likely to get the attention of the revenue agent examining John’s offshore bank account as waiving a red flag is likely to get the attention of a bull at a rodeo:

♦ John maintained his Swiss account in the name of a “foreign shell corporation or foreign trust,” or some other entity typically used to conceal ownership.

♦ John made several wire transfers from his Swiss account to a U.S.-based investment account.

♦ Grosser Schweizer Bank was not the original bank to hold the assets. Instead, it was established at “Swiss Miss Bank.” John transferred the account from Swiss Miss to Grosser Schweizer Bank after reading a press release in The Wall Street Journal announcing that Swiss Miss had been issued a summons by the U.S. government requesting information about U.S. taxpayers who held financial accounts there (or that Swiss Miss had become the target of an investigation launched by the U.S. government).

♦ Before transferring the account to Grosser Schweizer Bank, John had a private discussion with the bank manager regarding bank secrecy. The manager assured John that Swiss bank secrecy was “impenetrable” and that Grosser Schweizer would never release any information pertaining to his account to the IRS.

♦ John, with the assistance of personnel at Grosser Schweizer Bank, held the account in the name of a fictitious person or entity.

♦ John, with the assistance of personnel at Grosser Schweizer Bank, set up a “standby letter of credit or some other loan arrangement with the U.S. branch” of Grosser Schweizer Bank so that he could “use the money in his foreign account as collateral for a loan without bringing it into the U.S.”

♦ John gave Grosser Schweizer Bank instructions “to hold his bank statements and not to send them to him in the United States.”

♦ John “skimmed taxable income from his business and deposited it into his Grosser Schweizer account without reporting it to the IRS.”

♦ John “survived an earlier civil examination by lying to the IRS” about his Swiss bank account.

You get the idea. The point is that unreported foreign bank cases are not difficult for the government to prosecute. Tax returns and bank returns, by themselves, give the government sufficient ammunition to prove a substantial tax deficiency as well as numerous badges of fraud.

VI. The Audit Lottery: The Government Will Not Find Me!

Many taxpayers believe that the government “will never get them, either because the government will never find out about them or because the government will never be able to prove the case.” Given the limited resources at the government’s disposal to investigate and prosecute tax crimes, that belief may be entirely “rational.”

Others believe that even if they get caught, they can avoid being prosecuted by merely paying up and moving on – with the expectation that the criminal problem will go away.

Taxpayers with this cavalier attitude might just as well be playing a game of Russian Roulette. Those who think they can wait until they hear the IRS’s drums beating and their guns going off in the distance before acting are sadly mistaken. Indeed, that was the same trap that the holders of UBS foreign bank accounts fell into in 2009. These UBS customers were told over and over again by the Swiss bankers, “Don’t worry. Swiss bank secrecy is impenetrable. The U.S. government will never be able to obtain your account information.”

And they didn’t have anything to worry about, at least until UBS decided that it needed to save its own hide. In one fell swoop, the bank threw its U.S. customers under the bus, “turning over the names and accountholder information of thousands of U.S. taxpayers.”

The waiting game is “a dangerous one to play.” Indeed, to the extent that the IRS already knows who you are and that you are the holder of an unreported offshore account, any hope of participating in the Offshore Voluntary Disclosure Program has been lost.

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Footnotes:

“What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account?” Robbins, Edward; Toscher, Steven; and Perez, Dennis; Journal of Tax Practice & Procedure, CCH; p. 69, October-November 2012.
Id., supra, 69-70.
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As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.

   

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