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The Choice: Amnesty Or Quiet Disclosure For Foreign Bank Accounts: Criminal Tax Evasion, Negligence, Or Ignorance?



Preliminary Introduction For TaxConnections Global Internet Tax Summit, September 21-25, 2015

The most recent IRS push to close “the Gap” between collected U.S. tax revenue and the total tax revenue which should be reported by U.S. citizens and alien residents of the United States has focused on offshore income concealed in foreign or offshore accounts.

U.S. citizens are liable for U.S. taxation on all income realized globally, regardless of the foreign jurisdiction in which their funds are deposited in foreign accounts.  U.S. citizens are not only liable for U.S. tax on such foreign sources of income, they are required to report all funds in excess of $10,000.00 on deposit in foreign accounts over which they have “signature authority” even if they only have a nominal “financial interest” in the accounts.  For example, children with signature authority with their elderly parents in Swiss financial accounts.

Where U.S. citizens (or resident aliens of the U.S.) willfully do not report these foreign accounts and/or do not report their foreign income for U.S. taxation purposes, the IRS and the U.S. Department of Justice (Tax Division) focus on targeting these individuals for criminal tax investigation to seek federal felony indictments for violations of 26 U.S.C. § 7201 (tax evasion), § 7206(1) (filing false tax returns), and other U.S. criminal charges.

Conviction of these charges carry maximum federal prison sentences of three to five years for each charge or count, and multiple charges or counts may have longer prison sentences based on the amount of “tax losses” proven.

Where the criminal/civil tax fraud attorney determines the client has more likely than not,  willfully violated the tax evasion and tax reporting rules, his or her advice should be to seek Amnesty from IRS for the clients who can qualify.  Such advice necessarily requires experience in evaluating all the historical facts and evidence to determine the distinction between willfulness, gross negligence or negligence, or innocence.  Sometimes it is a close call to determine whether or not a person has potentially committed tax fraud.

To avoid this criminal exposure, the U.S. client’s choice usually should be to seek Amnesty under the U.S. Offshore Voluntary Disclosure Program (OVDP), which is expensive but, avoids criminal prosecution and probable federal prison sentencing.  Amnesty also significantly reduces civil tax penalties for income tax fraud (75% of the income tax) and willful failure to file Foreign Bank Account Reports (“FBARs”).  Willful failure to file FBARs may have penalties of 50% of the aggregate foreign bank deposits annually for up to five or six years, 200% to 300% of the deposits.

Clients whose names and foreign accounts have been disclosed to the United States (IRS or Department of Justice Tax Division) will not be eligible for IRS Amnesty procedures.  These individuals are subject to possible criminal tax investigations as “targets” for prosecution of tax crimes like tax evasion and filing false tax returns.  However, an IRS criminal tax investigation does not automatically lead to criminal charges and should be defended vigorously to avoid to a criminal prosecution recommendations, and to minimize prison sentencing through negotiation of federal plea bargain agreements and representation before U.S. Federal Courts in sentencing hearing procedures.

However, not all who do not qualify for Amnesty are guilty of tax crimes for international tax evasion or filing false tax returns or failure to report foreign bank accounts.

For example, I am counseling an innocent and naive U.S. former business woman who sold her business for approximately $5 million in early 2003, reported such sale on her federal U.S. income tax return, and paid all her U.S. income taxes on the gain she realized from such business sale.  Later, she “falls victim” to an unscrupulous financial planner (“con man”) who she trusts and who convinces  her to “protect” her after-tax wealth by allowing him to engage in international and foreign trust planning in Switzerland.  He advises her that such planning will protect her assets from U.S. law suits, as well as U.S. taxation, advising that all of these actions were legal.

Trusting the financial planner, she turns over $3.5 million to him, which he immediately deposits in financial accounts in a Swiss bank through a Swiss legal advisor, who sets up foreign trusts to hold the financial accounts in Switzerland, clearly showing that the trusts were “established” by a U.S. citizen (my client).  The financial advisor repeatedly assures this older lady (now a widow in her early 70s) that she has nothing to worry about and that he is taking care of all the necessary international and U.S. reporting requirements for these Swiss trust financial accounts.

As she does not need income or withdrawals from these accounts, the lady does not keep up with them and does not review them on an annual basis for many years.  She also does not discuss these “investments” with her Certified Public Accountant when her U.S. tax returns are prepared.  During this time, her financial advisor in the United States and the trust advisor in Switzerland managed to embezzle more than $500,000 from her account.  The financial advisor in the United States disappears.  My client eventually wakes up sometime in 2012 and realizes that she needs to close her Swiss account and recover her funds to the extent they remain in trust accounts in Switzerland.  At that point in time, she and her CPA hire our law firm for representation before the Internal Revenue Service.

At that stage of the game, it is our responsibility to evaluate all her facts and history to determine whether to place her in Amnesty, whether she qualifies for Amnesty (where her bank has already disclosed her accounts to the United States/IRS) or whether we should make a quiet disclosure or wait and see whether she is ever contacted by IRS.

I will further explain how to approach these Amnesty versus quiet disclosure cases as we continue the discussion of this issue at the Global Internet Tax Summit.

You can hear me speak about this at the Internet Tax Summit.

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If you have a complex IRS Civil Tax Audit or Tax Litigation with the IRS, and need advice and representation due to criminal investigation, contact Chip Hider for highly experienced and confidential professional advice on the matter.

Chip Hider specializes in IRS problem solving and getting excellent results for clients. Send A Message for assistance in criminal investigations or U.S. offshore accounts. I can definitely help you through this challenging process!