Sunday, April 24, 2016
In this blog, I’d like to examine the differences between non-willful conduct which can trigger an IRS penalty, and non-willful conduct for which reasonable cause can be given, which offers grounds for why penalties should not be assessed. An understanding of these differences can be critical to avoiding FBAR penalties or at least serve to make the taxpayer aware of circumstances under they might be imposed.
The IRS offers a reduced penalty (5%) for taxpayers (through the Streamlined Program) if they can show that their actions related to the non-disclosure of their foreign accounts were not willful. This means that a person entering the Streamlined programs does not have to show reasonable cause and only has to show that his actions were not a result of willful actions nor willful blindness.
Posted by Aaron at 10:42 PM
Saturday, April 16, 2016
This week, I’d like to begin examining the Panama Papers, a leaked set of over 11 million confidential documents that describe the activities of 210,000 corporate entities overseen by the Panamanian law firm Mossack Fonseca. Although only a handful of US citizens were named in the papers, this case offers an opportunity to evaluate a truly impressive example of outright tax fraud and willfully noncompliant behavior.
Internal Revenue Manual 188.8.131.52.5.1 states that the test for willfulness is “whether there was a voluntary, intentional violation of a known legal duty, which is demonstrated “by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.” Examples of willful behavior include filing an FBAR but omitting one of several foreign bank accounts, filing the FBAR in earlier years but failing to file the FBAR in subsequent years when required to do so, and failing to file the FBAR after being sent a warning letter explaining the FBAR filing requirement. Evidence of a willful violation is rarely direct, because willfulness is a state of mind, but is instead established by drawing reasonable inferences from available facts.
However, in the Panama Papers case, Mossack Fonseca engaged in extremely willful tax evasion, constructing some of the elaborate shell companies yet discovered. These companies, which boasted intricate, multi-level, and multi-national corporate structures, enabled clients to “operate behind an often impenetrable wall of secrecy.” To best accomplish this, Mossack Fonseca would move from jurisdiction to jurisdiction when incorporating its shell companies, abandoning those jurisdictions that had taken steps to become more compliant with international standards regarding these entities. They preferred to incorporate in jurisdictions with minimal to nonexistent rules regarding disclosure, and they tried to perform as little due diligence in these jurisdictions as possible.
Half of Mossack Fonseca’s shell companies were incorporated in the British Virgin Islands, a jurisdiction noted for its particularly lax tax regime. Setting up companies in this and other loosely-regulated locales is a simple process, requiring the payment of a fee and the description of the purpose of the company (usually “investment” and “wealth management” are specified). Estimates place the amount of wealth “offshored” in this manner at between $21 and $32 trillion dollars, with tax havens like the BVI accounting for a staggering 50 percent of all world trade.
Some have attributed the lack of US citizens among Mossack Fonseca clients to be the result of the effectiveness of the Foreign Account Tax Compliance Act (FATCA), FBAR, and other stiffened offshore reporting requirements. That said, jurisdictions such as Panama and the BVI may always remain havens for willful non-compliance with reporting regulations, and may have to be dealt with more harshly, such as via sanctions, to further discourage this behavior.
For a free consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.
Posted by Aaron at 4:59 PM
Saturday, April 2, 2016
In today’s blog post, I want to examine the indicators of fraud (sometimes called “badges of fraud,” though the terms are interchangeable) that can potentially trigger a criminal referral. These indicators/badges of fraud are extremely important, among other places, during FBAR investigations. I have written about the FBAR at length in previous posts--you can read these posts here and here --and the presence of fraud in an FBAR investigation can alter the dynamic considerably. When a finding of fraud is made, IRS criminal investigations may become involved; civil penalties increase to 75% of the additional tax due and there is an unlimited statute of limitations to audit a return.
The IRS fraud handbook offers a comprehensive if hardly exhaustive list of these indicators/badges, and taxpayers with an inadequate or confused understanding of their financial situation--usually sole proprietors or small businesses with a small chain of command--often run afoul of them either through an attempt to inflate expenses and understate income or simply through sheer recklessness. Offenses are sometimes tied to Chapter 9 of Title 18 of the U.S. Code, as consumers in bankruptcy proceedings may trigger fraud investigations because they are transferring assets for no consideration, leading an extravagant lifestyle, and failing to file the required income tax returns.
Although there are many potential indicators/badges of fraud, a handful of them are particularly common and will attract the attention of IRS examiners. Shell companies that hire employees and lease them back to the parent corporation, companies that withhold taxes from employees but fail to pay them to the government, the payment of cash wages, excise tax fraud, and the use of fictitious subcontractors as a way of paying employees off the books are all extremely common indicators of fraudulent activity. Revenue agents and revenue examiners are familiar with such behaviors and can very quickly assess and stereotype organizations that are engaging in them.
Once these fraud indicators/badges are discovered, IRS revenue agents will consult with their group manager and a Fraud Technical Advisor (FTA) to determine if a Fraud Development Recommendation should be filed. From there, agents will request returns--excepting, of course, those returns that have not been filed that have raised the suspicion of fraud. The IRS strives to avoid the perception that it is using a civil examination process to develop a criminal case against the taxpayer. That said, once the appropriate referral paperwork is complete, the revenue agent will forward the case to the FTA, who will recommend a criminal investigation, if necessary. At this point, evidence gathered in the case, including tax returns and a consideration of the taxpayer’s demographic profile, will determine what further subsequent steps are taken, such as additional investigation and prosecution.
The best way to avoid this situation is to keep detailed business records and avoid the business practices listed here or outlined in the IRS fraud handbook. However, once an IRS investigation begins, taxpayers wishing to avoid or reduce civil and criminal penalties are advised to consult with an experienced tax attorney to explore the options available to them.
For a free phone consultation regarding this subject or other tax matters, please contact The Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.
Posted by Aaron at 11:56 AM