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Risk of IRS Civil Audits and Criminal Investigations Increase for People with Unreported Offshore Accounts

The IRS and DOJ Move to Target and Prosecute Those with Unreported Offshore Accounts

On September 28, 2018, the IRS ended its Offshore Voluntary Disclosure Program. Under this program, individuals with unreported offshore accounts could obtain immunity from criminal prosecution upon successfully completing the program through full disclosure, payment of back taxes and civil penalties. The ending of the FBAR amnesty program coincides with increased reporting by offshore banks of U.S. account holders.

The Department of Justice and the Internal Revenue Service have classified unreported offshore accounts and the resulting underpayment of taxes as one of the more pressing problems involving tax fraud. Attorneys, as well as accountants, are beginning to see the results of the United States’ efforts to force offshore banks to report their American customers to the IRS.

When the IRS receives notification from an offshore bank that a U.S. citizen has an account, the result can be catastrophic. An IRS audit will be opened which can result in significant civil penalties including up to 50% of the value of the offshore accounts each year that the accounts were not reported to the Treasury Department. In addition, the IRS will seek to collect taxes on the unreported income. There may also be a 75% civil fraud penalty on the unpaid tax. Even more disturbing is the fact that the willful failure to report the offshore accounts and other offshore assets are crimes which can result in arrest, prosecution, and long terms of incarceration.

How Offshore Account Holders End Up on the Radar

The following is an example of IRS actions when it receives notice from an offshore bank of a U.S. customer. For purposes of this example, assume that an individual (who I will call John Doe) has accounts at five banks in Europe. The bank accounts were opened 10 years ago with a starting balance of $200,000 in each bank. Since opening the accounts, John Doe has earned interest. Mr. Doe did not disclose to any of the five banks that he is a U.S. citizen. However, in one of the bank’s files, there is a document indicating that John Doe’s address is in the United States. The banker, in reviewing the customers file, notices the address and reports the one account to the U.S. Department of the Treasury as is required under a treaty between the United States and the country in which the bank is located.

When the Department of the Treasury receives notification from the offshore bank of John Doe’s account, the U.S. government will check to determine if a Report of Foreign Bank and Financial Accounts Form, commonly called an FBAR was filed. Upon finding no FBAR filed by Mr. Doe, the matter will be assigned to an Internal Revenue Agent. The IRS will commence an FBAR audit and an audit of John Doe’s income tax returns.

Correspondence Regarding FBAR Audits and FinCEN Forms

Mr. Doe will receive an IRS letter advising him that there is a scheduled appointment with an IRS auditor to examine his compliance with filing of FinCEN Form 114 (formally Form TD F90-22.1, known as an FBAR). The letter will also inform Mr. Doe that U.S. law, 31 U.S.C. § 5314, requires U.S. persons, including U.S. citizens, residents and certain entities to report financial interest in, or authority over, foreign financial accounts if the total value of offshore accounts exceeds $10,000 during a calendar year.

The letter will also advise Mr. Doe that an FBAR examination is not an income tax examination and that Mr. Doe may be liable for penalties for failure to comply with the FBAR requirements as set forth in Section 5314. The letter will set forth the obligation to properly file the FBAR with FinCEN (Financial Crimes Enforcement Network) on or before June 30th of the year following the year being reported (the filing date for the FBAR has been changed to April 15th to coincide with the filing date for the income tax return). The FBAR requires disclosure of all offshore accounts which John Doe controls, has signatory authority or has an interest in. The audit letter will also include IRS Publication 4261 describing a foreign financial account. The purpose of this letter with the attachments is not only to start the process of the audit but also to advise Mr. Doe of the law. Knowledge of the legal obligation as to reporting the offshore accounts is important in the event of an IRS and Department of Justice criminal investigation and prosecution.

This FBAR audit notification letter also includes an “Information Document Request” (IDR) directing Mr. Doe to e-file all delinquent FBAR’s, and to bring all records concerning offshore accounts to the meeting with the IRS Agent. The filing of delinquent FBAR’s is an admission by Mr. Doe that he did not timely file the FBAR’s. The IDR will not be limited to the one offshore account disclosed to the IRS by the offshore bank. The document request covers items such as proof that FBARs were filed for at least the 5 previous years, bank records of all foreign bank accounts, copies of John Doe’s U.S. income tax returns, and amended income tax returns. The production of all offshore bank records will result in offshore civil penalties on each account and may lead to a criminal prosecution.

IRS Forms and Audit Letters

A second IRS letter will also be sent to Mr. Doe concerning the IRS Form 8938 (Statement of Specified Foreign Financial Assets). This form must be filed with the yearly income tax return. An audit will be initiated because Mr. Doe did not file the Form 8938 which not only requires disclosure of all offshore bank accounts, but various other offshore assets.

The audit letter concerning Form 8938 will also put Mr. Doe on notice of his legal obligations by describing the requirements for filing and completing the Form 8938. Mr. Doe will be advised that a $10,000 “Initial Penalty” will be assessed because of failing to timely provide the Statement of Specified Foreign Financial Assets, with all necessary information. The IRS letter will also advise that if the Form 8938 is not filed within 90 days of the letter, the IRS can charge an additional $10,000 penalty for each 30-day period, or fraction thereof, in which he does not file the Form 8938 with complete information. This is called a “Continuation Penalty” which cannot exceed $50,000. The failure to accurately complete Form 8938 will also extend the civil statute of limitations for 3 years after the Form 8938 is filed with complete information.

Penalties for Delayed Filing or Failure to File Form 8938

Every year that John Doe did not file the Form 8938 subjects him to the “Initial Penalty” of $10,000. In addition, if the Form 8938 is not filed within the 90-day period set forth in the letter, the “Continuation Penalty” can be as much as $50,000. Mr. Doe’s penalty for not filing 5 yearly Form 8938’s will be from a minimum of $50,000 for the Initial Penalty up to $250,000 for the Continuation Penalty, potentially totaling $300,000.

Neither of the two initial IRS letters will advise Mr. Doe that the information requested can be used against him in a criminal investigation and prosecution. The failure to file the FBAR is a serious felony and willfully providing false information to the IRS, either on the FBAR, the income tax return, or the Statement of Specified Foreign Financial Assets (Form 8938) are felonies.

What to Do if You Receive Letters, Notices, or Official Correspondence Regarding Offshore Accounts: Act Immediately

Anyone receiving these IRS audit letters who has unreported offshore income, offshore accounts, or failed to file the forms relating to the accounts and foreign assets is in a serious situation. Prosecution for failing to file the FBAR’s, failing to disclose the offshore accounts and offshore income, is possible. When an audit starts, it is imperative that care be taken to properly deal with the IRS in light of the potential for large civil penalties and criminal prosecution.

It must be remembered that the accountant-client privilege does not apply when the federal government is conducting a criminal investigation. In a criminal investigation and trial, the CPA can be forced to testify against the client and to produce the client’s documents relating to any subject matter including:

  • Offshore accounts
  • Failure to file the FBAR
  • Form 8938
  • Failure to disclose offshore interest, dividends, and income
  • Creating amended income tax returns
  • All documents relating to offshore accounts, assets, and income
  • Documents used by the accountant in relation to the client and offshore accounts

The IRS and the Department of Justice will be aggressively pursuing individuals with unreported accounts when notice is received from offshore banks and financial institutions. CPA’s and other tax return preparers will be confronted with IRS audits of their clients which can result in prosecutions followed by long terms of imprisonment.

Connect with a Tax Crimes Defense Lawyer as Soon as Possible

It is important that an attorney experienced in defending criminal tax investigations and prosecutions be consulted as soon as possible. It must be remembered that if the lawyer utilizes an accountant in representing the client, the attorney client privilege covers the accountant.

Compliance with IRS audit requests for documents as well as meetings can harm the client either through admissions by the client or IRS agents attributing statements to the client that are not correct. Any statements by the client, either oral or written, or producing requested documents including Form 8938, amended income tax returns, FBAR’s and offshore bank records must be considered carefully. There are various ways to deal with these issues which can be legally pursued. In November of 2018, the IRS issued a memorandum on its Voluntary Disclosure Program (VDP). The IRS memorandum set forth that the VDP is intended to provide those who are at risk of criminal prosecution for tax fraud, with a way to voluntarily disclose their proper taxes and avoid criminal prosecution. The VDP, however, is not available to those under IRS audit or criminal investigation.

Experience with IRS civil audits and criminal investigations is even more important in light of the Government's position on unreported offshore accounts. The government refers to tax evasion through unreported offshore accounts as one of the “Dirty Dozen” tax crimes.

Offshore Accounts & Tax Crimes Attorney Serving Clients in Orlando, Tampa, and Throughout the State of Florida

Connect with a member of our team at Law Offices of Horwitz & Citro, P.A. today to secure the skillful legal representation you need. Being contacted by the IRS or the federal government regarding offshore accounts and foreign income is very serious and could land you in serious trouble, especially if you don’t have a highly knowledgeable criminal tax law defense attorney on your side.

We have represented many clients in your situation and are prepared to provide you with the authoritative, trustworthy legal counsel you can rely on during your interactions with the government including the IRS and Department of Justice. Take a look at our case results for more information on cases we have handled and the kind of service you can expect to receive from our firm.

Contact us online today or call (407) 901-5852 now to speak to a member of our staff.