The government’s ability to collect taxes comes from the U.S. Constitution. To collect taxes, Congress created a series of criminal and civil statutes. The Treasury Department used these statutes to promulgate a series of regulations to assist in collecting taxes due the government. Unlike many countries, the government taxes income of U.S. citizens both living within the United States and abroad. Over the years, U.S. citizens have placed money into foreign banks, either mistakenly believing it was not taxable or intentionally trying to place it beyond the government’s reach. Failing to file a truthful return about income earned from assets overseas and failing to file the required Report of Foreign Bank and Financial Accounts (known as the “FBAR”) can subject the taxpayer to criminal prosecution pursuant to several statutes. From 2008 until September 28, 2018, the government encouraged citizens hiding taxable income abroad to enter a program that required paying a penalty to avoid prison. The program was called the Offshore Voluntary Disclosure Program (OVDP), and it ended on September 28, 2018. The purpose of this blog is to describe the government’s ongoing efforts to collect taxes owed from U.S. citizens who have stored money overseas or “in the cloud,” using cryptocurrency exchanges.
Before addressing the government’s ongoing efforts, it is important to note some historical developments in this area. Movies, television, and novels are replete with characters securely hiding money in secret Swiss bank accounts. Historically, Switzerland had laws prohibiting banks from disclosing information about its customers, regardless of how unsavory the characters of the customers may be. The best examples include World War II Nazis hiding profiteering from war crimes in Swiss banks. However, in 2008, U.S. federal prosecutors successfully obtained an order requiring UBS AG, a large Swiss bank, to disclose information about its customers and pay $780 million to avoid criminal prosecution. Using the same theories, federal prosecutors obtained similar results against institutions throughout the world. At least one source estimates that financial institutions have paid approximately $6 billion and disclosed customer data to the U.S. government to settle disputes in lieu of criminal prosecutions. Using that data, federal prosecutors have convicted numerous U.S. citizens who hid money overseas.
For U.S. citizens who did not willfully hide money overseas, the IRS will continue to offer a program that has lesser financial penalties but does not provide immunity from prosecution. That program is called the Streamlined Program, and the IRS has not publicly announced its intent to end that program. We have seen times when the IRS still pursues criminal charges against taxpayers who entered the Streamlined Program, which we will discuss in a future blog.
Despite ending the OVDP, the government continues to make pursuing tax cheats a priority. Given successful prosecutions and recovering more than $17 billion since 2008, there is no reason to believe the government will stop pursuing U.S. citizens hiding money overseas. Using provisions of the Foreign Account Tax Compliance Act (FATCA) of 2010 and its compulsory power, the government has been issuing “John Doe summons” to financial institutions and cryptocurrency exchanges. Earlier this year a federal court required one cryptocurrency exchange to disclose information about 14,000 users believed to be U.S. citizens. In short, the government is aware of previously untapped markets involving financial institutions in the Far East and cryptocurrency exchanges, and the IRS expects to find tax cheats there.
As we have advised in the past, you should not speak to a government agent without a lawyer. This applies equally to criminal and civil government authorities conducting an IRS audit. It is imperative to retain counsel experienced in criminal and civil investigations to navigate the perils you face when you learn the IRS is investigating you for hiding money overseas. If you believe you are under investigation, or if you are an attorney or accountant with a client under investigation, contact the Law Offices of Horwitz & Citro, P.A. immediately. Call (407) 901-5852 to request a free initial consultation with an experienced criminal defense lawyer.