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IRS Used Data Analytics to Uncover $10 billion of Tax Fraud in 2018

The IRS is using data analytics to refine how it detects tax fraud. The success of this effort can be seen by a fourfold increase in Criminal Investigation Division's detection of tax fraud from 2017 to 2018. The reasons for the fourfold increase in detection of fraud stem from several factors:

  • IRS criminal investigators are benefiting from the IRS movement towards more sophisticated analytical programs in an effort to ascertain potential fraud cases from data already available to the IRS.
  • Data available to the IRS allows analytics which can examine income tax returns as well as other returns or lack of returns (such as reporting offshore accounts) with entries on returns that have shown a likelihood of the existence of fraud.
  • An increase in cooperation with foreign countries in sharing records relevant to tax returns.
  • The Internal Revenue Service has amassed significant amounts of information on offshore accounts as a result of the Foreign Account Tax Compliance Act (FATCA) as well as treaties with an increasing number of nations to report U.S. citizens’ and residents’ accounts to the IRS.

The IRS as well as the Department of Justice have long recognized that an unreported offshore account is a strong indication of tax fraud. The number of reports flowing into the Internal Revenue Service pursuant to FATCA treaties has increased significantly (over the last few years following the enactment of FATCA). As the IRS acquires additional trained personnel and analytical programs, its agents will be able to use the vast data about offshore accounts to identify individuals with unreported offshore income. Data available to the IRS is also expanding due to cooperation between the United States, United Kingdom, Canada, Australia and the Netherlands. These nations have formed the Joint Chiefs of Global Tax Enforcement in 2018 to share methods to fight offshore tax crime, and to share intelligence, data and technology.

Investigations by the IRS Criminal Investigation Division have resulted in the Department of Justice filing significant criminal tax cases in 2018. Many of these cases involve charges of tax evasion, false statements on income tax returns and failure to file necessary forms relating to offshore accounts. Examples of some of these cases include:

  • A Houston attorney was indicted for conspiracy to defraud the United States and tax evasion in relation to offshore accounts (by one of the attorney’s clients). The undisclosed bank accounts were located in the Isle of Man which was previously known as a safe place to open secret offshore accounts.
  • An individual residing in Huntington Beach, California was prosecuted as a result of his having an offshore account in Israel at Bank Leumi Le-Israel. The charges alleged that tax returns filed did not disclose the financial interest in or signatory authority over foreign financial accounts. The government also contended that in an effort to hide money, the defendant instructed Bank Leumi to hold back delivery of mail to the United States. In addition, D.O.J. contended that the individual was able to obtain access to the offshore funds through loans issued by Leumi’s branch in the United States. The loans were an attempt to hide income. The offshore accounts were used to pay off the loans from Bank Leumi in Israel. The Government obtained the information as a result of its investigation into Bank Leumi, which ended with a deferred prosecution agreement whereby Bank Leumi agreed to cooperate with the IRS and DOJ in relation to Leumi’s U.S. citizens and residents.
  • A man residing in Scottsdale, Arizona, who had formally resided in Pagosa Springs, Colorado, was indicted for filing false income tax returns in which he failed to report the receipt of funds from his offshore accounts. The offshore accounts were in Lichtenstein, which for many years was known as a haven for bank secrecy.
  • The first criminal case brought as a result of the leak of offshore financial data known as the "Panama papers" charged four individuals with multiple years of tax evasion. Three of the four people have already been arrested. One was arrested in London, a second was arrested in Paris, the third defendant, a U.S. based accountant, was arrested in Massachusetts. The fourth defendant, a lawyer at the firm of Mossack Fonseca & Co. in Panama is a fugitive. In 2016 a massive leak of data from the Mossack firm revealed numerous individuals with offshore accounts.

These are just a few of the examples of prosecutions in the United States resulting from the U.S. obtaining banking records which for years were secret. The number of offshore banks reporting to the IRS continues to grow. Increased disclosure has come through efforts of the United States and other countries to identify tax fraud. Recently, the IRS Criminal Investigation Division unveiled two new investigative units. Both the International Tax Enforcement Group and the Nationally Coordinated Investigations Unit will add more resources to discover offshore tax fraud and enable the D.O.J. to bring more prosecutions.

Professionals such as accountants, attorneys and investment advisors are at risk of being accused of assisting their clients in committing tax fraud. Helping a client set up offshore accounts and foreign corporations to hide the true owner’s identity can expose U.S. professionals to criminal liability. It is common for the government to make a deal with the person committing the tax fraud in order to get to the professionals who the government believes helped the defendant commit the fraud. The government may believe the defendant even though the information about his attorney, account or investment adviser is not true.

Investigations and prosecutions of tax fraud cases are complicated and involve an extensive period of investigative time. It is important that anyone who learns that an IRS investigation is ongoing obtain experienced criminal tax defense counsel in order to deal with IRS investigators and Department of Justice attorneys.

The Law Offices of Horwitz & Citro, P.A. has experience as former federal prosecutors handling tax, money-laundering cases, and monetary reporting violations. In addition, as defense counsel, the Law Offices of Horwitz & Citro P.A. has tried criminal tax cases and obtained not guilty verdicts and judgements of acquittal for over 75% of clients who went to trial. The ability to analyze the government's investigation, conduct a defense investigation, identify pertinent defenses and develop effective trial strategies can only be gained through defending criminal tax investigations, prosecutions and winning trials. Our experience has been used not only to present winning arguments to obtain not guilty verdicts and judgments of acquittal but also to convince the government not to indict.

A criminal tax investigation presents defense counsel with the ability to request conferences with IRS Criminal Investigation, the U.S. Department of Justice Criminal Tax Division, and local U.S. Attorney's office assigned to prosecute a case by the Criminal Tax Division of the D.O.J. We have seen instances of lawyers who were not aware of the right to have conferences, failed to gain information, and lost the opportunity to convince the government not to indict.

The risk of detection and prosecution for tax fraud is real, but there is an alternative available to most people. This alternative is the IRS Voluntary Disclosure Practice. This program was updated by the IRS on November 20, 2018.