What is My Criminal Exposure on My Undisclosed Offshore Account?

 

A Message To Uncle Sam, “Will I be Prosecuted For Not Reporting My Offshore Bank Account?”

 

“I don’t know why the hell I’m coming into this program.  I know 500 people with foreign accounts like mine, and they’re not coming in.”

 

-          John Doe, a conflicted taxpayer, upon entering the 2012 OVDP Program

 

Obviously, John was exaggerating.  However, he likely knows twenty people like him who have elected to wait out the IRS.  So who is making the smart move?  In this article, I attempt to provide some clarity, not to mention some practical and sound advice, to a real-world dilemma faced by taxpayers who have failed to report their offshore accounts: “What is my criminal exposure on my undisclosed offshore account and does that exposure justify me seeking shelter in the OVDP bunker?”  This question is so pivotal that it cuts right to the heart of a taxpayer’s decision to enter OVDP.

 

I. Tax Crimes That The Government Relies Upon in offshore bank tax prosecutions

 

The government has used one or more of the following four charges to prosecute over one hundred offshore bank tax cases.  The elements of each can be found in the jury instructions for these crimes:

 

a. FBAR Requirements

 

A brief history of the FBAR is in order.  A once obscure Bank Secrecy Act form, the FBAR is not technically required by the tax code.  It was first instituted as a reporting requirement for U.S. persons with overseas accounts.  Today, the IRS has breathed new life into the FBAR as a tax enforcement and revenue-raising tool.  The IRS has administered and enforced the FBAR since 2003.

 

Who must file an FBAR?  Any U.S. person, including individuals, corporations and trusts, who hold more than $10,000 (USD) in a foreign account at any point during the calendar year must file annually an FBAR.  An FBAR must be filed for a range of accounts, including savings and checking accounts, brokerage and securities accounts, certain types of insurance policies and non-cash assets like gold.

 

The maximum value of an account is defined as the largest amount of currency – and non-monetary assets – that appear on any quarterly or more frequent account statement issued for the applicable year.

 

b. Willful Failure to File an FBAR (31 USC §§ 5314 and 5322(a) and 31 CFR § 1010.350)

Willfully failing to file an FBAR is a felony that is subject to criminal penalties under 31 U.S.C. § 5322.  Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $ 500,000.  In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:

 

(1)   First, the defendant was a United States person;

 

(2)   Second, the defendant had a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign county;

 

(3)   Third, the aggregate value of these financial accounts exceeded $ 10,000 at any time during the calendar year; and

 

(4)   Fourth, the defendant willfully failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).

 

Those who watch the criminal tax enforcement system know that DOJ Tax prosecutes only cases of material misconduct.  Therefore, the issue is whether the taxpayer is at material risk for prosecution.  A taxpayer not at material risk for prosecution is not the same as a taxpayer at “no risk” of prosecution.  This implies that any person for whom this question is even relevant must be willing to assume some risk.

 

Below is an example of when the IRS will overlook a taxpayer’s failure to file an FBAR.  John is a U.S. citizen.  He works and lives in Country A.  In 1999, John opened a brokerage account at a bank in Country A.  The account had a high balance of $ 2 million and generated income of $ 150,000 each year.

 

John did not report any of the income on his U.S. tax return because he mistakenly assumed that he only had to report it on his Country A tax return.  John subsequently filed an amended return.  After applying the foreign tax credit for taxes paid to the government of Country A, John’s amended return shows no tax deficiency with respect to the unreported interest income.

 

Under these circumstances, John need only make a quiet disclosure.  Why?  The purpose of the voluntary disclosure program is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters.  While John neither reported the interest generated by his Country A bank account on his U.S. tax return nor filed an FBAR disclosing the foreign account, the fact remains that there was no tax deficiency.  And in the eyes of the IRS, that is all that matters.

c. Filing a False Tax Return (IRC § 7206(1))

 

The tax charge most commonly used by the government in prosecuting offshore bank tax cases is Filing a False Tax Return.  And for good reason.  Filing a False Tax Return requires nothing more than proof of a false item on the return and proof that the false item was material.  In other words, the jury must decide whether the item was false and, if so, whether it was material.

 

Proving materiality is not as difficult as you might expect.  Under the law, a statement on a tax return is deemed material if at least one of the following conditions exists: (1) it is necessary to correctly calculate the tax due or (2) it has a direct impact on the IRS’s ability to verify the tax declared or to audit the taxpayer’s returns.

 

In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:

 

(1)   First, the defendant made and signed a tax return for the year [ ] that he knew contained false information as a to a material matter;

 

(2)   Second, the return contained a written declaration that it was being signed subject to the penalties of perjury; and

 

(3)   Third, in filing the false tax return, the defendant acted willfully.

d. Failure to File a Tax Return

Failure to file a tax return is a misdemeanor that carries a maximum sentence of one year in prison for each tax year.

 

As far as information reporting crimes go, the government’s burden to prove failure to file a return is as light as it gets.  The government must, of course, prove the minimal amount of income required to invoke the duty to file.  However, it need not launch the type of case that would be required for an evasion conviction.  The government must prove three essential elements beyond a reasonable doubt:

 

1.      Defendant was a person required to file a return;

 

2.      Defendant failed to file at the time required by law; and,

 

3.      The failure to file was willful.

 

There is no requirement that a tax be due.  In theory, the failure to file timely would be satisfied by any delinquency – even one day.  However, the government will not prosecute for a minor delay.

e. Klein Conspiracy (18 USC § 371)

 

The defendant is charged in the indictment with conspiracy to defraud the IRS.  In order for the defendant to be found guilty, the government must prove each of the following elements beyond a reasonable doubt:

 

(1)   First, there was an agreement between two or more persons to defraud the United States by impeding, impairing, obstructing, and defeating the lawful government functions of the IRS of the Treasury Department, by deceit, craft, trickery, or means that are dishonest, in the ascertainment, computation, assessment, and collection of the revenue: to wit, income taxes;

 

(2)   Second, the defendant became a member of the conspiracy knowing of at least one of its objects and intending to help accomplish it; and

 

(3)   Third, one of the members of the conspiracy performed at least one overt act for the purpose of carrying out the conspiracy, with all of the members agreeing on a particular overt act that was, in fact, committed.

 

II. Essential Elements of Tax Crimes

a. Willfulness

One small word is all that distinguishes a civil tax matter from a criminal tax matter.  That pestilent word is called “willfulness.”  It is the cornerstone to any criminal tax matter.

In the criminal setting, the government carries the heavy burden of proving – beyond a reasonable doubt – that the taxpayer acted willfully.  Willfulness is defined as an “intentional violation of a known legal duty.”

 

i. Proving Willfulness For Purposes of the Crime of Failure to File a FBAR

How do courts interpret willfulness?  The only thing that a person need know is that he has a reporting requirement.  And if a person has that requisite knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.  The latter is referred to in legal circles as the theory of “willful blindness.”

Under the theory of willful blindness, a jury may infer willfulness whenever a taxpayer intentionally fails to inquire and learn about his or her filing obligations.  Instead of proving that the defendant intentionally violated a known legal duty, the government need only show that “the defendant consciously avoided any opportunity to learn what the tax consequences were.” United States v. Bussey, 942 F.2d 1241, 1428 (8th Cir. 1992).

 

At the outset, it is important to recognize that this theory is not widely embraced by all of the circuit courts.  There are two reasons.  First, it is a “watered-down” substitute for the burden of proof on what is otherwise the most critical element of a tax crime – the mens rea element.  Very simply, willful blindness is much easier for the government to prove than an intentional violation of a known legal duty.

 

Second, for precisely this reason, willful blindness is ripe for abuse in cases where the government does not have sufficient evidence to prove willfulness under the heightened standard.  This is why many courts have found its use to be “rarely appropriate.”  United States v. deFrancisco-Lopez, 939 F.2d 1405, 1409 (10th Cir. 1991) (relying on several Ninth Circuit cases).  And those that do permit it have restricted its use to cases where the taxpayer has purposely buried his head in the sand like an ostrich to avoid learning about the reporting requirements.  The fact that the defendant was negligent in failing to inquire is not enough.

How does the government prove willfulness in the prosecution of a taxpayer for failing to file an FBAR?  Seldomly are there any witnesses and only in a rare case would a defendant admit the required state of mind.  So what does the government rely on?  Indirect evidence.  In other words, conduct or acts from which a person’s state of mind can be inferred.  These acts are commonly referred to as “badges of fraud.”

 

Ultimately, the jury must look into the mind of the defendant-taxpayer to determine whether he intentionally violated the statute.  To the extent that the government can show the jury enough “badges of fraud” to prove willfulness beyond a reasonable doubt, the government will have satisfied its burden of proving criminal intent through circumstantial evidence.

 

How many badges of fraud must exist in order for the government to prove willfulness?  Two?  Three?  The premise of this question is flawed.  Why?  Because it is not the quantity of badges of fraud that is determinative of willfulness as much as it is the quality.  Indeed, the government might have a stronger case against a taxpayer that has three badges of fraud, if those badges are particularly egregious, than it has against a taxpayer that has ten.

 

However, that’s not to suggest that a single badge of fraud, by itself, is enough to prove willfulness, especially if that badge is just as much a characteristic of a legitimate business transaction as it is a fraudulent one.  For example, consider an offshore account that is in the name of a foreign shell corporation or foreign trust.  Setting up an account in such a form has any one of a number of legal purposes aside from the illicit purpose of concealing ownership in order to evade the reporting of taxes.

 

ii. Proving Willfulness For Purposes of the Crime of Failure to File a Tax Return

 

Willfulness is often the battleground in failure to file cases.  But it is a battleground where the odds are stacked against the taxpayer who has not filed.  While the government must establish that the taxpayer knew of his duty to file the return, it is the rare citizen who doesn’t know that he has a duty to file.  To the extent that the taxpayer asserts such a defense, it can easily be overcome by a showing that the taxpayer filed returns in earlier years.

 

How does the government prove willfulness in a failure to file prosecution?  By far, the most common way is by a pattern of failing to file tax returns for consecutive years in which returns should have been filed.  There is also an element of common sense in establishing willfulness.  Thus, willfulness can be shown by such factors as: the background of the defendant; the filing of returns in prior years; that the defendant was a college graduate with accounting knowledge; that the defendant was familiar with books and records and operated a business; and that the defendant earned a large amount of income.

 

How about defenses?  The case of United States v. McCorkle, 511 F.2d 482 (7th Cir. 1975) (en banc) is informative because it furnishes a list of defenses that have previously been asserted but which have gone down in flames.  They can be grouped in the catch-all category of “factors beyond the control of the taxpayer.”  As such, they range from the sublime to the ridiculous: the defendant had no funds available to pay his taxes, the defendant feared that the IRS was going to attach a lien on his property, the defendant was going through a bitter divorce, the defendant did not keep accurate records, and the defendant was contemplating suicide.

 

iii. No Willfulness Required For Klein Conspiracy

 

Unlike Code Sec. 7206(1) and 31 USC §§ 5314 and 5322(a), the Klein conspiracy does not have a similar willfulness element.  Rather, the Klein conspiracy merely requires that the taxpayer intentionally enter the conspiracy and utilize deceit, craft or trickery, or at least means that are dishonest.  The taxpayer need not know that he had a legal duty not to defraud the IRS, but he does need to act dishonestly.  In this sense, the Klein conspiracy may be easier for the government to prove than the other two crimes because of the vagueness of what constitutes a Klein conspiracy.

 

iv. Practical and Sound Advice Regarding Willfulness

 

The ease with which willful blindness can be proven is a stark reminder to taxpayers of the risks inherent in making a quiet disclosure.  It is the flashing neon sign in the store window.  And if that sign could speak, it would say: “A quiet disclosure is not an exercise for the faint of heart, the risk-averse, or for anyone without some tolerance for risk.”  The only guaranteed result is to get in OVDP and stay in it.

 

b. Criminal Tax Deficiency

 

The second critical element to any criminal tax case is a tax deficiency.  Tax deficiency is defined as additional tax due and owing.  You might be wondering why there is so much fuss about tax deficiency when tax deficiency is not a required element of any one of the tax crimes discussed above.  Indeed, only tax evasion requires tax deficiency as an element of the crime and to date, the government has never charged tax evasion in connection with a foreign bank prosecution.

 

i.      Tax Deficiency In Connection With the Crime of Failure to File a FBAR

 

Although the willful failure to file an FBAR does not require a tax deficiency, the government usually does not prosecute taxpayers unless it has evidence of a substantial tax deficiency.  Why?  There are two reasons.  First, criminal tax prosecutions usually result in jail time, thus depriving citizens of what our founders intended to be the bedrock of the U.S. constitution – our freedom.  And second, the potential backlash from the public.  As a preliminary matter, one of the government’s primary goals in bringing a criminal tax prosecution is deterrence – in other words, to make an example out of the taxpayer in order to deter others from engaging in similar conduct.

 

But if the government targets a taxpayer with a small tax deficiency, there is a real risk that this strategy will backfire, having just the opposite effect on the public.  Indeed, it will alienate them by reinforcing their perception of Uncle Sam as a greedy “big brother” who picks on the little guy.  And that would be a public relations nightmare for the government.

 

For this reason, the IRS is often willing to overlook the failure to file FBARs, even for consecutive years, so long as the taxpayer has reported and paid tax on all offshore income.  However, just the opposite is true for a taxpayer who has failed to report and pay tax on all offshore income.  Non-FBAR filers who have failed to report and pay tax on their offshore interest income are aggressively pursued.

 

How much of a tax deficiency must there be before the government will bring a tax prosecution?  The unofficial rule is that there must be a $ 40,000 tax deficiency for all of the years in question.

 

ii.      Tax Deficiency In Connection With the Crime of Filing a False Tax Return

 

In theory, a false statement could have no effect whatsoever on calculating tax liability, yet still be considered material for purposes of violating Code Sec. 7206(1).  Such an example would be the case of a taxpayer who lies about not having a financial interest in a foreign bank account on Schedule B of his tax return, even though it generates no interest and therefore, no taxable income.

 

If you thought that was harsh, it doesn’t even come close to taking the prize.  As ridiculous as this might sound, a taxpayer could be found to have violated Code Sec. 7206(1) even by over-reporting income and tax.  How is that possible?  Because the crime requires a material false statement and overreporting income is just as much a misrepresentation that could adversely affect the correct amount of tax due and owing as underreporting income could.

 

c. Remaining Elements of These Crimes

 

The remaining elements of these crimes are a piece of cake for the government to prove.  For example, to prove that the taxpayer made and signed a return, the prosecutor need only point to the taxpayer’s signature on the return while citing Code Sec. 6064, which states that a taxpayer’s signature is prima facie evidence – for all purposes – that the return was actually signed by him.

 

Similarly, to prove that the return contained a written declaration that it was signed subject to the penalties of perjury, the prosecutor need only highlight the jurat beneath the signature space which states that the taxpayer is signing the return under penalty of perjury.

 

III. Shorthand Formula for a Criminal Offshore Bank Account Tax Case

 

At the end of the day, an offshore account tax fraud case comes down to proving two key elements:

 

(1)   A substantial tax deficiency, and

 

(2)   Badges of fraud (i.e., acts of concealment concerning the non-reporting of the offshore bank account).

 

Naturally, the government’s case becomes that much stronger the larger the tax deficiency and the more badges of fraud it can prove.

 

IV. Government’s Standard of Review for a Criminal Tax Case

 

The U.S. Department of Justice, Tax Division must authorize the prosecution of any and all tax offenses.  Before doing so, the following two conditions must be satisfied:

 

(1)   There must be evidence supporting a prima facie case; and

 

(2)   There must be a reasonable probability of conviction.

 

This is a trial standard.  The entire case is investigated, reviewed, and processed with an eye toward how likely a conviction would be if the case proceeded to trial.  Assuming the government has a prima facie case, that is, a scintilla of evidence supporting each element of the crime, then the case will survive a taxpayer’s motion to dismiss and proceed to trial.  Then, if there is a reasonable probability that the prosecutor will obtain a guilty verdict, the prosecution will be authorized.

 

V. A Hypothetical Involving a Typical Offshore Bank Case

 

John is a U.S. citizen.  He is a successful businessman with a history of filing individual income tax returns.  John is also the owner of an undisclosed foreign bank account which he inherited from his father ten years ago.  The account is with Grosser Schweizer Bank, a Swiss bank.

 

The account was funded with pre-taxed foreign assets that John’s father liquidated over a number of years.  Presently, the account contains a balance of $ 1 million and earns interest at the average rate of two percent per year.

 

John has never deposited or withdrawn any significant amounts of money from the account.  He does not receive statements, as per his father’s arrangement with the Swiss bank, but he visits the bank when he is on vacation in Switzerland.  During his last visit, he reviewed account statements and withdrew small amounts of spending money for dinner, wine, and a three-night stay at a five-star hotel.

 

While John has timely filed his individual income tax returns for the last ten years, he has withheld all information pertaining to his Swiss bank account from the IRS.  Specifically, he never disclosed the bank or the interest earned on the account on Schedule B.  In fact, he consistently checked the “no” box on Schedule B, which asks the taxpayer if he has a foreign bank account.  Nor has John ever filed an FBAR.  Finally, John never disclosed his foreign account to his tax return preparer or sought independent legal advice about how to properly handle the foreign account.

 

The IRS subsequently learned about John’s undisclosed foreign account.  Suspecting that there was some tax “hanky panky” going on, it issued Grosser Schweizer Bank a summons, requesting all of John’s account statements for the last ten years.  The bank obliged, turning everything over.  After reviewing it, the revenue agent referred the matter to CI.  CI, in turn, conducted an independent investigation.  That investigation culminated in a Criminal Reference Letter being sent to the Department of Justice – Tax Division, with a recommendation for prosecution.

 

The issue is simply, “How likely is the Department of Justice to prosecute this case?”  As a preliminary matter, this case involves inherited funds in a foreign financial account.  Generally, having inherited funds in a foreign financial account, without more, is not deserving of willful status by the IRS.

 

But, as should be obvious, this case involves a lot more than just inherited funds.

Very simply, this is just the type of case that is likely to result in a referral to the Department of Justice – Tax for prosecution.  The potential charges would include the following:

·         Filing a False Tax Return (IRC § 7206(1)); and

·         Willful Failure to File an FBAR (31 USC §§ 5314 and 5322(a) and 31 CFR § 1010.350).

The government’s case would be built around the two essential elements of these crimes:

 

Substantial Tax Deficiency: The government is very likely to satisfy this element.  The account statements prove two percent unreported interest income every year on a $ 1 million deposit.  That is $ 20,000 per year.  Over ten years, that is a total of $ 200,000 of unreported income.  At a tax rate of 35%, John’s tax deficiency is $ 70,000.  That is more than enough to satisfy the element of a substantial tax deficiency.  Unfortunately for John, that number could grow even larger.  Why?  In states having a state income tax, if the prosecutor wanted to go for the jugular, he could increase this tax deficiency with the state tax loss.  As if that was not bad enough, the sentencing guidelines provide for a two-point enhancement whenever foreign bank accounts are used to perpetuate tax fraud.  These two points have the effect of driving the criminal offense level, not to mention the actual sentence itself, into the sentencing stratosphere.  What this means is that it is all but certain that John will become a guest of Club Fed.  Indeed, these two points increase the criminal offense level to a level corresponding to more than twice the tax deficiency that exists in this case (i.e., over $ 140,000).

 

Badges of Fraud: Turning to the second and last factor, the government appears to easily satisfy this element too.  The government will argue the following:

 

·         John lied when he signed his return under penalty of perjury that it was true and correct.

 

·         John lied when he checked the box “no” on Schedule B, failing to disclose that he had a foreign bank account.

 

·         John lied when he failed to disclose on Schedule B, the country where his foreign bank account was located.

 

·         John lied when he failed to report on Schedule B that he had interest income from a foreign bank account.

 

·         John knew he was required to file an FBAR by virtue of the fact that he had been alerted to the FBAR requirement by the information on Schedule B.

 

·         John intentionally failed to file the FBAR.

 

·         John concealed $ 1 million in income producing assets and over $ 70,000 in unreported income from the IRS by hiding the assets and the income in an undisclosed offshore bank account.

 

·         John never told his tax return preparer about his “secret” Swiss bank account.

 

·         John never sought any independent legal advice about how to handle his “secrete” foreign bank account.

 

Of the badges of fraud listed above, none bears on the issue of willfulness more than the size of the account.  As one prominent tax attorney has said, “The amount of money at stake is critical.  In the real world, the biggest factor determining willfulness is the size of the account.  If a person has a $10 million account, I don’t want to hear he was nonwillful, and neither does the government.”

 

To understand how the above badges of fraud could be introduced at trial and how damaging they can be, imagine John taking the stand and being subjected to a relentless hour-long cross-examination by a skilled prosecutor.  To say that it would be the equivalent of placing an infant in the middle of a highway at rush hour would be an understatement.

 

So what is the answer to the rhetorical question, “How do you know when there is criminal tax ‘hanky panky’ going on in an undisclosed foreign bank case?”  Very simply, when there are enough “badges of fraud” that the prosecutor can look the jury in the eye with the confidence – or should I say, the “cockiness” – of a NASCAR driver who just won the Daytona 500, and argue that the only reason why John did not report his Swiss account was so that he could fleece the government out of paying his fair share of taxes.  The last sentence of the prosecutor’s closing argument would be the classic, “Ladies and gentlemen, if this wasn’t willful, then I don’t know what is.”

 

As bad as this case might be for John, it could get a lot worse with the addition of just a few more bad facts.  The following badges of fraud are just as likely to get the attention of the revenue agent examining John’s offshore bank account as a red flag is likely to get the attention of a bull at a rodeo:

 

n  John maintained his Swiss account in the name of a foreign shell corporation or foreign trust, or some other entity typically used to conceal ownership.

 

n  John made several wire transfers from his Swiss account to a U.S.-based investment account.

 

n  Grosser Schweizer Bank was not the original bank to hold the assets.  Instead, it was established at “Swiss Miss Bank.”  John transferred the account from Swiss Miss to Grosser Schweizer Bank after reading a press release in The Wall Street Journal announcing that Swiss Miss had been issued a summons by the U.S. government requesting information about U.S. taxpayers who held financial accounts there (or that Swiss Miss had become the target of an investigation launched by the U.S. government).

 

n  Before transferring the account to Grosser Schweizer Bank, John had a private discussion with the bank manager regarding bank secrecy.  The manager assured John that Swiss bank secrecy was “impenetrable” and that Grosser Schweizer would never release any information pertaining to his account to the IRS.

 

n  John, with the assistance of personnel at Grosser Schweizer Bank, held the account in the name of a fictitious person or entity.

 

n  John, with the assistance of personnel at Grosser Schweizer Bank, set up a standby letter of credit or some other loan arrangement with the U.S. branch of Grosser Schweizer Bank so that he could use the money in his foreign account as collateral for a loan without bringing it into the U.S.

 

n  John gave Grosser Schweizer Bank instructions to hold his bank statements and not to send them to him in the United States.

 

n  John skimmed taxable income from his business and deposited it into his Grosser Schweizer account without reporting it to the IRS.

 

n  John survived an earlier civil examination by lying to the IRS about his Swiss bank account.

 

The list goes on.  The point is that unreported foreign bank cases are not difficult for the government to prosecute.  Tax returns and bank returns, by themselves, give the government ample ammunition to prove a substantial tax deficiency as well as numerous badges of fraud.

 

VI. The Audit Lottery: The Government Will Never Get Me!

Many taxpayers believe that the government will never get them, either because the government will never find out about them or because the government will never be able to prove the case.  Given the limited resources at the government’s disposal to investigate and prosecute tax crimes, that belief may be entirely rational.

 

Others believe that even if they get caught, they can forestall prosecution by merely paying up and moving on – with the expectation that the criminal problem will go away.  Unfortunately, that is wishful thinking.  Payment of the tax won’t technically deflect a criminal investigation or prosecution.  In appropriate cases, payment may permit the taxpayer to argue that he really wanted to pay the taxes that he owed all along and, when first advised that he may have underpaid, moved promptly to pay.

 

However, the government cannot generally accept that as a resolution of the criminal case because if it did, every target would simply pay the tax.  Indeed, the deterrent effect of the criminal justice system would be gutted if every taxpayer who underreported his income could do so with the idea that, if caught, all that he would have to do is simply pay any taxes, penalties, and interest.

 

Taxpayers with this cavalier attitude might just as well be playing a game of Russian Roulette.  Why would a taxpayer risk his freedom to play such a dangerous game, especially when the government has offered taxpayers a way out?  While not discounting the fact that OVDP can be very painful – especially when it comes to the onerous offshore penalty – it beats the alternative: a possible criminal prosecution along with the parade of horribles that accompany a criminal conviction, the most serious of which is incarceration.  But incarceration is only the tip of the iceberg.

 

While easy to overlook, the collateral consequences of having a felony conviction can be just as serious as incarceration itself.  For example, one of the most serious collateral consequences is the loss of a professional license.  For a parent with a young family to support, the loss of a professional license may mean the loss of their livelihood and thus, the ability to provide for their family.

 

Stigmatization is another serious collateral consequence.  It can bring personal, social, and financial ruin.  In the words of James Donovan, a politician who was indicted on charges of larceny and fraud in the early 80’s in connection with a project to construct a new line for the New York City Subway only later to be acquitted, “Which office do I go to to get my reputation back?”

 

The argument becomes even less rational with the recent launch of FATCA and other tools that the government has deployed to ramp up its enforcement on the international tax front.  These tools make the chance of detection and prosecution every bit as real as the news that your mother-in-law will be coming to visit.

 

Taxpayers who think they can wait until they hear the IRS’s drums beating and their guns being fired off outside their home before acting are sadly mistaken.  Indeed, that was the same trap that the holders of UBS foreign bank accounts fell into in 2009.  These UBS customers were told over and over again by the Swiss bankers, “Don’t worry.  Swiss bank secrecy is impenetrable.  The U.S. government will never be able to obtain your account information.”

 

And they never did, until UBS decided that it needed to save its own hide.  That was when the bank threw its U.S. customers under the bus, turning over the names and accountholder information of thousands of U.S. customers.

 

The waiting game is a dangerous one to play.  Indeed, to the extent that the IRS already knows that you are the holder of an undisclosed offshore account, you will be barred from participating in the offshore voluntary disclosure program.

From the Author: DeBlis Law

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