The IRS Intensifies Focus on Offshore Tax Fraud Investigations

In recent months, the Internal Revenue Service has issued various warnings to U.S. Taxpayers worldwide involved in potentially abusive and unscrupulous tax schemes. Some of the current focuses of the IRS include:

• • • Sham Trust Arrangements,

    • Improper Use of Foreign Trusts,

    • Misapplication of International Tax Treaties,

    • Abusive Transactions,

    • Syndicated Conservation Easements, and

    • Cryptocurrency

At Golding and Golding, we specialize exclusively in international tax law matters and so our specialist team wanted to take the opportunity to update taxpayers worldwide about the recent IRS enforcement issues involving tax promotions that involve international tax and offshore compliance. For example, there have been several new tax promotions sprouting up that involve companies that can hide taxpayer crypto offshore so that it ‘allegedly’ goes undetected (read: this strategy does not work). The IRS has also focused on taxpayers who falsely claim treaty benefits under the Malta/U.S. tax treaty, concealment of offshore assets, and false valuations and appraisals during the expatriation process. In some cases, these are civil violations – with hefty fines and penalties – but in other cases, the investigations can turn criminal, such as with Malta Pension Plans and offshore crypto mixing. Let’s review some of the more common international tax promotions that have gotten the attention of the IRS.

The IRS Intensifies Focus on Offshore Tax Fraud Investigations

Bewares of Tax Promoters

A tax promoter is essentially a person or organization that is trying to sell taxpayers on a tax strategy that is too good to be true. These types of promotions tend to start with free webinars or seminars wherein the pitchman presents an alluring tax shelter. Similar to the infomercials of the late 1990s/early 2000s who alleged to have made zillions of dollars from their ‘tiny one-bedroom apartment,’ the pitchman touts a strategy where the taxpayer can still earn income but avoid paying taxes on the earnings. Sometimes this is done through allegedly legal means (sham trusts) and other times it is done illegally (exchanging dollars for crypto, mixing it with other funds to conceal the origins, and then distributing it as income).  The IRS takes the position that these strategies are not legitimate tax avoidance, but rather illegal tax fraud.

Concealing Assets by Moving Them Offshore

One common way taxpayers try to avoid paying taxes on income earned from overseas is to try to hide or conceal the assets. For example, the Taxpayer may have their money held in an offshore account that promises to keep the taxpayer’s information section (Swiss Numbered Accounts). Or the Taxpayer moves their money to a country that does not have a tax treaty with the U.S. Noting, that even though the U.S. has entered into only ~60 international income tax treaties, they have entered into more than 110 FATCA Agreements. FATCA is the Foreign Account Tax Compliance Act, wherein Foreign Financial Institutions (FFIs) agree to report information about U.S. Account Holders and foreign income generated to the U.S. government. This in turn may lead to eggshell audits, reverse eggshell audits, IRS Investigations, and ultimately fines, penalties, and possibly even criminal prosecution.

Fraudulent Conveyances to Third Parties

To avoid income being associated with the Taxpayer, the Taxpayer may transfer the income-generating assets/accounts to third parties or assign income to the 3^rd party (who is in a lower tax bracket or is a non-U.S. Person who is not subject to U.S. tax on worldwide income) who then transfers the money back to the U.S. person as a gift. When this is done solely to avoid income taxes, then from the IRS’ perspective, the transfer was a fraudulent conveyance. As a result, the income is imputed to the true owner of the assets – and the IRS may pursue fines, penalties, and investigations for fraud (resulting in significant fines and penalties).

Moving Crypto Offshore to Avoid Taxes

Unlike the United States which taxes cryptocurrency income gains, many foreign countries have preferred tax treatment for crypto. But, even if Taxpayers move their cryptocurrency overseas, if the Taxpayer is still considered a U.S. person for tax purposes, then even if the crypto is moved overseas and generates income overseas, the income is still taxable in the U.S. The DOJ has begun pursuing criminal investigations for crypto income violations.

International Mixing of Cryptocurrency

Some Taxpayers who move their cryptocurrency overseas take additional steps to try to hide their income. They do this by working with mixing companies that intentionally mix the cryptocurrencies from different owners, into one (or multiple) big pots, to try to make it harder for the IRS to detect and track. Oftentimes, the IRS has little to no problem uncovering the hidden crypto, as occurred in the recent criminal indictment in the case of                                       

Misusing Foreign Trusts

A key issue that has become a mainstay of compliance with the Internal Revenue Service is taxpayers who misuse foreign trusts. There are many different types of trust schemes and sham arrangements that taxpayers have to be aware of when it comes to strategies for reducing or eliminating income tax on earned income. Just because a promoter designates a trust as a non-grantor trust does not mean it is a non-grantor trust if the IRS believes it is a sham transaction. Recently, we prepared a detailed article about the IRS’s intent to go after all different types of sham trusts such as charitable remainder annuity trusts, section 643(b) trusts, Malta Retirement Schemes (which is a type of trust), and private family foundations.

Falsifying Expatriation Documents

Expatriation is the process in which a U.S. citizen or long-term lawful permanent resident formally terminates their U.S. person status for some taxpayers who are considered covered expatriates because they meet either the net worth test, the net income average tax liability test, or the five-year tax compliance test, may become subject to an exit tax at the time that they formally expatriate. As you may imagine, taxpayers want to try to avoid the exit tax if possible, and unfortunately, some taxpayers are goaded into illegal expatriation strategies such as artificially trying to reduce the taxpayer’s mark-to-market gain or eliminate any ineligible deferred compensation deemed distribution. There have been multiple recent cases lately of taxpayers who get caught trying to falsify their expatriation documents.

Puerto Rico Act 60

Puerto Rico Act 60 (previously Acts 20/22) is not an inherently illegal tax scheme. The purpose of Act 60 is to help Puerto Rico try to recover after some natural disasters, by bringing investment money into the PR economy. The problem with Act 60 is that many politicians believe that it is being used for false purposes only. While there are legitimate strategies that taxpayers can use for Puerto Rico Act 60, oftentimes taxpayers do not meet these stringent requirements. For example, they do not live or reside in Puerto Rico as required and either misunderstand or intentionally misconstrue which income is taxable and which income is considered tax-exempt for purposes of taxpayers who qualify for Act 60. Typically, what happens, is that the taxpayer wants to take the position that all of their income is sourced in Puerto Rico so that it escapes U.S. tax but it just doesn’t work that way and for taxpayers who get caught it could lead to significant fines and penalties and even criminal prosecution because filing false tax returns is a type of tax fraud/tax evasion.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.