There are now 50 foreign financial institutions on the IRS list of "bad banks" The list is published at the following link:
It may be a commone misunderstanding that a U.S. citizen or permanent resident (Green Card holder) can give up their citizenship or surrender their Green Card and then as a non-U.S. taxpayer make gifts or pass their estate to U.S. taxpayers free of estate and gift tax. The IRS recognized this loophole and has proposed a new Regulation designed to tax the recipient of the gifts or inheritances from "covered expatriates" at maximum estate and gift tax rates.
The following fact pattern should is representative of a tax evasion and structuring case. A taxpayer receives checks in the ordinary course of business from customers. Some of those checks are deposited into the business bank account and some are cashed. The cashed checks don't equal or exceed $10,000. The cash is then deposited into non-business accounts or otherwise used by the taxpayer. It never hits the books. The taxpayer using this method hopes to avoid the currency reporting rules under the Bank Secrecy Act and avoid income tax by under reporting income from the cashed checks.The Appellate Court case of U.S. v. Sperrazza illustrates what happens when a taxpayer gets caught. "Dr. Robert Sperrazza was convicted of three counts of tax evasion, in violation of 26 U.S.C. § 7201 and two counts of structuring a currency transaction, in violation of 31 U.S.C. § 5324(a)(3). The district court sentenced him to 36 months imprisonment and ordered him to forfeit $870,238.99" Dr Sperrazza, had a very bad day when he was indicted. He thought that he found a fool proof system of avoiding tax and avoiding the currency transaction reporting rules. What he did not figure on was the law against "structuring". The court further stated:
"First, we agree with the Government that Sperrazza's conduct places him "at the dead center" of the class of persons at whom 5324(a)(3) is directed. Law enforcement officials use the currency transaction reports filed by financial institutions to track down criminal activity. See Lang, 732 F.3d at 1247. Here the evidence shows Sperrazza structured transactions in order to disguise his tax evasion" The court affirmed Dr. Sperrazza's conviction and the forfeiture of assets. Dr. Sperrazza is a paradigm of "intentional/willful" conduct. Had he gone one step further and opened an "foreign" financial account or used foreign asset protection structure (such as a foreign trrust) he might have found himself afoul of the foreign financial account reporting rules under the Bank Secrecy Act for he would likely have failed to timely file a Report of Foreign Financial Account ("FBAR") and related income tax forms. He would therefore be subject to even greater penalties and a longer sentence. Regardless of whether there is an international dimension to the fact pattern or not, the methods by Dr. Sperrazza are somewhat common. Whether the taxpayer is a professional, or entrepreneur the temptation to under report income is to some, overwhelming. Which brings up the issue of how does the IRS determine how much income is under reported. The IRS has multiple methods of reconstructing income to maximize the estimated tax loss to the government. The incentive for maximization, is obvious, but includes, longer sentences, greater deterrence publicity and a larger potential tax recovery. Prior to an audit or other investigation, a taxpayer can come forward and make a voluntary disclosure. To make a voluntary disclosure a taxpayer should retain couns and provide all the relevant books, records and estimates of under reported income so that counsel can have an accurate estimate of taxable income prepared. Counsel can then use a skillfully prepared estimate to negotiate with the IRS and minimize adverse outcomes. In the event of an audit or worse yet a criminal investigation, a taxpayer should retain counsel and let counsel handle all communications with the government. We at MillarLaw have a highly skilled team that can methodically evaluate under reported income cases where "structuring" is involved. We can help to minimize tax and penalty exposure and reduce the risk of prosecution. The key is not to wait until the government makes you and offer you can't refuse.
A common technique used to pay immigrants who are ineligible to lawfully work and to pay lawful workers "offbook" in order to reduce reported payroll for workers compensation and other purposes is to pay workers wholly or partially in cash. Those employers paying in cash are often misclassifying the workers as independent contractors, in order to avoid customary payroll taxes. The misclassification of workers is the first step in potential civil and criminal actions by state and federal taxing authorities. The decision to prosecute or not is often based upon the "masking" actions used by the employer to hide the cash payments in other expense categories.MAsking is a form of "willful" conduct, (fraud) whereas misclassifcation on its own may not be.
Cash business operators are often prone to under report income or overstate deductions when filing tax returns. The effect of engaging in such conduct can be criminal charges, including tax evasion, money laundering and conspiracy to obstruct justice. The proliferation of Information Exchange Agreements between, local, state and federal taxing authorities makes the possibility of criminal proseuction all the more likely.
A recent article about convicted spy Jonathan Pollard speculated about the effects on his parole if he had an unreported foreign financial account. The simple truth is that Mr. Pollard would be ineligible for the Offshore Voluntary Disclosure Program (OVDP) if he held direct or beneficial ownership in a foreign financial account(s) which had $10,000 or more in a calendar year if the source of the funds in the account were illegal source. Payments for espionage against the U.S. certainly meet the test for illegal source. The test is stated in the IRS Frequently asked questions,, restated in part as follows:
The IRS published a list of Information Exchange agreements it has with state agencies, a copy of which is available here IRS State Information Exchange Table.pdf
A recent decision of the Third Circuit Court of Appeals illustrates the futility of expecting that the Fifth Amendment Privilege Against Self-incrimination will shield taxpayers from production of offshore financial records. The trial court was asked to protect a U.S. taxpayer from enforcement of an IRS Summons for production of offshore account document. The trial court held in favor of the IRS and ordered the taxpayer to appear and produce the records. The Third Circuit upheld the trial court, stating:
The IRS and the states have mutual exchange of information agreements. The agreements are oftern bi-directional, so that state information about audit results, often including sasles tax audits, is provided to the IRS jsut as IRS audit reuslt are provided to the states.