If your name was mentioned in the same sentence as Raoul Weil, Carl Zwerner, or Ty Warner, you can rest assured that you haven’t been nominated for an academy award or a Pulitzer Prize. Nor did you win the Publisher’s Clearinghouse Award. Instead, you’d have joined a disgraced group of taxpayers who have had the misfortune of being targeted by the U.S. government in their crusade to stamp out offshore tax evasion.
In stark contrast is John Doe, a conflicted taxpayer who recently entered the Offshore Voluntary Disclosure Program (OVDP). Neighbors and friends who run into John are a captive audience for him as he wallows in his self-pity. John regrets the decision to enter OVDP and tells his tale of woe to anyone who will listen: “I don’t know what I’m doing in this program. I know 500 people with foreign accounts like mine, and they’re not coming in.” These “good Samaritans” have come to know the true meaning of the expression, “misery loves company.”
Obviously, John was exaggerating. However, he likely knows fifty people like him who have chosen not to enter the OVDP, deciding instead to wait it out. Who is making the right decision? 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: “Can I be prosecuted for failing to report my foreign bank account such that I have no other choice but to seek 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 tax crimes 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 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. A person convicted of failing to file an FBAR faces 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 keep their finger on the pulse of the criminal tax enforcement system know all too well that not every case involving the failure to report an offshore bank account is prosecuted. Instead, the Department of Justice (Tax Division) is very selective when it comes to deciding which cases to bring. As should come as no surprise, it prefers to cultivate “winners” and not “losers.” Indeed, a conviction helps the DOJ maximize the deterrent effect of the criminal tax enforcement system while an acquittal might suggest that the taxpayer could “get off” with the “right” attorney standing by his side.
As a result, the Department of Justice tends to prosecute only those cases where the taxpayer’s conduct was particularly egregious. The most important question faced by every taxpayer with an unreported offshore account is, “How likely is it that I will be prosecuted?” In other words, is the taxpayer’s risk of prosecution material?
That question turns on a pestilent word called, willfulness. Willfulness is such a critical element of a tax crime that its very presence often answers this vexing question. The more evidence there is of willfulness, the greater the likelihood of criminal prosecution. The less evidence there is of willfulness, the lesser the likelihood of criminal prosecution.
When dealing with willfulness, it is helpful to think of an electromagnet spectrum,[i] with short-wavelength radiation at one extreme pole (i.e., gamma radiation) and long-wavelength radiation at the opposite pole. Focusing on these extreme poles, let’s substitute “Not willful” for the “short-wavelength” pole and “Definite willfulness” for the “long-wavelength” pole.
Sometimes, the needle is pointing so far in the direction of one of the extreme poles that determining the likelihood of prosecution is all but certain. These are what might be considered “slam dunk” cases for a specific type of disclosure. For example, a taxpayer who falls on the “Definite willfulness” end of the spectrum should not think twice about applying to the Offshore Voluntary Disclosure Program. On the other hand, a taxpayer who falls on the “Not willful” end of the spectrum might consider making a “quiet disclosure” or a streamlined submission.
Determining willfulness is not always so black and white. Instead, it can be as ambiguous as deciphering hieroglyphics. This is analogous to when the needle on the willfulness spectrum is not pointing at one of the extreme poles, but instead is vacillating in the middle. In these cases, assessing willfulness, not to mention the corresponding risk of prosecution becomes exceedingly difficult, requiring nothing short of a careful balancing of the facts both for and against. Needless to say, it should be left to the professionals.
In dealing with these gray areas, one should never forget that there will always be risk. Indeed, “a taxpayer not at material risk for prosecution is not the same as a taxpayer at ‘no risk’ of prosecution.” See Federal Tax Crimes, Townsend, Jack. This implies that any person for whom this question is relevant must be willing to assume some risk.
c. Filing a False Tax Return (IRC § 7206(1))
The tax charge most commonly used by the government to prosecute 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 very light. The government must, of course, prove the minimal amount of income required to invoke the duty to file. However, it need not unleash its holy wrath on the taxpayer by calling to arms a cavalry of Special Agents and Assistant United States prosecutors as would be required to guarantee a tax 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
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 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. Specifically, 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.”[ii] 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.[iii]
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 fraudulent 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. And it is a battleground where the odds are stacked against the taxpayer who has failed to file. When willfulness exists, it is like the “Helen of Troy,” in the sense that the government will mount an offensive as aggressive as the “launching of one thousand ships.”
While the government must establish that the taxpayer knew of his duty to file the return, how many taxpayers can legitimately argue that they did not know that they had 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? 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. For example, courts will look at such “human factors” as those listed below to determine whether the taxpayer was willful in failing to file: the background of the taxpayer; the filing of returns in prior years; whether the taxpayer was a college graduate with accounting knowledge; whether the taxpayer was familiar with books and records and operated a business; and what type of income the taxpayer earned.
How about defenses? The case of United States v. McCorkle, 511 F.2d 482 (7th Cir. 1975) (en banc) 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 defrauding the IRS was a “no-no.” However, the government must prove that he acted dishonestly. In this sense, the Klein conspiracy may be easier for the government to prove than the other two crimes.
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.” See Federal Tax Crimes, Townsend, Jack. 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.[iv] 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.[v]
i. Tax Deficiency In Connection With the Crime of Failure to File a FBAR
Although 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.[vi] Why? There are two reasons. First, criminal tax prosecutions usually result in jail time,[vii] thus depriving citizens of what our founders intended to be the most fundamental right protected by 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, resulting in a backlash from the public. For example, it may reinforce the public’s perception of Uncle Sam as a greedy “big brother” who picks on the little guy. In that sense, the government risks exacerbating the public relations nightmare that has already put it on the defensive in connection with the FATCA controversy.
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: such taxpayers are pursued as aggressively as an arctic fox chasing a hare.
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.[viii]
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).[ix] For example, consider an offshore account that generates no interest and no taxable income (or if it does generate interest, that interest is completely offset by the foreign earned income exclusion and/or the foreign tax credit). Further, assume that the taxpayer fails to report the account on Schedule B not due to any oversight, but instead because he didn’t want the government to know about it.
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 filing a false tax return requires a material false statement and overreporting income is just as much a misrepresentation that could adversely impact the correct amount of tax due and owing as underreporting income could.
c. Remaining Elements of These Crimes
Proving the remaining elements of these crimes is as effortless for the government as lifting a feather. 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 signed by him.[x]
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.[xi]
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).[xii]
The larger the tax deficiency and the more badges of fraud it can prove, the stronger the government’s case becomes.
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.[xiii] Before doing so, it must satisfy the following conditions:
(1) There must be evidence supporting a prima facie case; and
(2) There must be a reasonable probability of conviction.[xiv]
This is a trial standard.[xv] The entire case is “investigated, reviewed, and processed” with an eye toward how likely a conviction would be if the case proceeded to trial.[xvi] Assuming the government has a prima facie case, that is, the slightest bit of evidence needed to support each element of the crime, then the case will survive a taxpayer’s motion to dismiss and proceed to trial.[xvii] Then, if there is a “reasonable probability” that the prosecutor will obtain a guilty verdict, “the prosecution will be authorized.”[xviii]
V. A Hypothetical Involving a Typical Offshore Bank Case
This hypothetical is based on the one presented in the article entitled, “What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account,” with a few modifications.[xix] 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 report 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, “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, it 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 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 likely to satisfy this element. The account statements prove two percent unreported interest income every year on a $ 1 million deposit.[xx] That translates into $ 20,000 per year. Over ten years, that is a total of $ 200,000 of unreported income.[xxi] At a tax rate of 35%, John’s tax deficiency is $ 70,000 (.35 x $ 200,000).[xxii] That is more than enough to satisfy the element of a substantial tax deficiency. Unfortunately for John, that number could grow even larger.[xxiii] 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.[xxiv] 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.”
- Badges of Fraud: Turning to the second and last factor, the government appears to easily satisfy this element too.[xxv] The government will argue the following:
(1) “John lied when he signed his return under penalty of perjury that it was true and correct.”[xxvi]
(2) “John lied when he checked the box ‘no’ on Schedule B, failing to disclose that he had a foreign bank account.”[xxvii]
(3) “John lied when he failed to disclose on Schedule B, the country where his foreign bank account was located.”[xxviii]
(4) “John lied when he failed to report on Schedule B that he had interest income from a foreign bank account.”[xxix]
(5) “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.”[xxx]
(6) “John intentionally failed to file the FBAR.”[xxxi]
(7) “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.”[xxxii]
(8) “John never told his tax preparer about his ‘secret’ Swiss bank account.”[xxxiii]
(9) “John never sought any independent legal advice about how to handle his “secrete” foreign bank account.”[xxxiv]
Of the badges of fraud listed above, none bears on the issue of willfulness more significantly 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 “cross-examination by a skilled prosecutor.”[xxxv] 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 the badges of fraud are such that the prosecutor can look the jury in the eye convincingly and with all of the confidence – or should I say, “cockiness” – of a NASCAR driver who just won the Daytona 500, and state the following: “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 coup de grace: “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 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 waiving a red flag in front of a bull at a rodeo:
(1) John maintained his Swiss account in the name of a “foreign shell corporation or foreign trust,”[xxxvi] or some other entity typically used to conceal ownership.
(2) John made several wire transfers from his Swiss account to a U.S.-based investment account.
(3) 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).
(4) 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.[xxxvii]
(5) John, with the assistance of personnel at Grosser Schweizer Bank, held the account in the name of a fictitious person or entity.[xxxviii]
(6) 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.”[xxxix]
(7) John gave Grosser Schweizer Bank instructions “to hold his bank statements and not to send them to him in the United States.”[xl]
(8) John “skimmed taxable income from his business and deposited it into his Grosser Schweizer account without reporting it to the IRS.”[xli]
(9) John “survived an earlier civil examination by lying to the IRS” about his Swiss bank account.[xlii]
You get the idea. 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 sufficient ammunition to prove a substantial tax deficiency as well as numerous badges of fraud
VI. The Audit Lottery: The Government Will Not Find Me!
Many taxpayers are under the illusion 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.”[xliii] Given the limited resources at the government’s disposal to investigate and prosecute tax crimes, that belief may not be irrational. [xliv]
Others believe that even if they get caught, they can avoid being prosecuted 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 doesn’t necessarily avoid 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 from the very beginning and, when first advised that he underpaid, moved promptly to pay.
However, the government is not so naïve to accept this argument “hook, line, and sinker.” 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.” See Tax Crimes, Townsend, John, Campagna, Larry, Johnson, Steve, LexisNexis, 2008.
Taxpayers with this cavalier attitude might just as well be playing a game of Russian Roulette. Those who think they can wait until they hear the IRS’s drums beating and their guns going off in the distance 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.”[xlv]
And they didn’t have anything to worry about, at least until UBS decided that it needed to save its own hide.[xlvi] In one fell swoop, the bank threw its U.S. customers under the bus, “turning over the names and accountholder information of thousands of U.S. taxpayers.”[xlvii]
The waiting game is “a dangerous one to play.”[xlviii] Indeed, like the last grain of sand passing through the bulb of an hour glass, to the extent that the IRS already knows who you are and that you are the holder of an unreported offshore account, any hope of participating in the Offshore Voluntary Disclosure Program may have already been lost.[xlix]
[i] This metaphor comes from the creative genius of Professor Jack Townsend, author of the blog, Federal Tax Crimes, available at http://federaltaxcrimes.blogspot.com.
[ii] “What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account?” Robbins, Edward; Toscher, Steven; and Perez, Dennis; Journal of Tax Practice & Procedure, CCH; p. 69, October-November 2012.
[iii] Id., supra, 69-70.
[iv] Id., supra, at 69.
[v] Id., supra, at 69.
[vi] Id., supra, at 69.
[vii] Id., supra, at 69.
[viii] Id., supra, at 69.
[ix] Id., supra, at 69.
[x] Id., supra, at 70.
[xi] Id., supra, at 70.
[xii] Id., supra, at 70.
[xiii] Id., supra, at 70.
[xiv] Id., supra, at 70.
[xv] Id., supra, at 70.
[xvi] Id., supra, at 70.
[xvii] Id., supra, at 70.
[xviii] Id., supra, at 70.
[xix] Id., supra, 71-72.
[xx] Id., supra, at 71.
[xxi] Id., supra, at 71.
[xxii] Id., supra, at 71.
[xxiii] Id., supra, at 71.
[xxiv] Id., supra, at 71.
[xxv] Id., supra, at 71.
[xxvi] Id., supra, at 71.
[xxvii] Id., supra, at 71.
[xxviii] Id., supra, at 71.
[xxix] Id., supra, at 71.
[xxx] Id., supra, at 71.
[xxxi] Id., supra, at 71.
[xxxii] Id., supra, at 71.
[xxxiii] Id., supra, at 71.
[xxxiv] Id., supra, at 71.
[xxxv] Id., supra, at 71.
[xxxvi] Id., supra, at 72.
[xxxvii] Id., supra, at 72.
[xxxviii] Id., supra, at 72.
[xxxix] Id., supra, at 72.
[xl] Id., supra, at 72.
[xli] Id., supra, at 72.
[xlii] Id., supra, at 72.
[xliii] Id., supra, at 72.
[xliv] Id., supra, at 72.
[xlv] Id., supra, at 72.
[xlvi] Id., supra, at 72.
[xlvii] Id., supra, at 72.
[xlviii] Id., supra, at 72.
[xlix] Id., supra, at 72.