Verni Tax Law

Posts

Cash Intensive Businesses & the IRS; a marriage made in Hell

Cash intensive businesses

Operating a cash intensive business is often accompanied by poor record keeping as well as the lack of any meaningful internal controls. These two factors make it difficult, if not impossible, to determine the taxpayer’s operations, financial condition, and most important, whether the taxpayer’s tax returns are true and accurate. Where tangible evidence concerning the taxpayer’s business is absent, an IRS agent will have to rely on the oral testimony of the taxpayer as it relates the financial information contained in the taxpayers returns in order to determining whether the taxpayer’s testimony is credible.

A taxpayer, who is not represented by an attorney, is at a clear disadvantage when the IRS comes calling. A nervous response or responses to confusing questions may result in the examiner forming a negative opinion of the taxpayer and a decision to expand the scope of the examination or make a criminal referral. A taxpayer operating a cash intensive business should never submit to an IRS interview without the presence of an experienced tax attorney.

IRS examination of a cash intensive business entails:

Conducting an initial interview of the taxpayer to determine how cash is handled from the time the income is received to the time the income is deposited into a bank account or spent. This is a painstaking process where the IRS agent tries to understand the taxpayer’s business cycle and the identity of the individuals involved in handling the cash. The taxpayer has to explain in detail the mechanics of cash handling. This involves each step in the process including collection of gross receipts from every source and the manner in which cash sales are recorded.
Preparing a cash flow chart reflecting the time cash is received to the time it is placed in the hands of a third party. The flow chart will also contain the names of each individual who has contact with the cash at each point. Following its preparation, the agent will ask the taxpayer if the flow chart is correct. The above process will likewise be applied to cash disbursements. An agent will want to know who is authorized to pay cash and where the cash comes from. Where expenses are paid in currency, the agent will inquire as to how the expenses are recorded, whether a receipt was retained, whether the transaction was entered into books and an explanation as to how the disbursement is included in determining net income or a net loss.
Determining whether the taxpayer has an accounting system in place, and if so, who is responsible for maintaining the records. This a critical part in the examination. The examiner will ask about cash-on-hand that the taxpayer has access to, including funds available from friends or relatives. The agent is required to explain to the taxpayer that cash-on-hand includes pocket money plus cash in a safe or other location, and cash held in trust by others. The taxpayer’s responses to the agent’s questions will be taken down in detail and often times are accompanied by actual quotes from the taxpayer.
Developing data related to the taxpayer’s business and related businesses and determining whether any related party transactions exist. The IRs agent will ask about any recurring losses that are reflected on the taxpayer business or personal returns and attempt to determine what caused the losses and whether any remedial action has been taken by the taxpayer.
Careful scrutiny as to whether the taxpayer is commingling funds from his business accounts with his/ her personal bank accounts or his/ her immediate family member’s bank accounts. In this regard, the agent will inquire about the existence of any bank or personal loans, accounts payable and other borrowed funds as well as personal loans made to or from family members.

Take Away

With all the scrutiny and complexity embedded in cash intensive businesses by the IRS, operating a cash intensive business presents significant risks in terms of the tax and potential criminal consequences. If you operate a cash intensive business and have been notified of an IRS examination, it is important that you immediately seek the advice of an experienced and knowledgeable tax attorney prior to ever speaking with anyone. In some cases, IRS agents will show up at the taxpayer’s place of business or home, in an attempt to catch the taxpayer off guard. Should this happen to you, you should always refrain from answering any questions and ask to have an attorney present.

July 8, 2020/by Anthony N Verni, Attorney at Law, CPA

IRS Urges Businesses To E-File Cash Transaction Reports

Electronic Filing For Businesses

In an effort to promote compliance, on February 19, 2019 the IRS urged businesses that are required to file reports of large cash transactions to take advantage of the electronic filing option that was announced on September 19, 2012 by The Financial Crimes Enforcement Network (FinCEN). Under federal law a person who is engaged in a trade or business must file Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business) within 15 days after a transaction (IRC 6050I; 26 CFR 1.6050I-1(e); 31 USC 5331; 31 CFR 1010.330). Although businesses still have the option of filing Form 8300 on paper, electronic filing has several benefits. One of the benefits is that electronic filing is convenient and cost effective. It is also a secure way of transmitting sensitive financial information. Similarly, by filing Form 8300 electronically, businesses are able to receive immediate acknowledgement of receipt when filing is completed.

The filing requirement for Form 8300 authorized under Internal Revenue Code Section 6050I pre-dates the enactment of Section 5331 under the Bank Secrecy Act (BSA). Section 5331 enacted in 2001 requires non-financial trades or businesses to file Form 8300. In 2001 Treasury Regulations were issued permitting a single Form 8300 to satisfy both the Title 26 and Title 31 filing requirements.

Who is required to file?

Although the term “person” is defined differently under Titles 26 ad 31, the regulations under both titles expressly incorporate the definition of “person” under Section 7701 of the Internal Revenue Code to include an individual, trust, estate, partnership, association, company or corporation. The term “trade or business” generally includes any activity carried on for the production of income from selling goods or performing services. It is not limited to integrated aggregates of assets, activities, and goodwill that comprise businesses for purposes of certain other provisions of the Internal Revenue Code. Activities of producing or distributing goods or performing services from which gross income is derived do not lose their identity as trades or businesses merely because they are carried on within a larger framework of other activities that may, or may not, be related to the organization’s exempt purposes.

What payments need to be reported?

While the Internal Revenue Code requires reporting cash receipts, Section 5331 of the BSA requires the reporting of receipts of coins or currency. The definition of “cash” under Treasury Regulation 26 CFR 1.6050l-1 (c) (1) is similar to the definition of “currency” under Title 31.

Under the Treasury Regulations the term “cash” includes:

Coin and currency of the United States or any other country which circulates and is accepted as money in the country in which it is issued
A cashier’s check, bank draft, traveler’s check or money order having a face amount of not more than $10,000 that is (1) received in a designated reporting transaction, or (2) received in any transaction in the which the recipient knows that the instrument is being used in an attempt to avoid the reporting of the transaction

Under Title 31 the term “currency” is defined to include foreign currency and to the extent provided in the regulations proscribed by the Secretary, any monetary instrument with a face amount of not more than $10,000, except a check drawn on the account of the writer in most financial institutions. 31 CFR 1010.330(c)(1).

While there are stiff civil and, in some cases, criminal penalties associated with failing to file Form 8300, a report issued by the Treasury Inspector General for Tax Administration (“TIGTA”) on September 24, 2018 concluded that the BSA Program has had a minimal impact on compliance. Nevertheless, if you are required to file Form 8300 you should be concerned and take action.

The takeaway here is that the IRS has streamlined the filing process for Form 8300 by permitting electronic filing. By doing so, businesses should take advantage of this process in lieu of paper filing, which remains an option. Those who fail to file Form 8300 may find it difficult to explain the reason for non-compliance in light of the electronic filing option. Failing to file Form 8300 may also create risk particularly where a financial institution has filed a Suspicious Activity Report (“SAR”) in connection with a transaction which should have been reported on Form 8300. In the event an SAR is filed there is a possibility that you will be identified by the IRS and be subject to their scrutiny. The impetus behind requiring the filing of a cash transaction report is to promote compliance and establish money trails and expose hidden criminal trends and patterns that include money laundering and terrorist financing.

March 16, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FBAR, News

New Developments in The Willful Civil FBAR Penalty

Current Developments May Make It Easier For the IRS To Assess Penalties After Willfully Failing to File FBAR’s

A taxpayer who willfully fails to file a Report of Foreign Bank and Financial Accounts (FBAR) may be subject to both civil and criminal penalties as well as imprisonment. In both the criminal and civil context, the government has the burden of proof.

In FBAR criminal prosecutions, the standard of proof is well settled and requires the government to prove its case using the beyond a reasonable doubt standard. However, in cases involving the assessment of the 31 USC § 5321(a) (5(C) willful civil FBAR penalty, the standard of proof is unsettled and remains the subject of debate among legal scholars, practitioners and the judiciary. Practitioners have argued that the standard of proof in assessing the willful civil FBAR penalty should be the clear and convincing standard, citing Chief Counsel Advice (CCA) memorandum released January 20, 2006, CCM 200603026 (See discussion below) in support of using the higher standard of proof.

The correct standard of proof to be applied for assessing the willful civil FBAR penalty often arises in the context of an assessment of the willful civil FBAR penalty by IRS Examinations, an Appeal by the taxpayer, or in defense of an action by the U.S. government to enforce the 31 USC § 5321(a) (5(C) penalty. The proper standard of proof to apply in the context of the willful failure to file an FBAR has been the subject of a number of lower federal court decisions and is also reflected in jury instructions submitted by U.S. District Court in the Southern District of Florida. The Courts in all three cases have cited the preponderance of evidence standard as the correct standard to apply when assessing the 31 USC § 5321(a) (5(C) penalty.

Based upon two recent cases, the stage may now set for the U.S. Court of Appeals for the Fifth and Ninth Circuits to ultimately decide the correct standard of proof to be applied when assessing the31 USC § 5321(a) (5(C) penalty.

The first case, Gubser v Comm’r, 2016 WL. 3129530 (S.D. Tex. May 4, 2015) comes out of the U.S. District Court for the Southern District of Texas. In Gubser, the taxpayer filed a complaint in the District Court asking for a declaratory judgment that the proper standard to be applied in a willful civil FBAR penalty case is the clear and convincing standard. The District Court dismissed the taxpayer’s suit based upon lack of standing. The taxpayer subsequently filed an appeal.

Although the question currently before the Fifth Circuit is limited to standing, some observers believe that if the taxpayer prevails and the matter is remanded back to the District Court for further findings, the standard of proof issue to be applied in a willful civil FBAR penalty will find its way back to the Fifth Circuit.

The second case, U.S. V. August Bohanec and Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16) involves a decision from the United States District Court for the Central District of California. In Bohanec, the Court rejected the taxpayers’ argument that the clear and convincing standard should be applied in a willful civil FBAR penalty case. Instead, the District Court applied the lower preponderance of the evidence standard of proof. The taxpayers’ attorney has indicated the taxpayers will appeal the decision.

The ultimate determination of the standard to be applied when assessing the willful civil FBAR penalty and its importance cannot be overstated; a decision by the Fifth and/or Ninth Circuits citing the preponderance of evidence as the correct standard will certainly have a chilling effect on taxpayers, who are considering opting out of the OVDP, and will also pose a greater risk to those taxpayers who have or will submit a Certification of Non-Willfulness as part of the Streamlined Procedures. If the Appeals Court finds that the correct standard is the preponderance of evidence, taxpayers can also expect the IRS to be more aggressive in scrutinizing taxpayers who opt Out of the OVDP or those who proceed using the Streamlined Procedures.

This article outlines the concept of “willfulness” in light of U.S.C. §5321(a) (5) (C), CCM200603026, JB Williams, McBride and Zwerner and in anticipation of the Gubser and Bohanec cases making their way to the U.S. Court of Appeals.

A taxpayer who “willfully” fails to file an FBAR faces a penalty equal to the greater of $100,000 or 50% of the foreign financial account balance as of the June 30 FBAR due date,31 U.S.C. §5321(a) (5) (C). Neither the FBAR statute nor the regulations promulgated there under provide any guidance on the standard of proof to be applied in the assessment of the willful civil FBAR Penalty. In Chief Counsel Advice (CCA) memorandum released January 20, 2006, analyzing the issue of willfulness in the FBAR civil context, the IRS compared the burden of proof for the willful civil FBAR penalty to the burden of proof for the civil fraud penalty under 26 U.S. Code §. 6663, explaining that it expects the standard of proof will be the same—clear and convincing evidence, not merely a preponderance of the evidence. Proponents for applying the higher standard often cite CCM 200603026 in support. Despite CCM 200603026, the U.S. District Court, in three cases has cited the lower preponderance of the evidence standard as the correct standard when assessing the willful civil FBAR penalty.

The United States District Court in JB Williams applied the preponderance of the evidence standard,United States vs. Williams, 2010 U.S. Dist. LEXIS 90794 (ED VA 2010). In JB Williams, the government brought an action in the US District Court for the Eastern District of Virginia seeking to enforce the civil willful FBAR penalties assessed against the taxpayer for his failure to report his interest in two foreign bank accounts for tax year2000, in violation of 31 U.S.C. § 5314. The taxpayer previously plead guilty to two count superseding information for Conspiracy to Defraud the IRS and Criminal Tax Evasion. As part of the plea, Williams agreed to allocute to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the Swiss accounts.

Furthermore, the taxpayer checked “no” in response to the question on Schedule B Form 1040, regarding the existence of a foreign financial account, despite having transferred $7M to a Swiss bank account. In addition, the taxpayer completed a tax organizer, wherein he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over a foreign financial account. The taxpayer provided the following statement as part of his allocution.

“I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon, until I filed my 2001 tax return.”

. . . .

The District Court, held without discussion, that the government’s burden to establish a willful violation of 31 U.S.C. § 5314only requires proof by a preponderance of the evidence.The District Court further held that the Taxpayer’s eventual filing of the delinquent FBARS, “negated” willfulness. In reversing the District Court’s decision, the U.S. Court of Appeals for the Fourth Circuit, dodging the standard of proof question, held that the District Court clearly erred in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314.

In U.S. v. McBride, [908 F. Supp.2d 1186, 1201 (D. Utah 2012)], the District Court for the District of Utah Central District, relying on Williams held that the correct standard for imposition of the willful civil FBAR penalty is the preponderance of the evidence standard. Likewise, in U.S. v Zwerner, a 2014 Florida Case, the Federal District Court for the Southern District of Florida submitted the issue on willfulness to the jury using a preponderance of evidence standard.The U.S. Court of Appeals has yet to weigh in on the correct standard of proof to be applied in a 31 USC § 5321(a) (5(C) willful FBAR penalty case. However, two recent lower court cases make clear that the higher court will ultimately be called upon to determine the correct standard of proof question.

In Gubser v. Comm’r, 2016 WL, 3129530 (S.D. Tex. May 4, 2016), the taxpayer, a Swiss citizen by birth and later naturalized asa U.S. Citizen maintained a Swiss account, which he opened when he was a young man. The purpose for opening the account was to enable the taxpayer to accumulate savings for his retirement in Switzerland. Since its opening, the account was always held in Gubser’s name and the funds in the account represented after tax earnings. Grubser retained the services of a CPA, who prepared the taxpayer’s U.S. tax return for over 20 years. During this time, the CPA never raised the question whether the taxpayer had an interest in any foreign financial account. The matter first came to the taxpayer’s attention in 2010 when someone from the CPA’s office raised the question of the existence of foreign financial accounts. Gubser promptly filed an FBAR report for 2009 and subsequent years. In addition, the taxpayer entered the OVDP, covering the tax years 2003-2010. Subsequently, Gubser opted out of the OVDP, which resulted in the IRS sending Gubser a 3709 Letter (the FBAR 30 day letter), proposing the50% willful civil FBAR penalty pursuant to 31 USC § 5321(a)(5(C) for the tax year 2008. The penalty in the amount of $1.3M reflected approximately 50% of the taxpayer’s entire life savings. Grubser filed a timely protest letter with Appeals. When the taxpayer discussed the matter with the Appeals officer, the Appeals officer told Gubser that the IRS could prove willfulness by using the preponderance of the evidence standard, but not by the clear and convincing standard. The Appeals officer also asked for guidance on the proper standard.

Grubser thereafter filed a declaratory judgment action with the U.S. District Court for the Southern District of Texas, requesting that the Court declare that the IRS must prove willfulness by clear and convincing evidence. In response the government filed a motion to dismiss based upon lack of standing, arguing that the taxpayer’s injury could not be redressed by a declaratory judgment, since such a judgment would be non-binding on the IRS. The government’s motion was granted and Gruber appealed to the Fifth Circuit.

The second case to watch isU.S. V. August Bohanecand Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16). In Bohanec, the taxpayers had previously applied for and were denied participation in the Offshore Voluntary Disclosure Program (“OVDP”), in part, due to several misrepresentations made during the OVDP process. The U.S. District Court for the Central District of California rejected the taxpayers’ argument that the government had to show willfulness under the clear and convincing standard of proof, and instead applied the preponderance of evidence standard of proof. The Court found that the taxpayers’ failure to file FBAR’s for three accounts the taxpayers maintained for over a decade was at least “recklessly indifferent to a statutory duty.” The taxpayers’ attorney has indicated that the taxpayers will appeal the District Court’s decision.

Taxpayers currently participating in the OVDP, who are considering opting out of the Program or those who are thinking of making a disclosure using the Streamlined Procedures certainly need to proceed with caution. The U.S. Court of Appeals for the Fifth and Ninth Circuits will ultimately address the correct standard to be applied in the assessment of the willful civil FBAR penalty. These decision(s) will undoubtedly have a significant impact on both current and future taxpayers who have made or are considering making a voluntary disclosure.

The takeaway here is that any decision involving making an offshore voluntary disclosure should not be made based upon an internet search. Instead, those faced with the decision of making an offshore voluntary disclosure should consult with a knowledgeable and experienced tax attorney, who can assess the specific facts of each case and assess the risks associated with choosing one method of disclosure over another. At the Law Office of Anthony Verni, we know that there is no one size solution to fit all, contact us today or leave a comment below.

January 13, 2017/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, IRS Payments, News

Delinquent IRS Trust Fund Taxes Update

The Trust Fund Penalty for Delinquent IRS Trust Fund Taxes

If you owe back payroll taxes, you should hire a capable Tax Attorney, who is experienced and familiar with the rules pertaining to the application of the Trust Fund Penalty. The IRS considers unpaid Trust Fund Taxes a serious matter and has made collection of these taxes a priority.

This is based upon two factors. First, as of September 2015, $59 Billion in payroll taxes remained outstanding.Second, approximately 69% of all taxes collected by the IRS are income taxes that are withheld from employers. The heightened scrutiny is evidenced by Assistant Attorney General, Caroline D. Ciraolo’s, statement made during a key note address at the American Bar Association’s 27^th annual Philadelphia Tax Conference on November 2, 2016.

“Among our top priorities is civil and criminal employment tax enforcement. Employment tax violations represent $91 billion dollars of our country’s $458 billion dollar gross tax gap, and as of June 30, 2016 more than $59 billion reported on quarterly employment tax returns remained unpaid.”https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-caroline-d-ciraolo-delivers-keynote-address

In addition, recent prosecutions and convictions make clear that “the willful failure to comply with employment tax obligations is a crime – plain and simple.” https://www.justice.gov/opa/pr/nevada-business-owner-and-bookkeeper-sentenced-employment-tax-crimes.

The following is representative sample of criminal prosecutions and convictions for unpaid employment taxes.

On October 26, 2016, Michigan owners of sixteen adult foster care homes were indicted for failure to pay employment taxes. From September 2010 through 2014, the owners withheld payroll taxes from their employee paycheck, but failed to file employment tax returns and also failed to pay over the trust fund taxes they collected.https://www.justice.gov/opa/pr/michigan-owners-sixteen-adult-foster-care-homes-indicted-failure-pay-employment-taxes

On October 25, 2016, Kyle Archie was sentenced to 10 months in prison for failure to pay over employment taxes for the tax years 2003-2009 related several entities including Reno Rock, Inc., GKPA Inc. and D Rockeries, Inc. . https://www.justice.gov/opa/pr/nevada-business-owner-and-bookkeeper-sentenced-employment-tax-crimes

On October 18, 2016 two West Virginian business owners pled guilty for failing to pay employment taxes. The defendants operated a construction business from July 2007 through 2010. The defendants also failed to pay over $490,000 in employment taxes for a prior business. https://www.justice.gov/opa/pr/west-virginia-business-owners-plead-guilty-failing-pay-employment-taxes

On September 15, 2016 a North Carolina man pled guilty to failing to pay employment taxes. The defendant operated an audio business in Burlington, North Carolina. From 2008-2011 the defendant failed to pay over employment taxes withheld from his employees. Instead, the defendant used the trust fund taxes https://www.justice.gov/opa/pr/north-carolina-man-pleads-guilty-failing-pay-employment-taxes

In April of 2015 the IRS launched the Federal Tax Deposit X Coded Pilot Program.

The Program was designed to test the impact of alternate Alert treatments such as Soft Notices and Revenue Officer visits and identify which taxpayers benefit most from the alerts. In addition, In addition, the IRS plans to roll out Electronic Federal Tax Payment System (“EFTPS”) in 2017. According to the IRS, the EFTPS will modify the Federal Tax Deposit platform by creating a near real time system to identify variances in Federal Tax Deposits. These initiatives are designed to improve collection case selection, assignment to agents, and enable the IRS to make data driven decisions regarding taxpayer contacts.

The takeaway here is that failure to pay Trust Fund Taxes can result in substantial penalties as well as imprisonment. If you have unpaid payroll taxes you should immediately contact a Tax Attorney.

11/10/2016

November 10, 2016/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, IRS Payments, News, OVDI, OVDP

FBAR Collections Ten Billion and Counting

IRS Releases 2016 Offshore Voluntary Compliance Statistics

On October 21, 2016 the IRS released the latest statistics on Taxpayers who have made disclosures under the Offshore Voluntary Disclosure Program (OVDP) or by using the Streamline Procedures.

According to the News Release, a total of 55,800 taxpayers have come into compliance since 2009, resulting in the collection of approximately $9.9 billion in taxes, interest and penalties.

An additional 48,000 Taxpayers have made disclosures using the Streamlined Procedures, paying $450 million in taxes, interest and penalties.

In its News Release, the IRS implies that IRS detection is inevitable for those who fail to come forward.

The foregoing is based upon Taxpayer information received by the IRS through a number of initiatives including:

(i) inter-governmental agreements (IGA’s) executed between the U.S. and its international partners under FATCA providing for the exchange of Taxpayer financial information;

(ii) Taxpayer information provided by institutions participating in the Swiss Bank Program;

(iii) criminal prosecution of Foreign Financial Institutions, institution relationship managers, bank officers, attorneys and other facilitators;

(iv) information gathered in response to the issuance of a John Doe Summons;

(v) Taxpayer information obtained from IRS “Whistleblowers;” and

(vi) Taxpayer information gathered through IRS participation in various international task forces.

For those who elect to proceed under the Streamline Procedures, the bar to establish “non-willfulness” has been raised. The IRS will no longer accept Taxpayer applications under the Streamlined Procedures unless the Taxpayer provides a “narrative statement of facts,” pays the tax due, and submits the required information returns.

This statement must clarify why the particular party failed to disclose offshore assets. Accordingly, a request for relief that fails to contain a detailed explanation, in all likelihood, will result in a denial of relief. Similarly, a statement that the Taxpayer was unaware of the filing and reporting requirements will not meet the threshold for non-willfulness.

Finally, taxpayers, who self prepared their returns and who answered “no” to questions 7a and 7b on Schedule B pertaining to the existence of an interest in or signatory authority over a foreign financial account, will find it difficult, if not impossible, to establish “non-willfulness.”

https://www.irs.gov/uac/newsroom/offshore-voluntary-compliance-efforts-top-10-billion-more-than-100000-taxpayers-come-back-into-compliance

October 24, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, OVDP

Money Laundering Is Tax Evasion

Money Laundering and Tax Evasion

Money laundering and tax evasion are closely related. The IRS has used money laundering statutes to help cut down on tax evasion. Money laundering may be seen as willful tax evasion. Hiding money will off course lead to not paying taxes on the same.

What is Money Laundering?

Money laundering is a common occurrence today. Global concern surrounding this nefarious activity is based upon the theory that failure to report and account for this activity erodes the economic base of national economies. Individuals and organizations involved in criminal activity attempt to obscure the illegal source of the funds in an effort to avoid detection from law enforcement officials.

These funds commonly referred to as “dirty money” are the by-product of illegal activities such as drug and human trafficking, gambling, elaborate fraud schemes, and terrorism. Historically, criminals have utilized foreign financial institutions for purposes of “washing” dirty money through legitimate enterprises in order to avoid the scrutiny of taxing authorities.

Recent Global initiatives in combating money laundering including criminal prosecution, and the imposition of stiff criminal penalties have heightened foreign financial institution awareness and willingness to cooperate with authorities. Moreover, new reporting requirements, mutual exchange of information agreements and coordination of local, national and global law enforcement agencies will make it more difficult for individuals to avoid detection.

How does money laundering work?

The main objective behind money laundering is to obscure the illegal source of the funds, thereby enabling the criminal to use the money without detection. The process is complex as it involves several financial transactions which may be carried out through various financial outlets in various countries. There are so many ways in which individuals hide money derived from criminal activities to avoid detection. Some of them are:

Depositing a large sum of money earned illegally in small amounts in a financial institution under different fake names.
Depositing a large sum of money earned illegally in small amounts by using various bearer instruments like money orders.
Creating a Trust or Corporation or a non-profit organization or an account under a different name in a different country and moving large sums of money there.

The hidden money is then accessed through debit cards, credit cards, money orders or cash withdrawals. Check this article “Caribbean based investment advisors and an attorney” to see how Caribbean based investment advisors and an attorney colluded in their efforts to helping US Citizens hide money abroad.

Tax Evasion

Tax evasion is the wilful attempt to evade or defeat the assessment of taxes or the payment of taxes. The act of evasion occurs when a taxpayer either willfully fails to report his or her income as required by law, or having reported the income, engages in conduct that either hinders or defeats any attempt by the IRS in collecting the tax owed. In the latter case, the taxpayer prevents IRS from collecting by moving assets around under different ownership. An example would be: A taxpayer reports his income and has a tax liability. He has the money to pay the liability but instead, he closes all his bank accounts and moves the money to a different account under a different name. This is a clear indication of wilful tax evasion. For more on Tax evasion, check IRS Tax Crimes handbook.

Is money laundering therefore tax evasion?

In the U.S., money laundering is tax evasion but not all tax evasion is money laundering. According to IRS, money laundering is tax evasion in progress if the underlying conduct violates income tax laws and Bank Secrecy Act. If you are a U.S. citizen/ permanent resident, the law requires you to report your income and pay taxes on the same.

As a U.S. taxpayer, when you are involved in money laundering, it is obvious that you are hiding the money in question. The reason may be because the money is from criminal activities you are involved in and you do not want your cover to be blown. In this case, you want to hide the dirty source of your money through laundering to be able to spend it without worrying about the IRS and the tax consequences. Alternatively, the main reason behind your hiding the money may be because you are actually running away from paying your taxes. Either way, this is tax evasion engineered through money laundering. It does not matter if the income is legal or illegal, you have to pay your taxes or else the IRS will somehow catch up with you some day. It is even worse when your income is from criminal activities since there may be additional consequences for the underlying crime. I think this is why individuals who engage in criminal activities choose to launder their money to avoid detection by the government for the fear of facing criminal prosecution. While doing so, they are evading their responsibility to pay taxes.

Is there a way out of this money laundering mess?

You may have been involved in money laundering and off course tax evasion in the process and may be you are tired of hiding. Your question may be “can I really make it right? Is there really a clean way out?” While there is no guarantee of avoiding criminal prosecution, there is still a chance to make it right. This is by getting into the OVDP (Offshore Voluntary Disclosure Program). You have to get a pre-clearance letter from the IRS to be accepted into the OVDP. You do this by providing all information on all foreign financial accounts, filing amended income returns for all the years in question etc. Once approved, you will be able to enter into “Closing Agreement” with the IRS which means that the IRS will not revisit the matter again.

The Closing Agreement may differ from one case to another since one size does not fit all. This sounds easy, right? It may seem so but the whole process requires a careful evaluation of all the facts. If you need help walking through this, contact The Law Office of Anthony Verni . We can help you evaluate your situation and devise the best strategy to follow.

February 25, 2016/by Anthony N Verni, Attorney at Law, CPA

FATCA, News, OVDP

IRS modifications to OVDP and streamlined procedures a Relief to offshore bank account holders

IRS modifications to OVDP and streamlined procedures

The Offshore Voluntary Compliance Program

Internal Revenue Service’s major revisions in its Offshore Voluntary Compliance Program may just be the light at the end of the tunnel for tax payers with offshore bank accounts. The revisions provide a new path for tax payers with offshore bank accounts to come into compliance with their tax obligations. The modifications of the OVDP 2012 and the expansion of streamlined procedures (IR-2014-73) are just a relief. They are more inclusive for both U.S tax payers residing abroad and in the U.S.

IRS launched the Offshore Voluntary Compliance program in 2012 following the success of its prior voluntary programs offered in 2009 and 2011. The 2012 OVDP was launched to help people with undisclosed income from offshore accounts get current with their tax returns. It encourages taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. All the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.

These current modifications in the OVDP 2012 have been fueled by the implementation of the Foreign Account Tax Compliance Act (FATCA) and Department of Justice determination to deal with tax evasion. FATCA will soon go into effect, as a matter of fact, from July 1^st2014. With FATCA in place, foreign financial institutions will start reporting to the IRS foreign accounts held by U.S persons. The IRS enforcement efforts and implementation of FATCA, have made taxpayers are more aware of their obligations. This means that it’s going to be so hard for U.S. citizens in the U.S or overseas to conceal foreign bank accounts and assets.. That is why the IRS has come up with the modifications in the 2012 OVDP to help U.S Citizens who have undisclosed foreign bank accounts or assets to come to compliance, including those who are not willfully hiding assets. The IRS is providing the tax payers this golden chance through these modifications to help them avoid prosecution and limit their exposure to civil penalties.

Streamlined Procedures and OVDP 2012 changes

OVDP’s 2012 changes just expand the Streamlined Procedures put in place in Sept 2012. The streamlined filing compliance procedures were put in place to help U.S. taxpayers living abroad comply with their tax obligations. The IRS recognized that some of the U.S taxpayers residing abroad may not have been aware of their filing obligation. They failed to timely file U.S. federal income tax returns or report Foreign Bank and Financial Accounts (FBARs) not because they wanted but because they were unaware. This program is available to non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed U.S. tax returns during the same period. These taxpayers must also present a low level of compliance risk.

The changes to the Offshore Voluntary Compliance Program (OVDP 2012) will expand on streamlined procedures to help accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts. The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States.

Changes to streamlined procedure include:

The changes to streamlined procedures will help cover a much broader group of U.S. taxpayers who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations. To encourage these taxpayers to come forward, IRS is expanding the eligibility criteria. These changes include:

Eliminating a cap on the amount of tax owed to qualify for the program (requirement that the taxpayer have $1,500 or less of unpaid tax per year).
Doing away with the risk questionnaire that applicants were required to complete.
Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

These modifications provide an ease avenue for taxpayers who have been looking for a better easy way to comply with their tax obligations. Taxpayers with offshore accounts should take advantage of these changes in the OVDP while it lasts. This grace period is something that U.S. taxpayers should not overlook.

June 24, 2014/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, OVDP

IRS to Modify OVDP to Accommodate Non-willful tax evasion

OVDP changes to accommodate non-willful tax evasion

The OVDP (Offshore Voluntary Disclosure Program) may face more modifications as IRS continues to focus on international tax compliance. The IRS Commissioner John Koskinen hinted on the upcoming modifications to the OVDP on June 3rd, 2014 before the IRS Council. His remarks give a ray of hope to U.S citizens and residents who have offshore bank accounts that have gone unreported. This may be because the OVDP has been previously centered on criminal prosecution and hefty penalties under Bank Secrecy Act. The modifications would consider the U.S. Citizens and residents who have resided in other countries for so long that their failure to comply with their tax obligations has not been intentional. The IRS looks to accommodate these tax payers by easing the penalty on them. This is aimed at encouraging them to report their offshore accounts and comply with their tax obligations.

OVD program focus on combating tax evasion

OVDP (Offshore Voluntary Disclosure Program) was put in place to curb global tax evasion. It was to provide an opportunity to U.S. Citizens and permanent residents living overseas or those with offshore accounts to comply with their tax obligations voluntarily. This would involve disclosing offshore accounts and paying a monetary penalty thus avoiding criminal prosecution. The program has been successfully and as such seen various modifications since its inception. Despite this, there are still many tax payers who have not tapped into the OVDP program. They may have been willing to comply with their tax obligations may be if the penalties were minimal and reduced chances of criminal prosecution. For more on help with OVDP program, click here.

IRS modification to include willful tax payers in OVDP

IRS is determined to ensure maximum cooperation of its taxpayers abroad through yet another possible modification of OVDP. The OVDP program has without a doubt targeted all taxpayers with offshore bank accounts without considering if the taxpayers were willful or non-willful tax evaders. In his remarks, the IRS Commissioner John Koskinen notes that they are considering whether their voluntary programs have been too focused on those willfully evading their tax obligations and not being accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. According to the IRS commissioner, some of the U.S. citizens have resided abroad for many years, perhaps even the vast majority of their lives. This is the driving factor behind the forthcoming foreseen possible modifications by the IRS to the OVDP.

The IRS, through its Commissioner, hinted on the possibility of giving these tax payers, whose non-compliance does not constitute willful tax evasion, the opportunity to come into compliance without having to face the type of penalties relevant for those who willfully hid their investments overseas. These tax payers might not have had the opportunity of coming into compliance that doesn’t involve the threat of substantial penalties.

June 6, 2014/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, News

IRS Deadline for U.S. Citizens and Resident Aliens Abroad

IRS Expectations of U.S. Citizens and Resident Aliens Abroad

IRS (Internal Revenue Service) in one of its news releases has reminded U.S. citizens and resident aliens abroad of the deadline on their tax obligations. According to the IRS, U.S Citizens and permanent residents who lived or worked abroad in 2013 in full or in part may have a U.S. tax liability and a filing requirement in 2014. The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas including those serving in the military abroad.

IRS has provided a filing deadline of June 16 to U.S. Citizens and alien residents. To cater for tax payers residing overseas who cannot meet this deadline, IRS has provided an automatic extension to Oct. 15, 2014 to the taxpayers. However, it is important to note that the extension by the IRS is on time to file and not time to pay. An interest rate interest rate of 3% p.a. is compounded daily applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month applies to payments made after June 16, 2014.

Federal Law takes on IRS tax obligationa abroad

U.S. citizens and resident aliens living abroad are required by Federal law to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. The IRS requires the affected taxpayers to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their tax return Form 8938 (statement showing their financial assets abroad). U.S. Citizens and resident aliens with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 should these accounts. IRS requires tem to file Form 114 electronically with the Treasury Department. This is known as Reporting of Foreign Bank and Financial Accounts (FBAR). For more information on how to file the FBAR, click here.

June 4, 2014/by Anthony N Verni, Attorney at Law, CPA