Offshore Tax Evasion – Waiver of Criminal Civil Penalties

U.S. Taxpayers who commit offshore tax evasion are subject to serious civil and criminal penalties, which may include:

1. An FBAR civil penalty of up to 150% of the account balance (see: 5/14 case of Florida Taxpayer Carl Zwerner)

2. 20%-40% accuracy related penalty (on underpayment of tax due).

3. Civil Tax Fraud penalty (75% of tax due) and suspension of the IRS statute of limitations for civil tax audits

Criminal Penalties

Criminal Prosecution for Tax Crimes: Willful Evasion of Tax (5 years in jail; IRC 7201), Obstruction of Tax Collection (3 years in jail; IRC 7212), Conspiracy to Commit Tax Evasion (5 years in jail; 18 USC 371), Filing a False Tax Return (3 years in jail; IRC 7206), Failure to File FBAR ( 10 years in jail for each tax year not filed; Fincen form 114) .

In addition, tax crimes may be linked to 3 separate 20 year felonies: mail fraud, wire fraud, and money laundering. Mail fraud requires the use of the postal system to effectuate a scheme to defraud (18 USC 1341). Wire fraud requires the use of a telecommunications facility to effectuate a scheme to defraud (18 USC 1343) and if the wire fraud affects a financial institution, the fine is up to $1m and up to 30 years in prison.

Money Laundering is the use of illegal funds to purchase assets (hiding the origin of the illegal funds). These illegal funds may come from tax evasion. Tax evasion is a Specified Unlawful Activity (“SUA”), a predicate offense for money laundering under the Money Laundering Control Act, 18 USC 1956, 1957, as is wire fraud & mail fraud).

Tax evasion is a Specified Unlawful Activity in a financial transaction involving the proceeds of a specified unlawful activity with the intent to violate IRC Sec. 7201 (willful attempt to evade tax) or IRC Sec. 7206 (False tax return filed or false and fraudulent statements made to the IRS).

In addition to monetary penalties, violations of mail fraud, wire fraud and money laundering are punishable by civil and criminal forfeiture (18 USC 981(a)(1)(A): civil forfeiture 18 USC 982(a)(1)(A): criminal forfeiture.

Civil Penalties

For failure to file Fincen Form 114(“FBAR”) to report the off-shore account a penalty equal to the greater of $100k or 50% of the balance in the account for each violation. In 2014 a Florida taxpayer, Carl Zwerner, lost at trial with the IRS for failing to file an FBAR and had a 150% of the account balance penalty imposed.

A 20-40% accuracy-related penalty for underpayment of tax.

A Civil tax fraud penalty (75% of tax due) and suspension of the IRS statute of limitations for civil tax audits.

Waiver Of Penalties/Good Faith Belief

Clearly, there is great risk for undeclared offshore accounts and unreported income. The key issue for the taxpayer to eliminate penalties is cited in IRC Sec. 6404(c) which states that no penalty will be imposed with respect to any portion of an underpayment if it is shown that there was reasonable cause and the taxpayer acted in good faith.

To avoid both criminal prosecution and criminal conviction the taxpayer must demonstrate that he had a “good faith” belief that he did not owe the tax. In Cheek v. US 1991(1991) 498 US 192 willfulness is required for federal tax crimes.

A good faith misunderstanding of the law, or a good faith belief that one is not violating the law negates the willfulness element of a tax evasion charge( See: Standard Federal Tax Reports Par. # 41.318.034; Tax Research Consultant
Sec. 66.050, Practical Tax Explanations Sec. 40.245).

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