Foreign Bank Account Red Flags that Trigger IRS Investigations
No one particular offshore financial activity will get flagged by the IRS as an indicator of tax evasion, but several flags may trigger a deeper examination into your foreign financial accounts by the Internal Revenue Service. This can be followed by a criminal investigation for tax evasion, violations of the Bank Secrecy Act, money laundering, structuring transactions and defrauding the U.S. Government where the penalties can result in civil and criminal fines, and in some cases imprisonment.
The following offshore tax evasion schemes have been extracted from actual criminal prosecutions by the United States Department of Justice, Tax Division and represent the common elements in a typical tax prosecution involving offshore tax evasion and violations of the Bank Secrecy act, the reporting requirements contained in the Foreign Assets Tax Compliance Act as well as violations of the Federal statutes dealing with money laundering, structured transactions and defrauding the United States.
If you have engaged in one of these schemes and have failed to make a disclosure, you may be subject to significant civil and criminal penalties as well as incarceration. If you have not been contacted by the Internal Revenue Service, you may still be able to participate in the Offshore Voluntary Disclosure Program. Recent global tax enforcement initiatives make clear that those taxpayers who fail to come forward will suffer severe sanctions.
The following list represents some of the offshore tax evasions schemes created by taxpayers and their representatives:
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes a sham foundation, organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts;
- The Taxpayer closes a Foreign Financial Account and converts the proceeds to gold. The gold is thereafter placed in a safe deposit box with a different Foreign Financial Institution;
- The Taxpayer relying upon a bank relationship manager, attorney or other representative’sassurance that a country’s bank secrecy laws would prevent the Foreign Financial Institution from disclosing a Taxpayer’s undeclared accounts to U.S. law enforcement, opens numerous Foreign Financial Accounts. The Taxpayer fails to report the existence of these accounts or the income generated there from.
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes numerous entities, includingForeign (offshore) partnerships, LLCs and LLPs. Organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts, as well as Foreign Financial Assets;
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes an International Business Company organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts. Even though the Taxpayer is the beneficial owner of the accounts, he fails to report the existence of the account or the income generated from the accounts;
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes an Offshore Private Annuity organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts. The Taxpayer fails to report his beneficial ownership interest as well as the income generated from those accounts;
- The Taxpayer owns and operates a corporation in the United States. The Taxpayer decides to forms a foreign corporation in Panama and also Opens Corporate Bank and Brokerage Accounts there. The Taxpayer uses a Panamanian Management Company, who is listed as the foreign corporation’s sole shareholder. The Taxpayer also engages the services of a Panamanian Attorney. Various individuals from the Panamanian Management Company are listed as the Company’s Officers and Directors. The Taxpayer is not listed on the incorporation documents, nor is he listed on any document related to the opening of the account. All communications between the Taxpayer and his attorney and the management company are done via the taxpayer’s personal email account. The fees for the set-up of the company and the bank accounts are wired from the Taxpayer’s U.S. Corporate Account to the Panamanian Attorney. Once the foreign corporate account is set up, the Taxpayer wires $2,000,000 to the newly opened corporate bank account. On the U.S. Corporate Tax Return, the Taxpayer claims a deduction for consulting fees in the amount of $2,000,000. Further, the Taxpayer fails to report his beneficial ownership interest in the Panamanian Corporation and also fails to report the Foreign Financial Account on Fin Cen Form 114 as well as the income derived from the Foreign Financial Accounts.
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes a Personal Investment Company organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts and for the purpose of concealing the Foreign Financial Account and the income generated from the IRS;
- The Taxpayer, with or without the assistance of a bank relationship manager, officer, attorney or other agent, establishes a Captive Insurance Company organized under the laws of non-U.S. countries for the purpose of holding legal title to Foreign Financial Accounts in an attempt to conceal the existence of the account as well as the income from the IRS;
- The Taxpayer has numerous Foreign Financial Accounts all of which are maintained at a Foreign Financial Institution. The Foreign Financial Institution issues the Taxpayer both a credit card and an ATM card, which the Taxpayer uses in the United States for purposes of making purchases and withdrawals.
- The Taxpayer, directly or indirectly sets up a Foreign Financial Account under a pseudonym, code name or a nominee entity set up in Country outside of the United States in an effort the evade detection from the Internal Revenue;
- The Taxpayer completes a tax organizer provided by the Taxpayer’s accountant every year. The Taxpayer answers “no” to questions contained in the tax organizer asking the Taxpayer: (1) whether”you have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account or other financial account; “and(ii) whether “you have any foreign income or pay any foreign taxes.”
- The Taxpayer creates an offshore entity in order to move money into a Country outside of the United State. The Taxpayer uses a foreign attorney, agent or bank representative as a nominee intermediary for the transactions.
- The Taxpayer fails to report an interest in or a signatory authority over a Foreign Financial Account as well as the income generated from the Foreign Financial Account for a number of years. Prior to the Internal Revenue Service discovering the concealment of the Foreign Financial Account, the Taxpayer closes the account and a transfer the proceeds to a newly created entity in a Country other than the Country the original Foreign Financial Account was maintained. Finally, the Taxpayer goes to a U.S. Embassy in Foreign Jurisdiction and renounces the Taxpayer’s U.S. citizenship and also in forms the U.S. Department of State that the Taxpayer had acquired the nationality of a Foreign Jurisdiction by virtue of naturalization.
- The Taxpayer closes a Foreign Financial Account and repatriates the funds to the United States by structuring a series of financial transactions (Less than $10,000.00) in an effort to avoid the currency reporting requirements. (I.e. sending cash via Federal Express, DHL or by other means) all in an effort to conceal the prior existence of a Foreign Financial Account.
- The Taxpayer maintains a Foreign Financial Account in a Foreign Jurisdiction. The Taxpayer only discusses business with a bank officer, attorney or other agent when the Taxpayer is physically present in that Foreign Jurisdiction;
- The Taxpayer opens a Foreign Financial Account by setting up a Foreign Entity. Although the Taxpayer is not listed on the opening documents as a director or an authorized signatory, the Taxpayer is identified on another bank document and emails as the beneficial owner of the Foreign Financial Account.
- The Taxpayer structures withdrawals from the Taxpayer’s undeclared Foreign Financial Accounts by sending multiple checks, each in amounts below $10,000, to the Taxpayer or his nominees in the United States;
- The Taxpayer withdraws large sums of cash from his Foreign Financial Accounts at a branch office of the Foreign Financial Institution located in a foreign jurisdiction other than the jurisdiction where the Foreign Financial Institution’s principal place of business is located or where the Foreign Financial Institution is incorporated;
- The Taxpayer maintained Foreign Financial Accounts at a Swiss Bank. Upon discovering the Bank was either under investigation, criminally charged or a participant in the Swiss Bank Program, the Taxpayer moves his accounts to a Foreign Financial Account in another Foreign Jurisdiction outside of the United States;
- Instead of having the Taxpayer’s Foreign Financial Account Bank Statements mailed to the Taxpayer’s U.S. address, the Taxpayer arranges with the assistance of the Foreign Financial Institution, to have statements and mail held by the Foreign Financial Institution. This schemes is designed to conceal from the Internal Revenue Service the existence of undeclared Foreign Financial Accounts and any income generated therefrom and to prevent the interception of the Taxpayer’s information by U.S. Law Enforcement Agencies.
- The Foreign Financial Institution does not maintain a presence in the United States. The Taxpayer with assistance of the Foreign Financial Institution causes withdrawal checks to be issued to the Taxpayer from the Foreign Financial Institution’s correspondent bank in the United States;
- The Taxpayer, either directly or with the assistance of a foreign bank representative, attorney or other bank agent, opens Foreign Financial Accounts held in the name of a foreign trust, in order to conceal the Taxpayer’s beneficial ownership of the accounts.
- The Taxpayer sets up a sham structure in a foreign jurisdiction. The sham structure is named as the account holder of a number of Offshore Brokerage Accounts, but the U.S. Taxpayer is authorized to trade in U.S. securities.
- A qualified intermediary failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of the intermediary’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.
- Taxpayers set up sham structures and used trust officers as nominees for purpose of controlling the sham structures. However, the sham structures were in fact controlled by the U.S. taxpayer-clients;
- The Taxpayer owned commercial real estate in Los Angeles. He sells the property to a newly formed Offshore Company in exchange for a promissory note. The Offshore Company is ostensibly controlled by a professional management company, but in reality the Taxpayer runs the day to day operations. The Offshore Company never makes any payments on the Promissory Note. Neither the Taxpayer nor the Offshore Company ever reports the income received following the sale.
- The Taxpayer sets up a management company for the ostensible purpose of providing direction and management services over Foreign Financial Accounts and Foreign Financial Assets. The management company in truth is a shell company formed for the sole purpose of holding the assets of the U.S. Taxpayer;
- The Taxpayer, with the assistance of Foreign Financial Institution, sets up a shall company and uses the foreign mailing address provided by the Foreign Financial Account for purposes of receiving bank statements and other documentation;
- The Taxpayer learns that Internal Revenue Service is spearheading a number of Global Tax Enforcement Initiatives.The Taxpayer liquidates all of his Foreign Financial Accounts and uses the proceeds to purchase real estate in another Foreign Jurisdiction in the name of a relative non-resident alien;
- The Taxpayer maintains undeclared joint bank accounts with a Non-Resident Alien Parent, who was retired at the time the accounts were opened. The Taxpayer is notified by the Internal Revenue Service that The Taxpayer’s information has been furnished to the IRS by the Foreign Financial Institution. In an effort to cover his tracts, the Taxpayer maintains that the account really belonged to the Non-Resident Alien parent and that the Taxpayer’s name was on the account for convenience;
- The Taxpayer owns and operates a business in a Foreign Country. The business is structured as a Limited Liability Company. Furthermore, the business maintains numerous bank and brokerage accounts in its name. The Taxpayer uses these accounts to pay for personal expenses, to construct a home in the United States and to pay for all incidentals. The Taxpayer has never reported any income from the foreign business on his U.S. Tax Return, nor has he ever filed FinCen Form 114 for any of the accounts. In order to conceal the use of business funds for personal use, the Taxpayer sets up a shareholder loan account to track the payment of personal expenses. A promissory note was never been executed by the Taxpayer, nor a rate of interest ever established. Finally, no payments were ever made by the Taxpayer to the business on the shareholder loan.
- The Taxpayer has established two offshore companies for purpose of conducting his manufacturing business overseas. The first company is set up in China (Company A), where all the manufacturing takes place. The Taxpayer with the assistance of a Singapore Bank sets up a trust is designated as the sole shareholder of Company A. The Taxpayer also establishes Company B. in Hong Kong that serves as an intermediary. Company B is responsible for taking international orders and collecting the sales proceeds on behalf of Company A. When Company B receives an Order, it purchases goods from Company A at cost; thereby eliminating any profit in Company A. Company B merely serves as a conduit and serves no other business purpose. The Taxpayer effectively controls both corporation and has failed to report any income, his interest in the two Corporations and the trust and has failed to report any of the Foreign Financial Accounts maintained by either Company A and B.
- The Taxpayer makes a disclosure using the Domestic Offshore Streamlined Procedures. The Taxpayer prepares and signs a Certification of Non-Willfulness, wherein he acknowledges checking no to the questions 7a and 7b contained on Schedule B. However, he claims the Tax Return Preparer checked “no” to both questions, but he did not review the return before signing the tax return. The Taxpayer further certifies that the tax organizer he filled out for his Tax Return Preparer did not contain any question concerning an interest in or the signatory authority over a Foreign Financial Account. During the verification process the IRS contacts the Tax Return preparer and obtains a copy of the Tax Organizer. A review of the Tax Organizer reveals that question 43 specifically asks “During the Tax Year, did you have an interest in or signatory authority over any foreign financial account.” Question44 if the answer to Question 43 is “yes” whether the aggregate balance for all Foreign Financial Accounts exceeded $10,000 during anytime during the Tax Year. Finally, Question 45 asks whether the Taxpayer received any income from any Foreign Financial Account. The Taxpayer answered “no” to questions 43, 44 and 45. The Taxpayer signed the Tax Organizer.
If you have participated in any financial activities similar to the ones described above, and have received a letter from the Internal Revenue Service, you may need to seek the help of a qualified tax attorney to mitigate these penalties. Don’t face the IRS alone, as a Taxpayer you have rights; the right tax lawyer can inform you of the corrective options available to you. Contact The Law Office of Anthony N. Verni for more information.