EVALUATING RISK OF PROSECUTION OUTSIDE OF THE OVDP

An article authored by Edward Robbins, Jr. Steven Toscher and Dennis Perez, “What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account? (Journal of Tax Practice, October – November 2012 pp 67-74), astutely summarizes the most likely charged tax crimes in an offshore bank account case and what the government must prove to obtain a conviction.  The article was written for tax attorneys but I shall summarize the lessons to be gleaned from the analysis and some not discussed in the article.

From the article:

The two elements that must be present before the Department of Justice will authorize a criminal tax prosecution in an offshore bank account case are a substantial tax deficiency (informally at least $40,000 cumulatively for all years); and, sufficient ‘badges of fraud” to indirectly prove that the taxpayer knew he or she had an obligation to file an FBAR, answer the bank account question on Form 1040 truthfully,  and/or report all offshore income; and, knowingly failed to file, or falsely filed and/or failed to report all offshore income.  The evidence must be weighty enough to satisfy the Department of Justice that the case has a reasonable probability of conviction.

Criminal tax cases require intensive IRS investigations and arduous gathering of proof.  But, once evidence is gathered the cases are not difficult to convict on.

My analysis of risk:

Taxpayers who enter the OVDP obtain certainty that they will not be prosecuted if they comply with the terms of the OVDP process.  Some taxpayers, however, decide to go outside of the OVDP and assume the risk of being found-out, being indicted and going to jail, no less paying a draconian FBAR penalty.  These taxpayers may choose to:

  • Do nothing. They file no amended returns and, do not enter the OVDP. Essentially, they stick their heads in the ground and hope they are not found-out. These are the real gamblers who choose to play the audit lottery. There are so many fish in the barrel, they tell themselves, that IRS will choose another fish. They have a high risk-tolerance and can sleep at night even if the house has faulty electrical wires and may burn down at any moment. But, what if they are the unlucky fish that gets hooked?
  • Make a quiet disclosure by filing amended returns directly with the IRS Service Center instead of going through the OVDP or Streamlined Process. These taxpayers want to hedge their bets a bit. They think if I am caught at least filing returns may mitigate their criminal exposure and civil penalty. Maybe so for some, but then again, maybe not.
  • Certify their non-willfulness and make a Streamlined Process filing. These taxpayers are attracted to the 5% Miscellaneous Offshore Penalty but overlook the risk of making a certification under penalties of perjury and of being rejected from the Streamlined Process. If the worst occurs they will be left out in the criminal and FBAR-penalty cold without an overcoat.

In all of these instances a tax lawyer may be able to give an opinion as to the likelihood of prosecution but no lawyer can give assurances.  There is always the risk of the unlikely indictment. What troubles is that in making these decisions, people often miss the boat in attempting to understand risk.  The make critical strategic mistakes in:

  • Focusing on “risk-tolerance” and not understanding that “risk-tolerance” or a willingness to assume great risk will not earn them a star in the offshore school. They may be willing to live with danger but can they afford to?
  • Not focusing on “risk-capacity” or their ability to withstand the hit should the unlikely come to pass as do all unlikely events with regularity (Chaos Theory).
  • Undervaluing the benefit of having certainty about a prospective result.

Some examples may help to shed light on these concepts:

  1. Consider John Chen, attorney at law. He inherited a $2 million offshore bank account from his grandfather 12 years ago and has not reported the account. He did not inform his tax return preparer of the account and answered “No” to the Form 1040 bank account question. The cumulative unreported income was $100,000. He only visited the bank in Singapore once but did make some wire transfers to the U.S. for the college education of his children. John believes IRS will not discover the account because it is not in Switzerland, the Bahamas, Israel or India, focus countries of the Department of Justice. John wants to repatriate the funds and wait-out the IRS hoping the criminal statute of limitations and civil FBAR penalty will run. He will explain the transfers to his long-term banker and friend as an inheritance so that the bank will not file a suspicious activity report. John has enough other assets so that the OVDP 27.5% penalty would not impact his lifestyle. Is John being smart? The answer is no, John is not being smart. If found-out, indicted and convicted, John would be disbarred and lose his livelihood apart from losing his freedom for a while. John should enter the OVDP which is private, not disclosed to the state bar, and averts the public humiliation of media coverage.
  2. Alfonso Ortiz has a U.S. Green card. He is 72 years old. The facts are similar to that of Mr. Chen but the account is located in Mexico. Alfonso should also enter the OVDP because of his age and also because conviction of a tax crime could result in his deportation from the U.S.
  3. Mac Brown, 83, is a U.S. citizen with $50 million in liquid assets within the U.S. and another $10 million cash stashed away in the Bahamas and titled in the name of Hidden Cash Ltd. Mac loves to go to Las Vegas and is a big-time gambler. He has no problem with rolling the dice over his offshore indiscretions. But, Mac is not thinking clearly. Betting he’s the longshot here would be a large error of judgment. He can well afford the OVDP toll-charge. The $2,750,000 penalty (or, even a 50% penalty if his bank has been publicly spotlighted by the DOJ) would not impact his lifestyle. On the other hand, he would greatly benefit from the certainty of knowing he will not be prosecuted for tax or FBAR violations. At his age, he wants to spend his remaining years enjoying his grandchildren and having something to leave them, not by commiserating with fellow inmates.

For offshore clients, the most valued asset of a tax attorney is wisdom and good judgment.  All can recite the law; but, not all have the maturity and good judgment to constructively advise their client to a sound decision about how to proceed in an offshore matter where the cost of poor or ill-conceived advice may prove devastating.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in 214 OVDP, FBARS, OFFSHORE BANK ACCOUNTS, TAX, VOLUNTARY DISCLOSURE and tagged , , , , , , , , , , , . Bookmark the permalink.

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