Prospective clients often ask me, “What is the likelihood of my unreported offshore bank account being discovered?” My answer is always: “Very likely if you are caught.”
I don’t mean to be cute by answering thus. What I am emphasizing is that the likelihood of being caught and whether you can sleep at night (risk tolerance) is not the proper test. What those with unreported foreign financial accounts should be asking is: “Can I accept and live with the consequences if I do get caught, no matter how likely that may be.” This is called “risk capacity.” If your answer is “No” to that question, you should enter the OVDP. You should never assume a risk when you lack the capacity, be it financial or emotional, to absorb the consequences.
For example, a U.S. Green Card holder cannot accept the risk of being deported should he or she be convicted of a tax crime. A U.S. attorney cannot not accept the risk of being disbarred should he or she be convicted of a tax crime. An 80 year old man or woman would not find federal prison, even a minimum security prison a palatable way to spend “these precious days” of their later years. (Lyric line from “September Song,” by Kurt Weill with lyrics by Maxwell Anderson. Complete lyric line is, “These precious days I’ll spend with you.” Of course, Riverboat gamblers will often proceed in the face of risks they should not undertake, because they thrive on danger. But, such behavior is rather adolescent and adults should make grown-up decisions based on rational and considered choices.
Despite over 55,000 non-compliant taxpayers choosing the OVDP as the course through which to come into compliance, many have chosen to remain out in the cold in the hope of not being caught before the statute of limitations runs on (1) civil income tax assessments; (3) civil FBAR penalties; (3) Income tax related criminal sanctions under Title 26 or Title 18 of the United States Code; and (4) criminal charges under the Bank Secrecy Act, Title 31 of the United States Code.
Those remaining at odds with compliance are laboring under faulty reasoning in two respects: First – it is becoming increasingly likely that they will come to the attention of the IRS or DOJ sooner than later; and, Second – some or all of various statutes of limitations upon which they place their hope for escaping civil and criminal liability may be tolled for any one of a number of reasons. For a complete discussion of tax statutes of limitations read my blog posts “Statutes of Limitations and Streamlined Filings or File-Forward Strategies (8-10-15); and, “18 USC 3287, The Statute without Limitations – Impact on OVDP Decisions (11-3-16).
It is becoming more likely that one will be caught. Here are some of the reasons:
• OECD CRS (Common Reporting Standard) – 100 countries are on board with about 60 to begin reporting in 2017.
• Heightened pressure on tax haven countries by G20 nations to adopt the CRS.
• Swiss Bank Settlement Program – DOJ obtaining information from which to make treaty requests for specific taxpayer information.
• .IRS data base from OVDP and Streamlined filings (Over 100,000 combined participants)
• Investigations extending beyond Switzerland – Caribbean, Asia, Middle East
• FATCA (Foreign Account Tax Compliance Act) – Information Sharing Agreements have been signed and banks are asking for W-9s as part of their due diligence obligations.
• Panama Papers – DOJ opened investigation
• John Doe summonses continue to be obtained which seek information from foreign banks about the identity of U.S. account holders.
• Summons or subpoena issued to taxpayer – Courts have uniformly held there is no Fifth Amendment defense to act of production of documents concerning accounts under Required Records doctrine.
• Under examination disqualifier – Receipt of an audit letter ends eligibility for both programs until audit is closed.
When is audit considered closed? Per my conversations with OVDP Hotline personnel:
Receipt of Form 987 in agreed case officially closes audit after which a Code 300 series entry will appear on the taxpayer’s account transcript.
Signing Form 4549 is not official end of audit
But if the taxpayers fears his or her name is about to be disclosed, the individual can fax names to CI with copy of the signed 4549 and CI might accept that person into the OVDP. But, there is no guarantee of acceptance.
They can hunt you longer than you think. Statutes of limitations are not equally effective as a shield to assessment or conviction.
The big scary one: Title 18 of the United States Code Section 3287 – Wartime Suspension of Limitations Act (WSLA), provides as follows:
When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)), the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not (emphasis added), or (2) committed in connection with the acquisition, care, handling, custody, control or disposition of any real or personal property of the United States, or (3) committed in connection with the negotiation, procurement, award, performance, payment for, interim financing, cancelation, or other termination or settlement, of any contract, subcontract, or purchase order which is connected with or related to the prosecution of the war or directly connected with or related to the authorized use of the Armed Forces, or with any disposition of termination inventory by any war contractor or Government agency, shall be suspended until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress. (Emphasis added).
Definitions of terms in section 103  of title 41 shall apply to similar terms used in this section. For purposes of applying such definitions in this section, the term “war” includes a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).
Some individuals who have unreported foreign financial accounts may be thinking to continue to hide and out-wait the Department of Justice and IRS to the statute of limitations for crimes under Title 26 (tax), Title 31 (Bank Secrecy Act) and Title 18 (General federal criminal statute).
Apart from the increasingly heightened risk of discovery and other events that toll the various statutes of limitations (continuing conspiracy or concealment of conspiracy, out of the country, fleeing felon – see below.) 18 USC 3287 is perhaps the scariest tolling provision. While the statute does not apply to Title 26 crimes, such as tax evasion under IRC Section 7201, it does apply to Klein conspiracy crimes under 18 USC 371.
The SOL on conspiracy, six years, is extended when it is a continuing conspiracy or when a conspirator commits acts to conceal the crime. But, 18 USC 3287 eliminates the need for the government to prove these extending elements. The SOL under the WSLA is suspended until 5 years after the “termination of hostilities” as proclaimed by the President with notice to Congress or by a concurrent resolution of Congress.
To trigger the SOL suspension the U.S. does not require a formal declaration of war although that would trigger the section’s application. It is triggered when Congress enacts a specific authorization for the use of the Armed Forces as described in section 5(b) of the War Powers Resolution (50 USC 1544 (b).
Presently there are two active authorizations for the use of the Armed Services that have not been revoked by Presidential proclamation with notice to Congress or by a concurrent resolution of Congress. These are:
• Congress authorizing on September 18, 2001,the use of military force against those tied to the attacks of September 11, 2001, and,
• Congress authorizing on October 11, 2002 the president’s use of military force relating to the weapons of mass destruction threat posed by Iraq.
The Fifth Circuit Court of Appeals in United States v. Pfluger, 685 F. 3d 481 (June 21, 2012) has held that the “termination of hostilities” test in the WSLA is a formal test that requires the specific action stated in the statute, that is a proclamation of the President with notice to Congress or a concurrent resolution of Congress. Termination of hostilities cannot be established as a result of termination of the conditions justifying the original authorization for the use of military force.
The U.S. Supreme Court unanimously held in Kellogg, Brown & Root Services Inc. v. U.S. ex rel Carter (576 U.S. __, 12-1497, slip op. at 11 (May 26, 2015). that the WSLA does not suspend the applicable statute of limitations (SOL) in civil litigation, in Kellogg Brown & Root a civil false claims act case. Kellogg Brown & Root, however, also confirms that the criminal statute of limitations in criminal fraud cases is indefinitely suspended as long as Congressional authorizations for military force in Afghanistan and Iraq continue in force.
Moreover, civil tax assessments may be made at any time by IRS if fraud is proved.
What is the implication of the WSLA? Rosa Brooks in her book “How Everything Became War and the Military Became Everything”, states that a global war on terror, “was a war that could by its nature have no boundaries; no geographic limits, no limits on who could be targeted, captured or killed and no end.”
Since almost all offshore tax fraud involves an implicit agreement between two or more persons (U.S. taxpayer and at least one enabler) and overt acts in furtherance of the agreement, the SOL on tax fraud will remain open and waiting will not make the problem go away. The tax fraud also vitiates the tax SOL on assessment of the tax and civil fraud penalty by IRS.
On the other hand the FBAR civil penalty SOL is not suspended by the WSLA and waiting can eliminate that penalty if the foreign financial accounts have been closed and funds repatriated to the U.S. or moved into non-reportable assets. Although in the latter case the criminal conspiracy SOL would be suspended by virtue of additional acts committed in furtherance of the tax fraud scheme. Such individual may think to wait and then enter the OVDP after the FBAR SOL has expired. He or she would then opt-out of the OVDP penalty regime while preserving the criminal amnesty feature of the OVDP. While FBAR penalties would be time barred if 6 years had elapsed since the last required FBAR filing, Title 26 penalties could still be assessed if fraud is proved. Presumably, such individual will have closed all foreign financial accounts and repatriated the funds to U.S. accounts to turn-off the FBAR filing requirement.
This plan may seem plausible but waiting is a very dangerous tactic because:
• The likelihood of discovery is growing exponentially (see above enumeration of reasons).
• There is no guarantee that the OVDP will continue in its present form although the commissioner has indicated it will continue at least through November 2017. (Comments of Commissioner John Koskinen on 12-12-16 during Tax Analysts Exclusive Conversation: Koskinen Looks to Future of Tax Administration. IRS Budget”. It should be noted however, that Mr. Koskinen was appointed by President Obama. President Trump has not yet nominated a replacement and Attorney General Steve Sessions, under fire from President Trump, has not indicated his intentions with regard to the present IRS Voluntary Disclosure programs.
• TIME IS ON IRS’ SIDE
Any one of a number of Statutes of Limitation (SOL) tolling provisions will suspend the running of the SOL and enable IRS to assess additional tax or the DOJ’s to bring criminal charges. For example:
As to Civil tax and penalty assessments:
IRC 6501 (c) (8) – extends SOL on return to 3 years after the date that all required foreign reporting forms (not FBARs) are filed (limited to foreign items if failure to file due to reasonable cause). This is civil SOL.
• Reasonable Cause – “taking that degree of care that a reasonably prudent person would exercise.” CCA 200748006 (Chief Counsel Advisory). What it means? Basically, the absence of negligence.
• Likelihood of establishing reasonable cause decreased over time as more years go by.
Unfiled returns – No SOL Sec. 6501 (c).
As to tax crime SOLs:
Normal criminal SOL is 6 years / Title 31 crimes 5 years.
• Outside U.S – Sec. 6531.
• Fleeing felon – 18 USC 3290
• During U.S. Gov’t request for evidence located in foreign country – 18 USC 3292
• Even worse – 18 USC 3287 – discussed above
• Possible Loss of Passport – IRC Sec. 7345. Seriously delinquent tax debt over $50K can lead to denial, revocation or limitation of a passport. If Sec. of State is notified by IRS, must not issue new passport and can revoke a passport previously issued.
Note well: Could be big problem for expats who do not necessarily receive all tax notices mailed to out of date addresses.
• Cost rising –
1. More banks, brokers, individual advisors being added to IRS enablers list that increased OVDP misc. offshore penalty to 50% – Now many individual and business enablers on list in addition to banks. As time goes by more names will inevitably be added. Waiting could significantly increase the cost of coming into compliance. There is also less warning to taxpayer that individual enabler will soon be added to list. Banks usually attract headlines when investigation begins before DOJ makes public.
a. Taxpayers connected to these individuals will pay the higher OVDP penalty of 50% on all non-compliant accounts, not just the one connected to the enabler.
b. Individuals – either under investigation or cooperating.
Anyone who assisted with offshore arrangement.
Mangers of offshore account
Lawyers who set up nominee entity
Bankers who assisted in hiding account
For all of these reasons waiting is generally not a safe plan as continued secrecy is a poor tax planning strategy. Someone always knows and someone is always willing to testify to save his or her own skin.
An offshoot of my 1960’s professional songwriting days, I write parody tax song lyrics for the American Bar Association Tax Section newsletter Tax Times. A recent submission, not yet published follows:
WHEN THEY CATCH YOU
(To the tune of “When You’re Smiling,” by Larry Shay, Mark Fisher and Joe Goodwin (1928) and made famous by Louis Armstrong)
When they catch you.
When they catch you.
They’ll take your offshore loot.
When they catch you.
And they’ll catch you.
Cause’ they’re in hot pursuit.
You think you’re home free.
You keep shunning
But when they catch you.
When they catch you.
Too late for amnesty.
The above discussion illustrates the complexity of these considerations. Obviously, individuals facing these concerns should consult with a tax attorney experienced in these matters.
© 2017 by Robert S. Steinberg, Esquire