A Guide to Avoiding Tax Evasion For Expats and Foreigners

A Guide to Avoiding Tax Evasion

While there are many different types of criminal tax violations, the crime of tax evasion is one of the most commonly known criminal tax violations among the general public. The two primary reasons why tax evasion is a well-known crime is because:

• • • Unlike other criminal tax violations, tax evasion is a felony; and

    • Whenever an actor, sports star or other famous individual is charged with tax evasion — it makes the news.

When taxpayers run afoul of the tax code, oftentimes it is a civil but not a criminal tax violation, which means the taxpayer is not subject to a criminal investigation and cannot be indicted for tax crimes such as tax evasion. The problem is that when a person makes a mistake with their taxes and then they head over to Google, the fear-mongers and scare-mongers make it seem like every tax violation under the sun is a form of tax evasion and that there is a high likelihood that the taxpayer will be investigated by the IRS special agents and ultimately charged with a tax crime — but this is not the case. As with any type of criminal violation, the government has to prove its case beyond a reasonable doubt. And, unlike other types of criminal tax violations, there are specific elements that the government must meet to successfully prosecute a taxpayer for tax evasion.

A Guide to Avoiding Tax Evasion For Expats and Foreigners

Tax Evasion Is Not an Easy Crime to Prove

Not all unreported income tax violations are considered ‘evasion.’

For example, filing a false tax return where the taxpayer intentionally underreported a significant amount of income may qualify as tax evasion — whereas simply not filing a tax return does not typically qualify as tax evasion because there is no affirmative act (See Spies Evasion later) — although an express affirmative act may not be required in some instances. Depending on the specific facts and circumstances, such as failing to file a tax return coupled with post-submission behaviors (such as making false representations to the IRS) may result in tax evasion.  Let’s take a brief look at the code section and follow that with some examples.

IRC Section 7201

• • • “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

International Tax Examples of Tax Evasion

Our tax law specialist firm practices exclusively in international tax, so these examples will be based on a taxpayer having an international component to their filing.

Simple Mistake is Not Tax Evasion

The taxpayer is a U.S. citizen who recently invested overseas to generate passive income in a country where she has family members. The income is tax-exempt in the foreign country because dividends and interests are not taxable in this country. The taxpayer files for tax returns each year but does not include the foreign income because she believes that the income is not supposed to be included on her U.S. tax return. The taxpayer did not seek to willfully evade or defeat any tax imposed and therefore this would not be an example of tax evasion.

Affirmative Act is ‘Usually’ Required

The taxpayer is a lawful permanent resident who became a permanent resident about five years ago — with the only income the taxpayer earns being from foreign sources. The taxpayer is not sure whether they are required to file taxes, but once they learn that they are supposed to file a tax return they continue to not do so. In this situation, the taxpayer has failed to file a tax return but did not file a false tax return.

Since no false tax return was filed, there was no affirmative representation to the IRS falsifying the amount of income earned — and taxpayers have been successful in defending tax evasion cases where the tax return was not filed because they take the position that no affirmative act was completed. In other words, failing to file a tax return would not be the same as intentionally filing a false return seeking to evade or defeat tax. That is not to say that the government will not still go after the taxpayer for evasion and fraud, but it may be difficult for the government to prove evasion unless Spies-Evasion applies.

Spies-Evasion

While the affirmative act of filing a false tax return is typically the catalyst for the U.S. government to go after a taxpayer for evasion, failing to file a return in addition to another act(s) can also be considered tax evasion and is commonly referred to as Spies-Evasion. One example that is referenced often is the case of Goodyear in which taxpayers did not file a tax return, and then later made false representations to the IRS. The false statements coupled with the failure to file resulted in the affirmative acts necessary for the U.S. government to go after defendants for evasion.

Intentionally Filing a False Tax Return

The taxpayer is a U.S. citizen who has several income sources from overseas. These overseas income sources primarily consist of small business income in which the taxpayer’s companies receive cash payments from customers.  The taxpayer believes that there is no way for the U.S. government to track the income overseas, so the taxpayer intentionally files a false tax return significantly excluding a large portion of their income. The problem is that once the taxpayer transfers the money to the United States, the U.S. government is alerted to the fact that there were numerous <$10,000 transfers (aka structuring). Here, the taxpayer committed several types of crimes, including tax evasion by intentionally filing a false return, along with structuring.

Transferring Money to Evade Payment of Taxes

While many taxpayers are charged with tax evasion because they are seeking to file false tax returns artificially reducing the amount of taxes that they owe, there is also the crime of evasion for taxpayers who are seeking to evade payment. One common example is when a taxpayer has a legitimate tax debt, but uses fraudulent means to intentionally seek to get assets out of their name to avoid making payment on taxes that are due.

For example, the taxpayer may have money located in U.S. bank accounts sufficient to make payment for a tax debt. Instead of paying the debt they intentionally transfer the money offshore hoping to hide that money. When the government pursues them for payment, they fraudulently state that they do not have assets or income sufficient to pay the debt. This may result in a charge of tax evasion. Noting, that if a taxpayer owes taxes and simply cannot pay those taxes that is not tax evasion. What potentially makes the behavior tax evasion is that the taxpayer does have the funds sufficient to pay the debt but instead transfers that money for the specific purpose of avoiding having to pay tax — in other words, to evade the payment of tax (aka fraudulent conveyance).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.