What Triggers IRS Criminal Investigations of Expats in 2024

What Triggers IRS Criminal Investigations of Expats

What Triggers IRS Criminal Investigations of Expats 

Unfortunately, when a U.S. taxpayer believes they made a mistake with their taxes and international reporting forms, their mind may wander into assuming that they did something criminal — when in fact, it was just a simple mistake. A lengthy Google search and a few rabbit holes later the taxpayer is under the impression that at any minute the Internal Revenue Service will be by to kick their door down, arrest them, and seize their assets. In reality, 99% of the time when a taxpayer has an error on their tax return, it is a civil violation with no threat of criminal investigation. Sometimes, taxpayers do run afoul of the law to the extent that it may trigger an IRS criminal investigation. Even taxpayers who live overseas such as expats may be subject to an IRS criminal investigation. Here are 5 triggers that expats should be aware of:

First, You are Probably Not a Criminal

The purpose of this article is to explain to taxpayers how expats may become subject to an IRS criminal investigation and what behaviors may trigger the Internal Revenue Service. That does not mean any violation that you may have committed is criminal — and as we mentioned above, most of the time violations are civil in nature.

Taking Improper Treaty Elections

While IRS tax treaty elections can be effective methods for reducing U.S. tax liability, some taxpayers make treaty elections that have no basis in law. These types of treaty elections come in all shapes and sizes so taxpayers should be very careful when making a proactive representation to the IRS that they should not be subject to US tax on certain types of income generated from overseas.

Failure to Report Foreign Accounts

Oftentimes, taxpayers may be unaware or not have the knowledge that they are required to report foreign accounts — this is not criminal. If on the other hand, taxpayers may have previously reported their foreign accounts and come into a windfall or for any other reason knowingly fail to report their accounts with the intent to avoid detection by the IRS or possibly to report income associated with those accounts, that may lead into a criminal tax situation.

Intentionally Underreporting Income

If a taxpayer knows that they have foreign income but do not report that income because they believe the IRS will not find them, this could be considered criminal behavior. With the introduction of FATCA and hundreds of thousands of Foreign Financial Institutions reporting account payer balances and income generated with certain foreign accounts to the US government, it is much easier for the IRS to discover intentionally non-compliant taxpayers.

Falsifying Foreign Tax Credits

Some taxpayers will attempt to falsify foreign tax credits and claim credits that they never paid or that they knew were already refunded to them to reduce their U.S. tax liability. The IRS can see this as a type of tax fraud or tax evasion depending on the amount of the credit claimed and the extent to which the taxes were artificially reduced because of the falsifying tax credits.

Crypto Income and Reporting

Some countries do not tax crypto and other countries do not even require any reporting of cryptocurrency transactions. Currently, the US tax laws are in flux involving cryptocurrency, but any type of cryptocurrency income is still reportable some taxpayers believe that because they are operating on foreign exchanges or that cryptocurrency is ‘anonymous’ they can escape detection by the IRS period since the IRS is seeking to develop regulations and other rules involving cryptocurrency. Thus, chances are they will try to make an example of taxpayers they believe are intentionally underreporting cryptocurrency income and this could trigger a criminal tax investigation.

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. 

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.