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Offshore Tax Evasion: 5 Ways the IRS Finds Your Foreign Money

Offshore Tax Evasion

Offshore Tax Evasion

Offshore Tax Evasion

Offshore Tax Evasion:  The IRS has significantly increased enforcement of offshore tax and reporting related matters. When a U.S. taxpayer fails to disclose foreign income, accounts, assets, and investments to the U.S. government, it may lead to significant offshore fines and penalties. Of course — and despite rampant online fear-mongering — not every international tax violation amounts to tax evasion. In fact, most tax violations are merely negligent mistakes that do not put the taxpayer at any risk for criminal enforcement.

If the Internal Revenue Service believes that the offshore violation was willful and/or intentional, it may lead to a criminal investigation by the IRS Special Agents, which could lead to an indictment for tax evasion.

Unlike other types of tax violations, evasion is criminal — and may result monetary penalties and confinement.

As with most  tax violations, the most pressing concern for taxpayers willing to jump into the shark tank and risk their freedom is simply:

“How does the IRS find and investigate me?”

While it may seem difficult to conceptualize how the Internal Revenue Service can locate a secret “number account” at a Swiss Bank, or a corporate account held in Malta or Jersey —  it is nowhere near as hard as you may think.

Here are five (5) techniques the IRS uses to locate your “hidden” foreign money.

FATCA Reporting

FATCA Is the Foreign Account Tax Compliance Act.

More than 110 foreign countries and over 300,000 Foreign Financial Institutions (FFI) have agreed to report U.S. account holder information to the U.S. government.

While some FFIs may first send the account holder a KYC (Know Your Customer) or FATCA letter before reporting to the IRS, not all institutions do so.

If the institution believes that the customer is a U.S. person, they may report the information to the IRS without even telling the customer. As such, some taxpayers may not even know if the FFI has already reported them to the IRS.

If the IRS deems the account holders’ noncompliance as willful, then it may lead to an evasion investigation.

International Wire Transfer

You have to get that foreign back into the U.S. somehow, right?

Let’s say you’ve successfully hidden some money overseas.

You outwitted the U.S. government and avoided detection under FATCA or FBAR. The problem now is that now you want to get that money back to the US, since that new Ferrari you’ve been eyeing isn’t going to pay for itself.

If you directly transfer the money to the U.S., you are risking the bank notifying the government of the large transfer (or multiple small transfers).  If instead you decide to deposit just a little bit of money at a time you may be setting yourself up for a structuring or smurfing violation.

The same goes for withdrawing the money in check form and then depositing the check it into a bank account in the U.S. – which may put the IRS directly on your trail.

In other words, be careful before moving your foreign money back to the United States.

SAR (Suspicious Activity Reports)

Depending on the size, nature and number of deposits or transfers made into a bank account, it may lead the bank to file a Suspicious Activity Report via FinCEN.

FinCEN is the Financial Crimes Enforcement Network, which is also the government agency responsible for developing the FBAR — which is technically FinCEN Form 114.

3rd Party Voluntary Disclosure

Take the following example: Two ambitious U.S. taxpayers decide to move overseas and create a foreign business.  Both taxpayers are entrepreneurs and are used to working long hours for small earnings.

Suddenly their business hits it big and the cash flows in. Taxpayers decide that they are going to forego the hassle of filing U.S. tax returns.

Taxpayer 1 is out enjoying the single life, but Taxpayer 2 has now settled down with a spouse and some kids.  Taxpayer 2’s foreign spouse wants to chase the American dream and thinks it would be wonderful for their children to be raised in America.

While Taxpayer 2 has not filed taxes for several years — he was fully aware that he was required to file taxes.

Taxpayer 2 decides to enter the traditional voluntary disclosure program  (Streamline Disclosure would not be an option since taxpayer two was willful).

As part of the voluntary disclosure, Taxpayer 2 must summarize the fraud for the IRS, as well as file past FBAR, 8938 and 5471.

Since their business had joint accounts, Taxpayer 2 will have to include taxpayer 1’s personal information on the FBAR.

Likewise, since these taxpayers owned several foreign businesses together, Taxpayer 2 will also have to include Taxpayer 1’s information on the form 5471 as one of the “U.S. shareholders.”

A year later, as Taxpayer 1 nurses a hangover on the deck of his beachfront condo, he gets a call from his sister in the U.S. about a summons received at her US property, which he lists as his current address.

Under Duress for other Charges

Despite that agreement you and your buddies made “no snitching” once one member of the group is facing 20-years in prison, reality sets in and they will almost always jump at any chance to reduce their sentence —

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