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FATCA Criminal Penalties | International Tax Lawyer & Attorney

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While there are a number of articles in professional publications and attorneys’ blogs covering the civil penalties associated with a failure to comply with the Foreign Account Tax Compliance Act (“FATCA”), there is almost a complete silence with respect to FATCA criminal penalties. This essay intends to fill this gap by introducing its readers to potential FATCA criminal penalties that the IRS may pursue in case of FATCA noncompliance.

FATCA Criminal Penalties: FATCA Background and FFI Reporting Requirements

Congress enacted the Foreign Account Tax Compliance Act (“FATCA”) as part of the Hiring Incentives to Restore Employment (“HIRE”) Act of 2010. The law revolutionized international tax compliance, because, for the very first time, it forced all foreign financial institutions (“FFIs”) to report their US account holders to the IRS, including their names, account numbers and highest values of these accounts.

In other words, FATCA has turned all compliant FFIs into IRS agents. FFIs now carry the entire burden of automatically (and, it is important to emphasize the word “automatically”) disclosing all of the FATCA-required information directly to the IRS. The IRS now only needs to properly process and analyze the data in order to identify noncompliant taxpayers and investigate them.

How did the Congress achieve this goal? It imposed a very harsh penalty on FATCA-noncompliant FFIs without paying much attention to the potential legal and political implications such an over-reaching law has for the sovereignty of other nations. FATCA created a new tax withholding regime under which every noncompliant FFI faces a 30% withholding with respect to any incoming transaction. The penalty is imposed on the gross amount of a transaction, which means that using a noncompliant FFI may result in a net loss for the parties engaged in the transaction.

The net impact of the FATCA FFI penalty is that no bank or person would wish to utilize a noncompliant FFI, effectively cutting off the latter from the any USD-nominated transactions and the world markets.

FATCA Criminal Penalties: FATCA Requirements Imposed on US Taxpayers

FATCA created a new tax reporting obligation specifically for US taxpayers called Form 8938. I have discussed Form 8938 in detail elsewhere on my website and here I will provide just a very simplified description of this requirement. A Specified Person (who can be an individual or an entity) must file Form 8938 if the value of his Specified Foreign Financial Assets (SFFAs) exceeds a certain filing threshold which is determined by the tax return filing status of the Specified Person.

SFFAs are defined very broadly to include pretty much any type of a financial asset, an ownership interest in a foreign business, ownership of a beneficiary interest in a foreign trust, ownership interest in a foreign trust under the IRC Sections 671 through 679, et cetera. Additionally, Form 8938 requires the Specified Person to report foreign income attributable to holding or disposing of SFFAs.

Failure to file Form 8938 may lead to an imposition of a $10,000 civil penalty, subject to reasonable cause exception. An additional $10,000 penalty applies if the taxpayer fails to file Form 8938 within 90 days after the IRS mails notice of the failure to file the form. If the taxpayer persists in his failure to file the form, the IRS will impose additional $10,000 for each thirty-day periods the failure continues up to the maximum of $50,000. It is important to note that the statute of limitations does not start to run if Form 8938 has not been filed.

FATCA Criminal Penalties in General

Interestingly, the US Congress did not create any separate FATCA criminal penalties. The IRS and the US Department of Justice (“DOJ”), however, have not had any problems in engaging into criminal prosecutions of FATCA violations.

There are three major provisions that the IRS and the DOJ can rely upon in their criminal prosecution of FATCA violations. First, 18 U.S.C. section 371 (see below for more details). Second, 26 U.S.C. 7201 – a felony charge for intentional filing of a false Form 8938. Finally, 26 U.S.C. 7203 – a misdemeanor charge for a willful failure to file Form 8938.

So far, the IRS and the DOJ have used Section 371 more than Sections 7201 and 7203. However, as time goes on, I expect that Sections 7201 and 7203 will be used more extensively.

Since Section 371 criminal charges are the most common at this point, let’s explore this type of a criminal prosecution charge in more detail.

FATCA Criminal Penalties: 18 U.S.C. Section 371

As long as there is enough evidence, the IRS and the DOJ can use 18 U.S.C. section 371 to prosecute US taxpayers based on a charge of engaging in a FATCA-related conspiracy. This is likely to become the most favorite tool to prosecute persons for aiding US clients to circumvent FATCA requirements, including tax withholding provisions.

The DOJ already used this tool as early as within two months after FATCA tax withholding obligations became effective in July of 2014. On September 9, 2014, Mr. Robert Bandfield, five other individuals and six corporations were charged under 18 U.S.C. section 371 for a conspiracy to aid US clients with evasion of FATCA reporting requirements.

It is important to point out that criminal charges under 18 U.S.C. section 371 are especially dangerous for foreigners who help US taxpayers with tax evasion.

Contact Sherayzen Law Office for Professional Help With a Willful Failure to File Forms 8938

For persons who willfully failed to file their Forms 8938, the best strategy to avoid a criminal prosecution is to engage in a voluntary disclosure of their undisclosed foreign assets before the IRS finds out about your willful FATCA violations. Sherayzen Law Office can help you!

While the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) was closed on September 28, 2019, the IRS updated its traditional voluntary disclosure program in November of 2018 to help willful taxpayers voluntarily disclose their prior tax noncompliance. I will refer to this option as Modified Traditional Voluntary Disclosure (“MTVD”).

Sherayzen Law Office can help you with MTVD and any other type of a voluntary disclosure. Our highly-experienced team of tax professionals has helped hundreds of US taxpayers to successfully conduct an offshore voluntary disclosure of their undisclosed foreign assets and foreign income. We have prevented the initiation of numerous criminal prosecutions and saved tens of millions of dollars in penalties for our clients. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

New Irish Software to Combat Offshore Tax Evasion | Tax Lawyer News

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The Irish Revenue is expanding its tax enforcement capabilities through new Irish software. This new Irish software will provide the Irish Revenue with a unique type of a multilateral analysis of a taxpayer in order to combat offshore tax evasion. This is definitely a new development in international tax enforcement and it is the one likely to be followed by other nations, including the United States.

New Irish Software Allows a Brand-New Versatile Analysis of a Taxpayer’s Life

The unique feature of the new Irish software is its multilateral analysis of a taxpayer. First of all, the software will match the data provided by taxpayer (or by other national institutions) with the data collected from other jurisdictions under the automatic information exchange agreements. So far, this is similar to the IRS FATCA software.

However, the new Irish software goes further: it will analyze the taxpayer’s social media accounts, statements, pictures and so on to see if the taxpayer’s posts about his lifestyle match the information provided by the taxpayer to the Irish Revenue. It appears that there are other features of the software which are not even disclosed to the public that also go beyond the traditional analysis of tax and financial documents.

In other words, the new software will do the data analysis that will allow the Irish Revenue to build a complete profile of Irish taxpayers and their activities. This is a very bold and creative approach to tax enforcement, but, as discussed below, it is completely within the logic of the recent trends in international tax enforcement.

The New Irish Software Comes After the Closure of the Irish Voluntary Disclosure Program

The new Irish software is being introduced by the Irish Revenue just about six months after the closure of the Irish voluntary disclosure program. The Irish Revenue received 2,734 disclosures with a declared value of almost 84 million before the program’s deadline for offshore disclosures on May 4, 2017.

Since the voluntary disclosure program is closed, the noncompliant taxpayers who will be identified by the new Irish software are likely to face substantially higher penalties.

Lessons to be Drawn from the New Irish Software With Respect to Future US Tax Enforcement

This latest development in Irish tax enforcement is indicative of the trend of using comprehensive data analytics through smarter, more aggressive software with elements of Artificial Intelligence to identify noncompliant taxpayers. This is the trend that will undoubtedly influence US tax enforcement. In fact, the IRS already has an advanced tax software to analyze FATCA data (which, right now, is filled with errors and not very effective). Moreover, the IRS has also stated that it will develop its own AI software to identify US international tax noncompliance.

Furthermore, it seems that there is a worldwide trend toward harsher international tax enforcement in lieu of continuation of the existing voluntary disclosure programs. The fact that the Irish Revenue unveiled new software after the closure of the voluntary disclosure program is also not an accident, but a planned course of events.

We can already observe the same trend here in the United States. The IRS is stepping up FBAR audits while the DOJ (US Department of Justice) is dramatically increasing its FBAR-related litigation. Additionally, the IRS has recently announced its intentions to seriously modify and even close its own voluntary disclosure programs.

The combination of all of these trends means that noncompliant US taxpayers are at an extremely high risk of detection at the time when most of their voluntary disclosure options are being closed or significantly modified. This is why this is the critically-important time for these taxpayers to explore their voluntary disclosure options while they are still available. Failure to do so now may lead to extremely unfavorable tax consequences, including the imposition of substantially higher IRS penalties.

Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure

If you have undisclosed foreign assets (including foreign bank and financial accounts) or foreign income, please contact Sherayzen Law Office as soon as possible. Our international tax law firm has successfully helped hundred of US taxpayers with their offshore voluntary disclosures. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Vadian Bank AG Signs Non-Prosecution Agreement with DOJ

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On May 8, 2015, Vadian Bank AG (Vadian) became the second bank to sign a Non-Prosecution Agreement with the US Department of Justice (DOJ) pursuant to the DOJ Program for Swiss Banks.

Program for Swiss Banks: Background Information

On August 29, 2013, the DOJ announced the creation of the “The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (Program)”. The basic goal of the program was to allow Swiss banks to purge themselves of the prior US tax non-compliance (or complicity with such non-compliance) in exchange for providing DOJ with detailed description of their illegal activities, bank accounts owned by US persons and, in many cases, the payment of monetary penalties.

The Program is a really a version of the 2014 OVDP for foreign banks. However, it was not open to all banks. The banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

As of the time of this writing, the application process has already been completed for the great majority of the Swiss banks, and the Program has entered into the resolution phase (i.e. the review of the banks’ disclosure and penalty calculation).

Vadian bank’s case was the second such case that completed the resolution phase (BSI SA was the first bank to do so).

Vadian Bank Background

Vadian has one office and 26 employees. Prior to 2008, Vadian’s business predominantly consisted of savings accounts, residential mortgage lending and small business loans. In 2007, Vadian hired a marketing firm to assist with its planned growth into private banking, and focused its efforts on attracting external asset managers. In 2008, after it became publicly known that UBS was a target of a criminal investigation, Vadian accepted accounts from U.S. persons who were forced out of other Swiss banks. At this time, Vadian’s management was aware that the U.S. authorities were pursuing Swiss banks that facilitated tax evasion for U.S. accountholders in Switzerland, but was not deterred because Vadian had no U.S. presence. As a result of its efforts, after August 2008, Vadian attracted cross-border private banking business and increased its U.S. related accounts from two to more than 70, with $76 million in assets under management.

Through its managers, employees and/or other individuals, Vadian knew or believed that many of its U.S. accountholders were not complying with their U.S. tax obligations, and Vadian would and did assist those clients to conceal assets and income from the IRS. Vadian’s services included: “hold mail” services; numbered accounts, where the client was known to most bank employees only by a number or code name; opening and maintaining accounts for U.S. taxpayers through non-U.S. entities such as corporations, trusts or foundations; and accepting instructions from U.S.-based accountholders to prevent investments from being made in U.S.-based securities that would require disclosure to U.S. tax authorities.

Vadian Bank: Terms the DOJ Non-Prosecution Agreement

According to the terms of the non-prosecution agreement that was signed on May 20, 2015, Vadian agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay a $4.253 million penalty in return for the department’s agreement not to prosecute Vadian for tax-related criminal offenses.

In resolving its criminal liabilities under the program, Vadian also provided extensive cooperation and encouraged U.S. accountholders to come into compliance.

Consequences of Vadian Non-Prosecution Agreement for Vadian US Accountholders

If you have (or had at any point since the year 2008) undeclared foreign accounts at Vadian, you may still be eligible to participate in the OVDP (assuming that you can pass the IRS-CI Preclearance process). However, the price of participating in the OVDP has almost doubled from the pre-Agreement 27.5% to the current 50% of the highest value of your undisclosed foreign assets.

Of course, if the behavior was non-willful, Streamlined options remain available at the same penalty rates.

What Should Vadian US Accountholders Do?

If you are a US person and an accountholder at Vadian, please contact the experienced international tax law firm of Sherayzen Law Office to explore your voluntary disclosure options as soon as possible.