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Hiding Assets and Income in Offshore Accounts Again Made the IRS “Dirty Dozen” List

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On February 5, 2016, the IRS again stated that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

The problem with offshore accounts is two-fold. On the one hand, there are numerous con-artists who use offshore accounts to lure taxpayers into scams and schemes. The second and a much larger problem for the IRS is the fact that many U.S. taxpayers used offshore account to hide assets and income from the IRS.

Fighting the strategy of using offshore accounts to hide assets and income has been one of the top priorities of the IRS since the early 2000s. The problem has been complicated by the fact that there are many legitimate reasons for having an offshore account – a fact that, unfortunately, has been largely ignored by journalists and the public opinion in the United States. Therefore, it is necessary for the IRS to approach the problem of offshore accounts carefully in order to avoid hurting innocent people.

Over the years, the IRS (with the help of Congress) has chosen five different and interrelated strategies to fight tax evasion through offshore accounts.

1. IRS Civil and Criminal Enforcement

IRS examinations, audits, subpoenas, and criminal enforcement play a central role in the IRS war against using offshore accounts to hide assets and income. The ability of the IRS to enforce U.S. tax laws is amazingly broad and the IRS will use it whenever it wishes.

Since 2009, the IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Hence, brute force still looms large in fighting tax evasion through offshore accounts and creates enormous (and fully justified) fear in the hearts of many U.S. taxpayers. This fear is also central to the IRS ability to use the other four strategies listed below.

2. Extensive Reporting Requirement for Owners of Offshore Accounts

As owners of offshore accounts have already noticed, the number of reporting requirements with respect to offshore accounts has risen dramatically. In addition to FBAR (which has existed since the 1970s), FATCA introduced Form 8938 in 2011. Furthermore, Form 8621 and Schedule B to Form 1040 have been modified to require additional reporting with respect to offshore accounts. Other forms also indirectly require reporting of foreign accounts (through reporting of ownership or a beneficial interest in a foreign entity or a foreign trust).

By forcing U.S .taxpayers to do extensive reporting with respect to their offshore accounts, the IRS has achieved two goals at the same time. First, it has collected an enormous amount of information with respect to U.S. offshore accounts and their owners. This information can be used in a later investigation to track fund and identify patterns of behavior. In a short while, due to the implementation of FATCA in many jurisdictions around the world, this information will also be used to compare the banks’ information with the information provided by the taxpayers on their information returns.

Second, the enormous fines associated with offshore accounts reporting can create huge tax liabilities for noncompliant taxpayers. This provides the IRS with a financial incentive to pursue these taxpayers. These potentially disastrous noncompliance fines also serve to deter many taxpayers from engaging in risky tax evasion schemes.

Of course, one of the biggest problems associated with these reporting requirements is that the majority of persons, including tax accountants, never heard of them until they were already in trouble. When the IRS pressure started to rise, it was already too late for a lot of U.S. taxpayers to do simply current compliance and they had to pay fines to the IRS. It is important to emphasize that the process is by no means over – on the contrary, as the complexity of U.S. tax compliance continues to rise, a lot of taxpayers (and their accountants) still do not know about a lot of these requirements.

3. Voluntary Disclosures

In order to alleviate the reporting noncompliance nightmares for U.S .taxpayers, the IRS created a number of voluntary disclosure programs. The early programs were not very successful; however, after the IRS stunning victory in the 2008 UBS case, the 2009 Offshore Voluntary Disclosure Initiative (OVDI) turned out to be a huge success. The 2011 OVDP, 2012 OVDP and 2014 OVDP with 2014 Streamlined Compliance Procedures followed in quick succession and with even bigger success. Since 2009, more than 54,000 OVDP disclosures took place and the IRS has collected more than $8 billion; this is not taking into account the huge surge in Streamlined disclosures since 2014.

The information that has been collected through OVDP is used to identify noncompliant individuals and entire schemes to evade U.S. taxes through offshore accounts. The IRS then uses this information to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas using offshore accounts. The IRS works closely with the Department of Justice (DOJ) to prosecute these tax evasion cases.

4. Swiss Bank Program

In addition to the voluntary disclosure program for individuals, the IRS also created a voluntary disclosure program for Swiss banks. Such voluntary disclosure program is, of course, an unprecedented event – never in history did one country force another country’s entire bank system to do a voluntary disclosure on the territory of that other country.

While the debate over this breach of Swiss sovereignty (although, technically, the Swiss government agreed to the Swiss Bank Program) is interesting, for the purposes of this article, it is important to note that Swiss Bank program was a huge step forward in attacking the usage of offshore accounts to hide assets and income.

By the end of February of 2016, about 80 Swiss banks went through Category 2 voluntary disclosure and paid penalties to the U.S. government. They also turned over enormous amount of information regarding their U.S. accountholders and the various schemes that Swiss bankers developed to hide assets and funds from the IRS. In essence, the Swiss bankers turned over to the IRS substantially all of the blueprints for tax evasion that they had created.

5. FATCA

The final major strategy for fighting the practice of using offshore accounts to hide assets and income from the IRS is the famous Foreign Account Tax Compliance Act or FATCA. Ever since FATCA entered into force, it has changed the global landscape of international tax compliance. One of the most salient features of FATCA is the fact that it forces foreign banks to report to the IRS all of the offshore accounts that they can identify as owned by U.S. persons.

This groundbreaking piece of legislation has had an enormous impact on the ability of the IRS to identify noncompliance by U.S. persons, because foreign banks now act as its agents and voluntarily disclose U.S. persons and their offshore accounts.

Contact Sherayzen Law Office for Help With Your Offshore Accounts

If you have undisclosed offshore accounts, you should contact Sherayzen Law Office as soon as possible. We have helped hundreds of U.S. taxpayers to bring their U.S. tax affairs in order while saving millions of dollars in potential penalty reductions. We furthermore help to reduce your income tax liability as a result of your voluntary disclosure and post-voluntary disclosure tax planning.

Contact Us NOW to Schedule Your Initial Consultation!

New Convictions for Helping Hide Millions in Israeli Offshore Accounts

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On December 19, 2014, a federal jury sitting in Los Angeles convicted two California tax return preparers of one count of conspiracy to defraud the Internal Revenue Service (IRS) and two counts of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to secret Israeli Offshore Accounts.

Israeli Offshore Accounts: Facts of the Case

According to the second superseding indictment and evidence introduced at trial, David Kalai and Nadav Kalai were principals of United Revenue Service Inc. (URS), a tax preparation business with 12 offices located throughout the United States. David Kalai worked primarily at URS’s former headquarters in Newport Beach, California, and later at URS’s location in Costa Mesa, California. Nadav Kalai, who is David Kalai’s son, worked out of URS’s headquarters in Bethesda, Maryland, as well as the URS locations in Newport Beach and Costa Mesa. David Almog was the branch manager of the New York office of URS and supervised tax return preparers for URS’s East Coast locations.

The second superseding indictment and the evidence introduced at trial established that the co-conspirators prepared false individual income tax returns that did not disclose the clients’ secret Israeli Offshore Accounts nor reported any income earned from these Israeli Offshore Accounts. In order to conceal the clients’ ownership and control of Israeli Offshore Accounts and to conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret Israeli Offshore Accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel -Aviv, Israel, with branches worldwide. Bank B is a mid-size financial institution, also headquartered in Tel Aviv, with a presence on four continents.

As further proven at trial, the co-conspirators incorporated offshore companies in Belize and elsewhere to act as named account holders on the secret Israeli Offshore Accounts. The co-conspirators then facilitated the transfer of client funds to the secret Israeli Offshore Accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense. The co-conspirators also failed to disclose the existence of, and the clients’ financial interest in and authority over, the secret Israeli Offshore Accounts and caused the clients to fail to file FBARs with the U.S. Treasury.

The evidence at trial established that David Kalai and Nadav Kalai each failed to file FBARs for calendar years 2008 and 2009 concerning secret Israeli Offshore Accounts. The bank account for Bank A in Luxembourg was held in the name of a nominee corporation in Belize and held over $300,000.

“The Kalais created sham foreign corporate entities and used banks in Luxembourg and Israel as havens for hiding their U.S. clients’ money from the U.S. government,” said Acting Deputy Assistant Attorney General Wszalek. “Today’s guilty verdict sends a clear message that those professionals who facilitate tax evasion through the use of offshore bank accounts will be held accountable for their criminal conduct. The Tax Division will continue its vigorous tax enforcement efforts in prosecuting return preparers, bankers, and other facilitators who assist clients in concealing assets offshore.”

“As the defendants in this case have learned, hiding income and assets offshore is not tax planning; it’s tax fraud,” said Chief Richard Weber IRS-Criminal Investigation. “There is no secret formula that can eliminate an individual’s tax obligations. Today’s verdict reinforces our commitment to every American taxpayer that we will identify and prosecute those who implement off-shore tax schemes designed to evade the payment of taxes.”

Sentencing of the defendants is scheduled for March 16, 2015.

Israeli Offshore Accounts: Obligation to Report Foreign Accounts and Income Including Israeli Offshore Accounts

U.S. citizens, resident aliens and legal permanent residents have an obligation to report to the IRS on Schedule B of the U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “yes” or “no” in the appropriate box and identifying the country where the account is maintained. They further have an obligation to report all income earned from the foreign financial account on the tax returns. Separately, U.S. citizens, resident aliens and legal permanent residents with a foreign financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year must also file an FBAR with the U.S. Treasury disclosing such an account by June 30th of the following year.

Israeli Offshore Accounts: Lessons from the Kalai Case

The Kalai case is pretty much in line with other similar cases where the IRS was able to obtain criminal conviction for failing to file FBARs to disclose foreign accounts, including secret Israeli Offshore Accounts.

The highly negative factors include: evidence of sophisticated planning to conceal the identify of the secret Israeli Offshore Accounts owners; evidence of international concealment of funds (by reporting them as a business loss) that formed the balances of the secret Israeli Offshore Accounts; evidence of intentional failure to report income from the secret Israeli Offshore Accounts; and the education level of Kalai as tax preparers.

What is critically important for US taxpayers with undisclosed secret Israeli Offshore Accounts to remember is that, if they engaged tax preparers to avoid disclosing their Israeli Offshore Accounts or foreign financial accounts in any other country, they are at an even higher risk of exposure. The reason is because these tax preparers are likely to have engaged in similar pattern of criminal behavior with respect to their other clients; when these other clients do their voluntary disclosure, they are very likely to exposure their tax preparers as well.

This is why it is critically important for US taxpayers with undisclosed secret Israeli Offshore Accounts or foreign financial accounts in any other country to explore their voluntary disclosure options as soon possible and before they are precluded by an IRS investigation.

Contact Sherayzen Law Office for Help with Your Undisclosed Foreign Accounts

If you have undisclosed foreign financial accounts and any other foreign assets, contact Sherayzen Law Office for professional legal and tax help. We will thoroughly analyze your current penalty exposure, identify the offshore voluntary disclosure options available to you, prepare all legal documents and tax forms (including amended tax returns) needed in your case, rigorously defend your interests in front of the IRS, and guide you through the entire voluntary disclosure process.

Contact Us Today to Schedule Your Confidential Consultation!