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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!

Specified Domestic Entity Seminar | International Tax Lawyer & Attorney

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On August 17, 2017, the owner of Sherayzen Law Office, Mr. Eugene Sherayzen, conducted a seminar on the new FATCA reporting requirement concerning Form 8938, specifically the new filing category of Specified Domestic Entities (the “Specified Domestic Entity Seminar”). Mr. Sherayzen is a highly experienced attorney who specializes in U.S. international tax compliance, including FATCA Form 8938. The Specified Domestic Entity Seminar was organized by the International Business Law Section of the Minnesota State Bar Association.

The Specified Domestic Entity Seminar commenced with the historical overview of FATCA. Then, it continued to analyze the three principal parts of FATCA (as relevant to the seminar), including Form 8938.

The next part of the Specified Domestic Entity Seminar focused on the filing requirements of FATCA, including the definition of the Specified Foreign Financial Assets. Mr. Sherayzen devoted considerable time to the exploration of various categories of Form 8938 filers and their respective filing thresholds. He explained to the audience that Form 8938 was previously required to be filed only by Specified Individuals. The tax attorney then stated that, starting tax years after December 31, 2015, a domestic corporation, partnership or trust classified as a Specified Domestic Entity was required to file Form 8938.

Having finished the review of the background information, Mr. Sherayzen proceeded to analyze the definition of Specified Domestic Entity. At this point, the Specified Domestic Entity Seminar turned very technical and analytical.

After stating the general definition of Specified Domestic Entity, the tax attorney divided the definition into various parts and analyzed each part in detail. In particular, the Specified Domestic Entity seminar covered the following topics: definition of “domestic” (as defined specifically for the purposes of domestic trusts and domestic business entities), Specified Foreign Financial Assets and the phrase “formed or availed of”.

As part of the analysis of the latter, Mr. Sherayzen discussed the Closely-Held Test and the Passive Tests with their varying applications to domestic trusts and domestic business entities. The tax attorney also discussed the highly unusual attribution rules within the context of the Closely-Held Test.

After the explanation of the Form 8938 filing threshold for Specified Domestic Entities, Mr. Sherayzen concluded the Specified Domestic Entity Seminar and opened the Q&A session.

2018 Egyptian Tax Amnesty | International Tax Lawyer & Attorney

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Egyptian Law 174 of 2018 announced the 2018 Egyptian Tax Amnesty program that commenced on August 15, 2018. Egypt is no stranger to tax amnesties; in fact, the very first documented tax amnesty program in the world is believed to be the one announced by Ptolemy V Epiphanes in 197 B.C.

The 2018 Egyptian Tax Amnesty program is a continuation of the worldwide trend to fight tax noncompliance with amnesty programs. If they are structured well (such as the US OVDP) and combined with effective tax administration, these amnesty programs can be highly effective, generating large revenue streams for national governments. There are, however, numerous examples of failed amnesty programs (like the ones in Pakistan) due to either poor structuring or other factors. Let’s acquaint ourselves with the 2018 Egyptian Tax Amnesty program.

2018 Egyptian Tax Amnesty: Term

The 2018 Egyptian Tax Amnesty program will last a total 180 days starting August 15, 2018.

2018 Egyptian Tax Amnesty: Taxes and Penalties Covered

The 2018 Egyptian Tax Amnesty program will cover stamp duty, personal income tax, corporate income tax, general sales tax, and VAT liabilities that matured before August 15, 2018.

The interest and penalties on the outstanding tax liabilities related to the listed taxes will be reduced according to a fairly rigid schedule which benefits most taxpayers who go through the program within 90 days after the Program opens on August 15, 2018. These taxpayers can expect a whopping 90% reduction in penalties and interest!

If a taxpayer misses the 90-day deadline, but settles his outstanding tax debts within 45 days after the deadline, he will be entitled to a waiver of 70% of the tax debt and interest.

If a taxpayer misses both, the 90-day deadline and the 45-day deadline, but settles his outstanding tax debts within 45 days after the 70%-waiver deadline (i.e. 135 days after August 15, 2018), he can still benefit from a 50% reduction in tax penalties and interest.

US Tax Amnesty & 2018 Egyptian Tax Amnesty

US taxpayers who participate in the Egyptian Tax Amnesty should also consider pursuing a voluntary disclosure option in the United States with respect to their unreported Egyptian income and Egyptian assets. There is a risk that the information disclosed in the Egyptian Tax Amnesty may be turned over to the IRS, which may lead to an IRS investigation of undisclosed Egyptian assets and income for US tax purposes.

While the IRS Offshore Voluntary Disclosure Program closes on September 28, 2018, there is still a little time left to utilize this option. Additionally, US taxpayers should consider other relevant voluntary disclosure options, such as Streamlined Offshore Compliance Procedures.

Contact Sherayzen Law Office for Professional Help With Offshore Voluntary Disclosure of Egyptian Assets in the United States

If you have undisclosed Egyptian assets and/or Egyptian income, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world to successfully settle their US tax noncompliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2018 FSI Ranks United States as Second Largest Secrecy Haven | FATCA

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Paradoxically, while demanding that other countries comply with FATCA, the United States itself has become the second largest secrecy haven in the world according to the Financial Secrecy Index (“FSI”) released by the Tax Justice Network (“TJN”) at the end of January of 2018. Let’s explore why the 2018 FSI considers the United States a Tax Haven.

What is 2018 FSI?

The TJN’s FSI is considered to be one of the most comprehensive assessments of secrecy of financial centers. It is published every two years using independently verifiable data. Its methodology is based on the European Commission’s Joint Research Center. The 2018 FSI, however, is not considered to be influenced by any political considerations.

The FSI is based on various criteria which is updated with each publication. The assessment of a country’s financial secrecy includes such consideration as: requirement to identify beneficial owners of companies, trusts and foundations; whether annual registries are made available to the public in an online format; the extent to which the countries’ financial secrecy rules are forced to comply with the anti-money laundering standards, and so on.

In order to create the index, a secrecy score is combined with a figure representing the size of the offshore financial services industry in each country. This is expressed as a percentage of global exports of financial services. The responsibility for bigger transparency increases with the size of the financial services industry of a country.

In 2018, new indicators where added to what are now considered 20 Key Financial Secrecy Indicators “KFSI”. The 2018 FSI new factors ask whether a jurisdiction in question provides for public register of ownership and annual accounts of limited partnerships; public register of ownership of real estate; public register of users of freeports for the storage of high value assets; protection against prison for banking whistleblowers; harmful tax residency and citizenship rules; and other factors.

2018 FSI Placed United States as Second Largest Secrecy Haven Among the Top 10 Countries

Based on the consideration of all of these factors, including KFSI, the 2018 FSI placed United States as the second largest secrecy haven among the top ten countries. Here is the full list of top ten countries:

1. Switzerland
2. United States
3. Cayman
4. Hong Kong
5. Singapore
6. Luxembourg
7. Germany
8. Taiwan
9. UAE
10. Guernsey

What this means is that the United States is now the country that, with the exception of Switzerland, most contributes to financial secrecy in the world.

Reasons Behind the US Rise in the 2018 FSI Ranking

The second rank of the United States was assigned due to its growing share of the offshore financial services industry. According to 2018 FSI, the US market share of the offshore financial services industry is 22.3%. It was 19.6% in 2015. In fact, in order to occupy the second place in the 2018 FSI, the United States displaced such a notorious offshore haven as the Cayman Islands.

There are other objective reasons and comparative reasons for the US rise to the second place of the 2018 FSI. The main comparative reason is the European Union’s lead in the transparency initiatives. The EU is now the definite leader in combating financial secrecy.

The objective reasons are various. The United States does not have any beneficial ownership registries. It also lacks the country-by-country reporting of corporate profits (although, this may change). Finally, the United States continues to refuse to join the OECD’s Common Reporting Standard (“CRS”).

The Second Place in the 2018 FSI Points to Dubious Cost-Benefit Analysis

The second place in the 2018 FSI is not accidental. Rather, there is a cold, though morally dubious, cost-benefit calculation behind it. On the one hand, the United States was the country that really propelled the global fight against bank secrecy in the years 2008-2014. It trampled all over the vaulted Swiss Bank Secrecy laws when it came to its pursuit of US tax evaders, enacted the revolutionary FATCA legislation, forced the vast majority of foreign financial institutions to share information (including beneficial ownership information) with the IRS concerning US owners of foreign accounts, and engaged in a number of other activities to increase the worldwide financial transparency with respect to US taxpayers.

On the other hand, all of the US efforts to combat bank secrecy were not a fight for transparency ipso facto. Rather, the US government was only interested in fighting bank secrecy in so far as it concerned US taxpayers. With respect to its own bank secrecy laws concerning foreigners who wish to invest in the United States, the US government is on par and even exceeds some of the most secretive tax havens.

In other words, when it comes to fighting US tax evasion, the US government is an innovative champion. With respect to attracting investment in the United States, the same US government seems to do everything possible to turn the United States into a tax haven. This is precisely why it never joined the CRS.

While the US government seems to be acting in the name of the national self-interest, there is one huge problem that this policy creates. Currently, the elites of the most corrupt regimes, mafias and cartels of all stripes, narcotics dealers and other criminals can see the advantage of using the United States as a haven for illicit financial flows, including money laundering and funding of terrorism. There is also an increased danger that the corruption created by one part of the US financial policy may spread to other aspects of our society.

In other words, the current US bank secrecy policy seems to be in contradiction with other stated policies which attempt to specifically target the aforementioned criminal activities. This contradiction is an easy target for critics of the US financial policy and may contribute in the future to potential reversals of the current gains in international financial transparency.

Sherayzen Law Office will continue the monitor the developments in the US bank secrecy laws.

IRS Prioritizes Combating Offshore Tax Cheating | Offshore Tax Lawyer

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On March 20, 2018, the IRS announced that offshore tax cheating – i.e. hiding money and other assets in unreported foreign accounts – remains on the IRS “Dirty Dozen” tax scams for the year 2018.

Offshore Tax Cheating: What is the “Dirty Dozen” List?

The IRS uses the “Dirty Dozen” list to describe various scams that a taxpayer may encounter and which form the focus of the IRS enforcement efforts. Some of these schemes peak during the tax filing season.

Illegal scams can lead to significant penalties and even possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

What is Offshore Tax Cheating?

In its most basic form, offshore tax cheating is a long-running scheme that uses foreign accounts to hide money in order to avoid paying US taxes. The taxpayers then use debit cards, credit cards or wire transfers to access the hidden accounts. More complex schemes include the usage of foreign corporations, foreign trusts, employee-leasing schemes, private annuities, insurance plans and other third-parties to conceal the real US owner of foreign accounts.

The most modern offshore tax cheating scheme has involved cryptocurrencies traded overseas and exchanged into a foreign currency by using an offshore account. The IRS has already begun addressing tax evasion based on virtual currencies, but we have not yet seen a fully-developed IRS enforcement in this area.

Offshore Tax Cheating is the Long-Standing Focus of the IRS

The IRS warns that taxpayers should be wary of these schemes, especially given the continuing focus on this issue by the IRS and the Justice Department.

In fact, since mid-2000s, offshore tax cheating has been one of the primary targets of the IRS. The IRS already conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Every investigation yields important information that is used to learn about noncompliance patterns and commence other investigations. Some of these investigations may focus on bankers and financial advisors who helped set up a scheme that led to offshore tax cheating.

Offshore Voluntary Disclosure as a Way to Settle Prior Tax Noncompliance

If a taxpayer participated in scheme that the IRS may characterize as offshore tax cheating, he should consider doing a voluntary disclosure as soon as possible. It is very likely that the IRS will consider tax noncompliance associated with such a scheme as willful. Hence, the Offshore Voluntary Disclosure Program (“OVDP”) may be the primary choice for such taxpayers.

In fact, according to the IRS, more than 56,400 disclosures were made through various versions of OVDP since 2009. The IRS collected more than $11.1 billion from the OVDP during that time period.

Additionally, more than 65,000 taxpayers who claimed that they were non-willful in their prior tax noncompliance participated in the Streamlined Compliance Procedures. As I stated above, however, a taxpayer should be very careful about participating in the Streamlined Compliance Procedures if he participated in a scheme that the IRS may classify as offshore tax cheating.

OVDP Will Close on September 28, 2018

Taxpayers who wish to participate in the OVDP should consult Sherayzen Law Office as soon possible. The IRS recently announced that the OVDP will close on September 28, 2018.

Contact Sherayzen Law Office if You Wish to do an Offshore Voluntary Disclosure That Involves a Scheme Classified as Offshore Tax Cheating

If you participated in a scheme that the IRS may classify as offshore tax cheating, you should contact Sherayzen Law Office to explore your voluntary disclosure options as soon as possible.

Sherayzen Law Office is a leading international tax law firm that specializes in offshore voluntary disclosures, including OVDP (closed) and Streamlined Compliance Procedures. We have helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!