IRS Audit Techniques – Expatriation

Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?

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Senators on the Permanent Subcommittee on Investigations have recently focused extensively on U.S. nationals living outside the U.S. who have Swiss accounts. The full report can be read  REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)

There are millions of U.S. citizens living in all parts of the world, many of whom I have identified as “Accidental Americans.”  See the detailed tax article Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal,CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45; Martin, P.

During the past century U.S. Citizens living permanently or nearly permanently outside the U.S. have been “de facto” non-residents for U.S.  income tax purposes. Not because the law provided they were not residents, but simply because there was little awareness of the unique system of U.S. citizenship based taxation (or those cases where individuals purposefully chose not to comply with U.S. tax laws). The U.S. Supreme Court in Cook vs. Tait found it Constitutional nearly 100 years ago.  See . “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.

This “de facto” non-residency for U.S. citizens is rapidly changing for several reasons:

First, the UBS scandal of U.S. citizens with undeclared accounts broke in 2008 and 2009.

Second the legal struggle between the U.S. Justice Department and the Swiss government and Swiss financial institutions during these past years.

Third, the adoption of FATCA by the Congress and President Obama in 2010.

Fourth, the current day technology which makes collecting, sending, sorting and identifying taxpayers and their assets through the worldwide financial sector now feasible.

Fifth, the implementation of FATCA by the U.S. in 2014 and the 20 plus FATCA Intergovernmental Agreements  entered into with various countries.

Sixth, the OECD plan for a worldwide multilateral FATCA like system to be implemented shortly.

Seventh, the high profile IRS offshore voluntarily disclosure programs in 2009, 2011 and the current program launched in 2012.

Eighth, the on-going deferred prosecution agreements that have been entered into with more than 100 Swiss banks and the U.S. Justice Department.

Ninth, on-going criminal indictments by the U.S. Justice department of various taxpayers, foreign bankers, foreign lawyers and other so-called enablers for tax evasion, filing fraudulent documents and aiding and abetting the same.

Tenth, the Senate bi-partisan hearings that have and keep focusing and pushing these issues publicly at multiple levels.

Eleventh, the internet and current methods of communications and internLiving Outside - all US National clientsational media that have brought worldwide awareness to all of the above.  This awareness has arrived to many of the corners of the world about these efforts and the concept of U.S. citizenship based worldwide taxation.

A large portion of the Senate committee report is dedicated to U.S. citizens who live outside the U.S. and are not compliant with U.S. tax laws.  The following chart from the report highlights this focus as to the approximately 6,000 U.S. citizen accounts at Credit Suisse who were/do not live in the U.S:

For further observations on this topic, see an earlier post – Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.; Posted on March 4, 2014

 

 

 

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What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?

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Below is a fairly detailed summary of the type of tax crimes that are commonly investigated by IRS Criminal Investigation (“CI”) agents.

As has already been noted, TaxAnalysts reporter Jaime Arora reported in the 3 March 2014, Worldwide Tax Daily certain comments made by Mr. Jeffrey Cooper, who is the deputy director of the IRS Criminal Investigation division’s international operations.  It was reported that IRS CI is looking into why people are making the choice to shed their U.S. citizenship; whether it is related to any particular laws.  Cooper was quoted at the Federal Bar Association’s Section on Taxation’s 38th Annual Tax Law Conference held on February 28, 2014.

TaxAnalysts journalist Arora quoted Cooper as identifying why people are making the choice and  “If we find something, we do; if not, we just move on,” he said.

It is common policy for the IRS CI not to provide information on how they commence taxpayer investigations, including how they obtain U.S. citizenship renunciation referrals or documents.  There could be a number of ways these investigations are commenced.  It may be as simple as taking the list from the Quarterly Publication of Individuals, Who Have Chosen to Expatriate – Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G and start reviewing their tax return files (IRS Forms 1040, 8854, etc.) along with FBAR filings.

IRS CI tax investigations generally focus on false documents or false statements, evasion of taxation, aiding and abetting of the above along with other related tax and Bank secrecy (Title 31) crimes.

The tax reporting process for expatriates is extensive, including the basic requirement of signing IRS Form 8854 under penalty of perjury, which provides as follows on the last page of the form:signature line -8854 perjury.

There are a host of reporting requirements and factual information that must be provided under Sections 877 and 877A, for all persons (including those with little to no assets), specifically including filing IRS Form 8854 which asks for a “boat load” of asset, income, liability and tax information.  A former U.S. citizen or LPR always needs to be careful that the information provided is true, accurate and complete.  See Part V of the form.

A summary of these crimes is set out below:

1.         Criminal Offenses under Title 26 (Federal Tax Law)Part V of IRS Form 8854

a.         Tax Evasion (IRC Section 7201)

b.         Filing a False Return or Other Document – Perjury (IRC Section 7206(1) )

(i)        Aiding or assisting in the perpetration of a false or fraudulent document (26 U.S.C. § 7206(2))

(ii)       Removal or concealment with intent to defraud, commonly related to untaxed liquor (26 U.S.C. § 7206(4))

(iii)     Compromises and closing agreements involving fraud or concealment (26 U.S.C. § 7206(5))

c.         Failure to File Return, Supply Information, or Pay Tax – (IRC § 7203 – Misdemeanor – up to 12 months imprisonment)

d.         Fraudulent Returns, Statements, or Other Documents (IRC § 7207)

e.         “Structuring” Transactions to Evade Cash Reporting (IRC § 6050I)

In addition to these tax specific crimes, other key crimes commonly used by IRS CI agents in tax cases, particularly international cases, include:Part B Form 8854

2.         Tax Related Criminal Offenses under Titles 18 and 31 (Not Tax Law Specific)

a.         Conspiracy (Section 371 of Title 18)

(i)        Elements of the Offense

(ii)       Penalties and Statute of Limitations

b.         False Statements (Title 18 U.S.C. § 1001)

(i)        Penalties and Statute of Limitations

c.         Perjury

d.         Mail fraud

e.         Principals and those Who Aid and Abet (Title 18)

f.          Accessory After the Fact

Finally, it is worth noting that the government regularly collects information from internet resources, such as blogs and e-mails as they build a case for criminal prosecution.  A former head of the Tax Division at the U.S. Department of Justice once told me that “e-mails and internet communications was God’s gift to prosecutors”.

 

 

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Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.

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Instead of the government finding U.S. citizens living outside of the United States, as a low priority, the Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by these individuals.  The full report can be read  REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)

Some key excerpts of that report are as follows (at page 4):

. . . focused primarily on Swiss accounts held by U.S. residents, ignoring the over 6,000 accounts opened by U.S. nationals living outside of the United States. . . . It was not until 2012, that the bank expanded the Exit Projects to include a review of the thousands of Swiss accounts opened by U.S. nationals living outside of the United States.. . .

In addition, the report is replete with statistical data of accounts held by U.S. nationals living outside the U.S., such as the following:Chart - Swiss accounts - including US National Living Outside the U.S.

Instead of concluding that the complex U.S. laws are leading to non-compliance by U.S. citizens residing outside the U.S. (per the Taxpayer’s Advocate Report), it seems to conclude to the contrary and the report highlights the virtues of the OVD program in non-compliance as generally willful with millions of U.S. citizens living outside the U.S. who are not in compliance, per the following statement (at page 22):

“The OVDP continues to provide valuable information for the United States in its efforts
to combat offshore tax abuse, although it is far from clear that effective use is being made of the
information generated. For taxpayers, it continues to offer a useful alternative to report
undeclared offshore accounts that, potentially, number in the millions.  According to the Taxpayer Advocate, “While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012,” signaling “significant information reporting noncompliance.”69  2013 Annual Report to Congress — Volume One, Taxpayer Advocate Service, “OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes,”
at 229.

This report seems to get off track by not distinguishing between normal U.S. citizens who are living out their lives in their country of residence, as opposed to U.S. nationals who are intentionally attempting to evade taxes, filing false documents, not filing returns, or otherwise intentionally violating U.S. law.  All of these 7.6 million U.S. nationals living around the world are being lumped together by the government with U.S. resident citizens, irrespective of the facts of each individual and family.

This is a bit of a Bombshell – If the IRS Criminal Investigation (“CI”) is investigating U.S. citizens renouncing their citizenship?

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See the blog spot of Jack Townsend –

IRS CI Is Looking at Renunciations of Citizenship Just in Case (3/1/13)

It is reported the IRS CI is interested in the reasons that U.S. citizens renounce their citizenship.  Jaime Arora, IRS Criminal Investigation Division Looking Into U.S. Citizenship Renunciations, 2014 TNT 41-8 (3/3/14).  The article is nonspecific about what the IRS is looking for and the consequences might be if they found something.

Still, there are tax requirements for renouncing citizenship in certain cases.  I won’t go into them now, but link to blogs on the subject here.

I can imagine that mishandling the various forms and representations required for renunciation, including the tax forms and representations, could be a crime under various federal statutes — tax and nontax — and, at last if something was done wrong related to taxes, conceivably the renunciation conduct could refresh statutes of limitations for tax crimes that might have otherwise expired.

Importantly, why someone renounces their U.S. citizenship under the current tax law (IRC Section 877A) is not relevant as to the tax consequences to the individual who renounced.  This is very different from the law that was passed in 1996.  These rules changed in 2004 and yet again in 2008 to create an objective set of taxation rules.  For this reason, it would be very odd for the IRS CI to be investigating (at least recent expatriates) former U.S. citizens to determine why, i.e., the reasons, they renounced U.S. citizenship.

 

 

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Will the IRS be assisting the Justice Department to prosecute U.S. citizens who have lived abroad most (if not all) of their lives?

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Will the IRS be assisting the Justice Department to prosecute U.S. citizens who have lived abroad most  (if not all) of their lives?

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The on-going focus of of the government, including the purported “Billions in Hidden Offshore Accounts” by the Permanent Subcommittee on Investigations, begs the questions, where are these billions of assets by U.S. taxpayers?

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Will this be the premiss used by the IRS and Justice Department to try to prosecute U.S. citizens residing overseas?

Law abiding U.S. citizens who have spent most (if not all) of their lives overseas are put in an untenable position visàvis the U.S. federal government regarding U.S. tax and tax filing obligations.

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See what the government has to say

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Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

The Treasury Inspector General wrote the following in a 2009 report  (of which none of these numbers have seriously been questioned, supported or analyzed) – – titled

A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap

Synopsis

The IRS estimated that the entire tax gap for Tax Year 2001 was $345 billion.  However, the IRS has not developed an estimate for the international tax gap.  Non-IRS estimates of the international tax gap range from $40 billion to $123 billion.  While there might be overlap between the IRS tax gap estimate and the international tax gap, it is doubtful that the $345 billion estimate includes the entire international tax gap.

The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time–consuming.[4]  Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Project (NRP) estimate for the Tax Year 2001 tax gap.  Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates.  In fact, the IRS’s Research, Analysis and Statistics (RAS) organization reasoned that because of cost, staffing, and technical limitations, an NRP type of direct measurement is unfeasible.  However, in an attempt to learn more, the IRS has other initiatives underway.

 

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Should the IRS modify its offshore voluntary disclosure program for U.S. citizens residing overseas? IRS is reconsidering the effectiveness of its offshore voluntary disclosure program. Should it be modified?

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Should the IRS modify its offshore voluntary disclosure program for U.S. citizens residing overseas?  IRS is reconsidering the effectiveness of its offshore voluntary disclosure program.  Should it be modified?

According to Tax Analyst’s “The IRS is reexamining its offshore voluntary disclosure program and considering making modifications to it, according to Michael Danilack, deputy commissioner (international), IRS Large Business and International Division.”

U.S. citizens who have lived most all of their lives overseas should not be subject to the same scrutiny and inflexibility that currently exists for U.S. taxpayers residing in the U.S.  Important differences exist, mostly because of the lack of U.S. citizens residing overseas to understand the complex U.S. tax law system applicable to them; in addition to the country’s tax laws and requirements in their country of residence.

The de-facto U.S. income tax residency regime is a residence based regime for several reasons.  First, the National Taxpayer Advocate estimates there are between 5-7 million U.S. citizens residing overseas.  Second, only a small portion of these taxpayers apparently even file U.S. income tax returns.  The IRS taxpayer statistics office showed that only 334,851 U.S. taxpayers filed a foreign earned income exclusions (for the year 2006, which is the latest year available from the IRS office of tax statistics).   How many of these taxpayers are not even U.S. citizens? The details of U.S. tax returns filed with foreign earned income exclusions can be read here.

Each country’s filings are set out below (notice only 6,112 returns were filed from Mexico, where the largest number of U.S. citizens reside in any particular country; with Canada as the second most populated with U.S. citizens):

    All geographic areas 334,851
North America, total 36,179
Canada 30,067
Greenland 0
Mexico 6,112
Latin/South America, total 13,911
Argentina 751
Brazil 2,696
Chile 902
Colombia 1,870
Costa Rica 1,662
Panama 1,032
Peru 419
Venezuela 705
Other Latin and South   American countries 3,876
Caribbean, total 7,323
Bahamas 1,089
Bermuda 1,758
Cayman Islands 970
Dominican Republic 1,093
Other Caribbean countries 2,414
Europe, total 99,732
Austria 1,361
Belgium 1,881
Czech Republic 1,091
Denmark 1,754
Finland 354
France 9,653
Germany 21,513
Greece 1,484
Hungary 604
Ireland 1,896
Italy 5,199
Luxembourg 219
Netherlands 3,263
Norway 1,215
Poland 735
Portugal 387
Russia 2,495
Spain 2,453
Sweden 1,399
Switzerland 7,093
Turkey 1,199
United Kingdom 28,409
Other European countries 4,078
Africa, total 9,697
Algeria * 241
Angola 398
Egypt 1,658
Kenya 992
Nigeria 906
South Africa 923
Other African countries 4,576
Asia, total 138,795
Afghanistan 5,912
China 12,430
Hong Kong 10,792
India 4,214
Indonesia 1,786
Iraq 18,325
Israel 8,986
Japan 23,529
Malaysia 1,160
Philippines 2,313
Saudi Arabia 5,109
Singapore 3,636
South Korea 6,668
Taiwan 6,588
Thailand 3,643
United Arab Emirates 7,423
Other Asian countries 16,284
Oceania, total 9,724
Australia 6,420
New Zealand 2,518
Other Oceania countries 787
All other countries 19,490

 

 

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Should IRS use Department of Homeland Security to Track Taxpayers Overseas Re: Civil (not Criminal) Tax Matters? The IRS works with Department of Homeland Security with TECs Database to Track Movement of Taxpayers

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The Department of Homeland Security (DHS) uses the TECS  database, which was originally managed and created by the Treasury Department as the  Treasury Enforcement Communications System.  This database allows the U.S. federal government to track the movement of people, funds and various transactions.  It is now being used by the IRS to feed taxpayer data to the TECS as described in the IRS Internal Revenue Manual –

http://www.irs.gov/irm/part9/irm_09-004-002.html

9.4.2.4.1      (08-09-2004) Treasury Enforcement and Communication System

  1. The Treasury Enforcement and Communication System (TECS) is used extensively by the law enforcement community. This subsection discusses the information available on TECS. Items discussed include:
    • description and purpose of TECS
    • responsibilities for TECS
    • information available from TEC

9.4.2.4.1.1   (03-15-2007) Description and Purpose of Treasury Enforcement and Communication System

  1. Treasury Enforcement and Communication System (TECS) is a computerized information system designed to identify individuals  and businesses suspected of, or involved in, violation of Federal law. Treasury Enforcement and Communication System is also  a communications system permitting message transmittal between Treasury law enforcement offices and other Federal, national,  state, and local law enforcement agencies. The TECS provides access to the FBI’s National Crime Information Center (NCIC)   and the National Law Enforcement Telecommunication Systems (NLETS) with the capability of communicating directly with state    and local enforcement agencies. The NLETS provides direct access to state motor vehicle departments.

9.4.2.4.1.2    (08-09-2004) Responsibilities for the Treasury Enforcement and Communication System

  1. The responsibility for TECS lies both in Headquarters (HQ) and the field offices. The following subsections provide a brief   description of these responsibilities.

9.4.2.4.1.2.1    (03-09-2012) Associate Director, Warrants and Forfeitures

  1. The Associate Director, Warrants and Forfeitures will be responsible for ensuring that all TECS entries meet authorized disclosure  criteria.
  2. All fugitive entries will be made through HQ and all non-fugitive entries will be made through or authorized by the Associate Director, Warrants and Forfeitures.
  3. Headquarters is also responsible for conducting and coordinating periodic training for TECS operators, as well as providing  operating instructions, including the TECS Operating Manual, at all locations, and additional instructions as needed.

9.4.2.4.1.2.2   (03-09-2012) Resident Agent in Charge, Scheme Development Center

  1. Each Resident Agent in Charge (RAC), Scheme Development Center (SDC), will be responsible for:
    1. designating TECS users and coordinating their training
    2. performing queries for field offices upon request, and reporting the results upon receipt of a TECS reply (either a HIT or    a No Record) by telephone, transmission of the TECS hard-copy reply to the field office, or by attachment of the hard-copy   reply to the primary investigation (PI) being evaluated

9.4.2.4.1.2.3  (08-09-2004) Special Agent in Charge

  1. The Special Agent in Charge (SAC) in each field office will be responsible for:
    1. designating a TECS Systems Control Officer (SCO) to assist other users and compliance functions in obtaining authorized data
    2. designating TECS users and coordinating their training
    3. disseminating written instructions to field office personnel regarding TECS query requests within the general guidelines as     stated in this section
    4. providing HQ with a mailing list for their field office of direct distribution recipients of wanted circulars

9.4.2.4.2     (08-09-2004) Information Available From Treasury Enforcement and Communication System

  1. All information retrieved from TECS must be stamped OFFICIAL USE ONLY.
  2. The US Customs Financial Intelligence Branch (FIB) Financial Information Database provides information via TECS as follows:
    1. Form 4789, Currency Transaction Reports (CTR)
    2. Reports of Foreign Bank and Financial Accounts (FBAR), Treasury Form 90-22.1
    3. Form 8362, Currency Transaction Reports by Casinos (CTRC)
    4. Suspicious Activity Reports (SARs), Form TDF 90-22.47

    See Also –

http://www.dhs.gov/xlibrary/assets/privacy/privacy-pia-cbp-tecs-sar-update.pdf