7 Most Common Criminal Tax Questions and Answers for Expats

7 Most Common Criminal Tax Questions and Answers for Expats

Most Common Criminal Tax Questions

Oftentimes, when U.S. taxpayers make a mistake involving international tax and reporting, their knee-jerk reaction is to assume that they may have done something criminal and that the IRS Special Agents will be banging down their doors, but this is rarely the case. Making matters worse, are all the fear-mongering articles taxpayers will find online when they begin researching international tax and offshore reporting violations, fines, and penalties. In reality, most tax violations are civil and not criminal. That means that taxpayers who may have violated various tax filing requirements, failed to file the FBAR, or missed reporting foreign income may be subject to monetary fines and penalties, but it will not result in any type of incarceration. Each year, our international tax law specialist team receives many questions about the criminal tax implications of missed reporting, and more often than not, the taxpayer is not at any risk of a criminal investigation. We have compiled seven of the most common criminal tax questions we receive to (hopefully) help put some of these issues into perspective.

If I Missed Foreign Account Reporting, Will I Go To Jail?

Just because the taxpayer did not file certain international information reporting forms does not mean the taxpayer will go to jail. Most of the time, tax violations are civil violations and not criminal violations. When assessing a person’s tax or reporting non-compliance, taxpayers should look at the totality of the circumstances as to why they did not follow the reporting form. For example, did the taxpayer know they had to file the form and intentionally failed to file it, did they not know anything about the form, or were they simply unsure whether the form was required or not?

In other words, just because a taxpayer may have failed to file a foreign account reporting form does not mean they will go to jail.

Is an IRS Quiet Disclosure a Crime?

A quiet disclosure is a situation in which a taxpayer knows they are out of compliance with previously unfilled international information reporting forms such as the FBAR and Form 8938. A quiet disclosure is not necessarily a crime. A distinction must be made between an intentional quiet disclosure and an unintentional quiet disclosure– the latter being a situation when the taxpayer realizes they failed to file prior year forms and starts filing in the current year going forward but was not aware that they were supposed to go back and file for previously years as well.

If a taxpayer knowingly makes a quiet disclosure and intentionally fails to file certain forms then those factors may impact whether overall, in conjunction with potential other factors such as failing to report income may lead to a criminal investigation that could ultimately result in prosecution.

Is Unfiled FBAR a Crime

No, the mere non-filing of an FBAR is not a crime per se. In other words, people fail to file the FBAR for many different reasons, so it is not necessarily a crime simply because a person does not file the form. What matters the most is ‘why‘ the taxpayer did not file the form. When an unfiled FBAR is a crime, it is part of a larger scheme such as money laundering, structuring, smurfing, tax fraud, and/or evasion.

Are Willful FBAR Violations a Crime

Even a willful FBAR violation is not inherently a crime. It depends on whether the taxpayer reached the level of criminal willfulness or not. For example, if a taxpayer was reckless in their non-compliance, then typically this will not reach the level of a criminal FBAR violation. Conversely, if the taxpayer developed a scheme to knowingly avoid fling the FBAR because they were hiding money overseas and possibly laundering the money and/or engaging in fraudulent conveyances, then this may make a taxpayer the target of a criminal investigation.

Does the IRS Prosecute for FATCA (Form 8938)?

In general, out of all of the different international information reporting forms, Form 8938 is the relative newcomer to the gang. For U.S. taxpayers, FATCA generally means they file Form 8938 to report their specified foreign financial assets. In years past, the IRS was not strictly enforcing Form 8938 — and even if taxpayers violated the statute, the IRS was lax when it came to assessing penalties. In more recent years, the IRS has begun enforcing penalties for FATCA Form 8938 more than it did in prior years, but generally, a Form 8938 violation does not lead to a criminal investigation.

There was a criminal FACTA enforcement win for the United States government a few years back, but in that case, the government was going after the investment company/firm for criminal FATCA violations.

Unreported Income Tax Fraud or Evasion?

Another common misconception is that just because a taxpayer fails to include income on their tax return means that they are subject to criminal enforcement for tax fraud or tax evasion, but this is also not true. As with other violations identified above, it is based on the totality of the circumstance. For example, if a taxpayer may have failed to report foreign income because they were unaware they were required to report income generated from a foreign country where they already paid tax in that foreign country, then that generally is not going to be tax fraud or evasion. If instead, the taxpayer knowingly earned a significant amount of foreign income and intentionally did not include it on their tax return because they thought the IRS would never find them, this could lead to a criminal investigation.

Is the Statute for Criminal Fraud Unlimited?

No. While the statute of limitations for civil tax fraud is unlimited (the IRS can go past the three or six-year statute to auditor examine/investigate taxpayers for potential tax fraud), these same rules do not apply to the different criminal fraud statutes.

Late Filing Penalties and Fines May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.

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