United States: How IRS Is Targeting Offshore Accounts, Virtual Currency

This article by partner Kathleen Gregor, counsel Gabrielle Hirz and associate Isabelle Farrar was published by  Law360 on January 23, 2018.

Despite continuing Internal Revenue Service budget cuts over the last several years and significant attrition among its most experienced special agents, the IRS' Criminal Investigation Division is resolving to keep the pressure on in the new year.

In addition to maintaining its presence throughout the United States, and a significant international presence, the new chief of IRS CI, John D. "Don" Fort, has been focusing his staff's attention on two new initiatives: (1) the Nationally Coordinated Investigations Unit and (2) the International Tax Enforcement Group. These initiatives have been implemented over the past few months and should be fully operational early this year.

IRS CI's National and International Presence

IRS CI has an active presence throughout the U.S. and the world. Domestically, IRS CI has 26 field offices in most of the biggest metropolitan areas in the country, such as New York, Los Angeles, Chicago, Dallas, Houston, Washington, D.C., Atlanta and Boston. Each of the 26 field offices also operates satellite offices in additional locations across the United States.

Internationally, IRS CI maintains a presence through its attachés on the ground in Barbados, Bogota, Frankfurt, The Hague (Europol headquarters), Hong Kong, London, Mexico City, Ottawa, Panama City and Sydney. These attachés perform a number of functions. They are responsible for coordinating with foreign governments and law enforcement agencies, and assisting with information exchanges pursuant to the United States' tax information exchange agreements, mutual legal assistance treaties and other tax treaties. The attachés also assist with domestic investigations against individual taxpayers, and investigate broader schemes by promoters that facilitate the evasion of U.S. tax obligations by their clients.

IRS CI trains foreign law enforcement officers in Botswana, El Salvador, Hungary and Thailand, and collaborates in trainings sponsored by the U.S. State Department and the Organization for Economic Cooperation and Development. In 2017, IRS CI hosted delegations from Croatia, Japan, New Zealand, Singapore and South Korea.

Nationally Coordinated Investigations Unit

The new Nationally Coordinated Investigations Unit is responsible for overseeing all IRS field offices and coordinating major investigations at a national level. The NCIU is initially focusing on four areas: (1) international tax enforcement, (2) employment tax, (3) microcap stock fraud (coordinating enforcement with the Securities and Enforcement Commission) and (4) fuel excise tax.

One of the NCIU's primary goals is to put data analytics at the forefront of identifying noncompliance and selecting cases in the hopes that those measures will help mitigate budgetary and staffing pressures.

International Tax Enforcement Group

The new International Tax Enforcement Group compounds the NCIU's focus on international tax enforcement. It was set up as an elite group dedicated to developing significant international tax investigations, and, like the NCIU, will also be using analytics to leverage data compiled from both internal and external sources.

In particular, the IRS has been scouring data collected from Foreign Account Tax Compliance Act (FATCA) reporting, which currently includes 113 jurisdictions, the Offshore Voluntary Disclosure Program (OVDP) and the Swiss Bank Program, and analyzing data published by whistleblowers, including the Panama Papers and other sources.

Although IRS investigations and indictments are down overall, international investigations and indictments have continued to increase significantly: In 2017, more than nine percent of investigations initiated by IRS CI were international, as compared to only about five percent in 2015. International investigations initiated over the last three years have increased from 186 in 2015 to 283 in 2017. Indictments have correspondingly increased, from 166 in 2015 to 211 in 2017.

The NCIU is IRS CI's latest push to ensure that these trends continue their upward trajectory. As IRS CI Chief Don Fort explained on Dec. 15, "We are trying to use the wealth of data that we have at our fingertips. Since we have tight resources we want to use data to pursue the best cases to reinforce our case selection technique."

Building on Recent Trends in International Enforcement

In an era of reduced resources, international enforcement has been a tempting area for the IRS. IRS CI knows for a fact that there are many taxpayers who are still not complying with foreign reporting requirements.

For example, even though the Department of State estimates that between 3 and 9 million U.S. taxpayers reside internationally, only a fraction are reporting foreign income and foreign taxes paid: only approximately 350,000 returns report foreign income, and approximately 970,000 report foreign tax credits. Although FBAR filings continue to increase, in 2015, just over 1 million FBARs were filed.

The IRS is targeting both institutions, facilitators and individual foreign account holders. Not only can these cases result in prison time for individuals, but also additional names of noncompliant taxpayers from institutions. The cases can also yield significant monetary rewards, in the form of disgorgement from institutions and facilitators and 50 percent of the value of foreign accounts from individuals, in addition to criminal fines, back taxes, penalties and interest.

2017 saw the resolution of charges in the prosecutions of two Credit Suisse bankers, who escaped with probation, and Prime Partners SA, a Swiss investment management company that agreed to forfeit roughly $5 million and disclose the names of 175 noncompliant U.S. customers for a nonprosecution agreement. It also saw the resolution of charges against various individuals, such as a Connecticut man who failed to file FBARs containing $28 million, agreed to pay a $14 million FBAR penalty and will be sentenced in January 2018, and three Californians who agreed to pay FBAR penalties and received sentences of one year of supervised release, among several others. Additionally, 2017 saw the sentencing of a New York business school professor for FBAR violations; he received seven months in prison.

Although so far IRS CI has been more successful in obtaining large monetary penalties than prison sentences, there are signs that the U.S. Department of Justice may change its litigating strategies to seek more prison time. In the past, the DOJ generally suggested sentences for FBAR violations based on the amount of the tax loss. But in December 2017, a DOJ Senior Litigation Counsel announced that the DOJ would instead recommend sentences based on the value of the undisclosed accounts, another option under U.S. recommended sentencing guidelines. If judges are convinced, this could dramatically increase sentences in these cases.

The IRS's Large Business and International Division (LB&I) and the DOJ Tax Division's Civil Trial Sections are engaging in complementary efforts. The Tax Division's Civil Trial Sections are focused on bringing more civil FBAR penalty cases, as reflected in the two-fold increase in FBAR penalty cases between 2016 and 2017. LB&I also announced two related campaigns in 2017: a first to follow up on taxpayers who considered joining the OVDP but did not follow through, and a second to focus in on taxpayers disclosed by Swiss banks as part of deferred prosecution agreements

All of these efforts by the IRS and the DOJ may contribute to an era where taxpayers no longer believe that the IRS is "so far behind us with the UBS junk, that they won't catch up with us in our lifetime," as one taxpayer is quoted as saying in a recent court decision in an FBAR penalty case.

Increasing Focus on Virtual Currencies

The IRS and the DOJ are also following the money as they move beyond the investigation of foreign bank accounts and into virtual currencies, which they believe may be one of the latest methods used to evade U.S. tax. Like with FBAR filings, a quick look at the numbers reveals the likelihood of significant noncompliance.

The IRS reported that only 800-900 individuals reported bitcoin transactions each year from 2013-2015, despite hundreds of thousands of bitcoin users and rapidly increasing bitcoin values. For most of last year the IRS and Coinbase, a digital currency marketplace based in the United States, battled over an IRS request for the names of its customers.

Although Coinbase ultimately forced the DOJ into narrowing its requests for data, Coinbase still was ordered to disclose the names, taxpayer ID numbers, birth dates, addresses and account records of more than 14,000 customers who transacted in more than $20,000 in bitcoin in any one year just after November 2017.

Those names disclosed to the IRS by Coinbase, as well as additional information identified by software pursued by the IRS "to identify and obtain evidence on individuals using bitcoin to either launder money or conceal income as part of tax fraud or other federal crimes," will provide fresh fodder for both future criminal investigations and civil audits.

Recommended Taxpayer Responses

More than ever, taxpayers who have unreported assets, whether offshore or in the form of virtual currencies, are advised to make this the year to take proactive steps.

Typically, applying to the OVDP and related "streamlined" programs, if eligible, is the best path — other options, including "quiet" disclosure where a taxpayer simply files amended returns and hopes the IRS will accept them, are increasingly risky. However, taxpayers are ineligible if they are already under audit or criminal investigation or otherwise under the IRS's radar due to third-party information, such as John Doe summonses, FATCA reporting, information provided by cooperating financial institutions, criminal warrants or otherwise.

For those holding unreported virtual currencies, the OVDP may still be an option, as most virtual currencies can be considered to be held offshore. The IRS also considers domestic voluntary disclosures based on the facts and circumstances, although no formal program exists. In the meantime, many taxpayers and practitioners are hoping for more guidance and possibly a specific program for virtual currencies in 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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