International Tax Evasion: Examples, Penalties, and Avoidance

While there are many different types of international tax crimes, the crime of tax evasion is one of the most well-known types of criminal tax violations. This is because tax evasion crimes tend to end up in the news — and especially when they involve celebrities — the cases garner a lot of press and national attention. Unlike other types of tax crimes, tax evasion is a felony, which means if a person is convicted of tax evasion they may face incarceration, along with substantially high fines and penalties. In addition, when a person is charged with tax evasion, they may also be charged with related crimes as well, such as conspiracy, tax fraud, money laundering, structuring, smurfing, conspiracy, etc.

Common types of international tax crimes involve:

• Laundering money overseas,
• Establishing dummy corporations abroad and opening secret bank accounts using ‘numbered accounts’ and other 3rd party identifiers instead of the individual’s Social Security number, and
• Intentionally failing to report foreign income the Taxpayers knows is reportable on Form 1040.

Let’s walk through the basics of international tax evasion, along with the definition, examples, penalties, and how you may be able to avoid tax evasion by submitting to the IRS Voluntary Disclosure Program (VDP).

Introduction to International Tax Evasion

The crime of tax evasion can be found in 26 U.S.C. 7201. Whether the violation is domestic or international, it still falls under 7201 – although ancillary violations may vary based on whether the crime is domestic or foreign. As a supplement, the criminal tax procedure manual provides excellent information about how the US government develops and investigates criminal tax evasion cases.

26 U.S.C. 7201

• “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

International Tax Evasion Example

International tax evasion comes in all shapes and sizes. Here is a common example of how international tax evasion cases can work:

• Charlie is a lawful permanent resident who resides in the United States. He was recently paid a significant amount of money in cash from a client, and he does not want to report this money on his tax return. Therefore, Charlie hatches a scheme where he opens foreign bank accounts under dummy corporations as well as numbered accounts (which means that accounts are only identified by a number and not Charlie by name).
• Charlie then moves the money overseas into the accounts where it begins earning a significant amount of interest income. When it comes time to file his U.S. tax return, Charlie does not identify that he has foreign accounts, does not include the income on his US tax return, and does not file the FBAR or Form 8938 even though he knows he is required to.
• Charlie does file a tax return, but he takes the affirmative step of excluding the foreign income from the return.

Recent International Tax Evasion Cases

There have been several recent tax evasion cases that have an international component to them. Here are a few examples of international tax evasion/fraud cases:

US V Butsellaar

• “Butselaar was an advisor to high-net-worth DJs and fashion industry clients who earned income all over the world (the “Clients”). The Clients earned millions of dollars every year. In certain years, these Clients became U.S. tax residents, meaning they had a legal obligation to pay U.S. taxes on their worldwide income. Butselaar, working with other professionals, devised a strategy to unlawfully conceal from the U.S. Government millions of dollars of income the Clients were earning outside the United States during years they were U.S. tax residents.”

US v Rahman

• “Rahman is also charged with filing a false “Streamlined Submission” in conjunction with the IRS Streamlined Domestic Offshore Procedures….The indictment alleges that Rahman’s Streamlined Submission did not truthfully disclose all the foreign bank accounts in which he had an interest, and falsely claimed that his failure to report all income, pay all tax, and submit all required information returns, such as FBARs, was non-willful.”

US v Bechtiger et al.

• “An indictment was unsealed today in New York, New York, that charges offshore financial service executives and a Swiss financial services company with conspiracy to defraud the IRS by helping three large-value U.S. taxpayer-clients conceal more than $60 million in income and assets held in undeclared, offshore bank accounts and to evade U.S. income taxes.”

Tax Evasion Penalties

Penalties for tax evasion include fines and incarceration. Sentencing for tax evasion tends to range from 3-5 years, but this varies extensively based on whether there are other violations, if it is a first offense, and if the defendant paid the amount of taxes due.

IRS Voluntary Disclosure Program (VDP)

For taxpayers who are willful, even if they may be considered to have violated criminal tax statutes, they may still qualify for the IRS Voluntary Disclosure Program. The IRS Voluntary Disclosure Program is a program that has been around for many years, and it is designed to assist taxpayers with getting into compliance and avoiding criminal charges. With VDP, willful taxpayers agree to acknowledge their misdeeds and pay any taxes, interest, and penalties they owe. In turn, they will usually avoid any criminal prosecution for these crimes. The key fact to keep in mind with the voluntary disclosure program is that taxpayers must submit to VDP before they are contacted by the IRS — otherwise, they lose the ability to submit to the program.

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.