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The IRS is ramping up, rewarding whistleblowers and prosecuting non-compliant taxpayers

As we have previously discussed, the IRS is aggressively looking for taxpayers who have not complied with their US tax obligations. Increased enforcement, voluntary disclosure programs, and the soon to be implemented FATCA rules, requiring foreign financial institutions to disclose their US customers and investors, are all designed to “find” the more than 6 million overseas non-compliant taxpayers.

Disgruntled employees or business partners, ex-spouses out for revenge, or even friends who know of your non-compliance may also expose you to the IRS.  Why? Because under the Internal Revenue Code’s Whistleblower Rules informants can receive between 15% and 30% of the tax, penalty or other amounts collected.

As noted in a recent internal IRS memorandum:

  • The IRS Whistleblower Office was established in 2007, in response to amendments to the legal authority for paying awards to individuals who report suspected tax compliance issues. Since that time, thousands of whistleblowers have reported hundreds of millions of dollars in suspected tax compliance issues, resulting in a wide range of audits and investigations. Some of these audits and investigations have yielded significant results, demonstrating that whistleblower information can be an important tool in our compliance programs.

As with any matter dealing with the Internal Revenue Code, the rules applicable to Whistleblowers are complex and may required the assistance of a tax professional.  Further, such awards are subject to income tax (a portion of which will be withheld by the IRS upon payment).  Finally, these rules only apply if the non-compliant taxpayer has income in excess of $200,000 and the amount of additional tax, penalties or other amounts exceed $2 million.

The Department of Justice
The IRS Criminal Investigation (CI) is the federal agency tasked with investigating potential criminal violations of the Internal Revenue Code.  When a taxpayer enters into a voluntary disclosure, it is CI who initially reviews the taxpayer’s background and disclosure positions.  The official position taken by the IRS is that a voluntary disclosure “will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended,” but historically there have been very few criminal prosecutions which have stemmed from a taxpayer’s voluntary disclosure.

This historical trend may be turning a little in the wake of the UBS disclosure, and may continue to turn once the IRS is able to process the data it has more recently received from Credit Suisse and other offshore banks.  Procedurally, it is important to note CI can only initiate an investigation and recommend prosecution to the Department of Justice (DOJ) and it is the DOJ, not the IRS, who prosecutes tax crimes.

The Department of Justice web site provides a summary of the offshore-banking related cases which have been brought by the DOJ.  Reviewing these cases allows us to see what elements are common to the taxpayers who are recommended for criminal prosecution, and to understand the basis for the sentences and penalties imposed.  It also makes interesting reading for anyone not compliant with their US tax filings. The statement notes:

The prosecution results so far have been encouraging: To date, approximately 150 investigations of offshore-banking clients have been initiated, of which 36 client cases have been charged, with 31 guilty pleas having been entered, two convicted after trial, and five awaiting trial. A number of facilitators who helped clients hide assets offshore have been indicted, resulting in 13 bankers and two attorneys being charged and awaiting trial, and one advisor and one banker being charged and convicted. In addition, investigations have been opened into numerous additional offshore banks across the world.

The statement concludes:
…the word is out that placing assets in foreign accounts no longer provides the protection from disclosure it once did.

Detailing the various cases to date, the IRS has provided a list of people who serve as examples of the severity of this effort.  For example:

Michael Reiss, a doctor, professor and medical researcher, was sentenced to eight months in a community confinement center for failing to file Reports of Foreign Bank and Financial Accounts (FBARs) with the IRS. Reiss pleaded guilty in August 2011 and agreed to pay back taxes and to pay a civil penalty.

Amir Zavieh, of San Francisco, California was indicted with conspiring to defraud the IRS. According to the indictment, Zavieh concealed a bank account by placing his domestic assets in the name of a nominee and failing to file income tax returns.

Steven Michael Rubinstein of Boca Raton, Florida, pleaded guilty to filing a false tax return for tax year 2004. On April 1, 2009, Rubinstein was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account for which he was the beneficial owner and failed to report any income earned on that account. Rubinstein was sentenced on Oct. 28, 2009, to three years probation, of which 12 months will be served in home detention.

Details of each of these cases can be found at:

For good bedtime reading, you can download the full DOJ news releases on two of these cases, as summarised below:

May 30, 2012 — Wolfgang Roessel, of Fort Lauderdale, Fla., pleaded guilty to filing a false tax return and failing to file a Report of Foreign Bank and Financial Accounts (FBAR). The plea agreement includes a tax loss of more than $312,000 and an FBAR penalty owed of more than $5,750,000.

June 20, 2011 — Sean and Nadia Roberts, of Tehachapi, Calif., pleaded guilty to filing a false tax return related to an undisclosed Swiss bank account.

There are several voluntary disclosure programs which may help get you back into tax compliance if this applies to you.  Contact us if you would like more information from our compliance experts.

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