United States v. Paul Manafort and Robert Gates: An Offshore Tax Evasion Case
On October 27, 2017, the Government filed criminal charges against former Trump aides, Paul J. Manafort and Richard W. Gates, III. While these are only allegations and all defendants should be considered innocent until otherwise proven, the case provides some important lessons in offshore compliance cases. I expect that many with undisclosed offshore assets will be unnerved by this case, but hopefully by understanding the particular facts in this case, such individuals won’t jump to conclusions about the best way to proceed in their situation.
There are a number of federal charges in the case, so I will try to discuss only the facts as they relate to offshore tax non-compliance.
IRS Audits of Streamlined Applications
A question that’s asked by every client in a streamlined compliance filing is: “will I get audited?” This article will hopefully shed some light.
Here’s what the IRS says:
Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.
Foreign Life Insurance Taxation
Life insurance can be good way to ensure that loved ones are taken care of in the event of an unfortunate situation. However, owning a foreign life insurance policy with cash value can prove to be more of a headache than it’s worth. We’ve come across such types of investments regularly in our offshore compliance cases; the reporting and tax obligations can be burdensome. Hopefully, this article will help foreign insurance policy owners understand their U.S. tax obligations.
How much does a Streamlined Case Cost?
Fixed fees. Some attorneys charge fixed fees. The tax laws regarding foreign accounts reporting are onerous. In addition, since there are seemingly unlimited types foreign investments, it takes time to review and understand your policy/investment to determine the correct tax treatment.
If you have investments in foreign life insurance, mutual funds, or stocks, your fees will be higher. Foreign mutual funds and stocks might qualify as much-dreaded passive foreign investment companies (“PFICs”). These are time-consuming to correctly report.
Hourly. For attorneys who use the hourly billing model, usually the tax preparation work will be fixed and the attorney’s time will be billed hourly. The tax preparation work might be done by a different firm. The hourly fee is not so much as important as what the total fees will be (a lesser experienced attorney might bill at $200/hr and spend 10 hours, whereas an experienced one billing at $400/hr might spend 5 hours). You should request that your attorney provide a range of what he expects your total costs to be.
Do you Need OVDP or Streamlined?
The Offshore Voluntary Disclosure Program (OVDP) is for taxpayers who need protection from criminal prosecution or civil willfulness penalties. Read more about OVDP vs. Streamlined. The following factors (not exclusive) are some indicators of willfulness.
- Location of accounts in tax havens. Do you have legitimate business or personal ties to the jurisdiction where your foreign assets are located? Or are they located in offshore tax havens such as Switzerland, Panama, Cyprus, Liechtenstein, Luxembourg, Austria, Singapore, and others where there are bank secrecy laws?
- The amount of unreported taxable income. Having a large offshore account in itself is not a major risk factor, assuming the source of that money is from legal sources. The IRS’s concern is not the amount in the account, but the unreported taxable income. We’ve successfully brought clients into compliance who have several million in offshore accounts through streamlined procedures. In these cases, even though the amount in the foreign accounts were sometimes in the millions, the tax loss to the government wasn’t much – it was a few thousand dollars of tax on the unreported foreign interest income. This is not large scale tax evasion that requires protection against criminal and civil prosecution, absent other factors.
- Using holding accounts. Those that are trying to willfully evade taxes will often use offshore holding accounts or “DBAs” to obscure the true legal ownership of the account.
Deciding between OVDP and the streamlined filing compliance procedures is sometimes a difficult judgment call. It’s one that should be carefully considered.
Do I Need a Tax Lawyer, or can I use a CPA?
While certain communications with a CPA retained by an attorney are privileged through the use of a Kovel Letter, a client should not directly reach out to a CPA in a legal matter where they may be facing civil or criminal penalties for a tax violation.
Can we just Forget about my past Non-Compliance and file Correctly Going Forward?
Our job is to bring clients into compliance safely and will not advise or assist you in your strategy of “going forward compliance.”
- Be Upfront During your Initial Consultation. This means truthfully and completely answering all questions. It is important to identify any weak links in your case so that they may be addressed early on, as well as to identify the full scope of the work involved.
- Be Organized. If you’re paying hourly, then obviously good organization on your part will save you money. If your attorney is charging a fixed fee and does not sense that you are organized, you can expect that your fees might be higher to reflect the additional time commitment on the attorney’s part.
The best outcome in such matters is when things have gone as planned. We have safely brought numerous clients into compliance with their unreported offshore accounts. And while we cannot guarantee every case will go without a hitch, so far all of our streamlined cases have been accepted as filed.
If you’d like to discuss your offshore account matter, please click here to schedule a confidential consultation.