Sanford Millar* Paul Manafort, the former campaign manager for president Donald Trump was sentenced to a term of 47 months in prison this week and ordered to pay millions of dollars in restitution.
He will also be assessed a 75% tax fraud penalty. Some have argued that his prison term was far to short and that he should have received a sentence consistent with federal Sentencing Guidelines (which are advisory).
Other, who deal with Manafort like cases on a regular basis see his sentence as within the range of experience. The purpose of this blog is to show how the Manafort case is applicable to other taxpayers. At its heart the Manafort case is a straightforward case of “willful” failure to file a Report of Foreign Financial Account, also known as an FBAR and tax evasion. Conspiracy to defraud the government and Money Laundering were also charged.
These are the charges that most taxpayers who intentionally hide money offshore and fail to file annual FBARS and make disclosures on their tax returns are likely to face. The question is whether it is too late to come forward.
The current rules:
If you have control, whether directly or indirectly over a foreign financial account, including a cash value life insurance policy and have a total of $10,000 at anytime during a calendar year over the account(s) then, under the Bank Secrecy Act, (“BSA”) you must report the account(s) highest balance on FinCEN Form 114 (FBAR). In addition, under the Internal Revenue Code,(the “IRC”) you must disclose the account(s) on Schedule B of you income tax return and on Form 8938 (if the account balance is $50,000 or more. The failure to make the disclosures has civil penalty and criminal penalty exposure.
The government has been successful in establishing “willfulness” in cases where the taxpayer failed to correctly answer the questions in Schedule “B”. Under the BSA the “willful” failure to file an FBAR is the greater of $100,000 or 50% of the highest annual account balance for each year up to six years. Under the IRC the penalty for failure to file Form 8938 is $10,000 per year and the civil fraud penalty is 75% of the tax on unreported income. Given that less than 2,500 taxpayers are prosecuted each year for all tax crimes, you could reasonably wonder why you should come forward. Note, the huge civil penalties if you get caught.
How will taxpayers get caught?
There are now two international reporting schemes in place. First, the U.S. scheme known as the Foreign Account Tax Compliance Act (“FATCA”) and Second, the European scheme known as “Common Reporting Standards”. Under FATCA, foreign financial institutions, virtually all that transact business in U.S. dollars, provide a list of U.S. customers to the IRS on a periodic basis.
All customers with a U.S. address, fax, email or other indicia of being a U.S. person must be reported.
The IRS then matches the FATCA disclosure reports with FBAR filings and the result is a list of non-compliant taxpayers. The Europeans do the same thing under the “Common Reporting Standards”. Information Exchange Agreements in the form of Mutual Legal Assistance Agreements provide the ability for additional methods of discovery. So, while the odds of being prosecuted may seem low, the odds of getting caught and facing huge penalties are fairly high
The IRS has recently made coming forward an expensive proposition if your conduct was “willful”. In September, 2018 the Offshore Voluntary Disclosure Program (“OVDP”) ended and a new program started.
The OVDP in its last form required filing of up to 8 years of unfiled FBARS and amended income tax returns, payment of a penalty of 27.50% of the highest combined account balances (including the value of certain property interests) for a single year withing the eight, and payment of income tax on any unreported income and a 20% negligence penalty on the tax. However, if the accounts were held a nay of the banks on the “bad bank list”) the penalty increased to 50%.
The new Guidelines have adopted the 50% penalty as the base for all unreported foreign accounts. The 50% penalty has, in our experience resulted in very few participants. The government has now created a disincentive to coming forward.
The government may feel confident in its ability to identify non-compliant taxpayers and commence audit activity, but that is where the advantage may end. The government has the burden of proof, by “clear and convincing evidence” that, in a civil context the taxpayer was “willful” in order to prevail on the FBAR and Fraud penalties. In a criminal prosecution the burden of proof is “beyond a reasonable doubt”. Various defenses in the form of “mitigation factors” apply in the civil context. There are many taxpayers who, given the choice of fighting the audit or paying the “Guideline” penalty will choose to fight the audit. In other words, the government has created an incentive to defer rather than come forward in “willful” cases.
If a taxpayer is “nonwillful” the taxpayer can use the Delinquent FBAR filing Program, if all income was reported and only the FBAR was unfiled. or the taxpayer can use one of the Streamline Procedures if there was an omission of taxable income. The vast majority of taxpayers will now likely use the Domestic Streamline Procedure and pay a 5% single year penalty and then fight the “willfulness” issue. There are risks in this approach, but the advantage is the filing starts the running of the Statute of Limitations on FBAR and income tax returns, whereas not filing leaves the years open.
WE are left with a highly imperfect system where a multitude of complex factors need to be considered in deciding how to come forward and possibly avoid prosecution. We are expert in evaluating these factors and have helped countless other taxpayers reach the correct outcome. Can we help you
*Sanford Millar is a tax attorney with over 40 years’ experience who practices at MillarLaw