How The IRS Is Catching On Tax Evasion For Offshore Profits

How The IRS Is Catching On Tax Evasion For Offshore Profits

Does your company owe the IRS taxes on international profits? Take note, and the IRS is watching you closely. Now, the agency’s auditors are focusing on accumulated offshore earnings in terms of the 2017 tax law. The IRS says that this area is rife with abuse with companies minimizing international profits to reduce their tax bills.

The old rules meant that companies paid 35% only if the money came back to the US. Money kept outside the US allowed for the deferment of all taxes.

WARNING!

The IRS warned that any such audit could expand into an examination of any changes made to tax strategy after the 2017 law, which lowered the corporate rate to 21 percent and overhauled international tax rules.

Returns selected will be risked and examined for material issues related to corporate planning in reaction to the tax law, with specific reference to repatriation taxes.

The IRS Reels In A Whale Of An Offshore Tax Cheat And Goes For Another

According to estimates by the Congressional Joint Committee on Taxation, the repatriation levy will generate $338.8 billion in tax revenue over a period of ten years, but President Trump expects up to $4 trillion to return to the US.

The IRS announced that Robert Smith admitted that he criminally evaded taxes on more than $200 million of income between 2000 and 2015. He used foreign accounts in Switzerland and the Caribbean. Robert Smith is a 57-year old private equity billionaire who founded Vista Equity Partners.

Robert Smith is the very same Mr. Smith, who pledged to pay off all the graduates’ student loans for the class of 2019 at Morehouse College. Mr. Smith will pay $139 million in tax and penalties to the IRS. He will forego claims to $182 million in deductions for charitable donations, which means a further payment to the IRS of approximately $65 million, but the IRS will not prosecute Mr. Smith.

Robert Brockman, the sole investor in Mr. Smith’s first private-equity fund, is a Houston based billionaire and software CEO. He was charged at the same time with hiding $2 billion of capital gains income from the IRS, also using secret offshore accounts between 2000 and 2018. Mr. Brockman, 79, pleaded not guilty and was released on a $1 million bond.

Mr. Broackman’s alleged evasion is the largest criminal tax prosecution of all times, while Mr. Smith’s $139 million is one of the largest payments ever made to the IRS in connection with secret offshore accounts.

These cases show the reach of the IRS and the Department of Justice in tracking hidden assets globally. It is recommended that high-net-worth individuals get their houses in order before the IRS comes knocking.

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Tax Evasion vs Tax Avoidance

Tax avoidance can be perfectly legal. Tax evasion, the willful non-payment of taxes, is a crime. In his confession, Mr. Smith used the word ‘willfully’ more than twenty-five times. Tax avoidance is dependent on secrecy. The perpetrators often start by placing assets into foreign trusts, companies, and offshore accounts nominally owned by foreigners to avoid IRS scrutiny while the American party controls the assets. The IRS has a hard time investigating assets like that, especially in countries without treaties or agreements to ease tax information exchange.

Smith admitted to controlling entities that were not in his name in Belize and the Caribbean Islands of Nevis.

These hidden entities received the pre-tax profits from his private-equity fund. He also controlled hidden bank accounts in the British Virgin Islands and Switzerland. Smith drew millions of untaxed dollars from these accounts to buy and improve luxury real estate in Sonoma, California, and Switzerland.

Those who play this illicit ‘game’ employ go-betweens and use encrypted communication and code names to cover their tracks. Smith paid an unnamed lawyer in Houston more than $800,000 between 2000 and 2014 to set up a false paper trail to hide his accounts. The lawyer was a long-time advisor of Mr. Brockman.

Not A New Trend

Tax cheats have used offshore accounts for tax evasion for decades. Still, the IRS’s sustained crackdown began after it caught Swiss bank UBS AG encouraging Americans to evade taxes and sent bankers into the US to market illegal avoidance schemes. The IRS eventually pierced the veil of bank secrecy in Switzerland and elsewhere. More than 56,000 US taxpayers who risked criminal prosecution entered a limited amnesty program and had to pay $11 billion to resolve their problems. The foreign banks paid another $ 6 billion.

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Catching Mr Smith

How the IRS caught Smith remains a mystery. However, by 2013 or 2014, Smith’s Swiss bankers informed him that they were poised to expose him to the IRS. The banks did this to reduce their penalties that arose from the crackdown. Subsequently, Smith applied for a limited amnesty, which the IRS rejected since the agency already had him in their sights.

Charities

Smith was a philanthropist of note, beyond his payment of the Morehouse student’s debt. He had charitable events but was not required to make donations. He contributed substantial amounts to the Fund II Foundation, which was his US approved charity. Between 2016 and 2019, he was named one of the top 50 US donors by the Chronicle of Philanthropy. Smith created a guide to help other colleges and donors replicate his Morehouse program. Insiders say this type of charitable donations can burnish a defendant’s image with judges and prosecutors. As yet, no one has come forward to explain why Smith is giving up his $182 million of charitable-donation-deductions as part of his settlement.

Not Indicted For Tax Evasion Of $200 Million

According to David Anderson, the US Attorney for the Northern District of California handled the case. He said that Mr. Smith’s cooperation with the government, presumably in the Brockman Case, put him on a path away from indictment. DOJ procedures do not allow defendants to buy their way out of prosecution, but cooperation is grounds for leniency.

Experts find Smith’s agreement unusual.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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