IRS Establishes New Criminal Investigation Group Using Big Data Analytics to Crack Down on Offshore, Bitcoin and Cannabis Tax Evasion

According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using traditional information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.

Source Of Data To Review Has Exponentially Increased.

But now there is totally new data flowing into the IRS which is gaining substantial attention, notably the following:

The Foreign Account Tax Compliance Act (“FATCA”) – As the IRS explains, FATCA “generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders,” meaning foreign banks are required to report their American clients to the U.S. government. This legislation became law in 2010. Starting in 2014, the IRS has the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. This allows IRS to scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCEN Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.

The Offshore Voluntary Disclosure Program (“OVDP”) – Since 2009 the OVDP incentivizes offshore account holders to come clean about previously undisclosed accounts, offering reduced penalties in exchange for the voluntary reporting of tax information. About 60,000 taxpayers over the past few years have come in to the program with each case bring a wealth of information for IRS to analyze in finding other non-compliant taxpayers and promotors. Another 50,000 have come forward under the Streamlined Procedures adding more treasure trove data to IRS.

The Panama Papers – In 2015, an unknown source leaked roughly 11.5 million sensitive financial documents from a Panama-based law firm, revealing hundreds of thousands of offshore entities in the process. In May 2016, the documents were published online by the International Consortium of Investigative Journalists (“ICIJ”), making them viewable to anyone with an internet connection and allowing the IRS to add this information to its data archives.

The Swiss Bank Program – The Swiss Bank Program is similar to FATCA, but, as the name suggests, is specifically geared towards Swiss banks, which can avoid criminal prosecution by giving the DOJ “detailed information” about “accounts in which U.S. taxpayers have a direct or indirect interest” and “other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed.”

Creation By IRS Of Two New Special Programs.

With the avalanche of billions of data flowing to IRS, the Criminal Investigation Division (CID) implemented two new programs: the International Tax Enforcement Group (ITEG), and the Nationally Coordinated Investigations Unit (NCIU). Both focus on increasing the rate of taxpayer compliance with income reporting requirements contained in the Internal Revenue Code – particularly those pertaining to the disclosure of foreign financial accounts, reporting of virtual currency transactions, and reporting transactions involving Cannabis.

John Fort, Chief of CID, appearing at a conference before tax professionals in June 2018 affirmed the formation of a dedicated international tax enforcement group,” adding that the ITEG would likely be comprised of at least 10 to 12 agents: more than the standard 8 to 10 agents typical of IRS-CID groups. He also affirmed the formation of the NCIU, explaining that the new group’s investigative technology, primarily data analytics, would be “cutting edge for CID and part of the future of IRS Criminal Investigation.” Elaborating on how the technology would be used, Mr. Fort told the audencice, “This particular unit is going to report directly to our frontline executives here in Washington, D.C. The goal of the unit is to really use all of the data that we have available to us to help identify and develop areas of noncompliance.” Two unit locations were established – one in Washington D.C. and the other in Los Angeles. Additionally he announced that every Special Agent is receiving mandatory cyber-crime training.

The Stakes Are High!

A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars. With the recent creation of the ITEG and NCIU, it is more critical than ever to ensure that you are compliant with federal tax laws if you maintain a bank account overseas, hold other foreign assets, or have recently used cryptocurrencies to make large transactions or do business in cannabis.

Perceived FBAR Widespread Noncompliance

Despite estimates that as many as 9 million U.S. persons could live abroad, 350,000 disclose foreign income (which is reported using an FBAR, or FinCEN Form 114, and Form 8938 (Statement of Specified Foreign Financial Assets)), while 970,000 disclose the Foreign Tax Credit (which is claimed using Form 1116 (Foreign Tax Credit)).

Perceived Bitcoin Widespread Noncompliance

Just over 800 taxpayers declared cryptocurrency-related capital gains or losses in 2013, 2014, or 2015, despite the fact that hundreds of thousands of individuals sell or purchase Bitcoin on Coinbase. Just earlier this year IRS was successful in getting a U.S. District Court Judge to order Coinbase under an IRS Summons to turn over 14,000 users. Those users will have some explaining to do to the IRS why they did not report their crypto transactions.

Perceived Cannabis Widespread Noncompliance

Despite certain states in the U.S. legalizing cannabis, it is still illegal under U.S. Federal law so U.S. cannabis business must still face the ongoing challenges of running a cannabis business given this disparity with U.S. Federal law. The proliferation of the businesses on Weed Maps makes then easy to find. Yet the challenges are large being: your local Federal District Attorney shutting down your business and seizing assets; losing all bank privileges; and getting a big tax bill from IRS that you cannot pay. Also for many the barriers to get a legal local license are high and sometimes even impossible without moving to another city.

What Should You Do?

With the recent creation of the ITEG and NCIU, it is more critical than ever to ensure that you are compliant with federal tax laws if you maintain a bank account overseas, hold other foreign assets, or have recently used cryptocurrencies to make large transactions. Failure to comply with reporting requirements can result in substantial civil and even criminal.

Whether you failed to report any type of income (domestic or foreign) or failed to file a tax return, you should promptly seek tax counsel who can act proactively before the IRS does. We can also conform that your past filings satisfied FBAR and FATCA the reporting requirements for Bitcoin and other cryptocurrencies. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) protect you from excessive fines and possible jail time and help maximize your profits.