IRS Announces New Investigative Units
In a press call on August 2, 2017, the Chief of the Internal Revenue Service’s (IRS) Criminal Investigation Division (“IRS-CI” or CID), John D. Fort, announced two new enforcement initiatives: a National Coordinated Investigations Unit and an International Tax Enforcement Group. Fort also explained that the Criminal Investigation division is—and will be—increasingly focusing on the use of cryptocurrencies.
Nationally Coordinated Investigations Unit
The Nationally Coordinated Investigations Unit (“NCIU”) is responsible for overseeing all IRS field offices, and coordinating major investigations at a national level. The unit will initially be focusing on four areas: (i) employment tax, (ii) international tax enforcement, (iii) microcap stock fraud (coordinating enforcement with the Securities and Enforcement Commission), and (iv) fuel excise tax. The NCIU will be using data analytics to identify areas of non-compliance, and select criminal investigations.
The units are intended to modernize CID’s investigative tools to rely more upon data analytics to harvest leads from information received through the Swiss Banking Program, the Foreign Account Tax Compliance Act (FATCA) and the Panama Papers investigation, among other sources. The effort is also clearly intended to maximize the Division’s resources in light of budgetary concerns.
International Tax Enforcement Group
The International Tax Enforcement Group (“ITEG”) is dedicated to developing significant international tax investigations, building on the NCIU’s focus on international tax enforcement. ITEG will also be using data analytics, to leverage data compiled from both internal and external sources. In particular, the IRS has been scouring its data collected from Foreign Account Tax Compliance Act (“FATCA”) reporting, the Offshore Voluntary Disclosure Program (“OVDP”), and the Swiss Bank Program, and analyzing data published by whistleblowers, including the Panama Papers and other sources. Despite IRS budget cuts, IRS is also maintaining a physical presence internationally, with IRS attachés on the ground in Barbados, Bogota, Frankfurt, The Hague (Europol headquarters), Hong Kong, London, Mexico City, Ottawa, Panama City, and Sydney. These IRS attachés are responsible for coordinating with foreign governments and law enforcement agencies, and assisting with information exchanges pursuant to the Tax Information Exchange Agreement (“TIEA”), Mutual Legal Assistance Treaty (“MLAT”), and other tax treaties.
The number of IRS international investigations—and indictments—have increased significantly since 2015: International investigations initiated have increased from 186 in 2015, to 221 initiated in 2016, to 270 initiated as of the end of August 2017. Indictments have correspondingly increased, from 166 in 2015, to 187 in 2016, to 201 as of the end of August 2017. The IRS is targeting both institutions and individuals; individuals targeted include both bankers as well as foreign account holders. Courts are imposing increasingly heavy monetary fines, and even prison sentences.
Individuals have been increasingly targeted through a two-fold increase in FBAR penalty cases between 2016 and 2017. IRS-CI believes that many taxpayers are not complying with foreign reporting requirements. For example, even though the Department of State estimates that between 3 and 9 million taxpayers reside internationally, only a fraction of these taxpayers are reporting foreign income and foreign taxes paid: only approximately 350,000 returns report foreign income, and approximately 970,000 report foreign tax credits. Although FBAR filings continue to increase, in 2015, just over 1 million FBARs were filed. The International Tax Enforcement Group is leading IRS efforts to bring taxpayers who have not yet been coaxed into voluntary disclosure programs or making so-called “quiet” disclosures out of hiding.
The IRS also has been increasingly focused on gathering data regarding cryptocurrencies, sending a John Doe summons to Coinbase, Inc. seeking information on holders of Bitcoin. The IRS has independently stated that it has begun using software “to identify and obtain evidence on individuals using bitcoin to either launder money or conceal income as part of tax fraud or other Federal crimes,” according to the contract between the IRS and Chinanalysis, Inc., the provider of the software. Based on the date of the contract, the IRS has been using this software since July of 2015. These proactive initiatives by the IRS are likely to result in increased scrutiny, while allowing the IRS to maximize its resources.
The new National Coordinated Investigation Units have the potential to reinvigorate and sharpen CID’s investigative efforts in the United States and for taxpayers abroad. Particularly in the area of undeclared offshore accounts, voluntary disclosure is strongly advisable.For individual taxpayers, this announcement is yet another indication that a “wait and see” mentality when it comes to non-disclosure of offshore financial assets, or tax non-compliance more generally, is too risky. The days of hiding offshore assets are over. Taxpayers confronting these problems should carefully evaluate all of their options, including voluntary disclosure, in light of CID’s recent announcement.
Taxpayers who have unreported assets, whether offshore or in the form of cryptocurrencies, are advised to take proactive action now. Simply hoping that these efforts will pass them by is increasingly unlikely as the IRS will begin using more advance data-gathering techniques. Typically, applying to the OVDP, if eligible, is the best path—other options, including “quiet” disclosure where a taxpayer simply files amended returns and hopes the IRS will accept them, is risky and increasingly ineffective. For those holding unreported cryptocurrencies, OVDP may still be an option, as most cryptocurrencies can be considered to be held offshore.