As long as there have been taxes levied in the world, there have been those who try to work the system or evade taxes altogether. Unfortunately for many, the world has become a much smaller place for those who wish to underreport income or shelter their income and assets. The IRS will discover your offshore financial and digital activities, and the risks associated with these activities are genuine and substantial.
Key Takeaways of How and Why The IRS Will Discover Your Offshore Financial and Digital Activities:
- The primary change in the past decade is the impact of FATCA – the Foreign Account Tax Compliance Act – and the resulting cooperation between the IRS and state tax agencies, foreign sovereign tax agencies, foreign financial institutions (FFIs), banks, investment houses, and cryptocurrency exchanges around the world.
- The IRS is receiving direct electronic information from FFIs, banks, investment houses, cryptocurrency exchanges, and wallets here in the U.S. and around the world, including information about U.S. taxpayers, such as their account information, balances, and transactions.
- The IRS Form 1040 – the U.S. Individual Income Tax Return Form – (a) asks specific questions of whether the taxpayer(s) received, sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset)?, and (b) requires each taxpayer’s signature under a statement that reads: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”
How is it Genuinely Possible that The IRS will Discover Your Offshore Financial and Digital Activities
One of the most common questions of those who attempt to hide income and assets asks, “How is it genuinely possible that the IRS will discover your offshore financial and digital activities wherever they are, or wherever they occurred? Isn’t the whole idea behind these schemes that offshore FFI accounts, assets (including real estate), and digital assets are a safe hiding place?
The answer lies in the implementation of FATCA (Foreign Account Tax Compliance Act) and in international cooperation among the IRS and state tax agencies, foreign sovereign tax agencies, foreign financial institutions (FFIs), banks, investment houses, and cryptocurrency exchanges worldwide. The IRS receives automatic, digital, electronic notifications of accounts and transactions specifically tied to U.S. taxpayers from these foreign financial sources, banks, tax agencies, investment houses, and now cryptocurrency exchanges and wallets around the world. FATCA established (since 2015) that if any entity wanted to be able to access U.S. markets, they would have to disclose specific details about account holders and their transactions to the IRS.
Fact: The IRS is receiving direct electronic information from FFIs, cryptocurrency exchanges, and wallets here in the U.S. and around the world, providing information about U.S. taxpayers, including their account information, balances, and transactions.
Another reason the IRS will discover your offshore financial and digital activities and pursue evasion immediately and aggressively is that IRS Form 1040 asks whether “the taxpayer(s) received, sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset)?”
The taxpayer must check “Yes” or “No.”
You should also take notice of an important warning just above the signature line on the Form 1040: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”
Fact: Any U.S. Taxpayer who fails to accurately check the box in the initial question regarding digital transactions at the top of the form, and who signs a tax return that is not “true, correct, and complete” is not only guilty of perjury (a federal crime carrying the genuine risk of jail time) but exposes themselves to extensive financial penalties and interest for each separate violation and unreported account or asset.
How will the IRS discover your crypto assets wherever they are? In the past few years, the IRS has invested heavily in the most advanced data processing systems and applications, as well as in Artificial Intelligence (AI) applications. These powerful systems and AI can quickly, efficiently, and inexpensively comb through the troves of electronic information pouring into the agency from around the world.
What used to be a manual process is now thoroughly automated and accurate. The systems and applications simply compare the electronic informational data from foreign financial sources, banks, tax agencies, investment houses, and now digital asset and currency exchanges from around the world with associated individual tax returns. This is a simple, automated audit check. If your taxpayer information is associated with any unreported or underreported asset, account, or transaction, and you have not disclosed it to the IRS on Form 1040, you should prepare for an immediate investigation and IRS audit, which carry substantial financial and legal risks.
Fact: It’s time to come into compliance and update previous tax returns and make a voluntary disclosure if you have unreported onshore or offshore financial accounts, assets, transactions, or digital assets.