Steep Drop in Tax Fraud Cases Raises Questions about Enforcement

offshore taxesSuccessful prosecution of high profile cases like those involving Paul Manafort and Michael Cohen would seem to burnish the reputation of the Internal Revenue Service (IRS) as hard on crime—but is it?


A recent piece in The New York Times details the decline in the number of cases developed for prosecution by the IRS, noting a decline of 25 percent since 2010.  As the article reports, “there may never be a better time to be a tax cheat.”


Just about a year ago, we discussed a drop in the number of cases referred for prosecution by the IRS.  Since 2011, budget cuts have impacted the number and type of cases developed and advanced by the IRS.

While concern over an IRS criminal tax investigation can ruin the lunch of any C-suite executive or high-wealth individual, criminal tax fraud cases against smaller fish appear to be in decline.  In the Times article, former IRS enforcement officer Chuck Pine said, “Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud.  I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws.”


For the IRS, budget cuts to enforcement resources widen the “tax gap.”  The tax gap is the difference between the tax liability collectively owed, and the actual amount paid.  Tax fraud occurs when taxpayers underreport earnings, fail to file, or underpay on their tax liability.  Both Mr. Cohen and Mr. Manafort admitted to fairly common tax crimes that contribute to the tax gap—like tax evasion, failure to file appropriate forms for offshore assets like the FATCA and FBAR, and filing fraudulent tax returns.


For the IRS, a civil tax audit can uncover evidence that later fuels a criminal tax audit.  As the agency budget has declined, so have the number of civil tax audits, a move that naturally translates to fewer criminal prosecutions.  Similarly, IRS staffing has declined from approximately 45,000 personnel in 2008, to just over 33,000 in 2017.  Along with staffing reductions, 25 field offices have been closed.


So what is the IRS doing instead?  While the number of IRS prosecutions has declined, the IRS remains relatively successful in the cases it does pursue.  Many of those investigations are aimed at offshore tax issues like secrecy jurisdictions, illegal tax havens, and money laundering. As such, Mr. Manafort was tripped up by his failure to file under the Foreign Account Tax Compliance Act (FATCA).  The Act requires banks to report income held by US taxpayers in foreign accounts.


At present, the likelihood of IRS criminal prosecution for some tax crimes may be less.  For high-wealth individuals holding money overseas, or moving it from locale to locale just ahead of the IRS, the possibility of prosecution remains high.  If you have reason to worry about your current tax holdings, or are approached by the IRS, speak with a skilled tax attorney sooner than later.


Skilled FBAR and FATCA attorneys in Cleveland, Chicago, and internationally


Robert J. Fedor, Esq., LLC provides strategic legal representation if you or your company is challenged with a tax controversy, criminal tax charge, or question about your foreign holdings.  We provide knowledgeable, discrete legal counsel and representation.  Contact us or call 800-579-0997 today.


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