How to Fix Your Tax Fraud Before it Gets Worse (Learn More)

How to Fix Tax Fraud

For one reason or another, you may have intentionally underreported your income to the Internal Revenue Service and now you want to fix it. Maybe you live outside of the U.S. and want to return to the United States, or possibly you are applying for your Green Card or Naturalization — or you just had a lapse in judgment. Underreporting your income or artificially reducing your tax liability comes in all different shapes and sizes. For example, maybe you operate a cash-heavy business and simply did not include all the income that you knew you earned on your tax returns. Or you did not receive 1099s for certain income that you generated and so you did not include that income on your tax return. Alternatively, you may have artificially increased deductions and expenses for your business so that it brought down your total AGI and thus reduced your tax liability. Whatever the case may be, when a person acts intentionally or with reckless disregard/willful blindness, they are limited in the different options they have to get into compliance. Let’s walk through some common scenarios and what you could do to resolve them.

Were You Intentional with Your Non-Compliance?

The first thing to keep in mind is that when you are dealing with intentionally underreported income, it involves an aspect of willfulness/reckless disregard. Conversely, if you were unaware that you missed the reporting of certain income or it was a mistake then that would not be considered intentional or willful and you would have several other options available to you such as the IRS non-willful amnesty programs or a Qualified Amended Return or a Reasonable Cause Submission.

Reasonable Cause Does Not Apply

When a person acts willfully or with reckless disregard then they lose the ability to submit a reasonable cause submission to the IRS to reduce or eliminate penalties. In other words, to qualify for reasonable cause, a person must have acted without intent or reckless disregard/willful blindness.

What About a Qualified Amended Return (QAR)?

Some Taxpayers may qualify to submit a qualified amended return to avoid certain penalties if they missed reporting income – but only if it was not fraudulent. In other words, to be eligible for a QAR submission, the underreporting cannot have been due to fraud. Thus, if a taxpayer acted with fraudulent intent or similar they would not be eligible to submit a Qualified Amended Return.

Common Underreporting Scenarios

While you may be down on yourself and feel like you are the only person that would have this type of lapse in judgment, it is very important to both not be so hard on yourself and also realize that the IRS has programs designed to assist Taxpayers who may have made these types of mistakes (read: it is not uncommon). Please try to be careful of the fear-mongering you will find online because oftentimes these types of situations can be fixed without much issue. Let’s look at some of the more common scenarios we find taxpayers who may have intentionally underreported their income.

Rental Income (US and Abroad)

When a person has rental property and collects income, typically there is no 1099 associated with that type of income. Therefore, it can be very alluring for taxpayers who are landlords to collect rent and either not report the full amount of rent or underreport certain aspects of the rent.

Self-Employed (Construction, Entertainment, Physicians, Finance, etc.)

For self-employed Taxpayers, oftentimes they will go many years without generating income, and then suddenly they become successful (overnight success, right?) And with that success comes the idea that the Taxpayer wants to make up for lost time and reap the benefits of the income they are earning now. Unfortunately, with the newfound success and increased income comes increased tax liability. If you are a self-employed business owner and you have underreported your income or overindulged your expenses/deductions, the voluntary disclosure program may be a great fit for you to get into compliance.

Crypto Income

While the tax rules involving cryptocurrency are all over the board and still being developed to this day, income generated from cryptocurrency is taxable. Whether you generate the income by way of an exchange of cryptocurrency, the sale of cryptocurrency, or received cryptocurrency in exchange for services, the income is taxable and if you intentionally or recklessly did not include that income on your U.S. tax return, you may be subject to potential fraud or worse– especially because the IRS is taking a hard stance against unreported crypto income.

Passive Income Not Reported to IRS

When a Taxpayer has passive income whether it is generated in the United States or abroad, that income is taxable on a U.S. tax return. Just because the taxpayer does not receive a 1099 does not mean the taxpayer can avoid having to include the income on their U.S. tax return. This is especially common in situations in which the Taxpayer may be generating income from overseas and not receiving any type of documentation from the Foreign Financial Institution. For Taxpayers who did not properly report their passive income, they may qualify for the voluntary disclosure program, but if they are non-willful then there are several other international tax amnesty alternatives to the voluntary disclosure program such as the streamlined procedures and delinquency procedures.

Penalties

The penalties for not properly reporting income can be substantial when it was done through fraud, intent, or reckless disregard. For Willful Taxpayers, they may qualify for the voluntary disclosure program to get into compliance and resolve their tax issues. If instead, the Taxpayer is non-willful, they may qualify for other types of submission procedures.  

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.