Introduction
The IRS recognizes that many taxpayers fail to timely and properly file income tax returns, information returns, and/or FBARs. Sometimes these failures are honest mistakes; but, other times such failures may be due to willful conduct.
The distinction between willful and non-willful conduct is an important one for purposes of certain programs the IRS offers to non-compliant taxpayers, i.e., the Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures (“Streamlined Procedures”). Taxpayers who have engaged in willful conduct are not permitted into the Streamlined Procedures. This is significant because the lookback period for prior years’ unpaid income tax and the amount of the penalty is generally lower under the Streamlined Procedures.[1]
Predictably, because of the extra costs of the Voluntary Disclosure Program, many taxpayers attempt to shoehorn their facts into a Streamlined Procedures submission. However, such taxpayers should recognize under the Streamlined Procedures that they are required to submit information (including a narrative of the non-willful conduct) to the IRS under penalties of perjury. If the IRS reviews the information and determines (even much later) that the information is untrue and/or not complete, the IRS can (and often does) initiate criminal investigations based on the information that was voluntarily submitted by the taxpayer as part of the Streamlined Procedures submission. In other words, taxpayers who incorrectly file Streamlined Procedures submissions to the IRS run the real risk of handing the government the information it needs (and may not have previously had) to prosecute the taxpayer for willful conduct.
The Rahman Case
The Allegations in the Indictment[2]
The Rahman case is an interesting one, at least according to the Indictment, which was filed in the United States District Court for the Eastern District of Virginia on March 3, 2021. According to the allegations in the Indictment:
- Rahman became a naturalized U.S. citizen on September 28, 1982 (this is significant because, inter alia, this would be the starting date of many of his U.S. tax and other reporting obligations);
- He held ownership and management interests in various foreign entities. In addition, Mr. Rahman held financial interests and/or signature authority over multiple foreign accounts.
- Rahman did not file accurate and complete federal income tax returns and FBARs for multiple years.
- In 2015, Mr. Rahman filed with the IRS delinquent FBARs for various years and an amended FBAR for another year. However, the Indictment indicates that Mr. Rahman did not properly disclose all foreign accounts on these FBARs.
- Later in 2015, he submitted to the IRS a Form 14654. This Form is used by taxpayers to make submissions to the IRS under the Streamlined Procedures. According to the Indictment, Mr. Rahman only disclosed interests in three foreign bank accounts for purposes of the FBAR lookback period (e., 2008 through 2013). In addition, he indicated on his amended Forms 1040X for the applicable lookback period (i.e., 2010 through 2013) that he had interests in and/or signature authority in foreign accounts located in Switzerland. However, the government contends in the Indictment that he should have also listed on the Schedules B his interests in foreign accounts located in the United Kingdom, the Republic of Singapore, and the People’s Republic of Bangladesh.
- For the tax years after the Streamlined Procedure submission, or 2014 through 2016, Mr. Rahman allegedly did not report that he had FBAR requirements on Schedules B. The Indictment alleges that these statements were untrue because he had signature authority and/or financial interests in at least eleven foreign accounts during those years.
Alleged Violations of Section 7206(1)
The Indictment seeks seventeen counts against Mr. Rahman. These include violations under: (1) 26 U.S.C. § 7206(1); (2) 18 U.S.C. § 1001(a)(3); and (3) certain provisions under Title 31 (i.e., the Bank Secrecy Act).
One of the counts against Mr. Rahman under 26 U.S.C. § 7206(1) is a felony charge for his statements in the Form 14654. Under 26 U.S.C. § 7206(1), it is a felony for any person to willfully make and subscribe to any return, statement or other document, which contains or is verified by a written declaration that it is made under penalties of perjury, and which such person does not believe to be true and correct as to every material matter. Put simply, it applies to any untrue assertions set forth in “any return, statement, or other document” signed under penalties of perjury.
Federal tax returns fall squarely under the umbrella of “any return.” Indeed, the government commonly uses 26 U.S.C. § 7206(1) to prosecute certain types of untrue statements made in a federal income tax return. But, the government has in the past (as it seeks to do in this case) used 26 U.S.C. § 7206(1) to bring criminal prosecutions against taxpayers who made untrue assertions in “other documents.” For example, the government has successfully brought 26 U.S.C. § 7206(1) claims against taxpayers for false statements on: (1) IRS Forms 433, Collection Information Statements, see, e.g., U.S. v. Holroyd, 732 F.2d 1122, 1127-28 (2d Cir. 1984); (2) IRS Forms 656, Offer in Compromise, see, e.g., U.S. v. Cohen, 544 F.2d 781 (5th Cir. 1975); and (3) Schedule B, Interest and Ordinary Dividends, see, e.g., U.S. v. Clines, 985 F.2d 578 (4th Cir. 1992).
Here, the government alleges that Mr. Rahman made untrue statements in another document, the IRS Form 14654. Specifically, the allegations against Mr. Rahman are that he made the following untrue statements on that Form: (1) that he met the eligibility requirements to come within the Streamlined Procedures; (2) that his failure to report all income, pay all tax, and submit all required tax returns, including FBARs, was due to non-willful conduct; and (3) that his reportable foreign financial assets, as reported on the Form 14654, constituted only three foreign Swiss bank accounts.
According to the Indictment, Mr. Rahman learned of the criminal investigation and left the country on or around December 17, 2019. Moreover, the government believes that he has relocated from the United States to a foreign country that has no extradition treaty with the United States. An arrest warrant, however, has been issued for him.
Summary
Taxpayers often routinely believe that nothing can go wrong if they submit a Streamlined Procedure to the IRS. Rahman shows this is certainly not the case. Indeed, taxpayers (and their attorneys) should be careful in carefully scrutinizing the facts and making a complete and truthful disclosure to the IRS. Moreover, attorneys working with taxpayers on Streamlined Procedures should ensure they ask their clients whether all information reported on the Form 14654 is truthful, accurate, and complete and also advise their clients of the risks of filing under the wrong IRS program. In the event the taxpayer mistakenly files a Streamlined Compliance procedure with inaccurate information, the Rahman case makes it crystal clear that the government will use the information submitted to try a case against the taxpayer under 26 U.S.C. § 7206(1).
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[1] In exchange for additional income tax years as part of the extended lookback period and a higher penalty, the IRS generally offers criminal amnesty for taxpayers who make voluntary disclosures. No such amnesty is available under the Streamlined Procedures.
[2] The Allegations in the Indictment are only the government’s assertions and claims against Mr. Rahman. He is entitled to fight the claims in the Indictment through judicial proceedings and therefore any of the statements in this Insight should not be deemed as true assertions against him at this early stage. That is, he is presumed innocent until the government is able to prove its case against him.
