Reporting SSA & IRS fraud (concealed income) - looking for advice

[Coolio]

Jurisdiction

D.C.

Dear all,

An American citizen has been the owner (direct ownership as a private person) of the real estate in a foreign country for several years.
He didn't declare this ownership to SSA when applied for Social Security benefits based on "limited income and few assets", and as a result has been getting since then the following monthly benefits: retirement pension, Medicare, food stamps and 1-bedroom apartment in a government-owned public housing.

Later he sold this real estate and brought the money to the U.S. in sums under $10 000 to avoid reporting it to U.S. customs.
He concealed the fact he sold the real estate (= got income) from both - SSA and IRS, so firstly - no income taxes were paid and secondly - he keeps on having monthly Social Security benefits.

He keeps the money in a safe deposit box (in American bank) so that it's not seen on his bank accounts - not to exceed the max. amount of assets to be eligible for getting Social Security benefits.

Questions:

1. Which federal or state (D.C.) laws has he violated - from SSA and IRS perspective?
2. What are the possible consequences of this violation?
3. Are there any liability time limits, i.e. may he become "not guilty" after a certain time period?
4. Which documents/evidence may serve as a proof of the above-mentioned illegal actions from his side (to both SSA and IRS)?
5. Are there any consequences for another American citizen (close relative), who was aware of this situation but hasn't reported it to SSA/IRS?

As a person who is going to report this fraud case to SSA and IRS I will be grateful for any information which may help to do it effectively, especially from the evidence (supporting documents) perspective.

Thank you!

 

[Zigner]

Dear all,

An American citizen has been the owner (direct ownership as a private person) of the real estate in a foreign country for several years.
He didn't declare this ownership to SSA when applied for Social Security benefits based on "limited income and few assets", and as a result has been getting since then the following monthly benefits: retirement pension, Medicare, food stamps and 1-bedroom apartment in a government-owned public housing.

Later he sold this real estate and brought the money to the U.S. in sums under $10 000 to avoid reporting it to U.S. customs.
He concealed the fact he sold the real estate (= got income) from both - SSA and IRS, so firstly - no income taxes were paid and secondly - he keeps on having monthly Social Security benefits.

He keeps the money in a safe deposit box (in American bank) so that it's not seen on his bank accounts - not to exceed the max. amount of assets to be eligible for getting Social Security benefits.

Questions:

1. Which federal or state (D.C.) laws has he violated - from SSA and IRS perspective?
2. What are the possible consequences of this violation?
3. Are there any liability time limits, i.e. may he become "not guilty" after a certain time period?
4. Which documents/evidence may serve as a proof of the above-mentioned illegal actions from his side (to both SSA and IRS)?
5. Are there any consequences for another American citizen (close relative), who was aware of this situation but hasn't reported it to SSA/IRS?

As a person who is going to report this fraud case to SSA and IRS I will be grateful for any information which may help to do it effectively, especially from the evidence (supporting documents) perspective.

Thank you!

You report it and the government will perform their investigation(s) as they see fit. The rest of your questions are moot.

 

[justblue]

Dear all,

An American citizen has been the owner (direct ownership as a private person) of the real estate in a foreign country for several years.
He didn't declare this ownership to SSA when applied for Social Security benefits based on "limited income and few assets", and as a result has been getting since then the following monthly benefits: retirement pension, Medicare, food stamps and 1-bedroom apartment in a government-owned public housing.

Later he sold this real estate and brought the money to the U.S. in sums under $10 000 to avoid reporting it to U.S. customs.
He concealed the fact he sold the real estate (= got income) from both - SSA and IRS, so firstly - no income taxes were paid and secondly - he keeps on having monthly Social Security benefits.

He keeps the money in a safe deposit box (in American bank) so that it's not seen on his bank accounts - not to exceed the max. amount of assets to be eligible for getting Social Security benefits.

Questions:

1. Which federal or state (D.C.) laws has he violated - from SSA and IRS perspective?
2. What are the possible consequences of this violation?
3. Are there any liability time limits, i.e. may he become "not guilty" after a certain time period?
4. Which documents/evidence may serve as a proof of the above-mentioned illegal actions from his side (to both SSA and IRS)?
5. Are there any consequences for another American citizen (close relative), who was aware of this situation but hasn't reported it to SSA/IRS?

As a person who is going to report this fraud case to SSA and IRS I will be grateful for any information which may help to do it effectively, especially from the evidence (supporting documents) perspective.

Thank you!

How do you know so much about this "American citizen's" financials?

 

[zddoodah]

1. For your purposes, it doesn't matter.
2. Fines and/or incarceration.
3. For your purposes, it doesn't matter.
4. We have no way of knowing what documents or other evidence might exist.
5. If the intent of this question is to ask whether it is a crime not to report a suspected crime, the answer is generally no.

 

[Zigner]

2. Fines and/or incarceration.

I don't disagree at all with you except I'd like to point out that it's quite possible that there ends up being no consequences.

 

[Tax Counsel]

Dear all,

1. Which federal or state (D.C.) laws has he violated - from SSA and IRS perspective?

Assuming your information is accurate and that he intentionally misrepresented his assets to SSA to get SSA benefits (and there is evidence to prove it) he is potentially guilty of a federal felony for SSA fraud, which is a federal felony with a maximum sentence of up to five years in prison and/or a fine for each count, along with restitution of the amount by which the government was defrauded. Income tax evasion, which requires evidence of intent to actually commit the crime of evasion and not merely misrepresentation on the return, is also a federal felony offense with a maximum penalty of up to five years in prison on each count along with restitution. Bear in mind for both the SSA improper benefits and tax underreporting there are civil penalties and provisions for civilly recouping the disallowed benefits and the underreported tax. The civil tax fraud penalty (which does not need a conviction on the crime for the IRS to assert) is by itself pretty expensive, 75% of the underreported tax. If the taxpayer is a resident of a state that has an income tax or DC (which has a pretty high income tax) the person may be guilty of state/DC tax offenses too. And as Medicare is a joint federal/state program, there could be state/DC criminal prosecution for the state/DC offenses in addition to any federal prosecution (although the federal DOJ and states generally coordinate prosecution on crimes that overlap, and in DC DOJ is the local prosecutor). In both the SSA and tax return filings there could also be perjury prosecutions as well.

Then there is prosecution for the customs offense in failing to report the cash brought into the US, which is a federal felony too, with penalties that can be as much as 10 years in prison and a fine of up to $500,000 along with forfeiture of the cash brought in.

Note that if the person had a foreign bank account into which the sale proceeds were deposited, he was required by federal law to report that account to the IRS and/or FinCEN depending on the details of the bank account. There are criminal penalties and very high civil penalties that may be imposed for failing to report such accounts.

If he also structured deposits of the cash into his U.S. bank account in an effort to avoid reporting, that too is a crime and can result in civil penalties, too. Note that the bank may well have submitted a suspicious activity report (SAR) upon seeing unusual deposits made into the account.

If you are not the person who engaged in this activity but have information about possible crimes, you may report them to the appropriate law enforcement agencies: Internal Revenue Service for the tax fraud and failure to report foreign bank accounts, Social Security Office of Inspector General for the SSA fraud, and U.S. Customs and Border Protection for the failure to declare the cash brought in. The links are to the pages on the respective agency sites that tell you how to report the crimes. Note that you are not generally required to report these crimes unless you engaged in some act of concealment of the crimes. Failing to report a federal federal felony crime and helping to conceal it is itself a federal crime, misprision of felony.

But if you do report the tax crimes, you may be eligible for a reward of up to 30% of the amount the IRS ultimately recovers as a result of your report.

For all the criminal reports, the more detailed your information, the better. At the very least for these kinds of offenses, it's very helpful to have the name and SSN of the suspect, along with as much detail as you have regarding the specific offenses committed. A report that just says "I know John Smith committed SSA and IRS fraud" is not helpful and won't go anywhere. But if you have details of specific transactions, like the date, location of the property, and sales proceeds, that is useful information that might get the agencies to act. Also include information like the person's age, level of education, etc., as those factors influence the decision of whether to prosecute.

 

[Coolio]

Sorry guys for not replying earlier - I did my own investigation on the topic and, taken that I'm not American it took some time to dive into details of your guys legal system and stuff.
Thank you all for your valuable input and I will highly appreciate if you kindly find time to read & comment my replies/questions below.

You report it and the government will perform their investigation(s) as they see fit. The rest of your questions are moot.

Zigner, to substantiate my report and make the overall "case" look solid to both SSA and IRS I need to provide them with supporting documents, which they find persuasive. The aim of my questions is to build a strategy.

How do you know so much about this "American citizen's" financials?

Let's say - close enemy. Like close friend but the other way round.


--- DOCUMENTS & FACTS - SUMMARIZED ---

I plan to build my report on the 1) documents I will provide IRS & SSA with; 2) facts/evidence I will state in my report (I won't be able to support them with documents, but IRS/SSA will definitely get necessary proof through official fact checking/requests/procedures).

These are the documents I have so far:

• doc1 The statement of ownership (from _date1_ to _date2_) of the 1st foreign real estate (sold), where the end date confirms that the change of the ownership took place (i.e. the former owner has sold it or granted, donated, etc.)
• doc2 The statement of the "estimated by the state" price of the real estate (for the date of its sale). This is the price based on which the state charges the property tax. It is more or less equal to the real market price at which the property may be sold.
• doc3 The statement of ownership of the 2nd foreign real estate, which this person still owns
• doc4 The statement of the "estimated by the state" price (latest possible) of the 2nd real estate

These are the additional facts I know, but they need to be officially "checked" by IRS & SSA (when/if these facts confirm violation to any of those bodies, of course):

• fact1 The person deluded SSA officer in that he did NOT leave the U.S. for more than 30 days in a row, and intentionally failed (several times!) to submit such a report (way(s) to check: see dates on border stamps in passport; request report from US border control authorities)
• fact2 The person concealed the fact he had foreign bank account with more than $2,000 in assets (way(s) to check: ask violator to provide paperback official bank statement for the time period needed; request confirmation from the foreign bank directly)
• fact3 The person concealed the fact he receives a "retirement pension for work not covered by U.S. Social Security", as he receives pension from the foreign state on a monthly basis (way(s) to check: ask violator to provide statement from the foreign state body on the amount of pension they have)
• fact4 The person willfully failed to report "foreign financial account(s) exceeding $10,000 in total in a calendar year", i.e. failed to file the FBAR - Foreign Bank and Financial Account Report (way(s) to check: ask violator to provide original copy of the real estate sale contract, which states the Buyer deposits $X to the bank deposit box in the name of the Seller; request confirmation from the foreign bank directly)
• fact5 The person has brought to the U.S. the money from sale of their foreign real estate (way(s) to check: NO way???)
• fact6 The person keeps the money from the foreign real estate sale in a U.S. bank deposit box (way(s) to check: report to IRS (FinCEN?) and let it do the rest)

--- "COMPOSITION" OF FUTURE REPORTS ---

IRS

Reported: failing to report/pay income tax
Supported with: doc1, doc2; fact3 (U.S. taxpayers must report foreign pension assets to IRS), fact4, fact6

Reported: failing to report foreign financial account(s) exceeding $10,000
Supported with: fact4


SSA

Reported: intentionally pretending to "have limited income and few assets"
Supported with: doc1, doc2, doc3, doc4; possibly (???) fact2 (high chances he had more than $2k on foreign accounts even before the real estate was sold), fact3

Reported: concealing multiple facts of leaving the U.S. for more than 30 days in a row and failing to submit reports on these facts
Supported with: fact1

Reported: willfully failing to report "changes in income and resources"
Supported with: doc1, doc2; fact2 (all the year 2020 long he 100% does have more than $2k on foreign accounts), fact4 (I mean SSA can ask violator to show the original copy of the real estate sale contract)


--- QUESTIONS LEFT ---

Assuming ... he intentionally misrepresented his assets to SSA to get SSA benefits (and there is evidence to prove it) he is potentially guilty of a federal felony for SSA fraud, which is a federal felony

1. Shall the documents/facts I've mentioned above look as a solid substantiation of the "intentional mispresentation of the assets" to SSA - in your opinion? Which document/evidence may hypothetically strengthen this part of my fraud report?

Income tax evasion, which requires evidence of intent to actually commit the crime of evasion and not merely misrepresentation on the return, is also a federal felony offense

2. Same question - shall the documents/facts I've mentioned above look as a solid substantiation of the "intent to commit the crime" to IRS - in your opinion? Which document/evidence may hypothetically strengthen this part of my fraud report?

Bear in mind for both the SSA improper benefits and tax underreporting there are civil penalties

3. Do you mean that if SSA or IRS do not find the documents/facts from my report enough to treat mispresentation or underreporting as intentional (and thus - take this case as a federal felony), there is enough of the evidence to at least apply civil penalties?

If the taxpayer is a resident of a state that has an income tax or DC (which has a pretty high income tax) the person may be guilty of state/DC tax offenses too.

4. Shall I send the copy of my IRS report to some D.C. authorities too, or is it rather an internal process which IRS handles themselves?

And as Medicare is a joint federal/state program, there could be state/DC criminal prosecution for the state/DC offenses in addition to any federal prosecution

5. Medicare is an SSA program (= based on earnings) benefit, while I'm going to report Supplemental Security Income (SSI) (= based on need) fraud. Or can the logic you've described be as well applied to Medicaid (part of SSI benefits)?

there is prosecution for the customs offense in failing to report the cash brought into the US, which is a federal felony

6. Does the above-mentioned relate to this particular case? As I've said the person has always brought sums less than $10 000 and did it during several trips. As far as I know sums under $10k are not to be declared when entering the U.S., or is it rather smth. else (that I'm not aware of) that is a felony here?

Note that if the person had a foreign bank account into which the sale proceeds were deposited, he was required by federal law to report that account to the IRS and/or FinCEN depending on the details of the bank account.

7. He surely had such an account and I mentioned it in my fact4 part above. How do I know if it's IRS or rather FinCEN that I should contact on this matter - which "details of the bank account" should I consider?

8. Am I right this person did NOT have to file FATCA (8938 Form) to IRS if his assets (money from sale of the 1st real estate) were below $50 000?

If he also structured deposits of the cash into his U.S. bank account in an effort to avoid reporting, that too is a crime and can result in civil penalties, too.

9. He did (mentioned it in my fact6 part above), but I don't know the name of the bank, so I can only state the fact itself to IRS.

Failing to report a federal federal felony crime and helping to conceal it is itself a federal crime, misprision of felony.

10. By the way, this person's daughter not only knows about all the situation, but also has one set of keys from the deposit box with cash. I'm not aware if she's the Party in the deposit box contract with the bank (maybe she is, maybe she's not), but she definitely has the keys. Does this mean she's part of this crime too?

Also include information like the person's age, level of education, etc., as those factors influence the decision of whether to prosecute

11. Do you mean there really is correllation between their decision to prosecute and violator's age or level of education? I'm surprised... Though education is more or less understandable - having MBA or PhD makes it harder to believe you failed to understand what "more than $10k" meant. )

Thank you for your comments guys!

 

[Tax Counsel]

These are the documents I have so far:

• doc1 The statement of ownership (from _date1_ to _date2_) of the 1st foreign real estate (sold), where the end date confirms that the change of the ownership took place (i.e. the former owner has sold it or granted, donated, etc.)

And what information do you have that he sold it and what amount did he get for it? How much did he pay for it? For income tax, he only is taxed on the gain in the property, so it's important to know what his basis was (which starts with what he paid for it) and what he got for it in the sale.

And what information do you have that he sold it and what amount did he get for it? How much did he pay for it? For income tax, he only is taxed on the gain in the property, so it's important to know what his basis was (which starts with what he paid for it) and what he got for it in the sale.

Was the home subject to a mortgage or something similar that had to be paid off in the sale? Any other judgments, taxes, or fees that had to be paid in the sale? That's important to figuring out how much cash he walked away with.

Does that country have currency controls that would restrict what he can take out of the country? That would help to know how much he could have brought back.

The ownership of property would certainly be relevant to whether he qualifies for SSI or Medicaid benefits during the time he owned it, though.

These are the additional facts I know...

How do you know those facts? Do you have something more than mere conjecture that he must have done it? In other words, how do you know that he told SSA what his assets were or what he reported on his tax returns? How do you know that the information provided was not accurate? And importantly, how do you know that he intentionally failed to report those things?

Note that the FATCA/FBAR filings are something that not many Americans actually know need to be done. Unless they have a tax lawyer or other tax professional who knows the U.S. international tax rules and knows all the facts of their situation they may have no clue they needed to make these filings. As for the requirements for those filings, see the IRS chart for Form 8938 and FBAR filings that compares what is required for each. Also, while the FBAR forms are filed with FINCEN, it is the IRS that enforces the requirement, so you'd simply report all that to IRS, not FINCEN.

Finally, your information doesn't have to be a complete case. You just need enough to show the agency that there is something strong enough to check into.

Shall I send the copy of my IRS report to some D.C. authorities too, or is it rather an internal process which IRS handles themselves?

Does he live in DC? If so, you could send your info to them, but DC has a very limited ability to investigate tax fraud claims itself. However, if the IRS adjusts his federal income tax return it will automatically give that information to DC.

Medicare is an SSA program (= based on earnings) benefit, while I'm going to report Supplemental Security Income (SSI) (= based on need) fraud. Or can the logic you've described be as well applied to Medicaid (part of SSI benefits)?

Yes, I was referring to Medicaid, not Medicare. Medicare is a joint federal/state program to provide healthcare to needy persons and thus is means tested (i.e. his income and assets have to be very low to qualify).

Does the above-mentioned relate to this particular case? As I've said the person has always brought sums less than $10 000 and did it during several trips. As far as I know sums under $10k are not to be declared when entering the U.S., or is it rather smth. else (that I'm not aware of) that is a felony here?

It could still be a crime if it can be proven that he intentionally structured bringing in the cash in amounts under the reporting requirement to avoid the reporting.

He surely had such an account and I mentioned it in my fact4 part above. How do I know if it's IRS or rather FinCEN that I should contact on this matter - which "details of the bank account" should I consider?

As I said, it is IRS that enforces both the FBAR and the Form 8938 filing requirements.

Am I right this person did NOT have to file FATCA (8938 Form) to IRS if his assets (money from sale of the 1st real estate) were below $50 000?

It's the total value of the reportable assets that matters. As the IRS states in the Form 8938 instructions, the requirement for an unmarried individual is: "If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year."

By the way, this person's daughter not only knows about all the situation, but also has one set of keys from the deposit box with cash. I'm not aware if she's the Party in the deposit box contract with the bank (maybe she is, maybe she's not), but she definitely has the keys. Does this mean she's part of this crime too?

That by itself does not make her party to either the SSA fraud or the tax fraud.

Do you mean there really is correllation between their decision to prosecute and violator's age or level of education?

Yes, those are very much factors that the U.S. attorney (DOJ) considers for tax evasion/tax fraud cases. The reason is that for tax evasion cases the statute sets out a very specific intent requirement not found in most criminal statutes. As the U.S. Supreme Court explained, the government doesn't have to just prove that he knowingly didn't report items of income on the return, but that he knew it was a crime not to report it. The level of education, age, profession, etc all are things that may affect how likely it is that a jury may buy the defense argument that the defendant simply didn't understand that it was a crime not to report those things. When I was an officer for the IRS I had what I thought was a solid case for tax evasion by a chiropractor. The U.S. attorney rejected it because he was 80+ years old and rather frail looking, and they thought that would evoke sympathy with a jury and they may not want to convict him and potentially send an elderly, frail man to prison. That was some years ago and with different U.S. attorneys in place maybe a different decision would be reached on that case today. But in any event, they look at everything, including age, education, profession, etc.

 

[army judge]

Medicare is a joint federal/state program to provide healthcare to needy persons and thus is means tested (i.e. his income and assets have to be very low to qualify).

Really?

Medicaid is a needs based medical assistance scheme.

Medicaid in the United States is a federal and state program that helps with medical costs for some people with limited income and resources.

Medicaid also offers benefits not normally covered by Medicare, including nursing home care and personal care services.

Medicare is a national health insurance program in the United States, begun in 1966 under the Social Security Administration and now administered by the Centers for Medicare and Medicaid Services.

There are four parts of Medicare: Part A, Part B, Part C, and Part D.

Part A provides inpatient/hospital coverage.

Part B provides outpatient/medical coverage.

Part C offers an alternate way to receive your Medicare benefits. (supplemental PRIVATE insurance, for instance)

Part D provides limited prescription drug coverage. (Again supplemental insurance is available from insurance companies.)

 

[Tax Counsel]

Really?

Medicaid is a needs based medical assistance scheme.

If you had read my last reply before this one you will see that I acknowledged that I meant Medicaid rather than Medicare. A history of Medicare and its various parts really wasn't needed as it really has nothing to do with the OP's question and certainly wasn't information I wanted or needed either.

 

[Coolio]

Thank you so much @Tax Counsel , here are my comments too:

And what information do you have that he sold it and what amount did he get for it? How much did he pay for it? For income tax, he only is taxed on the gain in the property, so it's important to know what his basis was (which starts with what he paid for it) and what he got for it in the sale.

Hereinafter - emphasizing in bold is mine.

I don't know the precise amount he got from selling his real estate, as this information is in the sale contract, which I don't have access to. The idea was to point IRS's attention to the fact of the deal (supported with documents) and to the "state estimated price" (supported with documents), which this country's authorities use to calculate the annual property tax.

The crucial point you've mentioned (in bold) makes me think I need to provide IRS with 2 (!) documents indicating the "state estimated price": one for the date he became the owner of this real estate and the second - for the date he sold it. The difference between these figures will be the estimated income.
IRS may (and should - in my opinion) ask this person for a copy of the contract, where the precise sum of the deal is stated.
Do you agree with the logic and range of documents I propose for this part of my report?

it's important to know what his basis was (which starts with what he paid for it)

Does it matter for IRS if he initially bought it or got it as a heritage (= did not pay for it)?

Was the home subject to a mortgage or something similar that had to be paid off in the sale?

Nope. 100% ownership of the seller - no pay offs, no debts of any kind.

Any other judgments, taxes, or fees that had to be paid in the sale? That's important to figuring out how much cash he walked away with.

Yes, he had to pay local income tax. Moreover, having spent less than 183 days in his native country (he lives mostly in the U.S.) he has lost his local tax residence for the year of this sales deal, which almost doubled the amount of tax due.
Finally, as far as I know he did not pay any income tax in his country, which makes the overall plot even more vivid.
The situation looks pretty weird: if he wants to decrease the amount of income considered by IRS he'll have to prove he paid his country's local taxes (which he did not), otherwise IRS will apply tax to the full amount of income. If he pays his country's tax, the amount will be doubled because of his non-resident status from taxation perspective.

Does that country have currency controls that would restrict what he can take out of the country? That would help to know how much he could have brought back.

You don't have to declare amounts less than $10 000 when you leave his country. Same rule applies when you enter the U.S. While crossing the border purely for the purpose of bringing money to the U.S. is ridiculous, this scheme works if you anyway occasionally travel there and back (which he did - before Covid). It gives an opportunity to bring a significant sum over time.

It could still be a crime if it can be proven that he intentionally structured bringing in the cash in amounts under the reporting requirement to avoid the reporting.

Looks like there's no way particularly U.S. Customs and Border Protection (and their colleagues from that guy's native country) can help in this case, or am I mistaken? What do you assume can potentially serve as an evidence of the "intentional structuring" of the bigger amount into smaller parts?

How do you know those facts? In other words, how do you know that he told SSA what his assets were or what he reported on his tax returns? How do you know that the information provided was not accurate?

He told me all that in our conversations. I have no audio recordings, but I assume if I provide IRS and SSI with information part of which is initially confirmed (documents I'll enclose to my report), they should at the very least ask the violator to persuade them in the contrary. And of course they should understand that not everything I claim as being true, can be confirmed by myself due to reasonable legal reasons (e.g. I have no access to his sale contract - it's a private information).
Doesn't reporting to IRS and SSI suppose this logic?

And importantly, how do you know that he intentionally failed to report those things?

Well, I assume when a person for several years in a row doesn't report smth. they must report - this is exactly what an "intentional failure to report" means.

Finally, your information doesn't have to be a complete case. You just need enough to show the agency that there is something strong enough to check into.

As this sentence was the last in the passage where you've kindly explained about FATCA/FBAR (and thank you for that!) I want to clarify: do you mean my case is not complete from a perspective of investingating exactly "FATCA/FBAR filing failure", or do you rather mean the overall case is not substantiated enough to be even considered by IRS and SSI? :-O

Does he live in DC? If so, you could send your info to them

Could you please tell me the name of the D.C. authority to contact? I will find the contact details myself. Thank you!

I thought was a solid case for tax evasion by a chiropractor. ... he was 80+ years old and rather frail looking,

OMG, those chiropractors, uh? Same tricks worldwide.

 

[Tax Counsel]

Thank you so much @Tax Counsel , here are my comments too:
Do you agree with the logic and range of documents I propose for this part of my report?

If you can get information that would suggest what his basis was, that would certainly help to figure out how much gain may have been realized.

Does it matter for IRS if he initially bought it or got it as a heritage (= did not pay for it)?

The old term heritage is little used in the U.S. today. Normally the term used is inheritance. And yes, it matters whether he bought it or got it as an inheritance as that affects his initial basis.

Nope. 100% ownership of the seller - no pay offs, no debts of any kind.

Yes, he had to pay local income tax. Moreover, having spent less than 183 days in his native country (he lives mostly in the U.S.) he has lost his local tax residence for the year of this sales deal, which almost doubled the amount of tax due.
Finally, as far as I know he did not pay any income tax in his country, which makes the overall plot even more vivid.

Understand that to the extent he pays foreign income tax on that sale he will get a foreign tax credit on his U.S. federal income tax return. If the tax rate on the gain in the foreign country is equal to or more than the U.S. tax rate on it, he'll have no U.S. tax to pay on the gain.

Looks like there's no way particularly U.S. Customs and Border Protection (and their colleagues from that guy's native country) can help in this case, or am I mistaken? What do you assume can potentially serve as an evidence of the "intentional structuring" of the bigger amount into smaller parts?

You can report you suspicions to them, but without any evidence of the exact dates and amounts of cash brought into the U.S. there isn't a whole lot they can do about not declaring cash brought into the U.S.

Doesn't reporting to IRS and SSI suppose this logic?

They look at what you provide to see if it's enough to warrant investigating it. You don't need to have a perfect case for them. Just enough that they can see that there is likely a violation of the law there. They won't take guesses or supposition as worth anything, however, so avoid wading into that. Just present the FACTS you have and what evidence you have to support them. You can report things that he told you, but that will only be worth something if you identity yourself in the report you make and you are willing to testify should that be needed

Well, I assume when a person for several years in a row doesn't report smth. they must report - this is exactly what an "intentional failure to report" means.

He had to know he had a filing requirement in the first place. Many Americans are completely unaware of the FATCA and FBAR filing requirements for example. I some clients right now that have that problem, they had several years they should have filed the forms but didn't because they had no clue they were required to do so. So simply not filing a form for several years does not itself mean the failure was intentional.

As this sentence was the last in the passage where you've kindly explained about FATCA/FBAR (and thank you for that!) I want to clarify: do you mean my case is not complete from a perspective of investingating exactly "FATCA/FBAR filing failure", or do you rather mean the overall case is not substantiated enough to be even considered by IRS and SSI? :-O

I've not expressed an opinion one way or the other as to whether you have enough. All I'm saying is that you don't need to work up the entire case for them, which is what it appears you are trying to do. You just need sufficient information that would suggest that there is something worth investigating. If they decide there is something worth going after and they need more from you, they'll contact you if you provide them that contact info. They'll also investigate to gather what other evidence they need.

Could you please tell me the name of the D.C. authority to contact? I will find the contact details myself. Thank you!

For DC income tax, it is the Office of Tax and Revenue.

 

[Coolio]

Thank you @Tax Counsel - I highly appreciate your help. Being unaware of foreign country's legal system makes the process much more complicated, so your assistance was really indispensable.
Just final points that I'll ask you to kindly comment (if you don't mind) and I will start collecting all the documents needed:

If you can get information that would suggest what his basis was, that would certainly help to figure out how much gain may have been realized.

And yes, it matters whether he bought it or got it as an inheritance as that affects his initial basis.

This part is very important. When the violator's parent died he became the sole owner of the real estate.
As soon as I get documents from the authorities I will clearly see the shares of their ownership, all the details, etc. However, it will take some time, so may I kindly ask you to help me to understand the principles of what IRS treats as income - in each of those 2 possible scenarios:

Scenario #1: The violator initially owned 30% of the real estate and after his parent's death he inherited the rest 70% and became the sole owner.
On the day the violator became the owner of his 30% the total price of the real estate was $90 000, so his share was worth $30 000 when he got it.
On the day he inherited the rest 70% the total price of the real estate was $100 000, so he inherited the share worth $70 000.
Finally, he sold the real estate for $110 000.

Is it $110 000 - $30 000 = $80 000 that IRS will treat as an income (and tax it accordingly)? Or is it rather ($110 000 - $70 000) - $30 000 = $10 000 that is income, if inherited assests are not considered as income by IRS?

Scenario #2: The violator initially owned nothing, but after his parent's death he inherited 100% of the real estate.
On the day he inherited all 100% of the real estate its price was $100 000. Finally, he sold it for $110 000.

Is it $10 000 that is income or is it rather $110 000?
Or possibly, it is even more complicated: e.g. he inherited it in 2015 (so should have firstly paid income tax from $100 000) and sold it in 2018 (so should have paid income tax from $10 000 gained on sale)?

If the tax rate on the gain in the foreign country is equal to or more than the U.S. tax rate on it, he'll have no U.S. tax to pay on the gain.

The rate on the gain is 13% for tax residents and 30% for tax non-residents (his case). What about the U.S. rate?

You can report you suspicions to them, but without any evidence of the exact dates and amounts of cash brought into the U.S. there isn't a whole lot they can do about not declaring cash brought into the U.S.

True's that. However, possibly makes sense to point IRS's attention to the fact of cash in the deposit box? Being considered together with the documentally proved fact of real estate sale makes it pretty obvious this money was brought to the U.S.
Otherwise please prove where you've got it from, taken you're retired and worked only a limited time in the U.S. to earn 10 credits to become part of SSA program (retirement pension, Medicare, etc.). Which finally means you either brought the whole amount at a time and didn't declare it on the border (crime) or you intentionally split it into parts not to declare it (crime as well).
Or am I going too far and IRS doesn't "torture" even potential violators that much?

You can report things that he told you, but that will only be worth something if you identity yourself in the report you make and you are willing to testify should that be needed

If they decide there is something worth going after and they need more from you, they'll contact you if you provide them that contact info.

This point is important too. IRS accepts any of those 3 variants of reporting: 1) anonymous 2) feel free to contact me, but I'm not willing to testify 3) feel free to contact me and I'm ready to testify. Based on your experience, does the fact itself of whether the person has chosen to stay anonymous or rather not - does it somehow influence on the "credibility" of their report in IRS's eyes?

They'll also investigate to gather what other evidence they need.

But makes sense to provide them with info on which documents from the foreign country's side may help them, right? They may not know foreign paperwork that much, so extra help won't be bad, uh?

 

[Tax Counsel]

Scenario #1: The violator initially owned 30% of the real estate and after his parent's death he inherited the rest 70% and became the sole owner.
On the day the violator became the owner of his 30% the total price of the real estate was $90 000, so his share was worth $30 000 when he got it.

No, his share would be worth .3 x $90,000 = $27,000. Assuming that he paid $27,000 for his 30% share then his starting basis in that share is $27,000.

On the day he inherited the rest 70% the total price of the real estate was $100 000, so he inherited the share worth $70 000.

The manner of inheritance may matter, but in most cases what would happen is that he would have a basis in the inherited 70% equal to what the fair market value of it was on the date the decedent died. So that would mean a basis of $70,000 in that. Added to the $27,000 basis he had in his 30% shared, that's a total basis in the property of $97,000.

Finally, he sold the real estate for $110 000.

Assuming no other adjustments to basis, he would then have capital gain income $110,000 sales price - $97,000 basis = $13,000. Assuming a holding period of at least a year, the maximum tax rate on that is 20%, or a tax on the gain of $2,600. Any costs of sale would reduce that gain, thus reducing the tax, too. And to the extent he paid income tax to the foreign country on that sale he would get a credit for that tax paid (up to a maximum of the US tax on the $13,000). So under these facts the amount of tax at issue here is not terribly large. That will work against a criminal tax fraud case.

The violator initially owned nothing, but after his parent's death he inherited 100% of the real estate.
On the day he inherited all 100% of the real estate its price was $100 000. Finally, he sold it for $110 000.

Again, the manner of inheritance may matter, but in most cases his basis would the fair market value of the property on the day the decedent died. So his basis would be $100,000. Thus, his gain would be $110,000 sales price less $100,000 basis = $10,000 gain. At the maximum tax rate of 20%, he'd at most end up owing $2,000 in U.S. income tax on the sale.

Inheriting property is not income for US federal income tax.

The rate on the gain is 13% for tax residents and 30% for tax non-residents (his case). What about the U.S. rate?

Then if he actually paid that tax he would get a credit against the US tax for the foreign tax paid, up to the US tax on that income. At a 13% rate that would leave the US getting 7% tax on the gain. For a gain of $10,000, that's $700 in tax. If the foreign tax rate was 30% then the credit would fully offset the US tax and he would owe no US income tax on the gain.

Otherwise please prove where you've got it from, taken you're retired and worked only a limited time in the U.S. to earn 10 credits to become part of SSA program (retirement pension, Medicare, etc.).

It's not illegal to have cash in a safe deposit box and it would not disqualify him from SSA old age benefits or Medicare, either. Only Medicaid and SSI benefits are dependent on assets. Further, it is up to the government to prove that the cash was brought into the country and not declared as required. It is not up to him to prove that he didn't violate the reporting requirement. And it is Customs, not IRS, that would enforce that law.

This point is important too. IRS accepts any of those 3 variants of reporting: 1) anonymous 2) feel free to contact me, but I'm not willing to testify 3) feel free to contact me and I'm ready to testify. Based on your experience, does the fact itself of whether the person has chosen to stay anonymous or rather not - does it somehow influence on the "credibility" of their report in IRS's eyes?

Depends on the information given them. To the extent the information provided relies on the personal knowledge & credibility of the person reporting it then of course knowing who that person is, how they obtained that information, and what their relationship to the taxpayer is does matter.

 

[Coolio]

Dear @Tax Counsel ,

thank you for your detailed explanation! In order to close my "case" on the forum, may I kindly ask you to clarify the very last points, which will finalize the shape of my future report?

1. How does IRS apply income tax when the foreign currency is an integral part of the story? In all the documents, e.g. in the "Real estate price estimated by the state" (which I will provide them with) or in the sale contract (which they will probably request from the violator) sums will be indicated in the local (foreign) currency.
And here comes the tricky part connected with the currency exchange rate which is subject to fluctuations.
Let's assume we're talking about Russian Roubles (RUR) and 100% ownership of the real estate (not to overcomplicate the example with shares and inheritance).

On the date when the violator became the 100% owner of the real estate its price was RUR 1 000 000 and the RUR/US$ exchange rate was 20/1, so the price in US dollars was $50 000.
The violator sold the real estate for RUR 1 200 000, however the RUR/US$ exchange rate was 40/1 on that date, which means the price in US dollars was $30 000.
So on the one hand the real estate was sold at a higher price in RUR (= income), but on the other - at a lower price in US$ (= loss).
Finally, which calculation algorithm shall IRS apply? Will it be (RUR 1 200 000 / 40) - (RUR 1 000 000 / 20) = US$30 000 - US$ 50 000 = - US$20 000 (so no income tax to be applied)?
Or will it rather be (RUR 1 200 000 - RUR 1 000 000) / 40* = US$5 000 (which is subject for taxation)?
* - exchange rate valid on the date the income was received.

There's an article on the IRS website (called "Foreign Currency and Currency Exchange Rates") which explains the general approach to currency conversion, but doesn't clarify anything in regards to the above-mentioned situation (unless I overlooked smth. of course). I can't insert link to the article in this message due to my entry-level access rights on the forum I suppose - sorry for this inconvenience. :-(

2. Foreign social security pension is subject for income tax in the U.S. As per information on the IRS website "foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. They are not eligible for exclusion from taxable income the way a U.S. social security pension might be, unless a tax treaty provides for an exclusion."

There's no documentary evidence on this matter, that I can provide IRS (and SSA) with, because written confirmation on whether or not the person has a pension (with the statement of the precise amount - if he does) is only available upon the request of the recepient of the pension himself (this is the procedure of that foreign country). Shall I just point to the fact that I know he has this pension and that there is a local document which IRS may ask the violator to provide with in order to clarify the situation?

3. Does it make sense at all to report to the U.S. Customs and Border Protection the fact that the guy brought cash to the U.S. in small portions (to avoid reporting at the border) if I only have the documentary confirmation he owned the money abroad (foreign real estate sale) and also that guy's verbal statement he brought it to the U.S. and stored in the bank deposit box? Does this "case" have any chances?

 

[adjusterjack]

I have a couple of questions for you, Coolio.

How is it that you are acquainted with this person to the extent that you know all this about his financial activities?

What do you have against this person that makes you want to throw him under the bus?

Seems like you have some sort of personal vendetta going on.

 

[Tax Counsel]

1. How does IRS apply income tax when the foreign currency is an integral part of the story?

When it comes to reporting income from transactions that occur on specific dates, with purchase and sales of real estate being a classic example, the taxpayer uses the spot rate (i.e. the currency conversion rate for converting the local functional currency into U.S. dollars on the day of the transaction.)

So for example, suppose Joe buys property in England on date X for £100,000. On date X £1 = US$1.25. Thus, for U.S. tax purposes the purchase price on date X, and starting basis in the property, is $125,000. Joe sells that property 2 years later on date Y for £110,000. On date Y £1=US$1.15. Thus, for US tax purposes the sales price on date Y is $126,500. Assuming that there were no adjustments to basis during those two years his gain on the sale of the property is $126,500 sales price - $125,000 basis = $1,500. So while he had a gain in the local currency of £10,000, his gain in dollars is just $1,500 due to the decline of the pound between the purchase and sale dates.

Let's assume we're talking about Russian Roubles (RUR) and 100% ownership of the real estate (not to overcomplicate the example with shares and inheritance).

On the date when the violator became the 100% owner of the real estate its price was RUR 1 000 000 and the RUR/US$ exchange rate was 20/1, so the price in US dollars was $50 000.
The violator sold the real estate for RUR 1 200 000, however the RUR/US$ exchange rate was 40/1 on that date, which means the price in US dollars was $30 000.

Since it is the price in U.S. dollars that matters and given the spot rates in your example, the taxpayer here has a loss of $20,000. Given the spot rates in effect, he bought it for $50,000 and sold it for $30,000. The 200,000 Ruble gain in the Russian currency is irrelevant to U.S. tax. Assuming the property was held for investment that $20,000 loss then can be used to offset other gains that the taxpayer may have had. Any unused loss gets carried over to the next year. If the property was the taxpayer's own personal residence/vacation home and not held for investment the loss is not deductible. Either way, there is no tax due on that transaction and the failure to report it on the tax return would not draw any penalty whatsoever.

Foreign social security pension is subject for income tax in the U.S. As per information on the IRS website "foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. They are not eligible for exclusion from taxable income the way a U.S. social security pension might be, unless a tax treaty provides for an exclusion."

But note the important caveat: the foreign pension is not taxed if a tax treaty so provides. The U.S. has tax treaties with many nations of the world, including pretty much every major nation. Indeed, it has the most extensive tax treaty arrangements of any nation. And those treaties do often provide that Social Security type payments are taxable only by the nation paying it. If Russia is in fact the country involved here then there is a tax treaty in effect that has that very rule in it. So any Russian Social Security payment to a Russian national in the U.S. would not be taxable in the U.S. and need not be reported on the individuals U.S. income tax return. Thus, the country paying the benefit does very much matter, as does the nationality of the person receiving it.

Shall I just point to the fact that I know he has this pension and that there is a local document which IRS may ask the violator to provide with in order to clarify the situation?

Again, you don't have to set up the perfect case here. You are making this more trouble than it need be. Just tell the IRS he's receiving that pension and how you know that he is getting it. However, if the country that is paying it has either a tax treaty with the US or a tax information exchange agreement (TIEA) then the IRS likely already knows it because of the information exchange between the two countries.

Does it make sense at all to report to the U.S. Customs and Border Protection the fact that the guy brought cash to the U.S. in small portions (to avoid reporting at the border) if I only have the documentary confirmation he owned the money abroad (foreign real estate sale) and also that guy's verbal statement he brought it to the U.S. and stored in the bank deposit box? Does this "case" have any chances?

You can report that he claimed to have brought the money back and stashed it in his safe deposit box if you want. Note though that there are legal ways to bring in money into the U.S. that do not require reporting to Customs. Those methods are also generally safer than carrying actual cash. Do you have anything to support that he brought it back as actual cash? Any dates/amounts of cash brought in? If no, then the chances are that Customs won't be able to do anything with it.

 

[justblue]

I have a couple of questions for you, Coolio.

How is it that you are acquainted with this person to the extent that you know all this about his financial activities?

What do you have against this person that makes you want to throw him under the bus?

Seems like you have some sort of personal vendetta going on.

I asked the same question and Coolio said they (s/he and the American citizen soon to have large tire tracks on his/her back) are "close enemy" (post 7). I'm inferring from that answer that Coolio was dumped by the American and now wants to get back by using info gleaned during the relationship.

 

[Coolio]

@Tax Counsel thank you for clarifying the final details and for all the time you've kindly spent on this thread. I highly appreciate that and send +++ to your karma.

@adjusterjack As @Tax Counsel mentioned I've already answered the similar question earlier in this thread. Taken this forum is about legal stuff I assume it irrelevant to discuss personal relationships here unless they have direct impact on the case. Finally, my strong belief is that calling one's attempt to bring justice in full accordance with the law as "vendetta" is not professional and double as strange when happens on the forum specializing in legal matters.

I'm inferring from that answer that Coolio was dumped by the American

However, a small comment which I find important to be made in regards to this quote. I don't like much how "dumped by the American" sounds and though you've probably meant nothing special here, I want to highlight that his nationality/citizenship does not matter at all. This is about breaking the law - nothing more, nothing less. Even more so - he's not American by nationality, to be precise.

 

[Tax Counsel]

I want to highlight that his nationality/citizenship does not matter at all. This is about breaking the law - nothing more, nothing less. Even more so - he's not American by nationality, to be precise.

It does matter, actually. The rules for taxation in the U.S. vary significantly depending on whether the taxpayer is (1) a U.S. citizen or resident (resident being determined by tax law, not immigration law) or (2) a nonresident alien. If he's the latter, that sale of foreign real estate would not be subject to federal income tax at all, nor would any other non U.S. source income be subject to federal income tax.