Earlier this year the IRS, with the help of a US Bankruptcy Judge, successfully pierced a complex strategy by two Texas brothers Sam and Charles Wyly.  The Wyly brothers were accused by the IRS of tax fraud related to the funneling of money and assets to offshore banks through a comprehensive series of legal vehicles known as trusts.  The IRS was seeking $1.43 Billion from Sam Wyly and $834 Million from the surviving wife of the other brother, Charles.  While his widow was released from liability under the “innocent spouse” defense of US tax laws, the US Bankruptcy Judge issued an opinion of more than 450 pages detailing the brothers activities.  This case offers insight into the IRS offshore willful analysis strategy and how they will determine the conduct of US taxpayers.

The finding of the Bankruptcy Court was that the Wyly brothers had entered into “deceptive and fraudulent actions” through the establishment of a series of trusts and legal entities with numerous levels and redundant structures that served no genuine economic purpose.  The layered series of offshore entities was solely designed to funnel and shelter income to offshore accounts.  The Court concluded that the only purpose of the elaborate structure was to make it impossible for the IRS or any judicial entity to unravel the genuine purpose of the scheme.

The brothers then used the offshore funds to purchase personal items in the US on a “tax free” basis.  Every action or order to any of the trustees involved in the scheme came directly from Sam Wyly.  The trustees of the various entities simply followed their directions unquestioningly.

The key lesson here is akin to the strategies exposed by the “Panama Papers.”  A complex series of offshore corporations, trusts and other legal entities are deployed to mask the movement of money through a series of “transactions” whose only purpose is to shield income from US taxation.  When you employ unnecessary legal structures such as trusts and offshore companies the IRS will consider this as “willful” behavior.  For those who have yet to come into FBAR compliance this case provides a bit more insight into the decision between the IRS OVDP and the streamlined application.  If you have established legal entities such as an offshore company or any group of trusts, or structured a series of accounts through various banks the IRS is sure to deem your activities as willful.  The OVDP is your only viable option based upon “willful” conduct from the perspective of the IRS.

The case of the Wyly brothers provides a glimpse into how the IRS offshore willful analysis strategy will determine the conduct of US taxpayers in terms of FBAR compliance.  If you have yet to come into compliance with the IRS offshore reporting requirements your time to act is now.  The international tax attorneys at Allen Barron are uniquely positioned to analyze your unique situation and provide legal insight.  We invite you to contact us for a free consultation at 866-631-3470. 

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