Regardless of the outcome, guilt or reasoning behind the Paul Manafort trial, it illustrates a very important point. Not properly reporting international taxes is not only a serious crime, but for the IRS it is also relatively easy to prove noncompliance. Keep in mind, despite discussing Manafort’s lavish lifestyle, he isn’t on trial for being rich, he is on trial for not letting the IRS know he was rich.
First, some quick basics of international tax. U.S. citizens must report and pay tax on worldwide income regardless of where it is earned, where they live, how long they have lived there or any other factor. There may be credits or exemptions that limit the taxes, however, the starting point is always worldwide income. Next, there are several international reporting forms that must be filed on an informational basis. This means the forms may not necessarily report income or cause tax, but rather, they are simply to inform the IRS and U.S. government about certain foreign assets. At the center of this case are likely two forms:
- FBAR (Foreign Bank Account Report) – required when there is more than $10K in foreign accounts
- Form 8938 – required when certain foreign financial assets meet a value threshold
It doesn’t take long to see how these forms, along with worldwide income reporting, can begin to corner a taxpayer, and why the expenses, lifestyle and wealth of Manafort is at issue.
Let’s take an example to show how these forms work together. Imagine a taxpayer who has never reported an FBAR or Form 8938. Furthermore, the taxpayer reports about $500K/year income. Lastly, the IRS is auditing the taxpayer and sees roughly $200K in U.S. bank accounts. If this taxpayer buys a $2 million property there is not any legal explanation of how that could have happened. The taxpayer didn’t earn $2 million in the current year, didn’t report he had this much in a foreign account, and if he used cash there would have been reports filed for certain cash transactions. The only inference is that he is not in compliance. Likewise, if the taxpayer were to transfer $2 million into a U.S. account, the same questions would arise.
There is almost no way to have wealth that is not accounted for by the IRS when you are a U.S. person. Therefore, the trial of Manafort is discussing his expenses and lifestyle, not because it is illegal to live like that, but because there is no legal explanation as to where that money came from. Assume the money was legal, then he is in violation of reporting on the above-mentioned forms. This is the brilliance of international reporting, it paints the taxpayer into a corner where the money is either illegal or there is an extremely high likelihood of noncompliance on the reporting, which can also be a serious crime.
The answer is that the IRS has amnesty programs to get back into compliance. One of these programs, the OVDP, which closes on September 28, would have protected Manafort from criminal prosecution. However, based on the current charges he still would have had an issue with filing false returns per the indictments. Either way, even if found innocent, this case should be an example of the extreme importance of proper international tax compliance.