What is IRS Tax Fraud?

According to IRS, every American citizen is responsible for filing their own tax return when required to do so through a duty known as voluntary compliance. Fortunately the majority of Americans comply by determining and paying the correct amount of taxes to the government. However, there are many that willfully and intentionally violate their legal duty of voluntary compliance by failing to pay the correct amount of income, employment, or excise taxes.

Although some Americans live in fear of the IRS because they owe back taxes to the IRS, there is a big difference between owing a few hundred dollars because of mistakes on your previous tax return and committing tax fraud. In committing tax fraud you deliberately break the tax law by providing incorrect information on your tax returns for the purpose of some type of gain.

Activities the IRS determines as breaking the tax laws include but are not limited to:

* deliberately underreporting income

* deliberately omitting income

* keeping two sets of books

* overstating the amount of deductions

* making false entries in books and records

* claiming personal expenses as business expenses

* hiding assets or income

* claiming false deductions

* transferring assets or income

In order to combat tax abuses the IRS created the Criminal Investigation Division that strives to correct the issues of improper tax filing and payment. The Criminal Investigation Division of the IRS investigates a wide array of individuals and industries including business owners and self-employed wage earners. It is the main component of the IRS’s efforts to directly influence taxpayer compliance.

The Tax Fraud Program is the Criminal Investigation Division’s largest enforcement program that covers a variety of tax fraud and tax and money laundering crimes. According to IRS statistics there were 1,863 investigations initiated by the Tax Fraud Program in 2006, leading to nearly 700 people being sentenced and incarcerated for breaking the tax law.

The Tax Fraud Program classifies tax fraud crimes into two basic programs, legal source tax crimes and illegal source financial crimes. Legal source tax crimes involve people who earn wages legally but choose to evade taxes by violation of tax laws. These cases involve behaviors that threaten the tax system, such as questionable claimed refunds, unscrupulous tax return preparers, and persons who challenge the legality of income taxes. The prosecution of these cases is essential in supporting the IRS’s overall compliance goals, encouraging voluntary compliance with the tax laws, and promoting fairness and equity in the American tax system.

The second program, illegal source financial crimes, focuses on money gained through illegal sources of income, such as illegal gambling. According to the IRS, these underground operations threaten our “voluntary tax compliance system and undermine the overall public confidence in our tax system.” The IRS demands that taxes be paid on money earned through any means, therefore many recipients of illegal income attempt to legitimize their income. This process of “cleaning” the illegally obtained money is known as “money laundering.” The IRS deems money laundering as “tax evasion in progress.”

Nowadays, money launderers use various schemes and transactions to conceal income and assets. This includes manipulation of currency reporting requirements and the layering of transactions. Since money laundering and currency violations are often intertwined with tax violations, the illegal source financial crimes program encompasses many tax and tax related violations.

The punishments and penalties for tax fraud issues vary from cases to case. However, according to the US tax code (sections 18 and 26) some violations of tax law carry penalties of up to five years in prison with fines up to $250,000.00 for individuals and $500,000.00 for corporations. According to IRS statistics, the average incarceration sentence for tax fraud crimes in 2006 was 26 months.

The important thing to remember is to be completely honest when preparing your income tax returns. Alternatively, you should seek a competent professional to prepare your returns for you. If you follow your legal duty of voluntary compliance and pay your taxes without hiding income then there is never a reason to worry.

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Doing Business in India

There is no separate law governing setting up and doing business in India by foreigners. However there are compliances / regulations related to restrictions to foreign stake in an Indian company. This is covered in detail below. All taxes and duties applicable on Indian domestic companies are also applicable on foreign JVs and subsidiaries in the India. There are generally no restrictions or concessions for foreign JVs / subsidiaries in India unless specified. For example there are compliances under transfer pricing act and imports/ exports regulations for transactions between foreign JV/ subsidiary and their global group entities to ensure that no tax / duty loss occurs due to their close relationship.

Indian FDI Policy
India has liberal policy on FDI among the emerging economies. FDI under the current framework is permitted for all categories of investors and in all sectors except:

1. Retail Trading (except single brand product retailing which is allowed)
2. Atomic Energy
3. Lottery Business
4. Gambling and betting
5. Agriculture
6. Tobacco

For other sectors, there are two routes for investing in India:

(i) Automatic Route wherein the foreign investor does not require any prior approval from the RBI or Government of India. Post Investment, certain compliances are required and after completion RBI issues a registration number for FDI.

(ii) Prior Government Approval Route which applies in the following circumstances:

A. Activities/Items that require an Industrial License
B. Proposals in which the foreign collaborator has an existing financial/ technical collaboration in India in the same field
C. Proposals for acquisition of shares in an existing Indian company in:
a. Financial services sector and
b. Where Securities & Exchange Board of India (Substantial Acquisition of Share and Takeovers) Regulations, 1997 is attracted;
D. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.

FDI OPTIONS IN INDIA

Trading in India B2B
B2B trading is allowed under the Automatic Route of RBI in India, it is irrelevant whether the goods are sold to business customer, who conducts retail or to business customer conducting operations other than retail such as restaurant or a hotel. The concept of B2B sales form part of the wholesale trading and cannot be termed as retail trade.

Repatriation of Capital and Profit
In case foreign investments are made by a foreign company as per the Reserve Bank policy and necessary compliances are made, the foreign exchange can be remitted freely to India and also remittances can be made from India for dividends and capital gains on sales of shares after payment of necessary income tax and compliances with certain procedures which are fairly established.

The foreign investments laws for investments from Europe, America, Hong Kong, Taiwan and China are same.

Upon compliance with necessary procedures and allotment of a registration number by Reserve Bank of India for the foreign investments, the dividends declared by the Indian Joint Venture or company are freely repatriable after payment of Dividend tax (presently taxed at 16.995% in 100% subsidiary in India.

Foreign investments in India are subject to valuation norms prescribed by Reserve Bank of India. Inward investments should be not be at a rate lower than valuation of the Indian company certified by Company Auditor or Chartered Accountant with experience of over 10 years or a Merchant banker.

Similarly while remitting funds upon sale of shares of Indian company to the foreign investor; the sale of shares cannot be at a rate higher than valuation of the Indian company certified by Company Auditor or Chartered Accountant with experience of over 10 years or a Merchant banker.

Government Control on Foreign Exchange
An economy is said to have capital account convertibility when there is complete freedom to convert local currency into foreign currency and vice versa – without the permission of the Reserve Bank, and without limits. Indian Rupee is not fully convertible. It is convertible for revenue transactions; however it is not convertible for capital transactions. This allows residents to receive and make payments in foreign currency for all purposes other than investments and loans.

One can buy most things foreign with rupees when they are imported. One can travel abroad and buy whatever dollars you need – well almost – over the counter. One can also incur expenses abroad on your credit card and pay for the dollars (or pounds, or Euros) expended in rupees.

The foreign exchange transactions on revenue account are largely free i.e. an Indian company (including Joint Ventures and subsidiaries of foreign companies) can import and export freely except for restrictions on few items. However transactions of capital nature i.e. foreign investments in India companies and debt from overseas entities including overseas investments by Indian enterprises are stilled controlled by Reserve Bank of India though the policy is very open and liberalized and there are clear rules and guidelines governing compliances of these controlled transactions.

Limit on Foreign Exchange inflows and outflows
There is generally no limit on foreign change inflows and outflows for foreign investments and purchase/sale of goods and services. However there are restrictions on certain transactions of capital nature. Necessary compliances/ documentation needed as prescribed. Some indicative details given below –

FDI inflows – No limit except for banned sectors or where sector limit is not 100%
Profit remittance – No limit within the approved FDI
Payment for Import of goods – No limit except for certain banned products
Exports proceeds – No limits
Import of services – No limits
Technical fees & services – No limit
Foreign Loans – This is not free. There are restrictions

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PCI DSS, File Integrity Monitoring and Logging – Why Not Just Ignore It Like Everyone Else Does

The Safety Belt Paradox

The Payment Card Industry Data Security Standard (PCI-DSS) has now been around for over 6 years, but every day we speak to organizations that have yet to implement any PCI measures. So what’s the real deal with PCI compliance and why should any company spend money on it while others are avoiding it?

Often the pushback is from Board Level, asking for clear-cut justification for PCI investment. Other times it comes from within the IT Department, seeking to avoid the disruption PCI measures will incur.

Regardless of where resistance comes from, the consensus is that adopting the standard is a sensible thing to do from a security perspective. But like so many things in life, the common sense view is outweighed by the perceived pain of achieving it -this thinking is often referred to as ‘The Safety Belt Paradox’, more of which later.

This coupled with the anecdotal feedback that whilst the Acquiring Banks (payment card transaction processors) promote the need for PCI measures, they seldom have the focus and continual drive to monitor the status of compliance, making it all too easy for Merchants (anyone taking card payments) to carry on just as they are.

Prioritizing PCI Measures

With 12 headline Requirements covering 230 sub-requirements and around 650 detail points, encompassing technology, procedure and process, there is no denying that the PCI-DSS is complex and is likely to cause disruption. But the benefits ultimately outweigh the pitfalls, particularly when there are shortcuts to compliance, which follow the ‘How do you eat a whale?’ philosophy (one piece at a time, in case you were wondering).

This ‘prioritized approach’, advocated by the PCI Security Council, focuses attention on the most important ‘biggest bang for buck’ measures first, with the others broken into five levels of priority.

We would also always advise that in order to control costs and minimize disruption, that you understand the context and impact of each aspect to see which other Requirements can be taken care of by implementing the same measure – for instance, file integrity monitoring is specifically mentioned in Requirement 11.5, but actually applies to numerous other Requirements throughout the standard. For example, Device Hardening measures specified in Requirement 2 all come back to file integrity monitoring because configuration files and settings need to be assessed for compliance with best practices, and once a device has been hardened, it is vital that monitoring is in place to ensure there is no ‘drift’ away from the secure configuration policy adopted.

Similarly log management and the need to securely backup event logs from all in scope devices may only be detailed in Requirement 10, however, using event log data to track where changes have been made to devices and user accounts is a great way of auditing the effectiveness of your change management processes. Tracking user activity via syslog and event log data is generally seen as a means of providing the forensic audit trail for analysis after a breach has occurred, but used correctly, it can also act as a great deterrent to would-ne inside man hackers if they know they are being watched.

As evidence of the value of this approach, implementing firewall and anti-virus measures properly, with checks and balances provided via automated event log processing and file-integrity monitoring gets you around 30-35% compliant before you do anything else.

The Future of PCI-DSS

The PCI Security Standards Council insists that PCI is more about security than compliance. And it really does work – implemented correctly, the PCI-DSS will keep card holder data protected under any circumstances.

In the future, neglecting PCI Compliance measures could mean you are gambling with even higher stakes. With PCI being such a comprehensive framework, big-thinkers are arguing that PCI compliance should be leveraged to provide security for ALL company information as a whole and protect against the mainstream issue of Identity Theft. Losing card holder data is one thing, but risking your customers’ personal information is potentially far more damaging and your customers won’t thank you if you have been irresponsible.

This is certainly the case in Europe where, at the recent PCI Security Standards Council Meeting in London, the UK Government’s Information Commissioners Office recommended that organizations should look to implement PCI for general Data Protection. This is echoed across Europe where ISO 27001 is taken much more seriously, especially in Germany where their snappily entitled ‘Bundesdatenschutzgeset’ (or BDSG – Federal Data Protection Act) has real teeth.

If a German organization loses the Personal Information of its customers then it is required by law to ‘confess’ by placing at least two, full-page advertisements in the National press informing the public of the potential Identity Theft they have been exposed to. Even if you don’t believe in the power of advertising, you wouldn’t want to test what this kind of publicity does for your brand and your sales.

The closest parallel in the US is the Nevada ‘Security of Personal Information’ law, and Nevada Senate Bill 227 specifically states a requirement to comply with the PCI DSS, or how about The Washington House Bill 1149 (Effective Jul 01, 2010) which “recognizes that data breaches of credit and debit card information contribute to identity theft and fraud and can be costly to consumers”.

Which brings us back to the ‘Safety Belt Paradox’. 50 years ago, the State of Wisconsin introduced legislation requiring seat belts to be fitted to cars. But very few people used them, because they were uncomfortable and slowed you down when starting a journey, even though most would admit they were a good idea.

So it was only in 1984 when the first US state (New York) made the wearing of a seatbelt compulsory that the real benefits were realized. Only then did common-sense become standard practice. Maybe Personal information Protection needs the same treatment?

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