“ANOTHER KNUCKLEHEAD BITES THE DUST”
The definition of a Knucklehead is“someone considered to be of questionable intelligence.”
On October 7, 2016 a Michigan business man plead guilty to tax obstruction for filing a false amended tax return for the tax year 2008. The guilty plea echoes the sentiments of Chief Richard Weber of the Internal Revenue Service, Criminal Investigation that: “There are no safe havens for hiding money in secret bank accounts around the globe.” The case also makes clear that substance will always prevail over form for purposes of determining the true beneficial owner of a foreign financial account or asset and whether the income from any such account or asset is subject to U.S. tax. The following case is just one of many examples of the pervasive use by U.S. Taxpayers of abusive offshore tax avoidance schemes and the consequences of getting caught.
On or about November of 2004, Robert Rumbold (“Rumbold” or the “Defendant”), a manager of a trust account owned by his parents, transferred $2.6m from his parents’ account into Credit Suisse Bank AG in Switzerland. In order to evade income tax and to conceal the identity of the beneficial owner, the Defendant arranged for the account to be held in the name of Wisdom City Limited, a Hong Kong company. Although Wisdom City Limited was set up to be the named the account holder, the Defendant effectively controlled and was the beneficial owner of the account until December 2008, when Rumbold transferred control to a relative.
Rumbold failed to report any interest, dividends or capital gains received from the Wisdom City Limited Credit Suisse account on the Defendant’s personal tax returns for the tax years 2006-2008. The Defendant also falsely stated on each of his three tax returns that he did not have an interest in any foreign financial account. In 2010 the Defendant amended his 2008 income tax return, where he once again failed to report the income generated from the foreign financial account and failed to make any disclosure concerning his interest in the Wisdom City Limited Credit Suisse account.
The takeaways from this case are the following:
- A U.S. Taxpayer’s worldwide income is subject to federal income tax;
- Depending upon the circumstances, a U.S. Taxpayer may have to comply with certain financial reporting requirements under the Bank Secrecy Act and FATCA and may be required to make other financial disclosures;
- Irrespective of the form, abusive offshore tax avoidance schemes (“tax schemes”) are devised for the purpose of carrying out two objectives: First, to conceal the true identity of the owner of any foreign financial account or other foreign financial asset; and Second, to conceal income derived from those foreign assets that is subject to tax by the United States;
- These tax schemes may include, but are not limited to, the use of foreign trusts, foreign corporations, offshore partnerships, limited liability companies, and international business companies. The tax schemes can also include using anon-resident alien or maintaining funds in a foreign attorney’s trust fund account in order to carry out a taxpayer’s nefarious plan;
- The element of intent in a criminal tax prosecution more often than not is proven by circumstantial rather than direct evidence. Therefore, it logically follows that the more elaborate the tax scheme is, the easier it will be to establish intent. . Remember! “If it walks like a duck and talks like a duck, it’s probably a duck;” and
- Taxpayers, attempting to game the system, by creating and/or participating in these knucklehead schemes will eventually find themselves in deep trouble due to recent global tax enforcement initiatives and the financial reporting requirements established under the Bank Secrecy Act, FATCA, the Common Reporting Standards and other protocols.
If you are the architect, principal or a participant in such a tax scheme, you are either aware or should be aware that what you are doing is illegal. If you do not think what you are doing is illegal, you are probably in a state of denial. You only need ask yourself: “Does it pass the smell test?”
Any path to redemption with the IRS involves taking personal responsibility, making a conscious decision to right the ship and thereafter taking remedial action. Remember, you can generally recover from a financial setback. In contrast, imprisonment and the financial and emotional toll to you and your family may be insurmountable.
The immediate action should start with your speaking with a tax attorney to discuss your particular situation and evaluating whether making an offshore voluntary disclosure is a viable option for you.
© Anthony N. Verni, Attorney at Law, Certified Public Accountant 10/13/2016