IRS Hard at Work Despite the Pandemic

Financial crimesIndividuals, who have failed to report their foreign financial accounts, may feel a sense of relief, in light of the corona virus and its effects on IRS investigations. Better think again!

The DOJ recently announced the superseding indictment of Dr. Charles Lieber, a former Chemistry chair at Harvard University for:

  • Failureto file Foreign Bank and Financial Accounts (FBAR) and;
  • Filing false federal income tax returns.

The initial indictment charges the former Harvard Chair withmaking false statements to federal authorities.

Lieber served as the principal investigator of the Lieber Research Group at Harvard University and received more than $15 million in federal research grants from 2008-2019. In addition, the charging document records that from 2012 until 2015,  Lieber served as a Strategic Scientist at Wuhan University of Technology (WUT) and thereafter as a Contract Participant in the Thousand Talents Plan (a program established by the Chinese government in 2008 for purposes of attracting global scholars to assist in Chinese development).

Subsequent indictment shows that Lieber entered into a three-year agreement with Thousand Talents that required WUT to pay Lieber a salary of up to $50k a month, living expenses totaling $150k and $1.5 million for purposes of establishing a research lab at WUT. The DOJ alleges that Lieber failed to report the income he received from WUT in 2013 and 2014 on his federal income tax return. Individual U.S. tax residents are required to report their income on a worldwide basis, irrespective of where the income is earned.

In addition to his failure to report the income Lieber received from WUT, the superseding indictment alleges that Lieber failed to file FBARS for 2014 and 2015 with respect to a foreign financial account he opened while in China in 2012. The account was opened to enable WUT and Thousand Talents to directly deposit Lieber’s salary and other payments. A U.S. person is required to file an FBAR (FinCen Form 114) if that person had a financial interest in or signatory authority over foreign financial accounts with an aggregated balance in excess of $10k during any time during the year. It is clear from the indictment that Lieber received more than $10k between salary and living expenses. Failing to report this amount as required by law under FBAR is a crime.

To avoid being indicted by IRS, it is crucial that U.S. persons in foreign countries to report all income earned for tax return purposes and file FBAR for any account(s) they have financial interest in/ signatory authority over with aggregate balance in excess of $10,000. 

Florida man pleads guilty to tax evasion and hiding funds around the world

FBAR Quiet disclosuresIn April 2020, a Florida man pleaded guilty to tax evasion and the willful failure to file FBAR’s. What makes this case particularly interesting is that the taxpayer made use of a “quiet disclosure” rather than entering into the Offshore Voluntary Disclosure Program (OVDP). This is a classic case of greed on steroids.

Experienced tax attorneys will usually discourage their clients from making quiet disclosures. However, some practitioners may be tempted to recommend using a quiet disclosure to help close the deal with the client. An uninformed or greedy client will invariably opt for the least costly strategy. Unfortunately, these same practitioners routinely fail to provide the client with an explanation of the downside risks associated with making a quiet disclosure.

The following discussion is limited to the defendant’s foreign financial accounts, his failure to file FBAR’s and his unsuccessful attempt at making a quiet disclosure. If you interested in the tax evasion portion of the case you can click on the link hereand you will be linked to the Department of Justice, Tax Division, website.

Case background

The taxpayer owned and operated a U.S. business that bought U.S.-made agricultural machinery and parts and sold them throughout the world.  The taxpayer failed to not only file business, personal and employment income tax returns but also failed to pay corporate, employment or individual income taxes. Although the taxpayer never received a salary, he certainly was living large. In addition to the business paying all of his personal expenses, the defendant was also able to siphon off significant amounts of cash, which he used for a variety of reasons. In total, the taxpayer failed to report more than $7.7 million in income, resulting in a total tax loss to the Government of over $2.7 million.

-From 2007 to 2011, the taxpayer transferred 5.8 million from the company’s bank accounts to foreign financial accounts. The taxpayer maintained these foreign financial accounts in Croatia, Germany, Serbia, and Switzerland from 2008 to 2015. Despite knowing that he had an obligation to report these accounts on FinCEN Form 114 (FBAR), the defendant kept these accounts secret in order to avoid IRS detection.

In 2010, an account the taxpayer held at Credit Suisse in Zurich, Switzerland reached a year-end high value of $6,177,586. The taxpayer used the Credit Suisse account to fund the purchase of a $1,350,000 yacht and a $1,650,000 waterfront home in Florida.

In 2015, Credit Suisse closed the taxpayer’s account in Switzerland and advised him to enter the IRS’s Offshore Voluntary Disclosure Program (OVDP). To provide some context, the OVDP was terminated in September of 2018 and replaced that same year with the Voluntary Disclosure Practice rules.

The taxpayer failed to heed the Bank’s advice and elected not participate in the OVDP. The last iteration of the OVDP provided taxpayer’s with undeclared offshore accounts the opportunity to come clean in exchange for the prospect of avoiding criminal prosecution. Under the OVDP, participating taxpayers were required to:

  • File 8 years of delinquent or amended tax returns
  • File FBARS for 8 years.
  • Submit his or her returns and copies of the electronically filed FBAR, together with a penalty worksheet to the OVDP unit of the IRS.
  • Pay any outstanding income tax, together with a 20% accuracy penalty and interest.
  • Pay a one-time miscellaneous offshore penaltyequal to 27.5% of the highest aggregate account balance(s) in any one disclosure year.

In exchange for making these disclosures and paying all taxes, penalties and interest as well as the miscellaneous offshore penalty, the taxpayer and IRS would enter into a “Closing Agreement” (Form 906). A Closing Agreement effectively bars any additional claims by the IRS or the taxpayer for any of the years included in the disclosure period.

The taxpayer’s quiet disclosure consisted of filing several delinquent tax returns with the hope that the filings would fly under the radar, and the taxpayer would avoid paying income taxes, penalties and interest as well as the miscellaneous offshore penalty. Ironically, the taxpayer did not file any FBAR as part of his quiet disclosure.

Findings of the case

As it turns out, the tax returns filed by the defendant were materially false in several respects. First, the income tax returns disclosed only the taxpayer’s Credit Suisse account but failed to disclose his other foreign financial accounts. Second, the income tax returns submitted by the taxpayer failed to include the income the defendant earned from his company as well as the foreign source income earned from the taxpayer’s undisclosed foreign financial accounts.

Making a quiet disclosure, even in cases where the taxpayer files all FBAR’s in addition to his or her amended or delinquent income tax returns, is strong evidence of the taxpayer’s intent to prevent or hinder the IRS from detecting the existence of the taxpayer’s foreign financial accounts. It also demonstrates the taxpayer’s intent to avoid the assessment and payment of FBAR penalties.

Takeaway from the defendant’s guilty plea

If you make a quiet disclosure and are caught, there are significant financial consequences, even if you are fortunate enough to avoid criminal prosecution. The use of a quiet disclosure will invariably result in the assessment of the Willful FBAR Penalties which are substantial. Any hope of merely paying the Non-Willful FBAR penalty is out the window. In addition, if you are discovered, you will have to pay the outstanding tax, as well as the related penalties and interest on any unreported income. Among the IRS penalties, you could be subject to the 75% Civil Fraud Penalty.

Where criminal risk is minimal or non-existent, it may be possible to utilize the foreign or domestic streamlined procedures, thereby eliminating or limiting the FBAR penalty to a onetime 5% penalty.

While some taxpayers have been successful in avoiding detection by the IRS by using a quiet disclosure, you do not want to be the last person without a chair when the music stops. If you have undisclosed foreign financial accounts and foreign income, don’t let greed cloud your judgment. Nor should you make a decision based upon any potential savings in legal costs. Take the time to meet with an experienced and knowledgeable tax attorney to see what your options are. If any practitioner mentions the use of a quiet disclosure as a potential disclosure strategy, run like hell!

Michael Avenatti’s Indictment

Michael Avenatti Case on Criminal TaxThe temptation to use unfilled or altered tax returns as well as doctored financial statements for purposes of securing a bank loan, while not common, does occur. This practice typically occurs where an individual is faced with financial difficulties and sees no other way out. The consequences of submitting false documents including unfiled and false returns are strong evidence of the willful failure to file income tax returns as well as income tax evasion.

Recently convicted in New York for trying to shake down Nike, “Creepy Porn Lawyer” Michael Avenatti(“Avenatti”)must now travel to California to face multiple charges. Among the charges in the 36 count indictment, .

The discussion that follows is limited to the practice of using false tax and financial documents for purposes of securing bank loans and the criminal tax consequences associated therewith.

According to Counts 31 and 32 of the indictment, between 2014 and 2016, Avenatti obtained three loans from Peoples Bank on behalf of companies that Avenatti either owned or controlled. The loans  included an $850k loan to GB LLC (the “January 2014 loan”), a $2,750m loan to  Avenatti’s law firm, Eagan Avenatti, LLP (“EA”) (the “March 2014 loan”) and a loan to EA in the amount of $500k (the December 14, 2014 loan”).

The Indictment

The indictment alleges that in order to secure the March 2014 loan, Avenatti provided People’s Bank with false and fraudulent individual and partnership income tax returns as well as false and fraudulent financial statements, including a 2011 unfiled individual income tax return reflecting adjusted gross income of $4.5m and a tax due of $1.5m. Avenatti also provided the bank with a personal financial statement which failed to disclosethat Avenatti still owed the IRS $850k in unpaid personal income taxes for 2009 and 2010.

In addition to his personal return and financial statement, Avenatti provided the bank with a copy of the EA’s unfiled partnership return(Form 1065) for 2012 reflecting gross income of $11.5m and ordinary business income of $5.8. In October of 2014 Avenatti filed the 2012 partnership return for EA with the IRS. The partnership return filed with the IRS materially differed from the partnership return submitted to the bank. The filed return reflected $6.2m in gross receipts compared with the $11.5m on the return submitted to the bank. Furthermore, the partnership return filed with the IRS reflected only $2.1m compared with the $5.7m in operating income.

In support of the December 2014 loan, Avenatti submitted a balance sheet for EA reflecting a cash balance of $712k as of September 2014, even though the true balance was only $27k. Avenatti also submitted a personal financial statement as of November 1, 2014 which failed to disclose the unpaid 2009 and 2010 tax liability to the IRS. In furtherance of the  December 2014 loan application, Avenatti also provided the bank with copies of his unfiled U.S. individual income tax returns for 2012 and 2013, respectively reflecting $5.4 and $4m in income and estimated tax payments of $1.6m and $1.2m. Furthermore, the 2013 individual return reflected $103k in federal withholding.

According to the indictment, Avenatti last filed individual income tax returns for the 2010 tax year but failed to file individual income tax returns for the tax years subsequent thereto. In addition, Avenatti failed to file partnership and corporate returns.

Fraudulent Conveyances in Employment Taxes

TFR and Fraudulent conveyancesEmployers who willfully fail to remit an employee’s withholding to the IRS are liable to the IRS for the “trust fund recovery penalty” (TFRP). Generally, the IRS will assess the Penalty against any responsible person who fails to collect and pay these taxes to the IRS. A responsible person can include a business owner, a corporate officer, director or office manager and a trustee or executor as well other individuals and entities.

Those who are subject to the TFRP may attempt to impede IRS collection efforts by conveying their personal or corporate assets to relatives or to nominee entities, without fully considering the civil and criminal tax consequences associated with making such transfers.  A fraudulent conveyance can be as simple as transferring an asset to a spouse or child, or may involve multiple entities and other devices. While there may be legitimate reasons for transferring an asset to a third party, making a fraudulent conveyance is not one of them.

IRS Lawsuit on a Fraudulent Transfer Scheme

An excellent illustration of an elaborate fraudulent transfer scheme is United States v. William Planes,et al (8:18-cv-02726) where  William  Planes (“William”) and his wife, Regina Planes (“Regina”), failed to pay employment taxes exceeding $9 million on behalf of  at least ten entities over a 12 year period. The following is a partial summary of what happened. I would, however, recommend reading the case in its entirety.

The IRS filed a lawsuit in the U.S. District Court, for the Middle District of Florida against William. In its complaint, the Government alleged that while employment taxes continued to accrue, but prior to the lawsuit being filed, the defendant, William Planes (William),  fraudulently transferred almost $600,000 to his wife Regina (Regina) Planes.

In furtherance of the scheme, Regina lied to the IRS by maintaining that she was not a financially responsible person of South Capital Construction, Inc. The Court subsequently entered a judgment against Regina finding that William made the transfer to Regina in order to prevent the IRS from collecting the penalty from him.

On November 5th 2018, the Government filed a second lawsuit seeking to:

  1. Reduce a separate trust fund penalty of $529,000 assessed against William Planes in 2003 to a judgment.
  2. Disregard the corporate entities that the defendants were using to impede IRS collections.
  3. Apply the entities’ assets to the judgment.

A day after the IRS assessed $529,000 penalty against William, the defendant created the William Planes 2003 Irrevocable Trust and the Regina Planes 2003 Irrevocable Trust. These two trusts, in turn, owned six limited liability companies which William and Regina either owned or controlled.

The Government also requested and secured a temporary restraining order (TRO) on November 6th 2018, enjoining the defendants or anyone acting on their behalf or in concert with from transferring any entity asset.

On November 7, 2018 Regina was served with the TRO. Less than two hours later William transferred the sum of $160,000 from three of the entities bound by the TRO to Coast to Coast, an entity in which William is a director.  A contempt hearing followed. The Court subsequently found the defendants in contempt and converted the TRO to a preliminary injunction.

While this case has yet to be referred to the IRS Criminal Investigation Division, I suspect it will be given the dollar amount.

Trust Fund Recovery Penalty and Prosecution

The amount of the TFRP is for the most part irrelevant in the Government’s decision to prosecute an individual. Taxpayers have been prosecuted where the TFRP was far less. The following cases illustrate the dollar range in TFRP cases that have resulted in criminal prosecution:

  1. On August 27, 2019, a North Carolina woman was sentenced to 14 months in prison for employment tax fraud for withholding and failing to pay over $78,937 in employment taxes deducted from the employees of a Pediatrician where she worked as an office manager, as well as the failure to pay over $35,472 representing the employer’s share of taxes. Instead, the defendant used the money to pay her credit card bills, go on personal vacations and fund a business venture. She also helped herself to $1.4 million from the Pediatrician’s bank account.
  2. In June of 2019 a Long Island business man pleaded guilty to failure to pay over employment taxes to the IRS. According to the documents filed by the DOJ, the defendant owned and operated several steel erection businesses on Long Island. Over a four year period the defendant owed almost $500k in employment taxes. In May of 2011, the defendant changed the name of his business to BR Teck Enterprises Inc. and transferred ownership of the corporation to another individual. Despite transferring ownership of the business to a third party, the defendant continued to operate the business ad continued to pay over employment taxes. From January 2012 through June 2017, the defendant racked up an additional $950K in unpaid employment tax liability.

An Individual who owns or controls a business or is considered a responsible person who has a fiduciary obligation to accurately collect, account for and pay over to the Internal Revenue Service, all federal employment taxes withheld from its employees as well as the employer’s portion of any payroll taxes. Failure to remit such payments will invariably lead to assessment of the TFRP against an individual or entity that is considered responsible.

The above examples make clear that the transfer of corporate or individual assets to another person or an entity as a strategy to defeat or impede IRS collection efforts will seldom, if ever, work. This strategy is viewed by the Government as a deliberative process and has served as strong evidence in criminal prosecutions of intent to defraud the U.S. Government.

Alternatives other than the fraudulent transfer of assets are available when dealing with payroll tax issues. These issues can sometimes be mitigated, when an experienced tax attorney becomes involved at an early stage in the process. Conducting a Google search and handling the problem yourself is no strategy at all. Perhaps, it is time to stop digging.

Fraudulent IRS tax refunds

Fraudulent tax refundsEach year thousands of individuals flock to tax return preparation centers in anticipation of receiving a large income tax refund from Uncle Sam. For most, the money is already earmarked for a down payment on a new car, home improvement or a vacation with most of the refund spent within 90 days of its receipt. The problem arises when the taxpayer receives a tax bill years later from the IRS and is required to repay the refund plus additional tax, interest and, in certain cases, penalties. In many cases, the bill the taxpayer receives from the IRS will cover multiple years since it takes a long time for the IRS to catch up with and prosecute crooked return preparers. While there are taxpayers who are complicit and aware that they are not entitled to those large refunds, most taxpayers are totally taken by surprise, when the IRS contacts them.

The statute of limitation for the assessment of income tax is generally 3 years from the date the return is filed. However, in the case of a false or fraudulent return, the tax may be assessed at any time under IRC Section 6501(c) (1) Id. The question of whether a return preparer’s fraudulent conduct (related to a taxpayer’s return) extends the statute of limitation for the taxpayer, has been the subject of debate among the courts. In addition, a taxpayer’s negligence in failing to review his or her tax return, can serve as a basis for imposition of the 20 % accuracy related penalty.  In 2007 the Tax Court held that a third party preparer’s fraud extended a taxpayer’s statute of limitations (Allen v. Commissioner, (128 T.C. 37 (T.C. 2007)).  However, in 2015 the Court of Appeals, in BASR Partnership v. United States, (113 Fed Cl 181 (2013) aff’d, 795 F.3rd 1338 (Fed, Cir. 2015)), rejected the Tax Court’ holding in Allen. The issue was presented once again in a 2016 Tax Court Decision styled as Finnegan v. Commissioner  (T.C. Memo. 2016-118) where the Court held that in the case of a false or fraudulent return, the income tax may be assessed at any time. This case involved the tax years 1994-2001.

The Court in Finnegan also held that the taxpayers were liable for the 20% accuracy related penalty. The Court held that the taxpayers did not meet their burden of production under I.R.C. Section 7491(c). Quoting from Treas (Reg. Sec. 1.662-3(b) (1) (ii)), the Court stated that the taxpayers failed to “make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem too a reasonable prudent person to be too good to be true under the circumstances” (Id. at Pg. 29).

In addition, the Tax Court, in  rejecting the Court of Appeals decision in BASR noted that there was a persuasive dissent filed in BASR and also that a concurring opinion was filed that relied upon I.R.C. Section 6229, an inapplicable provision. Furthermore, the Tax Court pointed out that there is no jurisdiction for the appeal of any decision of the Tax Court to the Court of Appeals. In view of these decisions, it is important to point out that the Tax Court is the only forum, other than IRS Appeals, where a taxpayer can challenge a tax assessment without first paying the deficiency. In BASR, the taxpayer paid the outstanding deficiency and thereafter made a claim for a refund.

Tax return preparers

Individuals who have their Federal and State Income tax returns completed by an outside third party have many alternatives including using a licensed attorney, certified public accountant or enrolled agent, who has the knowledge and experience to ethically prepare tax returns in accordance with the tax laws. All things being equal, the cost to have your tax returns prepared by a licensed professional are commensurate with the fees charged by tax preparation services and other individuals. Given the repeated warnings from the IRS to stay clear of sleazy return preparers and information that is available on the internet, one would assume that consumers who have their returns prepared by outsiders would be somewhat circumspect in the selection process. After all, we review doctors, mechanics and other professionals prior to hiring them, right?

Inexplicably, many individuals spend very little time, if any, scrutinizing those who are tasked with the preparation of their income tax returns despite repeated warnings from the IRS. Nor is much time spent discerning the differences between a licensed professional, who is subject to professional standards, such as Circular 230, State Bar Ethics Rules and State Professional Regulations related to Certified Public Accountants and the impostors who operate illegally in the shadows.

Taxpayers often select a return preparer based upon a recommendation from a friend, relative or co-worker who in many cases has received a sizable tax refund. Unable to contain their joy, they naturally tell their friends, relatives, co-workers and anyone that will listen to them that: “I got a great tax guy.”

In the case of those who are new to the United States many will select a tax preparer that is from their home country and speaks their language. In most cases, the criterion for selecting a tax preparer comes down to the size of the refund.

Fraudulent tax return preparer business model

The fraudulent return preparer business model can be divided into three categories and many variations thereof. The First category constitutes return preparers who prepare fraudulent returns generating refunds to which taxpayers are not entitled. These preparers use fraudulent refunds as a means to build their tax preparation practices. They are also generally new to the game and unaware of the IRS use of analytics as a tool to detect patterns of fraud in the tax preparation industry. These return preparers may or may not charge higher fees than their licensed counterparts and sometimes may take a percentage of the refund, which, by that way, is illegal. This first category of fraudulent return preparer is fabricating returns and large refunds as part of marketing strategy designed to build a robust tax practice.

The second category of fraudulent return preparers is less concerned with building a large practice or longevity and more focused on the immediate financial gain. In many cases, the business is set up naming individuals other than the true owner as the principals for the business. For many scammers this is not their first rodeo. They are savvy enough to recruit preparers who have their own IRS identification numbers so that fraudsters’ identities remain anonymous. This also enables them to blame other preparers when the IRS uncovers the scam.

The fraud is perpetrated in the following manner. The return preparer prepares two tax returns; one that the taxpayer is shown and one that is actually filed with the IRS. In virtually every case, the client’s copy of the return reflects a much smaller refund, if any, than the refund reflected on the actual return filed with the IRS, which the client never sees. In addition, the client usually authorizes the refund to be deposited into an account controlled by the return preparer. Once the return is filed and the refund deposited, the return preparer pockets the difference between the refunds reflected on the client’s copy of the return and the higher refund received.

The third category of unethical return preparer known as the “ghost tax return preparer” has emerged over the years and was the subject of a recent IRS warning. Ghost tax return preparers are return preparers who are paid to prepare income tax returns by the public. Even though the law provides that anyone who is paid to prepare or assist in the preparation of a tax return must have a valid Preparer Tax Identification Number (PTIN), ghost return preparers are able to avoid IRS detection by not signing the tax returns they prepare. Instead, they print the returns and instruct their clients to sign and mail in the return to the IRS. In the case of e-filed returns, they prepare but refuse to digitally sign it as a paid preparer.

Fraudulent return preparers have a total disregard for their clients or the damage done to the public trust. In many cases, taxpayers are left to pick up the pieces. If a taxpayer received a tax refund to which he was not entitled; he will be required to pay the IRS back. The problem is exacerbated in situations where the IRS does not uncover the fraud and the taxpayer has received refunds for multiple tax years.

Taxpayers may first become aware that they received a tax refund to which they were not entitled to when they receive a notice from the IRS adjusting their tax liability. In many cases, the Taxpayer will receive notices for multiple tax years. In other cases, a Taxpayer may first learn of the fraud when they are contacted by either an examiner from the IRS or a special agent from Criminal Investigation, both of whom may be investigating patterns of fraud by a return preparer.

IRS crackdown on fraudulent income tax preparers

The parade of return preparers and tax preparation services that have come under investigation by the Internal Revenue Service and Department of Justice illustrates how pervasive tax preparer fraud is. In 2016, federal prosecutors shut down more than 70 Liberty Tax Franchises for improprieties related to filing fraudulent returns and over inflating refunds. Prior to this time, another 60 locations which were subject of multiple federal lawsuits shut down or were enjoined by a federal court from further operation. In December of 2018, the Department of Justice and Internal Revenue Service launched an investigation into the Franchise, Liberty Tax Company, who is responsible for the sale and operation of its franchise locations throughout the United States. The investigation is ongoing. In addition, civil lawsuits have been filed in an attempt to deal with unethical return preparer practices.

In April of 2017, a class action lawsuit was filed in the United District Court for the Central District of California against Jackson Hewett, Inc. and a number of its franchisees alleging that the Defendants obtained thousands of dollars from the IRS in the name of the Plaintiffs. In order to carry out the fraudulent scheme, the Defendants would provide its customers with a copy of a tax return that differed from the return that was actually filed. The returns that were filed with the IRS artificially reduced the clients’ federal tax liability, resulting in tax refunds being generated.  The clients were unaware of the scam, since the defendants instructed the IRS to deposit the tax refunds into accounts the defendants controlled, all without the clients consent.

Attempts by the IRS and Department of Justice to curb these abuses have resulted in both criminal prosecutions and civil actions designed to enjoin the fraudulent return preparer.

On March 20, 2019 a Charlotte, North Carolina return preparer was sentenced to 24 month in prison for assisting in filing false tax returns. According to the Court documents, the return preparer was able to increase the tax refunds her clients received by claiming false refunds and reported income and expenses for fictitious businesses in order to claim the Earned Income Tax Credit. The fraudulent returns filed by the defendant resulted in a tax loss to the IRS in excess of $500,000.  In a separate prosecution, a Raleigh man was indicted and charged with conspiracy to defraud the United States and 14 counts of aiding and assisting in the preparation of fraudulent returns. Among the illegitimate items claimed as deductions, the defendant claimed false education credits.

In another case, Pennsylvania man was sentenced to 12 months in prison for filing false returns and conspiring to defraud the U.S. Government. The defendant, together with a co-conspirator was convicted of preparing fraudulent tax returns during the 2007 and 2010 tax years by falsely claiming employee business expenses and other nondeductible expenses. The false deductions resulted in claims for inflated refunds. The court noted that the refunds were specifically inflated as a means to grow the defendant’s tax practice.

In March of 2019 a Texas Federal Court permanently enjoined Jhane Broadway, a Dallas Texas return preparer individually and doing business as Jeprofessionalz (aka MaxTaxPros) from preparing federal income tax returns for others. In this particular case, the Government was able to establish that the tax return preparer prepared false returns that understated the tax liabilities of her clients by claiming false, improper or inflated deductions, including fabricated itemized deductions and Schedule C business losses. On the same day, a Federal Court in Beaumont, Texas entered a permanent injunction against another female return preparer, barring her from preparing federal tax returns for others. In entering the order, the Court found that the return preparer made fraudulent claims for the Earned Income Tax Credit, the fuel tax credit and the American Opportunity Credit. In addition, the Court found that the return preparer reported fictitious business and inflated federal income tax withholdings on her client’s tax returns.

Based upon the tax court rulings in Allen and Finnegan, a taxpayer who used a fraudulent return preparer could be in for trouble, particularly if the taxpayer used the same preparer for a number of years, since the statute of limitation for assessments is likely to remain open. Moreover, if you used a fraudulent preparer, there is a good chance you will be subject to the accuracy related penalty. For those sophisticated taxpayers who participated in the fraud you may be subject to the civil fraud penalty and possible criminal prosecution.

The takeaway here is that as a consumer, you need to conduct some due diligence prior to selecting a return preparer. You should never engage an unlicensed individual, since there is little recourse available in the event of a problem. Finally, if you have been caught up in an IRS investigation related to your returns, it is time to contact an experienced and knowledgeable tax lawyer. If ever there was an appropriate term then it is “Caveat Emptor,” which means “Let the Buyer Beware.”




Reporting personal expenses as businesses expenses on a tax return

business tax deductions 2The justification for purchasing that $75,000 Mercedes, Rolex watch or other luxury item, paying for an expensive vacation, making monthly mortgage payments on one’s personal residence, and paying for home improvements then deducting these expenditures as ordinary and necessary business expenses is sometimes based upon  a sense of entitlement.  In other instances, a business owner who claims deductions for personal expenses may feel justified in financially ingratiating himself based upon a mistaken belief that the sole predicate for tax evasion is the under-reporting of gross income. Nevertheless,  a misunderstanding of the tax rules pertaining to reporting of income and expenses in connection with the operation of a trade or a business or the IRS definition of “Income Tax Evasion”  does not justify cheating the U.S. Government.

The IRS is well aware that business owners and those who are self-employed are in a unique position. Unlike a salaried employee who receives a W-2 or a retiree who is issued a Form 1099R in connection with a pension distribution, business owners have the ability to determine their income tax liability. The absence of third party reporting to the IRS makes this possible.  Although the U.S. Tax System is a voluntary system, the IRS is aware that business owners routinely pay personal expenses from their business accounts and thereafter deduct those expenses as if they were associated with the operation of a trade or a business.

While a  criminal tax prosecution of a business owner can include the failure to file returns or the under-reporting of income and the overstatement of business deductions, many business owners assume that tax evasion is only associated with  income side of the ledger. Nothing could be further from the truth. I.R.C. Section 7201 defines income tax evasion, in pertinent part, as the willful attempt “in any manner to evade or defeat any tax imposed by this title or the payment thereof. . . .” Id.

In addition to tax evasion, business owners, who are caught cheating on their business and/or personal tax returns are oftentimes charged with other crimes  such as Conspiracy to Defraud the United States, money laundering, filing a fraudulent tax return, or theft of government funds.

In an effort the promote compliance, the IRS provides qualifying business owners who have routinely deducted their personal expenses or otherwise cheated their returns with an opportunity to come clean. While there is no guarantee of non-prosecution, a business owner who makes a complete and honest disclosure is more likely to avoid jail time than if he waits for the IRS to discover his nefarious conduct. The IRS Voluntary Disclosure Practice is not suited for everyone. Each case must be carefully evaluated based upon the facts, the taxpayer’s history with the IRS and whether other non-tax laws have been violated.  A taxpayer who has otherwise had a clean tax history may be looked upon more favorably than someone, who had prior problems with the IRS or was under criminal investigation for a non-tax crime (i.e. securities fraud).

Detection of fraudulent business deductions by IRS

The IRS detection of fraudulent business deductions can occur in a number of ways:

  • The first and most obvious way is when a business or an individual is selected for examination by the IRS. Detection can also occur in cases where there are unpaid payroll taxes by a business and the IRS is conducting an investigation to determine whether to assess the Trust Fund Penalty against an individual considered to be a “responsible person.”
  • Where a business is owned by multiple parties, the examination of one principal can potentially lead to the examination of other principals in the business. In other cases, a disgruntled employee, who was passed over for a promotion or a bitter ex may serve as the catalyst for an IRS examination of a business owner’s questionable business practices.
  • On occasion, the IRS has been able to detect illegal deductions of personal expenses by a business through an outside tax preparer. In this case, an outside tax preparer involved in the preparation of the business owners’ business and personal income tax returns is identified by the IRS to be engaged in systematic and pervasive pattern of preparing false returns for business and individual taxpayers.
  • Another way in which the IRS may discover illegal business deductions is through court filings, such as a bankruptcy, divorce, business litigation or post judgment liquidity determination.
  • Nondeductible personal expenses are sometimes discovered as a result of a companion investigation related to mortgage or bank fraud. It is not uncommon to find that a business owner has submitted fabricated and unfiled personal and business income tax returns inflating the bottom line for his business as a basis for securing a business or personal loan, while at the same time, either failing to file or filing false returns with the IRS reflecting tax losses.
  • Finally, social media, statements contained on a business website, the use of analytics by the IRS and cyber security breaches have provided the IRS with a treasure trove of evidence that business owners routinely deduct personal expenditures as business expenses.

Criminal cases

The landscape is littered with those who have tried to game the system and paid dearly. The recent criminal charges  filed in Los Angeles against attorney, Michael Avenatti, illustrate the point. Avenatti’s meteoric rise in notoriety was due, in part, to his representation of porn star, Stormy Daniels, his 147 appearances on CNN and MSNBC as well as his announcement of a possible Presidential bid in 2020. Avenatti’s current legal problems originated, in part, from unpaid employment and personal taxes, submitting fabricated business and income tax returns in connection with bank financing and his lavish lifestyle. In fact, Avenatti failed to file personal and business income tax returns for multiple years. Specifically, Avenatti provided a false 2012 business return for his law firm, reflecting approximately $11.5m in gross revenues and net income of $5.8m (Id. at Page 184). In sharp contrast, the actual business return filed with the IRS for 2012 reflected approximately $6.2m in gross revenue and a $2.1m loss. The tax loss was generated, in part, by significant personal expenses that were deducted as ordinary and necessary business expenses on the law firm tax return.

During the past 25 years, I have been tasked by various clients who were a party to business, matrimonial and bankruptcy proceedings to review business and personal tax returns where fraud was suspected. I have also represented dozens of business owners who have been subject to IRS scrutiny with respect to the deduction of personal expenses as business expenses.

In this regard, my office has reviewed hundreds of business and personal income tax returns of litigants and clients who were self-employed. In many cases, I concluded that the business owner engaged in a rampant and systematic pattern of deducting expenditures for personal expenses as ordinary and necessary business expenses. I have also encountered this pervasive practice during the due diligence phase involving the valuation and sale of a business.

Personal expenses deducted as business expenses

Personal expenses that have been deducted as ordinary and necessary business expenses by business owners have included, but are not limited to:

  • A business owner who was engaged in an oil and gas drilling business constructed a garage at his home at a cost of $350,000. The garage which included a two bedroom upstairs apartment, auto lifts and service bays, was used for servicing and storing the business owner’s collection of vintage automobiles and motorcycles. The proceeds to build the garage came from the corporate business account. The cost of the building was recorded on the books of the business, as if the business owned the garage. The business capitalized the cost of the building over the useful life of the building, reflecting depreciation expense on the business income tax returns. In addition all the costs associated with maintenance of the garage as well as the salary of a full time service mechanic were deducted by the business. Finally, the individual’s automobile and motorcycle collection and related costs were all carried on the corporate books and written off, despite the fact that these assets were titled in the owner’s name, individually.
  • A beach front condominium was purchased for $1.2m by a prominent personal injury lawyer. He and his family used the condominium exclusively as a vacation home. The cost of the condominium was depreciated by the business. In addition, the business owner deducted all of the carrying cost including mortgage, taxes, insurance and HOA fees as ordinary and business expenses for his law practice.
  • A South Florida Certified Public Accountant, who was engaged in the business of providing financial expert testimony during court proceedings, used the funds from his practice to finance a long term extramarital affair. The expenditures included regular trips to Las Vegas, and the Bahamas, the purchase of a $65,000 BMW for the business owner’s girlfriend, multiple shopping trips and the purchase of luxury personal items, as well as the expenses associated with the rental of a penthouse apartment on Brickell Avenue in Miami. All of these personal expenditures were deducted by the business as ordinary and necessary business expenses. Subsequently, the business owner’s wife discovered the affair and filed for divorce. Her divorce attorney retained my office to review the husband’s finances. As part of the divorce proceedings, the business owner was required to provide his business and personal tax returns as attachments to his financial affidavit as well as copies of his business and personal bank statements. These documents were relevant in the context of equitable distribution, alimony and child support.
  • In the early nineties, a South Carolina Real Estate Developer and its principals were sued for bank fraud by a New Jersey lender in connection with a failed real estate project in Atlantic City. A judgment in excess of $18m was entered in favor of the bank. As part of its collection efforts, my office was retained to evaluate the potential for recovery against the developer and its principals. In this regard I reviewed the business and personal income tax returns as well as the business financial statements and bank records, which were submitted to the bank as part of the loan approval process. The returns submitted to the bank reflected robust earnings and substantial liquidity, including cash, trading accounts and work in process. Pursuant to a court order, my office secured the actual business returns submitted to the IRS. In sharp contrast to the information submitted to the lender, the business returns filed with the IRS reflected significant operating losses. The losses were created in part due to the inordinate number of personal expenses that were paid from and deducted by the business as ordinary and necessary business expenses. During my examination of the business returns, my office was able to determine that one of the principals had a son at Cornell Medical School and a daughter who was attending college in Lucerne, Switzerland. In addition, the son had full time use of a luxury company car. The tuition and all expenses were being funded by the corporate entity with the costs deducted on the corporate returns as continuing education, professional conferences and other professional fees. In addition, two of the other business principals, who happened to be brothers, paid all of their personal expenses out of the business and had full time use of luxury automobiles leased by the business. Perhaps the most outrageous expenditure involved cosmetic surgery for the brothers’ wives, which were deducted as “consultant’s fees” on the business return.
  • A Brownsville, Texas couple, who jointly owned a lucrative internal medicine practice, routinely deducted annual business losses associated with a cattle breeding business operated from their home. The losses were generated in part based upon personal expenses that were paid from the cattle breeding business, and thereafter, deducted as ordinary and necessary business expenses on Schedule F of the taxpayers’ personal income tax returns. The initial IRS examination resulted in the disallowance of the losses associated with the cattle breeding business and the imposition of the 75% civil fraud penalty for a period of three years. However, the taxpayers’ problems did not end there. At the conclusion of the IRS examination a referral to criminal investigation was made. While the taxpayers were successful in avoiding criminal prosecution, the time spent aware from their medical practice and the costs associated with their choices resulted in their filing personal bankruptcy as well as a bankruptcy for their medical practice. Ultimately, the couple separated and divorced.

The above examples illustrate that business owners, who engage in the illegal practice of deducting personal expenses as a means of under-reporting their federal tax liability, paid the price for their actions. Deducting personal expenditures as business expenses, at least circumstantially, is probative evidence that a business owner willfully intended to cheat the government and can result in substantial civil and criminal penalties as well as the possible loss of freedom. Even in cases where a business owner reports all of his gross receipts on his business or personal return, claiming personal expenses as ordinary and necessary business deductions can result in more than merely the IRS disallowing the deductions.

Today, we are subject to heightened scrutiny due to social media, the legal and illegal exchange of financial information and cyber security threats. In addition, rarely if ever, do business owners engage in this unlawful practice without knowledge by a third party, such as a partner, employee, spouse or girlfriend, who may be able to corroborate the fraud.

In the past, business owners were able to enjoy the benefits of deducting personal expenses as business expenses in order to defeat the assessment and collection of income taxes. That is no longer the case. If you are concerned about your potential exposure, now is the time to consider coming forward. In some, but not all cases, there is a potential to right the ship by making a complete and honest disclosure. Depending upon your circumstances and particular facts of the case, utilizing the IRS Voluntary Disclosure Practice may be an alternative to jail time. While some taxpayers cite the low number of Department of Justice criminal tax prosecutions as justification for rolling the dice, any business owner who has been prosecuted and convicted for tax and other related crimes will tell you that it was not worth it. IRS tax prosecutions can result in financial ruin, loss of earnings, divorce, family break-up, bankruptcy and, in extreme cases, suicide.

In the 25 plus years I have been representing taxpayers, I have yet to find one that has since departed this earth who was able to take it with him. Ultimately, it is about the choices we make in life.



©April 5, 2019


Pittsburgh Tax Attorney Gets 48 Months For Employment Tax Fraud

Trust fund penalty for tax evasion gets 48 months in jailOn January 12, 2017 Steven Lynch, a Pittsburgh tax attorney, was sentenced to 48 months in prison,following his conviction for the willful failure to pay over payroll taxes (Trust Fund Taxes). The defendant co-owned and operated a recreational sports facility in Washington, County, Pennsylvania between 2004 and 2015.

The sports facility, doing business as “Iceoplex at Southpointe,” included a fitness center, ice rink, soccer field, restaurant and bar. According to facts contained in the DOJ press release dated September 8, 2016, Lynch controlled the finances of the businesses. As a “responsible person” Lynch was required to: (i) collect income and employment taxes from employees of the various businesses; (ii) properly account for the trust fund taxes and file payroll tax returns; and (iii) remit the taxes collected to the IRS.

The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. Instead, Lynch set up SRA Services, a shell company with no assets and transferred the various payroll accounts to that entity. The corporation was set up for the sole purpose of obstructing or impeding the IRS efforts to collect the employment taxes owed.

An employer who collects Federal Withholding Tax from its employees is responsible for filing accurate payroll tax returns and remitting these taxes to the IRS.

Employment Taxes required to be withheld include Federal Income Tax as well as Social Security and Medicare Taxes. The Employer is also required withhold to the Employer’s’ portion of Social Security and Medicare Taxes. Failure to properly collect, report and pay these taxes to the IRS can result in criminal prosecution.

Employment Taxes are considered “trust funds.” As a fiduciary, Employer has an absolute duty to safeguard these funds and the failure to do so can have dire consequences. The Employer also has an affirmative duty to file quarterly and annual payroll tax returns, which accurately reflect the correct amount of Employee Withholding Taxes, as well as the Employer’s contributions for its portion of Social Security and Medicare taxes. Finally, an Employer is charged with the responsibility of remitting the taxes withheld to the IRS.

Over recent years, the IRS and the DOJ tax division have ramped-up criminal enforcement efforts in the area of employment taxes. This case makes clear that employment tax fraud is a top priority for the IRS and they will not hesitate to prosecute anyone, including tax attorneys.

©2017 Anthony N. Verni, Attorney At Law, Certified Public Accountant

Current Developments May Make It Easier For the IRS To Assess Penalties After Willfully Failing to File FBAR’s

The Foreign Bank Account Report (FBAR) can be submitted with the advice of a tax law attorney.A taxpayer who willfully fails to file a Report of Foreign Bank and Financial Accounts (FBAR) may be subject to both civil and criminal penalties as well as imprisonment.  In both the criminal and civil context, the government has the burden of proof.

In FBAR criminal prosecutions, the standard of proof is well settled and requires the government to prove its case using the beyond a reasonable doubt standard.  However, in cases involving the assessment of the 31 USC § 5321(a) (5(C) willful civil FBAR penalty, the standard of proof  is unsettled and remains the subject of debate among legal scholars, practitioners and the judiciary. Practitioners have argued that the standard of proof in assessing the willful civil FBAR penalty should be the clear and convincing standard, citing Chief Counsel Advice (CCA) memorandum released January 20, 2006, CCM 200603026 (See discussion below) in support of using the higher standard of proof.

The correct standard of proof to be applied for assessing the willful civil FBAR penalty often arises in the context of an assessment of the willful civil FBAR penalty by IRS Examinations, an Appeal by the taxpayer, or in defense of an action by the U.S. government to enforce the 31 USC § 5321(a) (5(C) penalty. The proper standard of proof to apply in the context of the willful failure to file an FBAR has been the subject of a number of lower federal court decisions and is also reflected in jury instructions submitted by U.S. District Court in the Southern District of Florida. The Courts in all three cases have cited the preponderance of evidence standard as the correct standard to apply when assessing the 31 USC § 5321(a) (5(C) penalty.

Based upon two recent cases, the stage may now set for the U.S. Court of Appeals for the Fifth and Ninth Circuits to ultimately decide the correct standard of proof to be applied when assessing the31 USC § 5321(a) (5(C) penalty.

The first case, Gubser v Comm’r, 2016 WL. 3129530 (S.D. Tex. May 4, 2015) comes out of the U.S. District Court for the Southern District of Texas. In Gubser, the taxpayer filed a complaint in the District Court asking for a declaratory judgment that the proper standard to be applied in a willful civil FBAR penalty case is the clear and convincing standard. The District Court dismissed the taxpayer’s suit based upon lack of standing. The taxpayer subsequently filed an appeal.

Although the question currently before the Fifth Circuit is limited to standing, some observers believe that if the taxpayer prevails and the matter is remanded back to the District Court for further findings, the standard of proof issue to be applied in a willful civil FBAR penalty will find its way back to the Fifth Circuit.

The second case, U.S. V. August Bohanec and Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16) involves a decision from the United States District Court for the Central District of California. In Bohanec, the Court rejected the taxpayers’ argument that the clear and convincing standard should be applied in a willful civil FBAR penalty case. Instead, the District Court applied the lower preponderance of the evidence standard of proof. The taxpayers’ attorney has indicated the taxpayers will appeal the decision.

The ultimate determination of the standard to be applied when assessing the willful civil FBAR penalty and its importance cannot be overstated; a decision by the Fifth and/or Ninth Circuits citing the preponderance of evidence as the correct standard will certainly have a chilling effect on taxpayers, who are considering opting out of the OVDP, and will also pose a greater risk to those taxpayers who have  or will submit a  Certification of Non-Willfulness as part of the Streamlined Procedures.  If the Appeals Court finds that the correct standard is the preponderance of evidence, taxpayers can also expect the IRS to be more aggressive in scrutinizing taxpayers who opt Out of the OVDP or those who proceed using the Streamlined Procedures.

This article outlines the concept of “willfulness” in light of U.S.C. §5321(a) (5) (C), CCM200603026, JB Williams, McBride and Zwerner and in anticipation of the Gubser and Bohanec cases making their way to the U.S. Court of Appeals.

A taxpayer who “willfully” fails to file an FBAR faces a penalty equal to the greater of $100,000 or 50% of the foreign financial account balance as of the June 30 FBAR due date,31 U.S.C. §5321(a) (5) (C). Neither the FBAR statute nor the regulations promulgated there under provide any guidance on the standard of proof to be applied in the assessment of the willful civil FBAR Penalty. In Chief Counsel Advice (CCA) memorandum released January 20, 2006, analyzing the issue of willfulness in the FBAR civil context, the IRS compared the burden of proof for the willful civil FBAR penalty to the burden of proof for the civil fraud penalty under 26 U.S. Code §. 6663, explaining that it expects the standard of proof will be the same—clear and convincing evidence, not merely a preponderance of the evidence. Proponents for applying the higher standard often cite CCM 200603026 in support. Despite CCM 200603026, the U.S. District Court, in three cases has cited the lower preponderance of the evidence standard as the correct standard when assessing the willful civil FBAR penalty.

The United States District Court in JB Williams applied the preponderance of the evidence standard,United States vs. Williams, 2010 U.S. Dist. LEXIS 90794 (ED VA 2010). In JB Williams, the government brought an action in the US District Court for the Eastern District of Virginia seeking to enforce the civil willful FBAR penalties assessed against the taxpayer for his failure to report his interest in two foreign bank accounts for tax year2000, in violation of 31 U.S.C. § 5314.  The taxpayer previously plead guilty to two count superseding information for Conspiracy to Defraud the IRS and Criminal Tax Evasion.  As part of the plea, Williams agreed to allocute to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the Swiss accounts.

Furthermore, the taxpayer checked “no” in response to the question on Schedule B Form 1040, regarding the existence of a foreign financial account, despite having transferred $7M to a Swiss bank account.  In addition, the taxpayer completed a tax organizer, wherein he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over a foreign financial account. The taxpayer provided the following statement as part of his allocution.

“I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon, until I filed my 2001 tax return.”

. . . .

The District Court, held without discussion, that the government’s burden to establish a willful violation of 31 U.S.C. § 5314only requires proof by a preponderance of the evidence.The District Court further held that the Taxpayer’s eventual filing of the delinquent FBARS, “negated” willfulness.  In reversing the District Court’s decision, the U.S. Court of Appeals for the Fourth Circuit, dodging the standard of proof question, held that the District Court clearly erred  in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314.

In U.S. v. McBride, [908 F. Supp.2d 1186, 1201 (D. Utah 2012)], the District Court for the District of Utah Central District, relying on Williams held that the correct standard for imposition of the willful civil FBAR penalty is the preponderance of the evidence standard. Likewise, in U.S. v Zwerner, a 2014 Florida Case, the Federal District Court for the Southern District of Florida submitted the issue on willfulness to the jury using a preponderance of evidence standard.The U.S. Court of Appeals has yet to weigh in on the correct standard of proof to be applied in a 31 USC § 5321(a) (5(C) willful FBAR penalty case. However,  two recent lower court cases make clear that the higher court will ultimately be called upon to determine the correct standard of proof question.

In Gubser v. Comm’r, 2016 WL, 3129530 (S.D. Tex. May 4, 2016), the taxpayer, a Swiss citizen by birth and later naturalized asa U.S. Citizen maintained a Swiss account, which he opened when he was a young man. The purpose for opening the account was to enable the taxpayer to accumulate savings for his retirement in Switzerland.  Since its opening, the account was always held in Gubser’s name and the funds in the account represented after tax earnings. Grubser retained the services of a CPA, who prepared the taxpayer’s U.S. tax return for over 20 years. During this time, the CPA never raised the question whether the taxpayer had an interest in any foreign financial account. The matter first came to the taxpayer’s attention in 2010 when someone from the CPA’s office raised the question of the existence of foreign financial accounts. Gubser promptly filed an FBAR report for 2009 and subsequent years.  In addition, the taxpayer entered the OVDP, covering the tax years 2003-2010.   Subsequently, Gubser opted out of the OVDP, which resulted in the IRS sending Gubser a  3709 Letter (the FBAR 30 day letter), proposing the50% willful civil FBAR penalty pursuant to 31 USC § 5321(a)(5(C) for the tax year 2008. The penalty in the amount of $1.3M reflected approximately 50% of the taxpayer’s entire life savings.  Grubser filed a timely protest letter with Appeals.  When the taxpayer discussed the matter with the Appeals officer, the Appeals officer told Gubser that the IRS could prove willfulness by using the preponderance of the evidence standard, but not by the clear and convincing standard. The Appeals officer also asked for guidance on the proper standard.

Grubser thereafter filed a declaratory judgment action with the U.S. District Court for the Southern District of Texas, requesting that the Court declare that the IRS must prove willfulness by clear and convincing evidence. In response the government filed a motion to dismiss based upon lack of standing, arguing that the taxpayer’s injury could not be redressed by a declaratory judgment, since such a judgment would be non-binding on the IRS. The government’s motion was granted and Gruber appealed to the Fifth Circuit.

The second case to watch isU.S. V. August Bohanecand Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16). In Bohanec, the taxpayers had previously applied for and were denied participation in the Offshore Voluntary Disclosure Program (“OVDP”), in part, due to several misrepresentations made during the OVDP process. The U.S. District Court for the Central District of California rejected the taxpayers’ argument that the government had to show willfulness under the clear and convincing standard of proof, and instead applied the preponderance of evidence standard of proof.  The Court found that the taxpayers’ failure to file FBAR’s for three accounts the taxpayers maintained for over a decade was at least “recklessly indifferent to a statutory duty.” The taxpayers’ attorney has indicated that the taxpayers will appeal the District Court’s decision.

Taxpayers currently participating in the OVDP, who are considering opting out of the Program or those who are thinking of making a disclosure using the Streamlined Procedures certainly need to proceed with caution.  The U.S. Court of Appeals for the Fifth and Ninth Circuits will ultimately address the correct standard to be applied in the assessment of the willful civil FBAR penalty. These decision(s) will undoubtedly have a significant impact on both current and future taxpayers who have made or are considering making a voluntary disclosure.

The takeaway here is that any decision  involving making an offshore voluntary disclosure should not be made based upon an internet search. Instead, those faced with the decision of making an offshore voluntary disclosure should consult with a knowledgeable and experienced tax attorney, who can assess the specific facts of each case and assess the risks associated with choosing one method of disclosure over another. At the Law Office of Anthony Verni, we know that there is no one size solution to fit all, contact us today or leave a comment below.

© 2017 Anthony N. Verni, Attorney at Law, CPA

The U.S Department of Justice, Tax Division:
Federal Tax Prosecutions Continue Unabated

tax evasion lawyer to help with criminal tax prosecutions by the IRSMany taxpayers are skeptical of the IRS and feel that the system is “rigged” against the small guy. These taxpayers may also feel that those with substantial means or political connections can get away with cheating the U.S. government out of its fair share of taxes.  Contrary to public perception, when it comes to criminal prosecution of tax cheats, the U.S. Department of Justice, Tax Division is an affirmative action prosecutor.

The following examples illustrate that, even those working within the U.S. tax system are subject to prosecution.  It makes no difference whether you are a politician, tax attorney, judge or IRS agent.

Be aware that in the eyes of the U.S. government, a tax cheat is a tax cheat.

Florida State Representative Pleads Guilty To Wire Fraud And Failure To File Federal Income Tax Returns

On September 30, 2016,Reginald Fullwood, a member of the Florida House of Representatives was convicted of one count of wire fraud and one count of failure to file federal income tax returns. According to the documents filed with the court, during his first election bid as well as his campaign for reelection, Fullwood made a number of wire transfers from the “Reggie Fullwood Campaign” bank account to a bank account in the name of Rhino Harbor, LLC, a nominee entity wholly owned by Fullwood.  Fullwood created the nominee entity to conceal his diversion and use of approximately $65,000 in campaign contributions which he used to pay for personal expenses including restaurants, groceries, retail shopping, jewelry purchases, flowers, fuel and liquor.

Former IRS Revenue Officer And Owner Of Tax Consulting Business Pleads Guilty To Tax Evasion

 On October 4, 2016 a former Internal Revenue Service (IRS) revenue officer pleaded guilty to one count of tax evasion and one count of corruptly endeavoring to impede the due administration of the Internal Revenue laws. The plea was taken in the United States District Court, for the Middle District of North Carolina.

According to plea agreement filed with the court, Henti Lucian Baird (“Baird”), a North Carolinian, filed tax returns each year but did not paythe income taxes reflected on his returns,dating back to 1998.  Prior to starting HL Baird’s Tax Consultants in 1989, Baird was a revenue agent with the IRS for 12 years. Baird advertised himself to clients as specializing in “IRS problems, delinquent returns, offer-in-compromise, tax problems, delinquent employee taxes and release of liens and levies.”

Baird evaded paying his federal income taxes  from 1998 to 2013by:(i)creating over 10 nominee bank accounts in the names of his children to hide hundreds of thousands of dollars; (ii) submitting false Form 433-A to an investigating revenue officer that did not reveal all of his nominee bank accounts; (iii) filing a bad faith, Chapter 13 bankruptcy petition wherein Baird submitted a cash offer in compromise, made a request for discharge and an application for subordination of his federal tax lien; and (iv)transferring funds out of nominee accounts to avoid impending IRS levies. During this time period, Baird continued to pay the mortgage on his 4,300 square-foot home, annual fees for a timeshare he owned in Florida and car payments on a BMW.  In an admission to the revenue officer, Baird stated that he did not keep money in bank accounts because he feared a levy or garnishment.

The documents filed with the Court further reveal that Baird used his stepson’s identity, without his knowledge, to apply for a Preparer Tax Identification Number (“PTIN”). ThereafterBaird used his stepson’s PTIN in order to file over 900 income tax returns for clients, as well as his own income tax returns.  Furthermore, despite having his authorization to represent taxpayers revoked by the IRS, Baird submitted, under penalties of perjury, at least 120 Forms 2848, Power of Attorney and Declaration of Representative, on behalf of clients that falsely stated he was an enrolled agent.

As of September 20, 2016 the total amount due in tax, penalties and interest for the tax years 1998-2013 was approximately $477,028.80. It seems that Mr. Baird failed to fully read 26 U.S. Code §7201, the tax evasion statute, which includes willful attempts at evading or defeating the payment of any tax in the definition of tax evasion.

Former United States Tax Court Judge Pleads Guilty To Conspiring To Defraud The IRS Of $450,000 In Taxes

On October 21, 2016 Diane L. Kroupa, a former U.S. Tax Court Judge, pleaded guilty to conspiring to defraud the United States. According to the plea agreement and Kroupa’s testimony, Kroupa was appointed to the United States Tax Court on June 13, 2003 for a term of 15 years. Kroupa was married to Robert E. Fackler, a lobbyist and political consultant who was also named in the indictment. Fackler was the owner/operator of a business known as Grassroots Consulting. For tax purposes, Grassroots Consulting was treated as a sole proprietorship.

From 2004 to 2013, the defendants maintained their principal residence in Plymouth, Minnesota. The defendants also leased a second residence in Easton, Maryland from 2007-2013. The home was leased in order to provide Kroupa with a place to live, while serving as a Judge on the U.S. Tax Court in Washington DC.

The court documents and Kroupa’s testimony further substantiate that between 2002 and 2012, Kroupa and Fackler would annually compile numerous personal expenses that would be included on Schedule C for Grassroots Consulting under the pretext that the expenses constituted ordinary and necessary “business expenses.” The Schedule Cexpenses included: rent and utilities for the Maryland home; utilities, upkeep and renovation expenses of the Minnesota home; Pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand.

In addition, Kroupa would sometimes prepare and provide Fackler with summaries of personal expenses falsely describing the expenses according to business expense category. Kroupa on occasion would also compile and provide fraudulent personal expenses to their tax preparer.The ongoing scheme to defraud the IRS resulted in the defendants deducting $500,000 of personal expenses as ordinary and necessary business expenses on Schedule C.

In addition to the bogus deductions claimed by Kroupa and Fackler,Kroupa made a series of other false claims on the defendants’ tax returns, including failing to report approximately $44,520 that she received from a 2010 land sale in South Dakota and falsely claiming financial insolvency to avoid paying tax on $33,031 on cancellation of indebtedness income that she and her husband received.

In furtherance of their nefarious scheme, Kroupa and Fackler also concealed documents from their tax preparer and an IRS Tax Compliance Officer during an audit of their 2004 and 2005 tax returns.

According to the plea agreement and Kroupa’s testimony at the plea hearing, Kroupa and Fackler delivered false and misleading documents to an IRS employee, during a second audit in 2012,to bolster their claim that certain personal expenses were actually business expenses of Grassroots Consulting. After the IRS requested documents pertaining to their tax returns, Kroupa and Fackler removed certain items from their personal tax files before giving them to their tax preparer because the documents contained potential evidence that Kroupa and Fackler illegally deducted numerous personal expenses.

During the audit, Kroupa also falsely denied receiving money from the 2010 land sale. Later, when they learned the 2012 audit might progress into a criminal investigation, Kroupa instructed Fackler to lie to the IRS about her involvement in preparing the portion of their tax returns related to Grassroots Consulting.

Kroupa and Fackler’s scheme to defraud the IRS resulted in the deliberate understating of their taxable income for the tax years 2004-2010 by approximately $1,000,000, resulting in approximately $450,000 in federal income taxes evaded.

Shea Jones, Special Agent in Charge of the St. Paul Field Office put it in perspective by stating:

“Those charged with upholding the laws are not above the law. While serving as a United States Tax Court Judge, Diane Kroupa conspired to break the law by evading the taxes she owed. Her actions were not only unlawful and dishonest, but they were a theft from the American public. No matter what your position, it is unacceptable to cheat the system that provides the government services and protections that we all enjoy. IRS Special Agents will continue to pursue tax cheats at all levels of society, regardless of position or status.”

Former IRS Criminal Investigation Special Agent Charged

On October 26, 2016 a federal grand jury in Sacramento, California charged a former Internal Revenue Service–Criminal Investigation (IRS-CI) special agent with six counts of filing false income tax returns, one count of corruptly endeavoring to obstruct the Internal Revenue laws, one count of theft of government money and one count of destroying records during a federal investigation.

According to the allegations in the amended indictment, Alena Aleykina (“Aleykina”), a certified public accountant and former IRS-CI special agent, filed false individual income tax returns for the years 2009, 2010 and 2011 by claiming false filing statutes, dependents, deductions and losses and tax returns on behalf of two trusts.

The indictment also alleges that, between 2008 and 2013, Aleykina attempted to obstruct the IRS by preparing false tax returns for herself, family members, trusts and partnerships and by making false statements to representatives of the Department of the Treasury.  In addition, Aleykina attempted to obstruct a federal investigation by destroying evidence on a government computer.  Finally, Aleykina was charged with fraudulently causing the IRS to issue IRS Tuition Assistance Reimbursement payments to her.

Tax Attorney And CPA Indicted For Tax Evasion And Diversion Of Tax Shelter Fees From Major Manhattan Law Firm

On October 26, 2016 Harold Levine (“Levine”), a Manhattan tax attorney, and Ronald Katz (“Katz”), a Florida certified public account, were charged in the U.S. District Court in New York with an eight-count indictment related to a multi-year tax evasion scheme. According to the indictment, the defendants diverted millions of dollars of fees from Levine’s Manhattan law firm and failed to report millions of dollars in fee income to the Internal Revenue Service.

The allegations in the indictment assert that Levine, the former head of the tax department at a major New York City Law Firm schemed with Katz, to divert from the Law Firm over $3 million in fee income from tax shelter and related transactions that Levine worked on while serving as a partner of the New York Law Firm.  The indictment further alleges that Levine failed to report that fee income to the IRS on his personal tax returns during the period 2005-2011.  Not to be excluded, the indictment also charged Katz with receiving and failing to report over $1.2 million in fee income to the IRS.

In order to carry out the nefarious scheme, Levine caused tax shelter fees paid by Law Firm clients to be routed to a partnership entity he co-owned with Katz, rather than being paid directly to the Law Firm. Thereafter, it is alleged that Levine used approximately $500,000 of those fees to purchase a home in Levittown, New York.  In an attempt to conceal the diversion, Levine purchased the Levittown home in the name of a Law Firm Employee with whom Levine had a personal relationship with.

For a period of five years Levine allowed the Law Firm Employee to reside in the Levittown house without paying rent. Even though the Law Firm Employee lived at the residence rent free, Levine and Katz prepared tax returns for the partnership through which the home was purchased and treated the home as a rental property thereby falsely claiming deductions related to the property.

When Levine was questioned by IRS agents concerning his involvement in the tax shelter transactions and the fees received for those transactions, Levine falsely represented that the Law Firm Employee paid him $1,000 per month in rent while living in the Levittown home.  In addition, after the Law Firm Employee was contacted by the IRS and summoned to appear for testimony, Levinecoached the employee to represent falsely to the IRS that she had paid $1,000 per month in rent to Levine.

IRS-CI Special Agent in Charge Shantelle P. Kitchen said:

“Tax and accounting professionals who conceal their incomes, evade income taxes, and otherwise obstruct the Internal Revenue Service simply have no excuse for violating the very laws their professions are centered on.  IRS-Criminal Investigation works hard to ensure that everyone pays their fair sure and we take particular interest in allegations involving professionals who should simply know better.”

Former Business Professor Pays $100 Million Penalty in Tax Fraud Case

On November 4, 2016, Dan Horsky (“Horsky”), age 71, pleaded guilty to his role in a financial fraud conspiracy involving a foreign bank account totaling more than $200M and further agreed to pay a civil penalty in the amount of $100M.

According to the statement of facts filed with the plea agreement, Horsky is a citizen of the United States, the United Kingdom and Israel. He was employed for more than 30 years as a professor of business administration at a university located in New York.  On or about 1995, Horsky started making investments in a number of start-up companies. The investments were made using financial accounts, which Horsky set up, at various offshore banks, including one bank in Zurich, Switzerland.  Horsky created “Horsky Holdings,” a nominee entity, to hold some of the investments. He used the Horsky Holdings account, and later, other accounts at the Zurich-based bank, to conceal his financial transactions and financial accounts from the IRS and the U.S. Treasury Department.

Horsky made various investments in Company A through the Horsky Holdings account. The funds used to make the investments represented Horsky’s own money, money provided by his father and sister, and margin loans from the Zurich-based bank.  Company A was purchased by Company B for $1.8 billion in an all cash transaction. At this time, Horsky held a 4% interest in Company A.  Horsky received approximately $80 million in net proceeds from the sale of Company A’s stock, but he only disclosed approximately $7 million of his gain from that sale to the IRS. As a result, Horsky paid taxes on just that fraction of his share of the proceeds.  In 2008, and in subsequent years, Horsky invested in Company B’s stock using funds from his accounts at the Zurich-based bank and by 2013, his investments in Company B, combined with other unreported offshore assets, reached approximately $200 million.

To further conceal his ownership in the foreign financial accounts, in 2011, Horsky caused another individual to have signature authority over his Zurich-based bank accounts, and this individual assumed the responsibility of providing instructions as to the management of the accounts at Horsky’s direction.  This arrangement was intended to conceal Horsky’s interest in and control over these accounts from the IRS as well as to conceal the income generated from these accounts.


The average taxpayer can find comfort in knowing that in the world of U.S. tax compliance, no one gets a pass.  The U.S. tax system is based upon voluntary compliance and the principle that each U.S. taxpayer has an obligation to report his income honestly and further is expected to pay his fair share of federal income tax.  The preceding examples are just a sampling of recent prosecutions and are not intended as an exhaustive list.

“No matter what your position, it is unacceptable to cheat the system that provides the government services and protections that we all enjoy. IRS Special Agents will continue to pursue tax cheats at all levels of society, regardless of position or status.”

Shea Jones, Special Agent in Charge of the St. Paul Field Office commenting on the Kroupa conviction.