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Bank Fraud and Criminal Tax Charges Against Michael Avenatti

Michael Avenatti’s Indictment

The 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.

March 9, 2020/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Law Office News, Tax Returns

Paying personal expenses out of a closely held business: civil and criminal tax implications

Reporting personal expenses as businesses expenses on a tax return

The 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

April 5, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, News

Tax Evasion: No One Is Immune From Prosecution

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

Many 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.

CONCLUSION

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.

December 22, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, OVDP

Money Laundering Is Tax Evasion

Money Laundering and Tax Evasion

Money laundering and tax evasion are closely related. The IRS has used money laundering statutes to help cut down on tax evasion. Money laundering may be seen as willful tax evasion. Hiding money will off course lead to not paying taxes on the same.

What is Money Laundering?

Money laundering is a common occurrence today. Global concern surrounding this nefarious activity is based upon the theory that failure to report and account for this activity erodes the economic base of national economies. Individuals and organizations involved in criminal activity attempt to obscure the illegal source of the funds in an effort to avoid detection from law enforcement officials.

These funds commonly referred to as “dirty money” are the by-product of illegal activities such as drug and human trafficking, gambling, elaborate fraud schemes, and terrorism. Historically, criminals have utilized foreign financial institutions for purposes of “washing” dirty money through legitimate enterprises in order to avoid the scrutiny of taxing authorities.

Recent Global initiatives in combating money laundering including criminal prosecution, and the imposition of stiff criminal penalties have heightened foreign financial institution awareness and willingness to cooperate with authorities. Moreover, new reporting requirements, mutual exchange of information agreements and coordination of local, national and global law enforcement agencies will make it more difficult for individuals to avoid detection.

How does money laundering work?

The main objective behind money laundering is to obscure the illegal source of the funds, thereby enabling the criminal to use the money without detection. The process is complex as it involves several financial transactions which may be carried out through various financial outlets in various countries. There are so many ways in which individuals hide money derived from criminal activities to avoid detection. Some of them are:

Depositing a large sum of money earned illegally in small amounts in a financial institution under different fake names.
Depositing a large sum of money earned illegally in small amounts by using various bearer instruments like money orders.
Creating a Trust or Corporation or a non-profit organization or an account under a different name in a different country and moving large sums of money there.

The hidden money is then accessed through debit cards, credit cards, money orders or cash withdrawals. Check this article “Caribbean based investment advisors and an attorney” to see how Caribbean based investment advisors and an attorney colluded in their efforts to helping US Citizens hide money abroad.

Tax Evasion

Tax evasion is the wilful attempt to evade or defeat the assessment of taxes or the payment of taxes. The act of evasion occurs when a taxpayer either willfully fails to report his or her income as required by law, or having reported the income, engages in conduct that either hinders or defeats any attempt by the IRS in collecting the tax owed. In the latter case, the taxpayer prevents IRS from collecting by moving assets around under different ownership. An example would be: A taxpayer reports his income and has a tax liability. He has the money to pay the liability but instead, he closes all his bank accounts and moves the money to a different account under a different name. This is a clear indication of wilful tax evasion. For more on Tax evasion, check IRS Tax Crimes handbook.

Is money laundering therefore tax evasion?

In the U.S., money laundering is tax evasion but not all tax evasion is money laundering. According to IRS, money laundering is tax evasion in progress if the underlying conduct violates income tax laws and Bank Secrecy Act. If you are a U.S. citizen/ permanent resident, the law requires you to report your income and pay taxes on the same.

As a U.S. taxpayer, when you are involved in money laundering, it is obvious that you are hiding the money in question. The reason may be because the money is from criminal activities you are involved in and you do not want your cover to be blown. In this case, you want to hide the dirty source of your money through laundering to be able to spend it without worrying about the IRS and the tax consequences. Alternatively, the main reason behind your hiding the money may be because you are actually running away from paying your taxes. Either way, this is tax evasion engineered through money laundering. It does not matter if the income is legal or illegal, you have to pay your taxes or else the IRS will somehow catch up with you some day. It is even worse when your income is from criminal activities since there may be additional consequences for the underlying crime. I think this is why individuals who engage in criminal activities choose to launder their money to avoid detection by the government for the fear of facing criminal prosecution. While doing so, they are evading their responsibility to pay taxes.

Is there a way out of this money laundering mess?

You may have been involved in money laundering and off course tax evasion in the process and may be you are tired of hiding. Your question may be “can I really make it right? Is there really a clean way out?” While there is no guarantee of avoiding criminal prosecution, there is still a chance to make it right. This is by getting into the OVDP (Offshore Voluntary Disclosure Program). You have to get a pre-clearance letter from the IRS to be accepted into the OVDP. You do this by providing all information on all foreign financial accounts, filing amended income returns for all the years in question etc. Once approved, you will be able to enter into “Closing Agreement” with the IRS which means that the IRS will not revisit the matter again.

The Closing Agreement may differ from one case to another since one size does not fit all. This sounds easy, right? It may seem so but the whole process requires a careful evaluation of all the facts. If you need help walking through this, contact The Law Office of Anthony Verni . We can help you evaluate your situation and devise the best strategy to follow.

February 25, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, News

United States vs Simon in Failure to file FBARs

Failure to file FBARs as a Signatory Authority

Failure to file FBARs as a Signatory Authority to a foreign bank account is an offense punishable by law according the to the Bank Secrecy Act.

The U.S. Court of Appeals for the Seventh Circuit affirmed the conviction of an Indiana CPA/Accounting professor by a U.S. District Court in United States vs Simon, 7th Cir, No. 11-01837. The conviction was based upon the taxpayer’s filing false income tax returns, failure to file FBARs (Foreign Bank Account Reports), mail fraud and financial aid fraud. One of the four FBAR counts related to Simon failure to file FBARs (reports on foreign bank accounts) for which he was a signatory for the years 2002 through 2007. During this time period he was the managing director of three foreign companies and had signatory authority over foreign bank accounts of these companies. The companies included: The Simon Family Trust based in the Cook Islands, Elekta Ltd, a Gibralter company and JS Elekta, a Cyprus corporation.

Charges on Failure to File FBARs

Simon was charged with four counts of failure to file FBARs related to foreign bank accounts according to 31 U.S.C. §§ 5314, 5322. For the years 2005 through 2007, Simon conceded he was required to file a form TDF 90-22.1 now FinCEN Form 114 by June 30^th for the foreign bank accounts aggregating more than $10,000 in the previous years. He also admitted that he failed to do so. However, Simon argued that he did not violate the law.

Simon’s defense

According to Simon, the IRS issued guidance in 2009 and 2010 that granted retroactive extensions for filing FBARs for the year 2008 and preceding years. This guidance was issued through IRS notices. Taking the notices into consideration, Simon asserted that he filed the required FBARS prior to his indictment. He insisted that he did the filing within the deadlines set forth in the notices 2009‐62 and 2010‐23 and could therefore not face prosecution on failing to meet the original deadlines.

Government’s standing

The Government maintained that Simon’s crimes were complete before the IRS issued the notices. According to the government, Simon could not use the notices to exonerate himself from crimes he had already committed before the notices came into play. According to the Government,

“amendment of a regulation does not relieve the taxpayer of criminal liability for conduct that occurred before the amendment even when the amendment purports to have retroactive application.”

In addition, nothing in the notices promised relief from criminal liability for taxpayers who willfully failed to file FBARs. The only relief in the notices was that the IRS would not impose civil penalties for taxpayers whose failure to comply was non-willful.

Evaluation Points

Setting up and using foreign corporations, trusts and other devices for purposes of hiding foreign funds never works and can be viewed as strong evidence of “willfulness” in an FBAR prosecution.
Masking transfers from foreign corporate and other third party accounts as “loans” can be used by the Government as strong evidence on intent in a criminal tax prosecution.
The facts in the Simon Case involved a wilful failure to file FBARs.

July 30, 2014/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, OVDP

IRS to Modify OVDP to Accommodate Non-willful tax evasion

OVDP changes to accommodate non-willful tax evasion

The OVDP (Offshore Voluntary Disclosure Program) may face more modifications as IRS continues to focus on international tax compliance. The IRS Commissioner John Koskinen hinted on the upcoming modifications to the OVDP on June 3rd, 2014 before the IRS Council. His remarks give a ray of hope to U.S citizens and residents who have offshore bank accounts that have gone unreported. This may be because the OVDP has been previously centered on criminal prosecution and hefty penalties under Bank Secrecy Act. The modifications would consider the U.S. Citizens and residents who have resided in other countries for so long that their failure to comply with their tax obligations has not been intentional. The IRS looks to accommodate these tax payers by easing the penalty on them. This is aimed at encouraging them to report their offshore accounts and comply with their tax obligations.

OVD program focus on combating tax evasion

OVDP (Offshore Voluntary Disclosure Program) was put in place to curb global tax evasion. It was to provide an opportunity to U.S. Citizens and permanent residents living overseas or those with offshore accounts to comply with their tax obligations voluntarily. This would involve disclosing offshore accounts and paying a monetary penalty thus avoiding criminal prosecution. The program has been successfully and as such seen various modifications since its inception. Despite this, there are still many tax payers who have not tapped into the OVDP program. They may have been willing to comply with their tax obligations may be if the penalties were minimal and reduced chances of criminal prosecution. For more on help with OVDP program, click here.

IRS modification to include willful tax payers in OVDP

IRS is determined to ensure maximum cooperation of its taxpayers abroad through yet another possible modification of OVDP. The OVDP program has without a doubt targeted all taxpayers with offshore bank accounts without considering if the taxpayers were willful or non-willful tax evaders. In his remarks, the IRS Commissioner John Koskinen notes that they are considering whether their voluntary programs have been too focused on those willfully evading their tax obligations and not being accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. According to the IRS commissioner, some of the U.S. citizens have resided abroad for many years, perhaps even the vast majority of their lives. This is the driving factor behind the forthcoming foreseen possible modifications by the IRS to the OVDP.

The IRS, through its Commissioner, hinted on the possibility of giving these tax payers, whose non-compliance does not constitute willful tax evasion, the opportunity to come into compliance without having to face the type of penalties relevant for those who willfully hid their investments overseas. These tax payers might not have had the opportunity of coming into compliance that doesn’t involve the threat of substantial penalties.

June 6, 2014/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, News

IRS Deadline for U.S. Citizens and Resident Aliens Abroad

IRS Expectations of U.S. Citizens and Resident Aliens Abroad

IRS (Internal Revenue Service) in one of its news releases has reminded U.S. citizens and resident aliens abroad of the deadline on their tax obligations. According to the IRS, U.S Citizens and permanent residents who lived or worked abroad in 2013 in full or in part may have a U.S. tax liability and a filing requirement in 2014. The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas including those serving in the military abroad.

IRS has provided a filing deadline of June 16 to U.S. Citizens and alien residents. To cater for tax payers residing overseas who cannot meet this deadline, IRS has provided an automatic extension to Oct. 15, 2014 to the taxpayers. However, it is important to note that the extension by the IRS is on time to file and not time to pay. An interest rate interest rate of 3% p.a. is compounded daily applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month applies to payments made after June 16, 2014.

Federal Law takes on IRS tax obligationa abroad

U.S. citizens and resident aliens living abroad are required by Federal law to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. The IRS requires the affected taxpayers to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their tax return Form 8938 (statement showing their financial assets abroad). U.S. Citizens and resident aliens with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 should these accounts. IRS requires tem to file Form 114 electronically with the Treasury Department. This is known as Reporting of Foreign Bank and Financial Accounts (FBAR). For more information on how to file the FBAR, click here.

June 4, 2014/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, News

Tax Evasion Not Cured with QI Pacts

Tax Evasion under QI agreements

On Feb. 28 2014, Thomas Sawyer, senior counsel on international tax matters with the DOJ’s Tax Division, clarified that banks who have helped clients hide assets from the US government aren’t immune from penalty simply because they have complied with a qualified intermediary (“QI”) agreement.

Mistaken Beliefs

Sawyer addressed the misconception of some banks that may have decided not to come forward under the mistaken belief that their QI agreements will protect them from enforcement. “If you’re hearing that advice, you should be put on notice that that’s wrong,” Sawyer said. Another misconception is that all banks have to do is pay a fine and they can simply move forward, he said.

An official from the IRS also said that the IRS has attaches in multiple countries to assist with investigations, and is looking at whether taxpayers who renounce their citizenship may be doing so for tax evasion purposes. Since the enactment of the Foreign Account Tax Compliance Act (“FATCA”), the government has seen an increase in these renunciations. It is very clear that the U.S. Government is committed to combating tax evasion. Foreign Financial Institutions holding U.S. Citizens bank accounts have to either comply with IRS under FATCA or face penalties or to the worst case, close the bank accounts.

Sooner or later, the government will catch up with non-compliant banks and non-compliant U.S. Citizens in foreign countries. There is no option to tax evasion.

March 23, 2014/by Anthony N Verni, Attorney at Law, CPA

FATCA, News

Tax Evasion Causes Cash Abroad to Rise

Tax Evasion and Profits

US-based companies added $206 billion to their offshore profits last year, shielding earnings in low-tax countries.

Bloomberg News reports that multinational companies have accumulated $1.95 trillion outside the US, up 11.8 percent from last year. Three companies—Microsoft Corp., Apple Inc., and International Business Machines Corp.—account for 18.2 percent of the total increase.

Tax Loopholes

“The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore,” said Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group, which seeks to counteract corporate influence.

Many of these companies are moving patents and other intellectual property to low-tax locales. US multinational companies reported earning 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.

“If you can choose between San Antonio and Shanghai, and you pay no taxes one place and 25 to 35 percent at home, you’re encouraged to move jobs overseas,” said Paul Jacobs, CEO of Qualcomm Inc., in his Mar. 4 farewell address. For US corporations, these overseas profits are building up and they are choosing to not bring the cash home and face the tax consequences. Because of this, CEOs like Jacobs are urging Congress to pass legislation that allows American companies to be able to bring money back to the United States without tax penalty. Doing so, they argue, would decrease tax evasion and increase domestic investment.

22 Companies

The majority of the offshore profits are held by a small number of companies. The top 22 corporations in Bloomberg’s analysis have more accumulated earnings outside the US than the other 285 combined. Under U.S. accounting rules, companies don’t have to assume they will pay federal taxes on profits they have deemed indefinitely reinvested outside the U.S.