Tax Crimes Roundup

Tax Crimes Roundup: Two professionals that should have gotten their tax problems right.

Case 1:

The first case is an update of former Tax Court Judge Kroupa's case.  As previously discussed in this blog, the former Tax Court judge and her husband were indicted on charges for filing fraudulent tax returns and conspiracy to defraud the U.S.

In September 2016, Kroupa's husband, Robert E. Fackler, pled to obstructing an IRS audit.  In his plea agreement and testimony, Mr. Fackler pled to the following facts:

  • Between 2002 and 2012, Fackler and Kroupa conspired to obstruct the Internal Revenue Service (IRS) from accurately determining their joint income taxes.
  • As part of the conspiracy, Fackler and Kroupa worked together each year to compile numerous personal expenses for inclusion as supposed "business expenses" for Grassroots Consulting in their joint tax return such as: 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.
  • From 2004 through 2010, the defendants fraudulently deducted at least $500,000 of personal expenses as purported Schedule C business expenses.
  • At times, Kroupa prepared and provided to Fackler handwritten summaries of personal expenses falsely described according to business expense categories.  On other occasions, Kroupa herself compiled and provided to their tax preparer the fraudulent personal expenses.
  • Fackler and Kroupa made a series of other false claims on their tax returns, including failing to report approximately $4,520 that Kroupa received from a 2010 land sale in South Dakota by falsely claiming financial insolvency to avoid paying tax on $33,031 on cancellation of indebtedness income.
  • During the second audit in 2012, Fackler and Kroupa caused false and misleading documents to be delivered to an IRS employee in order to convince the IRS employee that certain personal expenses were actually business expenses of Grassroots Consulting.
  • After the IRS requested documents pertaining to their tax returns, Kroupa removed certain items from their personal tax files before Fackler gave them to their tax preparer because the documents could reveal they had illegally deducted numerous personal expenses.  Fackler and Kroupa together concocted "false explanations" justifying payments questioned by the IRS.
  • 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.

Finally on or about October 21, 2016, Kroupa pled to conspiring to defraud the U.S.

Kroupa's and Fackler's cases raise serveral questions:

  • Why would two relatively smart people consciously circumvent paying their taxes in such a manner that would cause criminal charges when the tax code is ripe with plenty of allowable exclusions of income on their tax returns?  Maybe they were too greedy and as the business saying goes, "pigs get fat, hogs get slaughtered", they figured that they could get away with deducting expenses that are personal in nature and not business related.
  • What is the appropriate punishment for defrauding the U.S.? Also, should they be held to a higher standard because she was a Tax Court judge and should have known better?

Sentencing of Kroupa and Fackler will be interesting, but based on the Federal sentencing guidelines, a defendant who is found guilty of conspiracy to impede, impair, obstruct or defeat tax gets a base score of 10, and there can be adjustments to 12 or 14, depending on the circumstances.  With a base score of 10, the sentence would be 6-12 months, assuming this is Kroupa's and Fackler's first offenses.  A 12 would translate to 10-16 months, and 14 would be 15-21 months.  Note:  most tax crimes are based on tax loss, and in this case had Kroupa and Fackler not pled to conspiracy, the sentence for tax loss of $450,000 would be a base score of 18, with possible increases.  The score of 18 is equal to 27-33 months, again assuming this is Kroupa's and Fackler's first offenses.

Case 2

Similar to the Kroupa/Fackler case, a professor of business administration in New York pled to conspiring with others to defraud the US and to submitting a false expatriation statement to the IRS.

  • Dan Horsky, 71, is a citizen of the United States, the United Kingdom and Israel and was employed for more than 30 years as a professor of business administration at a university located in New York.
  • Beginning in approximately 1995, Horsky began investing in numerous start-up businesses through financial accounts at various offshore banks, including one bank in Zurich, Switzerland.
  • Horsky created "Horsky Holdings," a nominee entity, to hold some of the investments and he used 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 investments in Company A through the Horsky Holdings account using his own money, money provided by his father and sister, and margin loans from the Zurich-based bank.
  • Eventually, Horsky amassed a four percent interest in Company A's stock.  In 2008, Company A was purchased by Company B for $1.8 billion in an all cash transaction.  Horsky received approximately $80 million in net proceeds from the sale of Company A's stock, but disclosed to the IRS only approximately $7 million of his gain from that sale and 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.
  • Horsky directed the activities in his Horsky Holdings and other accounts maintained at the Zurich-based bank, despite the fact that it was readily apparent, in communications with employees of the bank, that Horsky was a resident of the United States.
  • Bank representatives routinely sent emails to Horsky recognizing that he was residing in the United States.
  • Beginning in at least 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.
  • In 2013, the individual who had nominal control over Horsky's accounts at the Zurich-based bank conspired with Horsky to relinquish the individual's U.S. citizenship, in part to ensure that Horsky's control of the offshore accounts would not be reported to the IRS.
  • In 2014, this individual filed with the IRS a false Form 8854 (Initial Annual Expatriation Statement) that failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.
  • Horsky also willfully filed false 2008 through 2014 individual income tax returns which failed to disclose his income from, and beneficial interest in and control over, his Zurich-based bank accounts.
  • Horsky agreed that for purposes of sentencing, his criminal conduct resulted in a tax loss of at least $10 million. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed false FBARs for 2012 and 2013.

The DOJ press statement states: "Horsky faces a statutory maximum sentence of five years in prison, as well as a period of supervised release and monetary penalties.  As part of his plea agreement, Horsky paid a penalty of $100 million to the U.S. Treasury for failing to file and filing false FBARs, which is separate from any restitution that the court may order."  Had Horsky not pled, the sentencing guidelines for $100 million in tax losses would have been a score of 30 with possible increases, and would equate to 97-121 month (8-10 years) for a first time offender.

This second case also raises the following questions:

  • Why didn't Horsky just pay his taxes and report the foreign accounts holding over $200 million?  Even assuming his company owned taxes on the full $200 million, the tax liability at 35% would have been $70 million.  Likely less than this because the gains were likely capital gains and if held for more than one year could have qualified for the 20% tax rate or $40 million.  It seems like paying the tax and reporting the accounts would have been cheaper than $100 million and up to 5 years imprisonment.
  • What/Who alerted the IRS to Horsky's accounts and his false filings?  Did Horsky's case have todo with the Panama Papers or UBS/Swiss Bank disclosures?
  • Why isn't the IRS and DOJ going after US Multinational Corporations for shifting profits to their low tax jurisdictions subsidiaries?

NOTE:  FBAR filings are returns that state ownership in foreign bank accounts and must be filed every year in which a US person owns or is the beneficiary of a foreign bank account. The IRS has been cracking down on FBAR filers that have not properly filed their FBAR, introducing two voluntary compliance programs in which taxpayers can get a break on the tax liability and penalties paid as a result of owning but not reporting their foreign bank accounts.  There is now even a streamlined filing procedureForbes outlines the success of the voluntary disclosure programs from 2003-2011.  Additionally, the Tax Court has held that FBAR penalties are including in the calculation of collected proceeds for determining an award payable to a whistleblower.  See Whistleblower 21276-13W v. Comm'r, (August 3, 2016).

If you know anyone not reporting their taxes in excess of $2,000,000, contact our office to discuss filing a tax whistleblower case.  The IRS is paying awards to whistleblowers that provide specific and credible information of unpaid tax, interest, and penalties in excess of $2,000,000.




Is the IRS retaliating against its own whistleblower?

As found in this article in the Washington Post, the IRS is facing questions as to whether it is retaliating against one of its own attorneys whom allegedly blew the whistle on how the IRS failed to identify "a multibillion-dollar corporate tax credit scheme involving a source of energy informally known as black liquor."

According to the Washington Post, William Henck, an attorney working inside the IRS Office of Chief Counsel for over 26 years, (see the powerline blog for a first person account by Mr. Henck) publically questioned the IRS' policy on refundable biofuels tax credits designed to foster new technologies but were being used by paper companies to receive huge refunds for burning pulp byproducts (known as "black liquor") since the 1930s.  See Washington Post article that quotes Henck.

The latest article and Henck's own account reflect the IRS auditing the Henck's returns and the IRS placing Henck's status at the IRS in limbo with the IRS and Treasury Inspector General's (TIGTA) office failing to properly investigate whether Henck committed any wrongdoing.

This account by an insider at the IRS raises serious questions about the IRS' commitment to investigate tax fraud even when reported by an attorney among its ranks.  It echoes an account by Jane Kim, a 10 year veteran chief counsel attorney in the Small Business/Self Employed Division outlining abuse at the IRS which resulted in tax cheats getting away without paying their taxes.  See this Tax Analysts' article.

This story also raises questions how committed the IRS is to investigate claims raised by whistleblowers under its Tax Whistleblower Program.  Despite Lee Martin's (Director of the IRS Whistleblower Office) statements to the contrary (see this blog on statements made by Lee Martin during Tax Whistleblower Bar call), this account can and may already have a chilling effect on the number and quality of submissions to the Whistleblower Office.

Nonetheless, if you know of tax fraud or tax violations committed by an individual or a corporation, and wish to report the violations to the IRS, contact us to prepare your tax whistleblower claim.  The IRS pays between 15-30% of the collected proceeds (tax, penalties, interest and additional amounts) for specific and credible information the IRS uses to prosecute the alleged tax violators.

Transfer Pricing News: Is the IRS doing its job?

As previously addressed in this blog, U.S. Multinational Corporations (USMNCs) are circumventing paying taxes in the United States through Transfer Pricing, Earnings Stripping and Inversions.  This blog also questioned whether tax holidays are just tax breaks for USMNCs that have utilized the three methods to avoid US taxation.

In recent news, (CNN Article), the French government has seized records from Google in an attempt to prove that Google evaded French taxes.  Based on the article, the French anti-corruption officers and tech experts raided the Google offices to ascertain the scope of Google's business in France.

In the same article, CNN points out that Google has recently agreed to pay about £130 million ($185 million) to the U.K. government, so this raid by French authorities may be an attempt to get Google to pay additional taxes in France.

While these events are interesting, the real question here is: why isn't the IRS raiding or requesting additional information from Google to ascertain the extent of its U.S. based business activities, so that the IRS can collect taxes in the U.S. despite Google's extensive use of transfer pricing (Dutch Sandwich strategy)?

Another CNN article points out that the EU is starting to tax corporations despite their use of transfer pricing to minimize taxes in European countries.  The article states that if the EU approves the new rules, companies would have to disclose more detailed records, which would be shared by the EU countries to ensure that all the taxes are being paid.  The article also highlights that EU countries are losing about $70 billion dollars in lost tax revenue from corporations shifting income. Finally the article also discusses other USMNCs that are paying additional taxes to EU countries.

These recent EU actions, as stated above, highlight a glaring weakness to the IRS' approach to transfer pricing; namely, why are EU countries able to get the USMNCs compliance with paying additional taxes and the IRS continues to let the USMNCs avoid taxation?

Perhaps this may be another reason why the House is seeking to impeach the IRS Commissioner.  See this MSN article, stating that the House is seeking to impeach the Commissioner due to the political group targeting scandal.  Maybe the Commissioner should direct his attention to transfer pricing and focus his efforts on collecting from the USMNCs that are not paying their taxes like our European counterparts.

If you have specific and credible information about a company utilizing transfer pricing to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking various abusive transfer pricing applications by USMNCs.