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.




Panama Papers

Panama Papers: Part 2. Law Review Article examines how US Trust Law enables people who had previously sought Panama Papers-like protection from offshore trusts.

As previously covered in this blog here and here, the Panama Papers is a collection of documents and emails from the Panamanian Law Firm, Mossak Fonseca, which specialized in creating offshore trusts and companies to help their clients in hiding money from government detection. 

Here’s a recap of the carnage of public officials caught in the wake of the Panama Papers (approximately 140 politicians, 29 billionaires and at least 33 blacklisted people to 214,000 offshore entities, according to Forbes):

Also interesting are these two articles about how the Panama Papers were leaked:

  • This Wired article discusses size of the data obtained from Mossak Fonseca (2.6 Terabytes)
  • This Forbes article discuss the leak and the data sharing between the journalists, often using open sourced encryption methods to secure the data while the journalists were preparing their articles. 

Since the Panama Papers leaked, Reid K. Weisbord, law professor at Rutgers, has published an article in the Columbia Law Review entitled, “A Catharsis for U.S. Trust Law: American Reflections on the Panama Papers.”  Professor Weisbord’s article summarizes the Panama Papers scandal and the public reaction to the uncovered offshore trust abuses.  He then outlines three trust practices that are permitted in the U.S. that offer similar protections that only offshore trusts were previously able to offer.  He concludes his paper with possible reforms to prevent on shore trust abuses.

In his paper, Professor Weisbord discusses the following trust tools which provide nearly the same protections once found in offshore trusts:

  • Self-Settled Asset Protection Trusts;
  • Tax Breaks through Dynasty Trusts; and
  • Minimal Reporting requirements.
  • Self-Settled Asset Protection Trusts

As explained by Professor Weisbord, traditional trust law allows the trust to be a separate entity from the donor (settlor or creator of the trust) and/or donee (or beneficiary of the trust), so that when a gift is made to a trust, with a spendthrift provision, the trust is not obligated to pay to a donee’s creditors.  The creditors can only reach the assets if the trust pays out to the donee, because the spendthrift provision can limit or restrict payments to the donee if there are creditors present.  

Also as explained by Professor Weisbord, a self-settled asset protection trust would allow the settlor to transfer his assets to the trust, and if there is a spendthrift provision, the settlor’s creditors could not reach the settlor’s assets.  This novel creation by state legislatures has minimized the need to use offshore trusts. 

See this pdf outlining the 17 states with some version of the self-settled asset protection trusts laws.

Tax Breaks through Dynasty Trusts

As most estate planners can tell you, one key outcome of an estate plan is to defer taxes.  While the tax code allows for certain kinds of deferral with respect to estate plans (and as explained by Professor Weisbord) the code changed over time to include a generation skipping tax so that transfers to a donor’s grandchildren and future generations were taxable.  The so called generation skipping tax (“GST”) imposes a transfer tax for gifts to future generations.  However, the GST tax also includes an exemption (approximately $5,000,000).

One other barrier to gifting to future generations through a trust is the rule against perpetuities (or simply put, the law that prohibits a trust from existing beyond a certain period, usually 21 years, following the death of the last named living beneficiary at the time the trust was drafted).  As Professor Weisbord has pointed out, several states have abolished or limited the rule against perpetuities to permit trusts to exist well beyond the death of the last named beneficiary’s lifetime. 

These so called dynasty trusts have enabled creative estate planners to obtain advantages in creating estate plans that were previously limited to using offshore trust.  For a summary of dynasty trusts and the rule against perpetuities, see this law firm’s website.  For a chart of states that have abolished/limited the rule against perpetuities, see this chart.

Minimal Reporting requirements

As stated by Professor Weisbord, states have reduced the reporting requirements of trusts, so that the trust reporting requirements are minimal or non-existent.  This change coupled with the Organization for Economic Cooperation and Development (“OECD”) increased reporting requirements for foreign jurisdictions has spurred moving former offshore trusts back to U.S. trusts.

See this Bloomberg article about the U.S. being the newest/latest tax haven because of its lax reporting and refusal to sign off on the OECD reporting requirements

Weisbord’s Recommendations

Weisbord summarizes his paper with recommendations that he acknowledges are implausible because states that have enacted changes to its laws are highly unlikely to amend them again to prevent the abuses he raises in his paper.  Weisbord does suggest the possibility that the trusts may be invalidated by the bankruptcy code and fraudulent conveyance laws, but, in reality if done right, even these federal laws may not invalidate a trust to prevent people from using the trusts in the US as a tax shelter.

Weisbord’s conclusions/recommendations place at a premium specific and credible information a whistleblower has on a donor/settlor establishing a trust and avoiding taxes (in the U.S. and possibly in other jurisdictions).  With this insider information the IRS may properly assess the tax liabilities of the donor/settlor. 

The IRS will pay a whistleblower for specific and credible information about persons and trusts violating U.S. tax laws.  The IRS pays between 15-30% of the total collected proceeds (tax, interest, penalties, and additional amounts) for specific and credible information that leads to the successful prosecution and collection of collected proceeds from the tax violators.  Contact us to discuss whether you should file a tax whistleblower award claim with the IRS.

Why the Panama Papers matter

As a primer, this blog discussed the release of documents from the Panamanian law firm Mossack Fonseca, known as the Panama Papers, which disclose a network of shell corporations and entities established by the Panamanian law firm to assist clients in hiding funds and avoiding taxes.

In the news today, as found in this NY times article, the U.S. Justice Department (“DOJ”), through its Kleptocracy Asset Recovery Initiative (for more information about this unit see this NY times article), has begun a forfeiture action against properties in the U.S. acquired by Malaysian individuals whom allegedly embezzled funds from the 1 Malaysia Development Berhad (“1MDB”, Malaysia’s sovereign wealth fund, designed to be used for investment that would return profits to support the Malaysian people).  

The DOJ is trying to seize $1 billion in assets including the $30.6 million penthouse at the Time Warner Center in Manhattan, a $39 million mansion in the Los Angeles hills, and a $17.6 million tear down home in Beverly Hills.  The DOJ is alleging that the individuals diverted over $3 billion funds from 1MDB for their own use.  The key individuals referenced are the stepson, close friends and associates of the prime minister of Malaysia.  There are even allegations that some of the funds diverted were used to fund the film “The Wolf of Wall Street” and also to purchase paintings from Picasso and Monet. 

The DOJ’s seizure action raises two questions:

  1. Why isn’t the government getting tough in preventing US Multinational Corporations (US MNCs) from shifting their profits offshore to avoid U.S. taxes; and
  2. Why are US banks allowing individuals to hide money in the U.S.

As previously discussed in this Blog, US MNCs have utilized transfer pricing, earnings stripping and inversions to shift profits from the U.S. to low tax jurisdictions to lower the effective tax rates paid by the US MNCs.  This recent news story (DOJ seizure) raises the question why isn’t the government utilizing more aggressive techniques to stop the US MNCs from shifting this income when the government is seizing asset allegedly begotten from embezzled funds of other nations.  Shouldn’t we first stop US tax income from flowing to low tax jurisdictions, then worry about US assets acquired by other nations’ stolen funds?

The Second question goes to the nature of the Panama papers and the uses of shell corporations to mask the identity of the owners of the shell corporations.  There is now an effort by the government to require banks to know the owners of the shell corporations.  See this NY Times article.  According to the article, the US Treasury is requiring US branches of foreign banks to know whom the beneficial owners of the shell corporations.  While the US Treasury’s plans have not actually translated to actual rules requiring banks to obtain the identities of the owners of the shell corporations it appears as if it is likely to get legislation passed through Congress to enact the more stringent requirements on banks. 

If you have specific and credible information about a U.S. MNC shifting its profits offshore using transfer pricing, inversions or earning stripping, or anyone not paying their taxes by using shell corporations through banks, contact our firm to discuss filling a tax whistleblower claim.  As a reminder, the IRS pays between 15-30% of the collected proceeds (tax, penalties, interest, and other amounts collected) based on the information provided and used by the IRS to stop tax violators.