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 procedure.  Forbes 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.

 

Tax Fraud or Tax Avoidance?

Lionel Messi

There is a joke among tax practitioners, namely: What's the difference between tax evasion and tax avoidance?  Answer: About $100,000 and a competent tax attorney.  While this may be a party joke, there are real world examples of this joke playing out.

Case 1: Lionel Messi and Tax Fraud Trial.

In the sports/tax news, Lionel Messi, a world renowned soccer player, testified in his tax fraud case before Spanish authorities. See SI article. 

Messi stated that he didn't know he wasn't paying his taxes, and that he would sign anything his father put in front of him, because he trusted his father.  With respect to tax issues, this blind dependence/trust in a person with the power of preparing your tax returns is known as willful neglect, and unfortunately it will not relieve you of your obligations to file and pay your tax liabilities.

In the United States, Internal Revenue Code Section (I.R.C. §) 6651 imposes an additional penalty for failure to file your tax return, and failure to pay your tax liability as shown on your tax return.  I.R.C. §  6651 contains a reasonable cause exception, but that must be raised by the taxpayer based on the facts and circumstances.  Noteworthy to this discussion, is that Lionel Messi's dependence on his father would not rise to the level of reasonable cause for exempting Lionel Messi from this additional penalties, because merely trusting or depending on someone does not relieve a person from their tax return filing and tax paying obligations.

Willful Neglect is defined by the United States Supreme Court as "a conscious intentional failure or reckless indifference to the filing requirement."  United States v. Boyle, 469 U.S. 241, n.3 (1985)  Ignorance of the filing requirements is not an excuse for failing to file a tax return. 

While Spanish tax laws may be different than the IRS rules and regulations, Messi's case reflects that blind trust in your advisors and/or family members does not eliminate your obligations to file tax returns and to properly structure your business affairs.  Note, the SI article states that Messi and his father are facing three counts of tax fraud and could be sentenced to nearly two years in prison if found guilty of defrauding Spain's tax authority of 4.1 million euros ($4.5 million) from 2007-09. The SI article points out that Messi and his father are not likely to face any jail time but could be fined and made to forfeit possible future tax benefits, and that both deny wrongdoing, and the money owed was already paid back.

Case 2: Donald Trump Tax Avoidance through the use of Delaware entities.

Contrasting Lionel Messi's situation is Donald Trump, the presumptive Republican nomine for President of the United States.  In recent news, Donald Trump has pooled 110 registered or pending trademarks and placed them into a new Delaware based (DTTM Operations LLC).  This Bloomberg article points out that this maneuver would permit Donald Trump to escape other states' income taxes on royalties paid for their use, which would be an income stream worth tens of millions.

Additionally, the article highlights ways that Donald Trump may have reduced his tax rates by utilizing foreign entities by shifting some of the trademarks to Ireland.  The Bloomberg article also provided possible other reasons for the consolidation, including debt financing and estate planning.

The significance of this second case when compared with the first case is that with proper tax planning, what appears to be tax fraud with the Messi case, is likely just proper prudent tax planning in the Donald Trump case.

Not all tax planning is proper, if you have specific and credible evidence of improper tax planning or fraud, contact us to discuss your case.  The IRS pays an award between 15-30% of the collected tax, penalties and interest for substantial and credible information provided by a whistleblower.