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.




Tax Holidays and Tax Amnesty Programs: Do they work or are we just giving tax violators a break?

In recent news, the State of Alabama is considering creating a tax amnesty period from June 30 through Aug. 30, 2016.  The amnesty program will apparently forgive tax liabilities related to individual and business income taxes, sales and use tax, lodgings tax, severance taxes, cigarette taxes and business privilege taxes. While some exclusion from the program are motor fuel taxes and certain healthcare and environmental taxes.  As noted by the Bloomberg blog, other states have also instituted amnesty programs, Massachusetts, or are considering implementing a tax amnesty program, South Carolina.

The IRS also has several amnesty programs in place for people that have not filed their taxes or have not paid their tax liabilities.  The programs are as follows:

  1. Domestic Tax Amnesty for unfiled tax returns or unreported tax liability (Voluntary Disclosure, See IRS IRM provisions.  See also blog discussing how far back to file unfiled tax returns.)

  2. Offshore Voluntary Disclosure Program

Additionally, Congress has, in the past, instituted a one-time tax holiday to allow U.S. multinational corporations to bring back money the multinational corporations had previously invested in its offshore foreign subsidiaries.  See NY Times article about the 2004 tax amnesty and its effects.  See also the article and the Senate PSI report stating that the promised 2004 tax repatriation holiday failed to meet the promised benefits of new jobs, or research and development (R&D) expenditure. 

The 2004 tax holiday allowed corporations to repatriate amounts held offshore at a reduced rate 5.25% instead of the statutory corporate rate of 35%.  The PSI report highlights the fact that the 2004 tax holiday permitted corporations to bring back $312 Billion.  The PSI report also highlights that while the 2004 law prohibited the repatriated funds for stock repurchases or executive pay, there was no mechanism for monitoring the use of the repatriated funds, so most of the funds were used exactly for stock buybacks and increased executive pay.

There have also been recent attempts by Congress to allow another tax holiday to allow U.S. multinationals to repatriate offshore funds.  In 2014, Senators Boxer and Paul introduced an infrastructure bill tied to a tax holiday (a 6.5% tax on repatriation of funds over a five year period).  The Boxer-Paul bill prohibits dividends, shareholder buybacks or executive compensation for 3 years and the revenue generated would by the 6.5% tax would fund infrastructure projects.  However, as presented in the Salon article, and as reported in Bloomberg, the Joint Committee on Taxation determined that such a tax holiday would really cost taxpayers $96 billion over 10 years.

An alternative to a tax repatriation holiday appears to be a transitory tax on “permanently reinvested offshore earnings.  Such a transitory tax was proposed by former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014.  As stated in The Center on Budget and Policy Priorities article, “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure” by, The Tax Reform Act of 2014 proposed to tax all offshore profits as a transition to a new international tax system that would generate an estimated $170 billion of revenue over 10 years for the Highway Trust Fund. 

President Obama has also introduced a budget proposal (fiscal year 2015) which would utilize revenue from transitioning to a new corporate tax system to finance infrastructure.  See the CBPP article.  The President’s proposal would require multinational corporations to pay a one-time U.S. tax on the profits held overseas prior to changing the permanent way the U.S. would account and tax the offshore profits currently not being taxed.  The President’s proposal allegedly would generate taxes in the amount of $268 billion over 10 years to fund infrastructure improvements.  See this CBPP article comparing transition tax and repatriation tax holiday.

As the CBPP articles reflect, and the PSI’s examination of the 2004 tax holiday, a tax repatriation holiday does not work to generate present and future investment in the United States.  Instead, the empirical data suggests that companies will use the repatriated funds to:

  1. Repurchase Shares from Shareholders or pay dividends to shareholders;

  2. Increase Executive Compensation;

  3. Terminate workers in the United States;

  4. More Aggressively transfer profits offshore to increase amounts “held” or “permanently reinvested offshore” to avoid U.S. taxes because Congress will just grant another tax repatriation holiday in the future.

Following the 2004 tax repatriation holiday as an example of what to expect when IRS or States permit tax violators to be forgiven of their tax liabilities through tax holidays or tax amnesty program, the question to ask is: Why are the tax violators getting a break at the expense of compliant taxpayers?  Or alternatively: Shouldn’t government be in the business of rewarding compliance instead of rewarding habitual tax violators?

How can governments reverse or flip the logic behind a tax holiday or tax amnesty program?  Maybe the governing bodies should reward compliant taxpayers by allowing them to reduce their tax rate for each year of compliance.  Or maybe governments could permit additional deductions/exemptions or reduce phase-outs for deductions for the taxpayers that are compliant and based on the length of compliance.  If the goal is compliance and tax collection, shouldn’t the carrot be a reward for compliance instead of rewarding habitual tax violators by giving them a break for their continued tax violations.  Something to think about.

If you know of any individual or corporation that has not paid their tax liabilities or has habitually avoided paying its taxes, you should file a tax whistleblower claim.  The IRS has a whistleblower program that will pay between 15% and 30% of the collected proceeds (that exceed $2,000,000) to whistleblowers that provide specific and credible evidence of the tax violations of the individuals/corporations.  Contact us to evaluate your claim and to file your claim for an IRS award.