Tax Problem Attorney Blog

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with IRS Tax Problems. In Stocker v. United States (6th Cir. 2013), the 6th Circuit affirmed the dismissal of Robert and Laurel Stocker's suit against the IRS challenging the IRS' denial of a $64,000 tax refund, holding that because the Stockers could not prove the timely filing of their amended federal tax return under the methods established in Internal Revenue Code (IRC) Section 7502, the District Court for the Western District of Michigan was correct in dismissing the case.

The Stockers' tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax audit of a business in which the Stockers had invested and lost money, Mr. Stocker's CPA prepared amended 2003 federal tax returns for the Stockers that entitled them to a $64,000 refund. Mr. Stocker's CPA advised him that the returns had to be mailed by October 15, 2007 to comply with the tax law. Unfortunately, though Mr. Stocker testified that he mailed the returns on that day, he neglected to bring copies of the certified mail receipts to the post office, therefore failing to obtain date-stamped receipts. Apparently this was because although the CPA's office manager prepared postage prepaid, certified mail return receipted requested envelopes for the Stockers she mistakenly retained the customer copies of the certified mail receipts for the 2003 amended returns, rather than giving these copies to Mr. Stocker so that he could present them at the post office as he mailed the returns.

This left the Stockers at a disadvantage when their tax dispute began, as the IRS' records stated that the envelope containing the Stockers' amended 2003 return was postmarked four days late. Compounding the Stockers' tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS' motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers' attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS' records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker's failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the "date of registration shall be deemed the postmark date". The court rebuffed the Stockers' attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS' failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers' mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers' own mistakes precluded them from receiving relief, despite their innocent nature. While calling it "unfortunate" that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.

Continue reading "Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return " »

After being convicted of criminal tax fraud and serving 18 months in federal prison, a prominent former California tax attorney recently found himself again the subject of an IRS investigation into his alleged tax fraud. After a criminal tax case that culminated in Owen G. Fiore's guilty plea to tax evasion for the 1999 tax year, the IRS began to seek civil tax fraud penalties against Mr. Fiore for 1996 through 1999. Although Mr. Fiore conceded the tax disputes and the tax fraud charges for 1998 and 1999, he disputed his fraud liability for 1996 and 1997. While the Tax Court felt that it was unclear whether some of Mr. Fiore's actions weighed in favor of a finding of tax fraud, the court took a novel approach and ultimately held that Mr. Fiore had been "willfully blind" to his unreported income, and consequently found him liable for tax fraud for the 1996 and 1997 tax years.

Borrowing heavily from criminal law principles and discussing relevant appellate jurisprudence on the issue, the Tax Court applied the infrequently-used (at least in the area of civil tax fraud) willful blindness concept to Mr. Fiore's actions in the years in question. Specifically, the court stated that if the IRS could prove by clear and convincing evidence that Mr. Fiore was "aware of a high probability of unreported income or improper deductions" and "deliberately avoided steps to confirm this awareness," the standard for civil tax fraud would be met.

Ultimately, the Tax Court found that Mr. Fiore met both prongs of the test for willful blindness. Discussing Mr. Fiore's extensive work experience and education, the court found that such experience ensured that he was aware of the risk of underreporting his income through generally neglecting firm administration. Furthermore, the court discussed Mr. Fiore's significant use of funds during the period in question, and inferred from this that he consciously chose to not pay taxes in order to have more funds on hand. As to the second prong of the test, the court found that since Fiore had access to bank statements, bills and deposit slips for each taxable year, yet failed to check them when preparing his tax returns, this constituted "deliberate" avoidance of steps to confirm the underreporting of his income.

After this discussion of Mr. Fiore's tax return problems, the Tax Court concluded that the finding of willful blindness not only weighed in favor of tax fraud, but deserved "particular weight" in determining whether Mr. Fiore had committed tax fraud. When added to other factors such as Mr. Fiore's repeated failure to cooperate in his IRS tax audits, consistent underreporting of income, and haphazard recordkeeping (none of which conclusively weighed in favor of a finding of tax fraud on their own), the court found that the IRS had met the burden of proof to show that Mr. Fiore committed tax fraud in 1996 and 1997.

Continue reading "Prominent Tax Attorney Found Liable for Civil Tax Fraud Penalties Due to Finding of "Willful Blindness" to Underreporting of Income " »

Last year the IRS announced an alternative to its Offshore Voluntary Compliance Program (OVDP) which was being made available to a limited group of non-resident individuals who failed to file Foreign Bank Account Reports (FBARs) on Form TDF 90-22.1. Our tax lawyers blogged about the Streamlined Program previously, taking a look at some of the pros and cons. Now the IRS has issued six Frequently Asked Questions about the Streamlined Compliance Program.

The most important FAQ is the first one. It makes clear that taxpayers who have a tax liability greater than $1,500 may apply to the Streamlined Program. It cautions that if a taxpayer exceeds the $1,500 threshold he or she may be classified as higher risk, and under FAQ No. 2 may be subject to higher penalties. It appears that the Streamlined Program may be a good bet for those individuals whose liability exceeds the threshold by a relatively small amount, perhaps $1,000 or $2,000, or even as much as $3,500. In the judgment of our tax attorneys going over that amount could be problematic, although as with tax problems in general and FBAR problems in particular, there is no substitute for a review of all of the facts. Simply put, a case by case determination is necessary before making the decision.

FAQ No. 3 provides that an individual who is already in the 2011 Offshore Voluntary Disclosure initiative (OVDI) or the earlier or later OVDP, who qualifies under the
Streamlined Procedure may move over from those programs into the Streamlined Procedure. Like everything else about the IRS' OVDP it is not possible to do so without risk. Specifically, the FAQs require one to opt-out of the OVDP by way of an irrevocable election. Only then will the examiner determine whether the taxpayer meets all of the qualifications of the Streamlined Procedure. So it is possible, especially in cases where the taxpayer is over the $1,500 per year threshold , to opt out, and wind up in a situation with the IRS asserting either a non-willful FBAR penalty, or even a willful FBAR penalty.

This is just another example of the IRS making FBAR compliance more difficult than necessary. There is no good reason why the IRS could simply combine the OVDP and the Streamlined Procedure into one coordinated system. A taxpayer wishing to come clean, and who believes she qualifies, could apply under the Streamlined Procedure, and then if the IRS disagreed that person would automatically be phased into the standard OVDP.

The reverse should also be the case. If a taxpayer is already in OVDP she should be able to get a determination as to whether she qualifies under the Streamlined Procedure without having to opt out, and possibly incur disastrous consequences.

As in all FBAR cases involving substantial dollars a knowledgeable tax lawyer should be consulted before anything is done.

Continue reading "Streamlined Foreign Bank Account Report (FBAR) Filing Compliance Procedure FAQs Issued by IRS for Non-Resident Taxpayers " »

Many people have the preconceived notion that used car salesmen are less than scrupulous and Mohammad Jafar Nikbakht didn't do anything to help that stereotype. Late last year in the United States District Court for the Southern District of California, Mohammad Nikbakht aka Freydoon Nikbakht was sentenced to 15 months in prison for criminal tax evasion for the year 2007. Mr. Nikbakht was the owner or co-owner of a number of wholesale used car dealerships in and around San Diego, California. He willfully and fraudulently understated his income on his Forms 1040 in a conscious attempt to avoid paying his federal income tax totaling over $200,000.

According to papers filed in his criminal tax case beginning in October 1999, Mr. Nikbakht purposely caused a false joint income tax return to be prepared on behalf of himself and his wife for tax year 1998, which substantially understated their income. Mr. Nikbakht signed and filed this fraudulent return with the Internal Revenue Service as well as doing the same for tax years 1999 and 2000. His intention was to knowingly and wantonly defraud the U.S. government of tax due and owing for those years.

In addition to filing false returns for 1998 through 2000, Mohammad Nikbakht allegedly also committed tax fraud by filing fraudulent Forms 1040 for the years 2002, 2003 and 2004, again purposely understating his income. For the years 2006 and 2007 he didn't file tax returns even though they were required. In his attempt to further criminally evade the income tax due and owing he operated a wholesale auto dealership under another dealer's license and had all of his income payments made payable to either cash or his ex-wife in an effort to hide his income. He moved money into, out of and between various bank accounts to hide the money from the IRS and created a sham corporation, opening a bank account in that corporation's name that he used to pay his personal expenses, again in a concerted effort to conceal his income.

Mr. Nikbakht eventually pled guilty to one count of the criminal tax indictment for 2007 with the remaining counts dismissed on the motion of the United States. In addition to 15 months in prison, Mr. Nikbakht was ordered to pay the IRS $124,454 in restitution and upon his release from prison will be on supervised release for three years. He will also be prohibited from opening checking accounts or incurring new credit card charges or opening additional lines of credit without approval of his probation officer.

Continue reading "San Diego Used Car Dealer Sentenced in Tax Fraud Case " »

In a criminal tax case last year the United States Court of Appeals for the Eighth Circuit upheld the conviction of a man for willful failure to pay the employment taxes of his healthcare staffing business. U.S. v. McClain (8th Cir. 2011). In United States v. Francis Leroy McLain, No. 0:08-cr-00010 (D. Minn. Jul. 20, 2009) the United States District Court for the District of Minnesota determined that Francis McLain knew he should have classified the workers for his temporary nursing staffing agency as employees but willfully chose not to.

How did McLain's payroll tax problems morph into criminal tax problems? First, he never filed federal payroll tax returns (Form 941) for the periods from the fourth quarter of 2002 through the fourth quarter of 2005 and only made one payment in December 2002 in the approximate amount of $4,200 for employment taxes although the total amount due was approximately $345,000. McClain's defense was that the nurses were in fact independent contractors and not employees, and even if they weren't he had a good faith belief that the workers were employees.

The courts were not impressed with McClain's arguments since he had a history of misclassifying his temporary nursing staff as independent contractors. In a previous civil tax case involving a predecessor company the IRS argued that McClain willfully misclassified his workers and failed to remit the payroll taxes to the IRS. That lawsuit was eventually settled and the IRS obtained a judgment for the unpaid employment taxes, penalties and interest. As a further part of that settlement McLain agreed that "with respect to any other business similar to the ... entities that he might own, operate, or control in the future, he would treat as employees for tax purposes all workers who performed functions or duties that were the same or similar as the functions or duties performed by the nurses and nursing assistants who worked for the...entities. In other words, defendant McLain was obligated to withhold and pay over employment taxes for the nursing professionals who worked for any of his entitles." In addition, McLain did comply with a Minnesota's statute requiring that nurse staffing agencies like his certify that they are treating their nurses as employees and not independent contractors.

Sometimes it's a gray area whether to treat workers as employees or independent contractors; but the wrong decision can have detrimental consequences to an employer, and its officers, resulting in large payroll tax liabilities and even tax evasion or tax fraud charges. The IRS has a number of criteria they use in determining whether a worker is an employee or an independent contractor and these federal criteria may differ on a state level as well.

Continue reading "Treating Employees As Independent Contractors Results in Criminal Tax Conviction " »

Our tax lawyers have represented a fair number of clients in the Tax Court, and before the IRS in so-called unreasonable compensation tax audits. The issue generally arises in closely held C corporations who pay out all of their profits as salary to the shareholders, rather than allocating any portion to dividends. The advantage is that salaries are deductible--dividends are not. An IRS tax audit can, however, result in the IRS denying a portion of the salaries as not being an ordinary and necessary business expense pursuant to IRC Section 162.

That's what happened in Mulcahy, Pauritsch, Salvador & Co. v. Commissioner (7th Cir. 2012). Mulcahy et. al. is a medium size accounting firm in Illinois. According to its website the firm provides a variety of services including income tax preparation for all types of businesses and individuals, IRS and State tax audit representation, payroll reporting, QuickBooks setup support and training, business startup services, monthly bookkeeping and financial statements.

The Mulcahy firm appealed the IRS decision by filing a Petition with the United States Tax Court, and when it lost there they appealed to the 7th Circuit Court of Appeal hoping no doubt for a better result. After an analysis of the tax law, and the facts Judge Posner of the 7th Circuit decided against the CPA firm, and upheld the imposition of the 20% negligence penalty. Judge Posner rejected the defense to the penalty advanced by CPA firms tax attorneys that the CPA firm relied on the many individual employees of the firm who were "knowledgeable in income tax matters." He wrote "... there was conflict in this case: taking advice from oneself." But Judge Posner didn't stop there. First he badmouthed the firm's tax lawyers:

Remarkably, the firm's lawyers (an accounting firm's lawyers) appear not to understand the difference between compensation for services and compensation for capital, as when their reply brief states that the founding shareholders, because they "left funds in the taxpayer over the years to fund working capital," "deserved more in compensation to take that fact into account." True--but the "more" they "deserved" was not compensation "for personal services actually rendered." Contributing capital is not a personal service. Had the founding shareholders lent capital to the company, as it appears they did, they could charge interest and the interest would be deductible by the corporation. They charged no interest (emphasis in original).

Not content with leaving it there Judge Posner finished up as follows:

We note in closing our puzzlement that the firm chose to organize as a conventional business corporation in the first place. But that was in 1979 and there were fewer pass-through options then than there are now; a general partnership would have been the obvious alternative but it would not have conferred limited liability, which protects members' personal assets from a firm's creditors.

Why the firm continued as a C corporation and sought to avoid double taxation by overstating deductions for business expenses, when reorganizing as a passthrough entity would have achieved the same result without inviting a legal challenge [citation omitted] is a greater puzzle.

The Tax Court was correct to disallow the deduction of the "consulting fees" from the firm's taxable income and likewise correct to impose the 20 percent penalty. That an accounting firm should so screw up its taxes is the most remarkable feature of the case.

OUCH!

Continue reading "CPA Firm Dissed by 7th Circuit Court of Appeals " »

The Fifth Circuit Court of Appeals ruled that offshore bank account records sought in a criminal tax investigation (related to a suspected failure to file Foreign Bank Account Report, TDF 90-22.1, i.e. FBAR) must be turned over to the IRS despite the fact that turning over those records would have incriminated the witness. The grand jury subpoena issued to the witness required him to produce any records required to be maintained pursuant to the Bank Secrecy Act including records reflecting the names on the offshore bank accounts, and the maximum value of the account. The witness was an individual in Texas who was the target of a grand jury investigation seeking evidence he had used secret Swiss Bank accounts to engage in tax evasion. The IRS already knew based upon records it received from UBS that the witness held offshore bank accounts.

To lay people, and even to most tax attorneys this was a startling result. Actually it would have been more startling, but for the fact that the Fifth Circuit Court of Appeals was the third Circuit Court of Appeals to hold that the Bank Secrecy Act which requires the filing of FBARs trumps the 5th Amendment of the U.S. Constitution. The Fifth Circuit, thus joined the 9th Circuit and the 7th Circuit which issued similar rulings in the last year.

The rulings rely on the "Required Records Doctrine." This is a rather arcane concept which I suspect even some criminal tax attorneys were not familiar with. To vastly oversimplify, the argument goes like this. The 5th Amendment only prohibits compelled testimony; therefore compelling someone to produce records that are voluntarily kept does not violate the 5th Amendment. The witness argued that the mere act of turning over the records was tantamount to compelled "testimony" since by turning over the records the witness was "testifying" as their existence, and also admitting that he knew about the foreign accounts. In addition, maintaining the documents in question are not voluntary since the Bank Secrecy Act "compels" one to keep certain records. Indeed it is a crime not to keep the records.

The Supreme Court has said however that the privilege against self-incrimination does not bar the government from imposing record-keeping and inspection requirements as part of a valid regulatory scheme. The doctrine first arose in the context of a wholesaler of fruit who was required to turn over certain records he was obligated to keep pursuant the Emergency Price Control Act. The Supreme Court explained in a later case that there are three prongs of the Required Records Doctrine. The records must be:

1. Essentially regulatory


2. Customarily kept; and


3. Have public aspects.

The witness argued that the true purpose of the Bank Secrecy Act was to combat criminal activity, and not simply to regulate the use of foreign bank accounts. That argument was rejected. The 5th Circuit also held that the records were of a type "customarily kept," and that they had acquired public aspects by virtue of the fact that the Treasury Department shares information it collects with other agencies. In the words of the Fifth Circuit: "That this data sharing is designed to serve an important public purpose sufficient to imbue otherwise private foreign bank account records with public aspects is not difficult to imagine."

What is difficult to imagine is why the Courts are willing to throw away an important Constitutional safeguard for the sake of catching of few criminal tax cheats.

Continue reading "Foreign Bank Accounts and the Failure to File Foreign Bank Account Reports (FBARS) May Be the Death Knell of the 5th Amendment " »

San Diego tax attorney Scott Waage was enjoined from preparing tax returns or giving tax advice pursuant to an injunction entered by a federal district court. The injunction had been sought by the Department of Justice in a complaint filed in the Southern District of California pursuant to Internal Revenue Codes Sections 7401, 7402 and 7408.

In its complaint the Department of Justice alleged that tax lawyer Waage along with CPA Robert O. Jensen promoted tax fraud schemes to clients that illegally reduced the client's reported income by, among other things, using sham consulting companies, and illegally structured employee benefit and pension plans. According to the complaint, Waage operated under the names of "The Tax Advisors Group, Inc." and "Pensions by Design." Apparently in his promotional materials tax lawyer Waage referred to himself as a "visionary tax attorney," and a seasoned tax litigator. Currently if you try to click on Waage's website at www.strategiclawgrouppc.com a message pops up that the site has been "disabled."

According to the Department of Justice press release CPA Jensen had been enjoined in March from preparing tax returns that understate income. It makes one wonder why the Department of Justice needed an injunction to prevent CPA Jensen from preparing tax returns that understate income! I always assumed that CPAs (as well as tax lawyers and enrolled agents for that matter) were already not supposed to understate income. Still the IRS uses the injunction process as a convenient, and relatively quick method of putting a tax preparer out of business; and sometimes as an alternative to a criminal tax prosecution. However, in some cases the IRS uses an injunction as a stop gap measure while it puts together its criminal tax case.

Tax attorney Waage is apparently no stranger to IRS tax problems. According to a summons action filed against him in 2008, Waage's law firm was under investigation for its federal income tax liabilities. U.S. v. Waage.

The injunction order against Waage also requires him to provide the IRS a list of his clients that have used his services since 2001. It is likely that those clients will be receiving tax audit notices from the IRS in the not too distant future. Even though the normal statute of limitations for income tax returns is only 3 years, in the case of tax fraud the statute of limitations is open indefinitely, and there is case law supporting the view that tax fraud includes tax fraud by the tax return preparer, nor merely the taxpayer.

Continue reading "California Tax Lawyer Enjoined From Providing Tax Advice or Preparing Tax Returns " »

Relief from penalties for failure to file Foreign Bank Account Reports (FBAR), TD F 90-22.1 for non-resident U.S. persons with offshore bank accounts was first announced by the IRS on June 26, 2012 with further guidance promised before the procedure's September 1st effective date. On Friday Aug. 31, 2012 with minutes to spare, the IRS announced the new "Streamlined" Filing Compliance Procedures for Non-Resident, Non-Filer U.S. persons. Those who qualify will only have to file tax returns for three years (rather than eight under the Offshore Voluntary Disclosure Program (OVDP)), and no FBAR penalties, or other penalties will be imposed. They will have to fill out a questionnaire, and answer such loaded questions as "Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?" and "If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?"

Who Is Eligible?
To qualify the taxpayer:

• Must have lived outside the United States since Jan. 1, 2009;


• Cannot have filed a U.S. tax return during the same period; and


• Must present a "low level compliance risk.

How is Compliance Risk Determined?
The tax due for 2009, 2010, and 2011 must be less than $1,500 in each year. However, even if the tax due meets this low level if any of the following factors are present then the compliance risk rises, and the taxpayer may not be eligible to participate. The factors are:

• If any of the returns submitted through this program claim a refund;


• If there is material economic activity in the United States;


• If the taxpayer has not declared all of his/her income in his/her country of residence;


• If the taxpayer is under audit or investigation by the IRS;


• If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;


• If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;


• If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;


• If there is U.S. source income; or


• If there are indications of "sophisticated tax planning or avoidance."

Taxpayers who meet all of these requirements will be few and far between. For example, consider a U.S. citizen who has emigrated to Israel. Generally new Israeli residents are granted a 10 year exemption from taxes for any income including interest or dividends generated outside of Israel. It would therefore not be surprising if such an individual invested outside of Israel. Yet that person would be excluded from the new IRS streamlined program since they have accounts outside their country of residence.

The requirement that excludes someone from participation if they are claiming a refund seems punitive. Why should someone have to forego a legitimate refund just to be free of FBAR penalties?

Why should persons with offshore bank accounts who filed tax returns be treated worse than those who didn't file any tax returns at all? For that matter why should someone with U.S. source income (perhaps social security or pension income) not be able to obtain relief?

Note that a person who became aware of the FBAR requirements for offshore bank account owners, and filed a timely and accurate return for 2010 or 2011 may be barred from participating in the program based upon the literal requirements.

Do You Need A Reason Not to Participate in the Streamlined Compliance Procedure?

According to the IRS:

• The new procedure provides no protection from the risk of criminal prosecution


• Once a submission is made if the IRS determines that the Streamlined Compliance Procedure is not appropriate, the taxpayer may not participate in the Offshore Voluntary Disclosure Program (OVDP)

For these reasons the Streamlined Compliance Procedure is extremely risky for taxpayers who meet the guidelines for the 2009 through 2011 period, but have substantial offshore compliance issues in prior years.

Once again tax attorneys will be working full time to guide their clients through another thicket of IRS rules which seem only to reinforce the notion that the IRS is not serious about providing FBAR relief to those taxpayers who legitimately lost their way.

Continue reading "IRS Foreign Bank Account Report (FBAR), TD F 90-22.1 FBAR Relief for Non-Residents With Offshore Bank Accounts--Too Little Too Late " »

When American billionaire Igor Olenicoff opened his offshore bank account with Swiss bank UBS, AG he was allegedly told he did not have to file Form TD F 90-22.1, or Foreign Bank and Financial Accounts Report, more commonly known as an FBAR, or pay taxes on the $180 million he held at the institution. In December 2007 Mr. Olenicoff pled guilty to willfully and knowingly filing a false tax return, yet sued the bank for $2.7 billion in damages less than a year later blaming it for his troubles. The case was dismissed last April because of his plea agreement, in which he took responsibility for his tax fraud in exchange for a reduced sentence.

Currently, UBS is suing Mr. Olenicoff for malicious prosecution. The bank argues that he was attempting to shift blame for not paying taxes on the money in his foreign bank account even though the billionaire swore in his criminal tax case that he willfully deceived the Internal Revenue Service. Mr. Olenicoff maintained in his suit against UBS that the bank misled him, and in doing so let him down the road to where he was forced to plead guilty to the criminal tax charges against him. Olenicoff also claimed that UBS mismanaged his offshore account assets. The financial institution is suing for special damages, including attorney's fees and harm to the bank's reputation, of more than $3 million, as well as other damages in an unspecified amount. Given UBS' own settlement with the IRS for $780 million, its suit against Olenicoff is an interesting spectacle, but as a practical matter may not have much to do with the "average" foreign bank account holder.

Some people, who have failed to file FBARs reporting their foreign bank accounts did so as part of a plan to commit tax evasion by concealing their offshore bank account holdings. Others failed to file FBARs out of ignorance about the legal requirements. If you have a foreign bank account and are not currently in compliance you may be eligible for a reduced penalty under the Offshore Voluntary Disclosure Initiative (OVDI). OVDI offers participants the opportunity to gain tax compliance. Most taxpayers with an undisclosed offshore bank account who are currently not undergoing investigation can take participate.

Continue reading "Criminal Tax Case Involving Offshore Bank Accounts Leads to Lawsuit Against U.S. Billionaire " »

Former Swiss banker Bradley Birkenfeld has been released from prison where he had served 30 months of his 40-month sentence for his work at UBS, AG helping clients hide their offshore bank accounts. Mr. Birkenfeld exposed the Swiss bank as a facilitator for U.S. taxpayers who wished to commit tax fraud, and hide their income from the IRS in part by failing to file Form TD F 90-22.1, the Foreign Bank and Financial Accounts Report, commonly called the FBAR. Birkenfeld was linked to billionaire developer Igor Olenicoff who pled guilty to felony tax charges.

Mr. Birkenfeld was arrested and charged with conspiracy to defraud the U.S. Government in 2008. Some tax attorneys believe that Birkenfeld got a raw deal at sentencing given his high level of cooperation with the IRS. Mr. Birkenfeld told the Department of Justice and Senate investigators about the illegal practices that the Swiss bank encouraged. For example, he claimed that UBS instructed him to solicit the business of affluent Americans by telling them about the tax advantages of having an offshore bank account. He began working for the bank in 2001.

UBS paid a $780 million fine in 2009. The bank agreed to release the names of more than 4,000 U.S. account holders. Since then, the Internal Revenue Service has offered limited amnesty to offshore bank account holders through its Offshore Voluntary Disclosure Program. Its 2012 incarnation, the Offshore Voluntary Disclosure Initiative, gives any taxpayer who failed to file an FBAR the chance to regain tax compliance. The program has raised over $5 billion in additional taxes so far.

In 2009, Mr. Birkenfeld filed a claim under a law awarding whistleblowers up to 30 percent of revenues recovered because of their efforts. According to his lawyer, Mr. Birkenfeld has a claim for the taxes paid by UBS as part of its $780 million settlement.

Continue reading "Offshore Bank Account Whistleblower Released from Prison " »

Willful failure to file a Form TD F 90-22.1, or Foreign Bank and Financial Accounts Report, more commonly known as an FBAR is a criminal violation of the Bank Secrecy Act. Luis A. Quintero, a former UBS Client, found that out first hand when he was sentenced recently to four months imprisonment.

In 2004, Quintero formed two corporations, each with an offshore bank account opened at UBS AG of Switzerland. By the end of 2006, the total aggregate balance in the two accounts was over $4 million. He then transferred approximately $2.4 million from the accounts to the accounts of U.S. corporations he controlled. Although Quintero knew he had to file an FBAR and had previously filed the Form TD F 90-22.1 relating to bank accounts in Mexico in the name of one of his U.S. companies, he decided against filing it.

As part of an agreement and in order to avoid prosecution for helping taxpayers commit tax fraud, UBS provided the American government with the identities of certain U.S. customers. It is not clear from the Department of Justice press release whether Quintero was one of the UBS customers whose names was turned over to the IRS.

The IRS requires a U.S. citizen with an offshore bank account containing an aggregate value of more than $ 10,000 to file the FBAR. Those who have not filed the Form TD F 90-22.1 in the past, but wish to do so to comply with tax laws may be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). By voluntarily disclosing Swiss or other foreign bank accounts, participants may be subject to lower penalties rather than all possible penalties were imposed after a tax audit by the IRS. On the other hand depending upon the situation many taxpayers may wish to take the risk of an IRS audit because the penalties could, with proper representation by a tax attorney, turn out to be lower than under OVDI.

In addition to the four months in prison, the court sentenced Quintero to three years of probation with 250 hours of community service and a $20,000 criminal fine. Quintero also paid $2 million in civil penalties for failing to file the FBAR. The penalty appears to be equal to 50% of the balance in his offshore accounts.

Continue reading "Former UBS Client Charged with Failure to File FBAR " »

The sentence of an individual who pled guilty to tax fraud was affirmed by the Seventh Circuit Court of Appeals. John McKinney was charged with eleven counts of tax evasion and conspiracy to defraud, impede, impair, obstruct and defeat the functions of the Internal Revenue Service (IRS) in the collection of income taxes. McKinney's actions are a textbook example of how to turn a financial problem into a criminal tax problem.

McKinney and his brother owned a construction company. Mr. McKinney failed to pay his taxes seven years between 1999 and 2006. In 2003, the IRS placed federal tax liens against McKinney for taxes he owed. He avoided the taxes by transferring money earned from his company into separate nominee accounts, which the brothers used for personal and household expenditures. McKinney gave the IRS Revenue Officer false statements regarding his ability to pay his taxes.

When his wife and sister-in-law applied for residential mortgages, which McKinney was unable to qualify for because of the federal tax liens, McKinney falsely told loan officers that they were both full-time employees of his company. However, neither worked for the company or reported this employment on their tax returns. These financial transactions diverted business income earned by the brothers into assets owned by their wives, thereby avoiding IRS tax assessments and tax liens.

The brothers made false statements regarding their inability to pay income taxes, causing the unsuspecting IRS to close its investigation in 2007. However, the IRS discovered the brothers' tax fraud, and charged the brothers in 2011. McKinney pleaded guilty to one count of conspiracy, one count of tax evasion and three counts of making false statements. He was sentenced to nearly five years imprisonment with three years of supervised release. The court also ordered him to pay $1.5 million in restitution.

Continue reading "Tax Evasion Conviction Affirmed by Seventh Circuit " »

A North Carolina residential builder was arrested on criminal tax charges stemming from his civil tax problems. The Department of Justice and the IRS announced that William B. Clayton was charged with one count of attempting to obstruct IRS efforts to collect his unpaid tax liabilities and one count of knowingly converting and disposing of U.S. government property.

According to the indictment Clayton failed to file income tax returns from 1999 to 2004. He never filed for extensions. In 2005 and 2006, the IRS began assessment and collection proceedings against Clayton. In 2007, Clayton hired a certified public accountant to represent him before the IRS, and the CPA prepared and filed delinquent tax returns for him. Based on these returns, the IRS reduced its prior tax assessments. However, Clayton did not pay his liabilities, and collection proceedings against him continued. No doubt that included tax levies, and tax liens.

Between 2007 and 2010, Clayton allegedly obstructed the IRS' collection efforts. Clayton allegedly hid property located in Virginia, which he partially owned, from the IRS. According to the press release he destroyed property that he had previously built and owned but that the Service had seized. The IRS had planned to auction the property in an effort to pay down Clayton's tax liabilities. However, Clayton allegedly destroyed parts of the property and vandalized others.

If convicted, Clayton could face a maximum potential sentence of three years in prison and a fine of $250,000 on the tax law obstruction charge, and 10 years imprisonment and a fine of $250,000 on the conversion of government property charge.

As the IRS and the Department of Justice point out in their press release an indictment is merely an accusation. The defendant is presumed innocent unless proven guilty beyond a reasonable doubt.

Still if the charges are true it should be a reminder to people not to allow their tax problems to turn into something worse. Depending upon Clayton's finances, chances are he could have resolved his tax problems through an offer in compromise, or an installment payment agreement with the IRS, but instead he allowed things to proceed to a point where instead the IRS filed criminal tax charges.

Continue reading "Builder's Tax Problems are a Springboard to Criminal Tax Charges " »

The convictions of a couple that committed tax fraud were affirmed by the Fifth Circuit Court of Appeals. The husband and wife were the owners and operators of a firm that prepared personal income tax returns in Texas. Donald Womack misrepresented himself as an accountant who has previously worked for the IRS. His wife, Tonya, helped Mr. Womack with the business. Her role progressed until she began filing clients' returns with the IRS electronically. The couple used the same electronic filing identification number (EFIN).

The IRS first noticed the Womacks based on the unusual deductions that were claimed on their clients' returns. Several of the Womack's clients testified against the couple, including one man who testified that Mr. Womack offered to provide false mileage logs to substantiate vehicle mileage deductions. Other former clients stated that they had never given the Womacks any information that would support the deductions that the couple claimed, such as charitable or mortgage-interest deductions. These clients are probably lucky they didn't get charged with tax evasion themselves!

The government also used an undercover IRS special agent, who brought in his tax information to the couple. Although he had calculated that he owed $300, the Womacks gave him a choice of three tax refund amounts, ranging from $3,200 to $4,200. Mrs. Womack claimed that, although she had taken a tax preparation course, all of her errors were accidental. Mr. Womack did not offer any theory as to the cause of his inaccuracies.

A jury indicted the couple on 26 counts of conspiracy and aiding and assisting in the preparation of false tax returns. Mr. Womack was ordered to serve five years in prison, plus three years of supervised release. Mrs. Womack got off with three years of prison time, plus three years of supervised release. The court also ordered them to pay over $160,000 in restitution. This is over and above any civil tax preparer penalties that may be assessed against them under Internal Revenue Code (IRC) Section 6694.The Fifth Circuit affirmed their convictions in an unpublished opinion.

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