March 2012 Archives

Failure to File FBAR (Foreign Bank Account Report) for Offshore Funds Leads to Seizure of Over 4.6 Million Dollars From Alaska Plastic Surgeon

March 23, 2012,

The failure to file a Foreign Bank Account Report TD F 90-22.1 (FBAR) for an offshore bank account has led to the seizure of an Alaska plastic surgeon's $4.6 million dollar account at a Seattle branch of Bank of America. According to the complaint filed in District Court Alaska plastic surgeon Michael Brandner was involved in a contested divorce proceeding with his wife, and decided to hide around $4.6 million from her by depositing the funds in a foreign bank account in Panama held in the name of a nominee offshore company. The complaint alleges that he drove the money from Alaska to Panama in the form of several cashier's checks. He was assisted in the transaction by an individual he met in Panama.

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As luck would have it the person who Brandner sought assistance from got caught up in an investigation into a totally unrelated stock fraud scheme, and began cooperating with the government. Reading between the lines here it seems that the so-called cooperating witness spilled the beans on Brandner in order to try and get some leniency in whatever mess he was involved in. The cooperating witness told the government that he had advised Brandner of the obligation to file an FBAR reporting for the offshore Panamanian account on at least two occasions.

The cooperating witness also advised Brandner that a new tax treaty with Panama might compromise the secrecy of his offshore account. Brandner then inquired if there was any other place he could hide the Panamanian funds. With the assistance of the cooperating witness created an offshore entity which then opened up an account at Bank of America held in the name of the foreign LLC. Homeland Security Investigations (HSI) then promptly seized the account in a civil in rem forfeiture action.

There are a number of lessons to be learned other than don't try and cheat your wife in a divorce action. Clients always ask our tax litigation attorneys variations of the question: "How is the IRS going to find out about my offshore bank account." The truth is that the IRS may not find out, but the consequences can be dire if they do. In Brandner's case he had the bad luck to trust someone who later came to have his own problems (which were not even tax problems) with the authorities. Always keep in mind that if two people know a secret it's not a secret.

The case is also interesting since this is the first time to my knowledge the government has attempted to use the civil forfeiture statute to seize 100% of the proceeds of offshore funds for failure to file an FBAR. It certainly significantly ups the stakes; especially since there is nothing to stop the IRS from criminally prosecuting Brandner for willfully failing to file an FBAR, or criminal tax fraud and that may be the next episode in this drama.

As a technical matter it is not clear to our tax litigation lawyers that the IRS has the right to seize the proceeds of an account simply because no FBAR was filed. For more about the technicalities our tax attorneys plan on posting a separate item next week.

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Tax Fraud Penalties Upheld First By Tax Court, Then by Ninth Circuit

March 15, 2012,

Tax fraud penalties were recently upheld against Miguel Robleto of Oregon by the 9th circuit. These were civil tax fraud penalties pursuant to IRC Section 6663, not criminal tax evasion charges under IRC Section 7201. The difference is that although you can wind up paying a lot of money if civil tax fraud penalties are imposed at least you won't go to jail. In some cases the IRS brings criminal tax evasion charges, and then goes after you for the taxes, plus a civil tax fraud penalty. Although Mr. Robleto probably doesn't think so he may have been lucky that the IRS didn't bring criminal tax evasion charges.

The civil tax fraud penalty under IRC Section 6663 is 75% of the tax that is owed. The process of imposing the civil tax fraud penalty is a lengthy one. Generally the first step is a tax audit, sometimes followed by an appeal to the Internal Revenue Service's Appeals Division. Next the IRS will issue a notice of deficiency, after which the taxpayer may petition the United States Tax Court to decide his case. In order for the Tax Court to uphold the fraud penalty it must find clear and convincing evidence of tax fraud. That's just what happened in Mr. Robleto's case.

Mr. Robleto was a small business owner, and under the auspices of the Oregon DMV charged non-English speakers a fee for administering Oregon drivers' license exams. Although the Tax Court determined, and Mr. Robleto pretty much admitted, that he failed to report over $300,000 spread over four years his excuse was that he had never operated a business before, that he was overwhelmed by all of the customers he had, that he was totally inept in handling the financial aspects of his business, that he couldn't even pay his utility bills on time, that he had unopened envelopes of cash lying around his home, and that the filing of his incorrect income tax returns was at worst grossly negligent, but not fraudulent.

The Tax Court didn't buy it. Instead the Tax Court looked at various so-called badges of fraud including inadequate books and records, concealment of ownership of assets, cash transactions and cash hoarding. As the Tax Court so subtly put it:

Dealing in large amounts of cash and not keeping any records thereof often go hand in hand with intentional underreporting of income and taxes. Noteworthy are [Robleto's] placement of assets in nominee names and [his] lack of cooperation.

Robleto probably wasn't helped by the fact that he had a safe in his house with almost $200,000 of cash contained in it, or that he had a side business of preparing tax returns. He hired an accountant to prepare his own tax returns, but neglected to tell the accountant about the income from the preparation of the tax returns.

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FBAR Non-Filers Beware: Either Tax Fraud OR Filing a False Tax Return Can Result in Deportation

March 2, 2012,

Recently the Supreme Court held in Kawashima v. Holder (Feb. 21, 2012) that filing a false tax return in violation of IRC Section 7206(1) as well as other criminal tax offenses are aggravated felonies which can result in deportation of a resident alien. Just over two years ago we blogged about the 9th Circuit decision in Kawashima which came to the same conclusion. The Supreme Court has now upheld that decision.

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To review the background, Mr. and Mrs. Kawashima were legal residents of the United States having moved to Los Angeles from Japan in 1984. According to an article in the Los Angeles Times they opened several sushi restaurants in the West San Fernando Valley area of Southern California. They were accused of violating various criminal tax laws, and in 1997 Mr. Kawashima pled guilty to a single count of violating Internal Revenue Code (IRC) Section 7206(1) (filing a false tax return). Mrs. Kawashima pled guilty to IRC Section 7206(2) (aiding and assisting in the filing of a false tax return). The tax loss was around $245,000. This would have included interest and penalties so the actual tax would have been much lower. It is possible that the Kawashimas pled guilty to charges under IRC Section 7206 to avoid the IRS bringing tax evasion charges under IRC Section 7201. Tax evasion carries a maximum penalty of 5 years, and a $250,000 fine; whereas filing a false tax return "only" has a penalty of $100,000 and 3 years in prison.

Neither the 9th Circuit opinion, nor the Supreme Court opinion stated whether they served any jail time, but according to the Los Angeles Times they repaid the full amount due to the IRS. The Kawashimas probably assumed that their tax problems ended there, but in 2001 the Immigration and Naturalization Service (INS), as it was then known, brought removal proceedings, against the Kawashimas seeking their deportation alleging that they had committed an "aggravated felony." These proceedings were brought pursuant to 8 USC ยง 1227(a)(2)(A)(iii) (stating that "[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable"). An aggravated felony is defined in 8 USC Section 1101(a)(43)M)(i) as any offense that "involves fraud or deceit in which the loss to the victim or victims exceeds $10,000."

The Kawashimas argued that filing a false tax return was not an aggravated felony. They relied on a related section of the law which specifically states that the commission of tax fraud pursuant to IRC Section 7201 is an offense which may lead to deportation. From that the Kawashimas criminal tax lawyers concluded that Congress intended that the only tax crime which would qualify for deportation is tax fraud, and not any other lesser tax crime.

Unfortunately for the Kawashimas in a divided 6-3 opinion the Supreme Court disagreed, clearing the way for the Kawashimas deportation. In her dissent, Justice Ginsburg pointed out that as a policy matter the majority made a bad choice because it would discourage immigrants from pleading guilty to tax crimes since in addition to any jail time they would be exposed to being deported.

In our view Justice Ginsburg hit the nail on the head, and criminal tax lawyers will need to advise their alien clients of this distinct possibility as one of the many factors to take into account when deciding whether or not to plead guilty to any tax crime. The concern for FBAR (foreign bank account report) non-filers is that without regard to whether or not failure to file an FBAR is a deportable offense individuals who do not file FBARs generally have filed false tax returns by checking the "no box" on Schedule B signifying they don't have a foreign bank account when in fact they do.

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