Recently in FBAR Violations Category

New FAQs For Offshore Voluntary Disclosure Program (OVDP) Released by IRS

October 16, 2014,

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Our tax lawyers have reviewed the IRS' newly issued FAQs for its Delinquent International Information Return Submission Procedures, the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States (SDOP), and the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP). These programs are first cousins of the IRS' Offshore Voluntary Disclosure Program (OVDP), but technically are not part of OVDP, and are options for individuals who have failed to report income from offshore bank accounts, and who may have failed to file a Foreign Bank Account Reports, FinCEN Form 114, formerly TDF 90-22.1 (FBAR) or other international information reporting returns.

Perhaps the most disturbing FAQ is the one issued for the Delinquent International Information Return Submission Procedures. The procedures replace former OVDP FAQ 18, and became effective July 1, 2014. Under old FAQ 18, if a taxpayer failed to file an information reporting form, but had reported all taxable income, and paid all the tax the IRS would not impose a penalty. Under the new Delinquent International Information Return Submission Procedures however, even if all income has been reported, and taxes paid, the taxpayer must submit a "reasonable cause statement" with each delinquent information return. Before the issuance of the new FAQ, many tax attorneys believed (hoped?) that if a taxpayer met the requirements of old FAQ 18 that no penalty will be imposed without regard to whether there was reasonable cause.

The FAQ makes clear that if the IRS does not accept the reasonable cause statement then penalties will be imposed. The FAQ states that the reasonable cause determination will be based upon longstanding authorities, and cites to Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3). The FAQ suggests that a statement of facts made under penalties of perjury should be included with the late filed returns.

The cited authorities are not particularly helpful in determining whether or not reasonable cause exists. For example, Treas. Reg. Section 1.6038-2(k)(3) which references reasonable cause for the failure to file Form 5471 (related to controlled foreign corporations or CFCs) does not set forth any standard for determining reasonable cause.

These requirements essentially make the Delinquent International Information Return Submission Procedures worthless. It has always been the case that penalties for the failure to file international information reporting forms could be waived if there was reasonable cause. The procedure adds nothing in the way of protection, and it is unclear why it even exists. A taxpayer who has reasonable cause for the failure to file can assert that defense at any time. Our tax lawyers see little benefit to filing under these procedures. Taxpayers who are concerned about not meeting the reasonable cause test should consider instead whether they would be better off in one of the IRS' Streamlined Filing Compliance Procedures, or even a full-blown OVDP.

If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

Florida Doctor Sentenced in Criminal Tax Case for Concealing Assets and Filing False Individual Income Tax Returns

September 16, 2014,

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Individuals using offshore bank accounts to conceal assets and facilitate tax fraud continue to be prosecuted by the Department of Justice. Under the Bank Secrecy Act, citizens and lawful permanent residents (i.e. "Green Card" holders) that have an interest in or signature authority over a financial account in a foreign country with assets in excess of $10,000 at any time during the year are required to disclose the accounts on their individual income tax returns, both on Schedule B, and if the accounts are large enough on Form 8938. They must also file a FBAR (Report of Foreign Bank and Financial Accounts) on FINCen Form 114 disclosing any financial account in a foreign country with assets in excess of $10,000. Dr. Patricia Lynn Hough was recently convicted of conspiracy to defraud the IRS by keeping money in offshore bank accounts and filing false individual income tax returns that failed to report the income received by her on the foreign bank accounts. Hough was sentenced to 24 months in jail and ordered to pay over $15 million in restitution in addition to paying over $40,000 in prosecution costs.

Hough, a United States resident and the owner of 2 medical schools in the Caribbean, created nominee entities and used undeclared foreign bank accounts to conceal assets from the IRS. Upon selling the medical schools for over $35 million, the entire proceeds from the sale were deposited into undeclared accounts in the names of the nominee entities. The majority of the sale proceeds were not reported on her tax returns. The unpaid taxes totaled over $15 million. In addition to the proceeds received from the sale of the medical schools, Hough also failed to report a large amount of interest and investment income and failed to report that she had an interest in bank securities or other financial accounts located in foreign countries.

The money in the accounts, though, didn't go untouched. Through evidence including e-mails, telephone calls and in-person meetings, the IRS was able to establish that Hough and her husband had asset managers that made investments and transferred funds from the offshore accounts in the names of the entities and medical schools to offshore accounts in their own names. The funds were later used to fund what the Justice Department referred to as "their lavish lifestyle."

Tax evasion through the use of offshore bank account continues to be a high priority for the IRS, and taxpayers may face high penalties and possible jail time if they are caught prior to making a voluntary disclosure.

If you have any offshore bank accounts and you want to discuss your options in light of the harsh penalties given out by the U.S. government, contact the tax controversy attorneys at Brager Tax Law Group, A P.C. for a confidential consultation.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

Business Owners Get Jail Time for Tax Evasion

September 3, 2014,

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Sometimes understating income is just carelessness. Sometimes its tax fraud or tax evasion. People don't always realize that tax fraud or tax evasion can lead to time in jail.

Convincing judges to sentence defendants to prison for criminal tax evasion continues to be a priority for the Department of Justice where taxpayers have willfully underreported their income or made false statements to the IRS revenue agents regarding their tax liabilities, as shown by unrelated decisions handed down against Abdelhamid M. Horany and Robert C. Sathre.

Horany, a business owner, admitted to underreporting his income by approximately $175,000, which resulted in his underreporting his tax due and owing by over $60,000 in 2007 alone. In total, Horany underreported his tax due by more than $145,000; he was sentenced to 12 months in prison for his actions. Sometimes taxpayers try to convince themselves that the IRS won't go after them because they are "minnows." This case is a warning that it is not necessary to evade millions of dollars in taxes in order to be prosecuted for tax evasion.

Sathre, also a business owner, was a much bigger fish; he pled guilty to charges of tax evasion and was sentenced to 36 months in prison and was ordered to pay $3,113,882 in restitution for willfully evading payment of his taxes for 1995 and 1996. According to the Department of Justice press release, Sathre concealed income from a property he sold, for which he received over $3 million in installment payments. Sathre compounded the problem by sending over $500,000 during 2005 and 2006 to an offshore bank account in the Caribbean, and later wired $900,000 from the sale of another property to the same offshore account in an attempt keep the funds out of the reach of the IRS. In addition, Sathre supplied the Caribbean bank with false declarations and false promissory notes and also claimed he was neither a citizen nor a resident of the United States. Although not mentioned in the press release, one would assume that Sathre also failed to file Foreign Bank Account Reports (FBARs) on TD-F 90-22.1 (now known as FinCEN Form 114). These criminal tax cases (among many others) demonstrate that the IRS takes the issue of underreporting income very seriously and will not hesitate to press for a prison sentence in cases involving tax evasion.

Call our experienced criminal tax attorneys at 1-800 Tax Litigator (1-800-208-6200) for a confidential consultation to discuss available options if you have been contacted by the IRS in connection with civil or criminal tax fraud or tax evasion, or any other high stakes tax problem.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

Big Changes to IRS Offshore Voluntary Disclosure Program (OVDP) for FBAR Non-Filers

June 19, 2014,

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Massive change is coming to the IRS Offshore Voluntary Disclosure Program (OVDP). These changes will affect different groups of taxpayers differently, and it will be at least a few days before tax attorneys have had an opportunity to make sense of it all. One group of FBAR non-filers that have a very short time frame to get into OVDP is those individuals who have offshore bank accounts with a foreign financial institution which has been publicly identified as being under investigation, or is cooperating with a government investigation. The same goes for taxpayers who worked with a "facilitator" who helped the taxpayer establish or maintain an offshore arrangement if the facilitator has been publicly identified as being under investigation or as cooperating with a government investigation.

Those individuals have until August 3, 2014 to enter the OVDP. If they do not enter the OVDP by that date then they will still be eligible to enter the OVDP, but they will be subject to a 50 percent offshore penalty rather than the existing 27.5 percent penalty. Of course if the IRS already has a particular taxpayer's name, then that person will not be eligible to enter the OVDP, and could be subject to multiple FBAR penalties.

The IRS has published a list of those foreign financial institutions or facilitators. The complete list is as follows:

1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
6. swisspartners
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
9. HSBC India
10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield).

Of course, the IRS may add names to that list at any time, and whole groups of taxpayers will then be cut-off from OVDP without prior notice.

For those taxpayers whose conduct was non-willful, however, they may be able to escape with only a one-time five percent offshore penalty, or perhaps no penalty. The IRS has greatly expanded its streamlined procedures, and created two streamlined programs for those taxpayers whose conduct was non-willful. One is for non-resident persons; the other is for U.S. residents. Qualifying non-residents will not pay any penalty. Qualifying residents will pay a five percent offshore penalty. This penalty will be assessed on the highest aggregate balance/value of the taxpayer's foreign financial assets, generally over the previous six years. The IRS will not assess any FBAR penalties, nor will it assess a 20 percent accuracy penalty under IRC Section 6661.

In order to be eligible, taxpayers must certify under penalty of perjury that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. Non-willful conduct is defined by the IRS as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Taxpayers who enter the streamlined programs are not automatically subject to audit, but may be audited under existing IRS procedures. The IRS warns that if the submissions are inaccurate, taxpayers could be subject to additional liabilities, and even criminal tax prosecution. That is because taxpayers who enter the streamlined programs, unlike those who enter the OVDP, are not insulated from criminal prosecution if the IRS later determines that the failure to file FBARs was willful. The IRS points out that individuals who are concerned that their behavior may be deemed to be willful, and want assurances that they will not be criminally prosecuted or subjected to additional penalties, should enter the OVDP.

Those taxpayers who already signed closing agreements, and paid substantially greater penalties will not be able to reopen their cases and obtain refunds. On the other hand, individuals who are currently in OVDP, but who have do not have countersigned closing agreements may be eligible to enter the streamlined programs if they otherwise qualify, but are subject to additional strictures under transitional rules announced by the IRS.

If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

Swisspartners Group Entered Into NPA to Avoid Criminal Tax Prosecution But Must Pay $4.4 Million in Forfeiture and Restitution for Assisting U.S. Tax Evasion

June 13, 2014,

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To avoid prosecution for tax evasion and other alleged crimes, the Swisspartners Investment Network AG, a Swiss-based asset management firm, and three of its wholly-owned subsidiaries (collectively, the Swisspartners Group) entered into a non-prosecution agreement (NPA) with the U.S. Attorney's Office. Although many taxpayers have been entering the IRS Offshore Voluntary Disclosure Program (OVDP), for some taxpayers it is now too late as the Swisspartners Group has already disclosed to the U.S. Attorney's Office the names of 110 U.S. taxpayers who may have failed to file Foreign Bank Account Reports (FBARs) and/or been engaged in tax fraud.

Although the Swisspartners Group avoided criminal prosecution for assisting U.S. taxpayers in opening and maintaining undeclared foreign bank accounts from about 2001 to 2011, it couldn't avoid paying large sums of money for its wrongdoing. Swisspartners Group agreed to pay $4.4 million in forfeiture and restitution. Of the $4.4 million, $3.5 million represents fees that Swisspartners Group earned by assisting U.S. taxpayers in opening and maintaining undeclared accounts, and $900,000 represents the approximate amount of unpaid taxes arising from the Swisspartners Group involvement in tax evasion.

There are several factors that led to the NPA between the U.S. Attorney's Office and Swisspartners Group: (1) beginning around May 2008, the Swisspartners Group voluntarily implemented remedial measures against offshore tax evasion; (2) without any pressure from the U.S. authorities or obligation under a criminal investigation or prosecution, the Swisspartners Group reported criminal conduct by its clients; (3) the Swisspartners Group produced 110 account files that identified U.S. taxpayers who evaded taxes; (4) the Swisspartners Group's willingness and ongoing cooperation with the U.S. authorities to combat tax evasion; and (5) the Swisspartners Group, when investigated by outside counsel, made true representations of the misconduct that was under investigation.

The Swisspartners Group admitted, as part of the NPA, that it knew certain U.S. taxpayers maintained undeclared foreign bank accounts with the intent to evade U.S. taxes. Swisspartners Group also admitted that it helped certain U.S. taxpayers conceal beneficial ownership of undeclared assets from the IRS by, among other things: (1) creating sham foundations or other sham entities that operated as the nominal account holders; (2) using non-U.S. nationals on accounts or insurance policies; (3) facilitating the transportation of large amounts of cash into the U.S. for the benefit of U.S. taxpayers; and (4) arranging large cash deposits in Swiss financial institutions for the benefit of U.S. taxpayers.

Under the NPA, the Swisspartners Group must continue to cooperate with the U.S. tax authorities for at least three years from the date of the agreement; otherwise, the U.S. Attorney's Office may prosecute the Swisspartners Group.


Continue reading "Swisspartners Group Entered Into NPA to Avoid Criminal Tax Prosecution But Must Pay $4.4 Million in Forfeiture and Restitution for Assisting U.S. Tax Evasion " »

Offshore Bahamian Vacation Comes To An End

May 13, 2014,

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An alleged tax fraud scheme by Victor Lipukhin, the former president of a large Russian steel company resulted in a recent grand jury indictment. According to court papers, he hid between $4 million and $7.5 million dollars in Swiss bank accounts at UBS from 2002 through 2007. If convicted, he faces a potential maximum sentence of three years imprisonment on each count. Presumably, Lipukhin's name was one of the more than 4,000 names that were turned over to the IRS several years ago in response to a John Doe summons served on UBS. In 2013, the IRS used similar tactics to obtain names of customers of Wegelin & Co., Switzerland's oldest bank.

Lipukhin, a Russian national, became a lawful permanent U.S. resident in 2002. He served as the president of Severstal, Inc. (USA), which is a subsidiary of AO Severstal, the largest steel producer in Russia. Allegedly, he used shell companies based in the Bahamas to conduct transactions in his offshore accounts. He was later able to bring funds to the U.S. to purchase real estate, pay for personal expenses, and to withdraw cash for personal use.

In 2002, he and another individual, opened a UBS bank account, in the name of sham Bahamian entities (Old Orchard and Lone Star) transferring over $47 million from previous UBS accounts. In 2003, Lipukhin became the sole owner and signatory on the account. He was able to control all transactions in the accounts with the help of a Bahamian national, who served as the nominee director. He also used the services of a Canadian attorney to create fictitious mortgages, through an entity called Dapaul Management, to conceal his purchases of real estate in the U.S. with the funds from the offshore accounts. In addition, he had the Canadian attorney transfer funds to a domestic entity, Charlestal, LLC, to purchase real estate in the U.S., which included a historic building in Illinois for $900,000. He also used the domestic entity to withdraw cash for personal use and to pay for his personal expenses.

Although Lipukhin reported income and paid tax in 2002, his reported income consisted primarily of W-2 wages and not the money earned from his foreign bank accounts. Lipukhin failed to file a tax return in 2003, and, surprisingly, he showed a loss on his tax returns from 2004 through 2006. He also failed to disclose his offshore bank accounts to the IRS by failing to file Foreign Bank Account Reports (FBARs) or to report the existence of the offshore accounts on Schedule B, Part III of his individual tax returns. The disclosure of the offshore accounts was required because he had over $10,000 in assets and had authority over the accounts. The fact that he was a non-citizen didn't change anything since lawful permanent residents, i.e. green card holders, as well as "tax residents," also have an FBAR filing requirement.

Lipukhin was also charged with obstructing the tax laws by attempting to prevent an automobile dealer from filing a Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business).

If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

Taxpayer Advocate's 2013 Report to Congress Again Critical of Offshore Voluntary Disclosure Program (OVDP) for Unreported Foreign Bank Accounts (Part I)

January 24, 2014,

The Offshore Voluntary Disclosure Program (OVDP) for taxpayers who have failed to file Foreign Bank Account Reports (FBARS), FINCEN Form 114, (this form was previously designated as TDF 90-22.1), has again been roundly criticized by the Taxpayer Advocate for its draconian penalties, and its one size fits all solution. The 2013 report demonstrates through statistics that were previously unavailable to the public what tax litigation attorneys have known for years: that the OVDP is unfair in both design and application.

In lieu of the OVDP, the Taxpayer Advocate has recommended a disclosure system which divides FBAR non-filers into three categories.

Category 1. Full relief from FBAR and information reporting penalties.

This would be available to those who underreported income by a de minimis amount, defined at least as high as the IRC Section 6662(d) threshold which is the greater of $5,000 in tax or 10% of the tax required to be shown.

Category 2. Taxpayers who have reasonable cause or who acted non-willfully.

Taxpayers who underreported more than the de minimus amount, but who believe they have reasonable cause or who acted non-willfully would be required to file delinquent returns, pay any applicable tax, interest and penalties under Title 26 (unless asserting reasonable cause). Depending on the circumstances and the taxpayer's explanation, these taxpayers should be required to pay either the non-willful FBAR penalty or no penalty under the reasonable cause exception. The IRS would audit some, but not all of these submissions.

Category 3. Taxpayers not included in Category 1 or 2. Taxpayers who do not fall into categories one or two would be penalized under the current OVDP structure which generally provides for a 27.5 percent penalty.

In the opinion of our tax lawyers, while the recommendation is a vast improvement over the current OVDP, it is still problematic. The biggest advance is the addition of Category 1 for taxpayers who only have minimal tax amounts due. Our tax attorneys have met with many taxpayers since 2009 who were not good candidates for the existing OVDP, because after the application of foreign tax credits or expenses from the rental of real estate, the tax due was a few hundred dollars or even a few thousand dollars. Yet, these taxpayers are exposed to penalties ranging from $100,000 to several million dollars if they were to enter the OVDP and not opt-out.

The problem with Category 2 is that it provides for tax audits of some percentage that elect this category. What will happen to those who file under Category 2, but are determined by the IRS to have acted willfully? Will they be able to fall back into Category 3 or will they be subjected to possible multiple 50 percent willfulness penalties? Also for those taxpayers who are non-willful, but who have made many accounts, will they be subjected to a $10,000 non-willful penalty for each year and each account? That is the IRS' current position for OVDP opt-outs.

There is no indication that the IRS is ready to adopt the Taxpayer Advocate's recommendation, so in the meantime, if you have an unreported foreign bank account, contact the tax controversy attorneys at Brager Tax Law Group, A P.C. for a confidential consultation about all of your options.

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The Family That Commits Tax Evasion Together May Go to Prison Together

October 4, 2013,

While tax fraud is often perpetrated by a single person, a recent case shows that offshore tax evasion can sometimes be a family affair as well. U.S. Attorney Preet Bharara recently announced a prosecution of an offshore tax evasion case involving multiple family members. This case illustrates the dangers involved when an older family member passes on without cleaning up his tax problems; this is especially true where there has been a failure to file Form TDF 90-22.1, Report of Foreign Bank Account (FBAR). Henry Seggerman, of New York and Los Angeles, pled guilty this summer to one count of conspiracy to defraud the U.S., as well as two counts of filing false tax returns in connection with his family's criminal tax evasion scheme.
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Along with four other siblings, Seggerman inherited a substantial estate from his father Harry Seggerman, a wealthy New York businessman who passed away in 2001. According to the Department of Justice ("DOJ"), the senior Seggerman's fortune totaled $24 million, over half of which was held in undeclared Swiss bank accounts. While the DOJ did not say that either Henry Seggerman or any of his siblings actively assisted the late Harry Seggerman with his offshore tax fraud during his lifetime, Henry Seggerman allegedly filed false tax returns after his father's death that grossly underreported the value of his father's estate. Furthermore, the tax return that Henry filed on behalf of his father's estate failed to disclose the over $12 million hidden in Swiss bank accounts.

According to the DOJ, Henry Seggerman and his family continued this offshore tax fraud scheme for over a decade after their father's death. Seggerman was accused of taking further steps to set up new Swiss bank accounts to conceal the funds inherited by himself and his siblings. Aside from controlling his own offshore bank account, Seggerman was accused of helping his brother repatriate funds from a Swiss bank account to the U.S. under the guise of loans from a foundation that he controlled.

Similar to many others who have been accused of committing offshore tax evasion, Seggerman is expected to fully cooperate with U.S. authorities in exchange for the possibility of a reduced sentence. Seggerman is expected to testify on behalf of the U.S. in the trial of Michael Little, an attorney who advised the Seggermans on financial issues. Little, who is accused of operating an 11-year offshore tax fraud conspiracy, has pleaded not guilty and is awaiting trial. Additionally, three of Seggerman's siblings have already pled guilty to conspiracy to defraud the United States and filing fraudulent tax returns. All three siblings are currently awaiting sentencing.

While no sentencing date has been set for Seggerman, he faces a maximum penalty of 11 years in federal prison. Additionally, he has already agreed to make a $600,000 restitution payment at the time of his sentencing; if the case follows past patterns it would not be surprising if the total restitution payments are in the 6 million dollar range.

Continue reading "The Family That Commits Tax Evasion Together May Go to Prison Together " »

Offshore Account Holders Beware. More Swiss Bank Account Information to Be Turned Over to the IRS

July 15, 2013,

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In a move which should send shivers through the spines of delinquent FBAR (Foreign Bank Account Report) filers the Swiss Federal Supreme Court has granted the IRS' request for the names of U.S persons holding "secret" Swiss bank accounts. The IRS had originally submitted a so-called group request in September 2011, but an account holder brought an appeal to the Swiss Federal Administrative Court which held that the group request was too vague and amounted to a fishing expedition. The IRS amended its group request, and the Federal Administrative Court ruled the amended request was allowable under the provisions of 1996 Convention between the United States and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income (the "Treaty").

Under the Treaty, the Swiss will supply information if the IRS can show a suspicion of "fraud or the like." Since Swiss and U.S. law are very different in terms of defining tax fraud it is sometimes difficult for tax attorneys in the U.S. to understand whether a particular set of factual circumstances will be considered fraud or the like. Indeed, "mere tax evasion" is not a crime in Switzerland. The key issue in the Credit Suisse case, however, was whether a "group request" i.e. one which describes a particular set of persons by their characteristics as opposed to providing a specific name could ever be honored.

According to its press release the Swiss Federal Supreme Court held that:

[R]equests for administrative assistance in relation with fraud and the like are in principle admissible under the 1996 Double Taxation Agreement with the United States, regardless of whether the suspicion falls on one or more persons and whether the said persons are explicitly named in the request.

In another words in the future the IRS can describe a class of individuals, and a Swiss Bank will be required to turn over their bank records. It wouldn't be a bit surprising if the IRS already has group requests in the works at other Swiss banks including those reportedly under investigation such as Julius Baer, Basler Kantonalbank, Zuercher Kantonalbank, HSBC, and Pictet.


It is hard to believe that anyone with a Swiss bank account is still laboring under the belief that their offshore accounts will remain secret from the IRS. The penalties for failure to file FBARS are very severe, and can include criminal convictions, as well as civil penalties which can reach 300% of the offshore account balances. In addition, criminal tax evasion charges could be brought by the IRS. Anyone with an offshore account needs to give serious consideration to whether or not they should enter the IRS' Offshore Voluntary Disclosure Program (OVDP). With the IRS racking up continued success in obtaining the cooperation of foreign banks it could decide to close the OVDP at any time, and therefore waiting may not be an option.

IRS Slams Offshore Account Holder with 200% FBAR penalty for Willful Failure to File Foreign Bank Account Reports

July 10, 2013,

The IRS has assessed FBAR penalties against Carl R. Zwerner for willfuly failing to file an FBAR (Foreign Bank Account Report) on Form TDF 90-22.1. The news here is that the IRS is seeking to impose a willful failure to file an FBAR penalty against Zwerner for multiple years. Specifically the IRS seeks to impose a separate 50% penalty for each of four years that Zwerner failed to file an FBAR. According to the Complaint the IRS assessed four separate penalties totaling over $3 million as follows:

2004 - $723,762, assessed on June 21, 2011
2005 - $745,209, assessed on August 10, 2011
2006 - $772,838, assessed on August 10, 2011
2007 - $845,527 assessed on August 10, 2011

Perhaps not surprisingly Zwerner didn't pay the FBAR penalties and the Department of Justice has filed suit to collect the penalties. These penalties, are civil penalties, and separate and apart from any criminal FBAR penalties that could be imposed, or criminal tax fraud charges that could be brought. As a practical matter though it would be unusual for the IRS to bring criminal tax or FBAR charges after a civil suit has been filed.

Tax litigation attorneys sometimes advised clients who are considering quiet voluntary disclosures that in the past the IRS has only imposed one civil FBAR penalty even in criminal tax cases. Apparently, however, there is no guarantee for a client who decides not to enter the IRS' Offshore Voluntary Program (OVDP) that penalties could total 300%! This is because the statute of limitations on assessing the FBAR penalty is 6 years from the June 30th deadline for filing the FBAR. Whether or not the IRS can impose such a large penalty without running afoul of the prohibition under the 8th Amendment against "excessive fines" is unknown. Perhaps Zwerner's tax litigation lawyers will raise that as one of his defenses.

The question for those individuals with foreign bank accounts who have not yet entered the IRS' Offshore Voluntary Disclosure Program is whether the IRS has raised the stakes for all offshore account holders, or were there particularly bad facts in Zwerner's case which led the IRS to assess multiple FBAR penalties. The complaint, which was filed on June 11th gives Zwerner until August 12th to file an Answer. Perhaps once the Answer is filed we will know more. In any event, this case brings home the point that the decision not to enter the OVDP is not one to be taken lightly. All of the facts and circumstances need to be analyzed to determine what the likely action of the IRS will be if the foreign bank accounts are discovered by the IRS. As our tax lawyers tell anyone who will listen: "There are no cookie cutter answers," and there is no substitute for exercising careful and considered judgment based upon years of experience.

87 Year Old Hawaiian Auto Mogul Acquitted of all Tax Fraud and Conspiracy Charges after District Court for District of Hawaii Finds Lack of Intent and Willfulness

May 2, 2013,

The U.S. District Court for the District of Hawaii recently acquitted an 87-year-old auto dealership mogul of all tax fraud and conspiracy charges that the U.S. Government had brought against him. James Pflueger, who was facing multiple counts of both tax fraud and conspiracy to defraud the government, had been indicted on those charges in 2010 based on his alleged involvement in two separate tax fraud schemes. On March 20th, 2013, however, Pflueger was acquitted of all charges in what his criminal tax attorneys called "the Justice Department's first unsuccessful prosecution relating to the use of foreign bank accounts in the Government's ongoing international enforcement efforts."

Pflueger was initially indicted on tax fraud and conspiracy charges related to two separate incidents, the first of which involved a situation where Pflueger's company allegedly improperly paid for personal expenses of Pflueger's family, and the second of which involved alleged underreporting of gain from Pflueger's sale of one of his properties, known as Hacienda. The government also initially charged Pflueger with the failure to file a Report of Foreign Bank and Financial Accounts (FBAR), but dropped that charge before trial.

Dennis Duban, the accountant who handled Pflueger's financial affairs, had pled guilty in October 2012 to conspiracy and aiding in the filing of a false tax return. According to the government, Duban and Pflueger engineered the Hacienda sale to effect offshore tax evasion by transferring the proceeds from the sale to a Swiss bank account in order to prevent the proceeds from being used to pay civil claims arising from a 2006 accident at another of Pflueger's properties. However, Pflueger's criminal tax attorneys were successful in arguing that Pflueger was not responsible for his IRS tax problems, and that Duban was the sole mastermind of the tax fraud.

Over the course of a bench trial (which was elected by Pflueger's counsel partly due to concerns about jury prejudice resulting from the aforementioned well-publicized accidents at Pflueger's property), Judge Kobayashi of the District Court for the District of Hawaii held that the government failed to prove beyond a reasonable doubt that Pflueger had conspired to obstruct the IRS. Kobayashi also agreed with Pflueger's arguments that he lacked the requisite intent for a conspiracy conviction (as well as a lack of financial wherewithal and knowledge), finding that "Pflueger relied in good faith on his company's accounting staff, and especially on Duban" in all matters related to his company's books. Kobayashi also acquitted Pflueger of the charges of filing false returns for 2004 and 2007, finding again that Pflueger lacked willfulness, and had relied in good faith on others that had committed tax fraud.

While Pflueger was ultimately acquitted it is worth noting that his advanced age, and his claimed reliance on his accountant did not nothing to stop the IRS from putting him through the stress and expense of a trial.

If you have received a tax audit notice, or are under civil or criminal investigation by the IRS you should contact a tax litigation attorney to find out your options.

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

March 6, 2013,

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.

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

October 23, 2012,

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.

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

September 10, 2012,

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?" 875413_balance.jpg

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.

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Criminal Tax Case Involving Offshore Bank Accounts Leads to Lawsuit Against U.S. Billionaire

September 4, 2012,

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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.

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