Nobody wants to file and pay taxes. However, the only thing worse than filing and paying taxes each year may be making a filing mistake that opens one up to an IRS tax audit or a criminal tax prosecution. Many times taxpayers may realize that they made an error on their initial filing. However what the individual does next could determine the consequences he or she may face. If, in a panic, the taxpayer attempts to conceal the error, she may have very well compounded her liability and make the possibility of facing severe tax consequences more likely. However, if the taxpayer discloses the error and corrects it she may be required to pay a relatively small penalty, but that could be the extent of the consequences.
Such was not the case for 46-year-old e-commerce entrepreneur, Gregg Kaminsky, who failed to pay taxes on money held in an undisclosed Swiss account and on income earned from the virtual world known as Second Life.
“I’m not a greedy criminal who set out to break the law”
Mr. Kaminsky is quick to point out that he does not consider himself a criminal. He states that he made an unfortunate series of mistakes and claims that, at the time, there was real debate over whether his virtual income was taxable. He says that he hopes people, “won’t judge him too harshly for this mistake.” But this leaves the question, how did an otherwise upstanding entrepreneur become involved in tax fraud? The remainder of this post will follow Mr. Kaminsky’s story and identify the tax mistakes he made over the course of more than 10 years.
Certain foreign accounts must be disclosed
Mr. Kaminsky opened a foreign account at Swiss bank UBS in 2000. He states that he opened the account on the advice of his grandfather, who helped Jewish families escape the Nazis during the 1930s and 1940s. He says that his grandfather told him that he should have funds stashed away “just in case” something happened and he needed to leave the country. Then, in 2004, Congress amended the law requiring FBAR reporting to include punishments for non-willful reporting failures. At the same time full investigatory and enforcement authority was delegated to the IRS.
Unfortunately Mr. Kaminsky did not report the income earned on the UBS account, nor file FBARs. Mr. Kaminsky then deposited additional income into the foreign account thereby compounding the initial FBAR filing error. If Mr. Kaminsky’s questionable acts had stopped here, it is at least conceivable he would have avoided a prison sentence, but additional conduct provided prosecutors with what appeared to be a pattern of fraudulent conduct.
Concealment of past tax mistakes will result in harsher penalties
Mr. Kaminsky applied for federal financial aid to attend an MBA program in 2007 and 2008. But, on the financial aid forms, Mr. Kaminsky failed to disclose the existence of the foreign account. On top of that, on his tax returns, he failed to report income of $140,000 that he earned from the Second Life virtual world in which he earned real money. Furthermore, about a year later as news swirled about UBS’ activities, Mr. Kaminsky moved his money from UBS to a Hong Kong bank while informing UBS that he expected, “any details regarding the account or its history to be kept entirely confidential.” Actions and explicit instructions of this nature show the taxpayer’s willfulness in concealing his or her tax problems. Willfulness is one element that must be proven in criminal tax prosecutions.
Meticulously consider and plan any disclosure you may make to the IRS
Perhaps realizing the he had made numerous mistakes in handling his taxes and foreign accounts, Mr. Kaminsky attempted to make a voluntary disclosure, but even this aspect of the matter was handled poorly. Mr. Kaminsky attempted to make what is known as a quiet disclosure. A quiet disclosure occurs when a taxpayer files an amended return and pays any back taxes, but the taxpayer does not take any other specific action to call attention to the noncompliant acts. Unfortunately, Mr. Kaminsky’s disclosures were incomplete because although he did disclose the UBS and Hong Kong accounts, he failed to disclose his income from Second Life.
Due to his questionable tax practices, Mr. Kaminsky has paid the IRS $91,983 in restitution plus more than $250,000 in penalties due to his concealment of foreign financial accounts. On March 4 2015, Mr. Kaminsky was sentenced to a four month prison term. Upon the completion of his sentence Mr. Kaminsky will also serve two years of supervised release and 200 hours of community service.