The Tax Law Blog – Tax Attorney
At one point in time, wealthy Americans routinely kept their assets in foreign accounts. For previous generations, distributing assets in nations throughout the world seemed to be a common sense hedge against instability in any one nation. For a time, the practices of the IRS and Department of Justice deferred to this worldview and long existing obligations such as the duty to file FBAR were not routinely enforced.
However, following the Great Recession and truly ramping up in 2010 with the passage of FATCA, Congress turned its attention to cracking down on offshore tax evasion. Routine enforcement of FATCA, FBAR, and additional informational reporting obligations now means that it is unreasonable for taxpayers to expect a secret account or accounts to remain undiscovered by the government. The IRS and DOJ can discover concealed foreign accounts through the utilization of information that was beyond its reach even a decade ago. Taxpayers who gamble on concealing income and assets overseas, frequently find that their assets cannot effectively be hidden due to new transparency in the international tax and banking system.
California Taxpayers Stashed Undisclosed Funds in Swiss Bank Accounts
Three family members, Dan Farhad Kalili, of Irvine, California, along with his brother, David Ramin Kalili, and his brother-in-law, David Shahrokh Azarian, who are residents of Newport Coast, California pleaded guilty to federal tax evasion charges stemming from the use of foreign bank accounts.
Starting as early as 1996, Dan and David Kalil opened a number of undeclared Swiss accounts. These accounts were opened at several Swiss banks including UBS and Credit Suisse. David Azarian also opened personal accounts at the Swiss branches of Credit Suisse and UBS. These accounts or successor accounts were generally maintained until roughly 2008 by all parties.
However, in the interim, the parties would engage in steps to conceal their foreign accounts. In July 2006, Dan Kalili came into contact with Beda Singenberger. Singenberger is a Swiss citizen who, through a financial advisory firm Sinco Truehand AG, opened a foreign account for Kalili in the name of “Colsa Foundation.” Through this account and other accounts opened at an unidentified Israeli bank and at Israel’s Bank Leumi, Dan Kalili attempted to conceal his offshore assets. David Kalili and Azarian engaged in similar behavior intended to conceal their offshore accounts. Each defendant made a partial disclosure of these accounts on their income tax return but failed to satisfy other reporting obligations.
The Taxpayer’s Failures to File FBAR
Taxpayers are generally obligated to disclose foreign accounts through an FBAR filing when the aggregate value of their covered foreign accounts exceeds $10,000. In this matter, each taxpayer had well over $1 million in his foreign accounts. As of December 2009, Dan Kalili’s held about $1.5 million in undeclared funds at an unidentified Israeli bank. In his undeclared account at Bank Leumi, Dan Kalili held assets valued at approximately $2,497,931. Similarly, in December 2009, David Kalili had just under $1.5 million in his undeclared foreign account while Azarian held just under $2 million in foreign accounts.
Due to the three taxpayer’s foreign accounts, each taxpayer had an obligation to file a Report of Foreign Bank Account (FBAR). From 2006 through 2009 an obligation to file FBARs existed. However, the taxpayers willfully failed to file this report each year.
What Penalties will the Taxpayers Face for FBAR Filing Failures?
The taxpayers have yet to face sentencing. Sentencing for their failure to file FBAR is scheduled to be held before U.S. District Judge Andrew J. Guilford of the Central District of California on April 24, 2017. While the exact nature of their penalty is yet to be determined, each defendant faces the potential of a prison sentence of up to five years followed by a supervised release period. Dan Kalili has already agreed to pay a civil penalty of $2,674,329, David Kalili agreed to pay a civil penalty of $1,325,121 and Azarian agreed to pay a civil penalty of $951,607. Additional restitution and other penalties may still apply.
Concerned about FBAR Reporting Failures?
If you are concerned about potential failures to file FBAR, you can face significant penalties. When your conduct is believed to have been willful, a prison sentence is a possibility and offshore penalties can consume much of the wealth held in the foreign account. However, taxpayers who come forward and voluntarily correct their mistakes or overly aggressive tax positions can avoid the harshest penalties. However, if the taxpayer comes under investigation prior to entering into OVDP, the program will not be available.
The tax attorneys of the Tax Law Offices of David W. Klasing can help your correct FBAR and offshore tax mistakes. To schedule a private and reduced rate consultation, please call our Los Angeles or Irvine law offices at 800-681-1295 today.
For businesses that have achieved any degree of success, the responsibility to account for, collect, hold, and turnover payroll taxes are well known and seemingly a matter of course. As most business owners are aware, payroll taxes are sometimes referred to as trust fund taxes because employers collect and hold certain taxes in trust for the United States government. These withholdings include the FICA and FUTA obligations and can extend to a variety of other purposes.
Unfortunately, it is surprisingly simple for a business and responsible parties to run into issues with the payroll tax when the company runs into difficult financial times or even temporary cash flow issues. Businesses that have not implemented necessary processes and controls may inadvertently engage in payroll tax fraud or otherwise violate its fiduciary or other duties.
Payroll Tax Fraud Can Result in Penalties for Both Company and Responsible Parties
It is essential to note that payroll tax fraud penalties are harsh and can apply not only to the company itself but also individuals who are “responsible parties.” A responsible party could include a bookkeeper, CEO, CFO, manager, owner, or another individual who has control or authority over company payments and financial affairs. When a court finds that payroll tax fraud has occurred, responsible parties can be held jointly and severally liable for the unpaid taxes, penalties, and interest.
Payroll Tax Problems Can Arise Seemingly Overnight When Controls Are Not in Place
A recent bankruptcy proceeding shows just how easy it is for even a well-meaning business owner to run into payroll tax problems. In the case of U.S. Dept. of Labor v. Harris (2017 WL65392), a manufacturing firm CEO eventually found himself in bankruptcy court due to downturns in the company business. In 2008, the company was late with employee insurance payments 10 times. The source of the insurance premium payments were payroll deductions held in trust by the company.
After several months of bounced checks and unpaid premiums, the insurer notified the company that employee insurance coverage would be canceled if the company’s accounts were not brought up to date. Upon learning of this fact, the company requested additional time to pay but this request was denied. At the time of the request for additional time to pay, the company owed about $55,000 in unpaid premiums and had roughly $70,000 in its operating accounts.
However, rather than utilize the funds in the operating account to pay off the insurance debts and maintain insurance coverage for employees, the company paid down other debts. This included paying down roughly $25,000 in personal debts held by the CEO. With the insurance premiums left unpaid, the insurance coverage for the employees was canceled. Shortly thereafter, the CEO resigned and the company was liquidated as part of a bankruptcy proceeding.
Insurance Debt Was Non-Dischargeable in Bankruptcy and Constituted Fraud and Defalcation
In court proceedings regarding whether the CEO could discharge, eliminate, the debt through bankruptcy, the court analyzed three questions:
- Did a trust res exist?
- If a trust existed, did the CEO owe a fiduciary duty in regard to the trust?
- Was defalcation committed when paying other expenses before trust obligations?
To the first questions, the court found that a trust res did exist. The employee wages became plan assets on the date where they were withheld from the employee’s paycheck. The court found that the CEO did have fiduciary duties to the employees because he had ultimate authority regarding which bills would be paid. The court then assessed whether defalcation – the misappropriate of trust fund assets — had occurred. As to this question, the court found that the fact the company could have paid the debt but did not and favored personal and other expenses did constitute defalcation. As such and as a responsible party, the CEO remained liable for the debt since fraud makes it non-dischargeable.
Payroll Tax Issues Are Easy to Encounter When Processes and Controls Are Not in Place
Most companies with employees will engage in some form of payroll withholding. When withholdings are placed into a general operating account, it can be particularly easy to lose sight of the purpose of the funds. When the company is facing financial stress and looking for every available dollar to maintain cash flow, this type of mistake is even easier to make. Unfortunately, serious consequences can attach when a business or responsible party engages in payroll tax fraud.
If you are concerned that your business is not properly handling payroll tax, the tax lawyers of the Tax Law Offices of David W. Klasing may be able to assist. We can assess existing internal controls and make recommendations regarding gaps or oversights in the process. If you suspect already existing payroll tax problems, we can determine your compliance status. If mistakes or errors are found, we can set forth an actionable plan to achieve compliance. We can also help you meet the challenge of a payroll tax audit by the IRS or a California state tax agency. To schedule a confidential reduced rate consultation, please call 800-681-1295 today.
When it comes to enforcement of the laws, any prosecutor or investigator will tell you that the biggest obstacle they face is resources. The United States is a large country with hundreds of millions of people and tens of thousands upon thousands of companies doing business here. Most of these individuals and entities have a duty to file tax returns and, potentially, to submit other informational returns regarding offshore accounts and other tax and financial details.
Due to the sheer volume of tax filings in the United States, it goes without saying that it would be unworkable for humans to review each and every filed return. Therefore, the IRS has implemented computer systems and other machines that can process tax returns for routine errors and misstatements far faster than a human ever could. The IRS also relies heavily on the deterrence effect to discourage taxpayers from cheating on their taxes. Therefore, in the lead-up to the tax filing deadline in April, it is extremely common for the IRS and Department of Justice to announce the results of an array of criminal and civil enforcement actions against individual taxpayers and businesses.
Owners of Landmark New Jersey Boardwalk Pizza Shop Face Prison Sentence Due to Tax Evasion Scheme
Manco & Manco opened on the Ocean City, New Jersey boardwalk in the 1950s and has served a steady stream of vacationers and locals since its founding. Business in Ocean City was so strong that the company expanded to four locations along the Boardwalk and in nearby Sommers Point.
However, this success was apparently not enough for Manco & Manco owners Charles and Mary Bangle. In 2015, the owners pleaded guilty to criminal tax charges. Charles Bangle pleaded guilty to tax evasion and structuring while Mary Bangle pleaded guilty to making a materially false statement to the IRS. The tax scheme involved taking various steps to conceal revenue thereby reducing the business’s income tax obligations.
After six postponements, the couple is scheduled to face sentencing at the end of February 2017. Charles could face up to 15 years in prison while Mary could face up to a five-year prison sentence.
Accountant for Non-Profit Government Contractor Sentenced for Misuse of Company Credit Card, Bogus Services, and Concealment of Income
Reggious Sanchester Bell was a former accountant for a non-profit government contractor. Through his position at the non-profit, Bell was issued a company credit card. For reasons that are not entirely clear, Bell was also able to convince the company to provide him with an additional company credit card in a fictitious name and Social Security number. Bell used the credit cards to run-up personal charges for airfare, luxury goods, electronics, and hotel stays. Bell concealed his fraud by deleting unauthorized purchases from monthly credit card statements and manipulating the company’s account ledgers. In all, Bell embezzled about $1.3 million and failed to report this income on his 2011 or 2012 tax returns.
Bell pleaded guilty to one count of theft and two counts of tax evasion. Bell must pay restitution to the company for the amounts he embezzled. He was sentenced to a two-and-a-half-year prison sentence for his crimes.
Missouri Pizza Shop Owner Faces Tax Evasion, Social Security Fraud Charges
In yet another prosecution targeting a business where many transactions are in cash, a multiple count indictment was filed against Tony Cowden, owner of Tony’s Pizza House. Mr. Cowden faces allegations of tax evasion from April 2008 until March 2015. According to statements by prosecutors, like many business owners, Mr. Cowden thought that cash transactions would be untraceable or at least provide plausible cover for his tax evasion activities. Prosecutors claim that Mr. Cowden would encourage customers to pay in cash by offering cash discounts. When customers paid in cash, IRS agents claim that Mr. Cowden would pocket the money and fail to include it in restaurant revenues. Mr. Cowden was also accused of and charged with fraudulently claiming Social Security benefits while he worked.
Facing Criminal Tax Charges? Worried About a Past Tax Mistake or Past Fraudulent Tax Returns?
If you have been accused of a tax crime, you face serious consequences which can include a federal prison sentence. It is important to recognize that there is no such thing as a foolproof tax evasion scheme and that IRS auditors will simply follow the money trail and are very adept at discovering tax fraud. If you are concerned about a civil tax audit transforming into a criminal tax prosecution, the tax lawyers of the Tax Law Offices of David W. Klasing may be able to assist. To schedule a confidential reduced rate consultation, please call 800-681-1295