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Department of Justice continues to hammer those with unreported foreign bank accounts

California pair gets the IRS FBAR hammer

The FBAR penalty the IRS seeks to assess on taxpayers failing to report their foreign accounts is wildly out of proportion with the crime committed. We’ve discussed previous instances of horrifically massive FBAR penalties the IRS has squeezed non-compliant taxpayers into accepting.

With a recent case from Los Angeles, the trend continues. Those with unreported accounts and unreported income who do not utilize the  Offshore Voluntary Disclosure Program (OVDP/OVDI) are treated more harshly than outright thieves, as a pair recent Israeli/Luxembourg FBAR cases from California demonstrates.

 

Click here to learn why 2013 could be the best time to disclose foreign bank accounts to the IRS

The Guity Kashfi FBAR plea

According to court documents, [Guity] Kashfi, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel. The accounts were held in the names of nominees in order to keep them secret from the United States government. Kashfi used the accounts to obtain “back-to-back” loans from a branch of the bank in Los Angeles. Although the loans were secured or collateralized with certificates of deposit held in Kashfi’s undeclared offshore accounts, that fact was concealed to keep Kashfi’s offshore accounts secret.

So even though this was a complicated transaction and the bank accounts weren’t even in her name, this was not sufficient enough to hide her accounts from the IRS. This is an important fact — the IRS does know that the majority of foreign accounts still intentionally hidden are using a nominee’s name or a controlled company. This case shows that just having the account in the name of your brother or a shell corporation is not going to be enough to shield your interest — especially when others who know about what you’ve done start spilling the beans.

According to the plea agreement, Kashfi never told her accountant about her undeclared accounts, and failed to report any income from the accounts on her individual income tax returns that were filed with the IRS. For tax years 2005 through 2011, Kashfi failed to report interest income of approximately $221,306. The highest balance in Kashfi’s undeclared accounts was approximately $2,501,469.

Two things about the above except are familiar. Many of those intentionally hiding assets fail to tell their CPAs.  There are many reasons for this, some involving intentional concealment, some because the CPA didn’t ask, or they didn’t think that foreign account was relevant for US taxes.  Regardless of intent, it’s a common situation.

The second thing is the insanely high FBAR penalty rate Kashfi must pay for her unreported Israeli and Luxembourg bank accounts — which we will now go into greater detail.

 

Guity Kashfi’s effective FBAR penalty rate

Assume that the $221,306 of income earned by Kashfi was taxes at the then-highest marginal rate of 35%. That means the total taxes unpaid were no more than $77,457.10.

In recent years the IRS has been determined to link FBAR nonreporting with tax evasion–that failure to report foreign accounts on FBARs is in and of itself an indicator of wrongdoing.  This was clear in the McBride case as well; the current angle on FBAR reporting/penalties is linking it with tax evasion associated with the accounts.  As such, let’s take a look at how the unpaid tax amount calculated above relates to the penalty

For that, the total FBAR-agreed-to penalty of 50% — is  50% of  $2,501,469.00, or $1,250,734.50

This means that the FBAR penalty rate is more than 16 times the evaded tax.

In addition, Kashfi is still subject to criminal penalties of up to $250,000 and imprisonment. 

Had Kashfi utilized the 2009 Offshore Voluntary Disclosure Initiate she would have paid a maximum FBAR penalty of $500,293.80 (20% of highest account value)  and not be subjected to any criminal penalties not charged with any crimes. IF she used the 2012 Offshore Voluntary Disclosure Program (the current rules) she would have faxed a maximum FBAR offshore penalty of $687,903.96 (27.5% of highest account value).  This is all in addition to the unpaid tax and related penalties/interest, which are of course nonnegotiable.

So for not using the program, and having avoided taxes, the IRS has hammered her big time.

 

Zvi Sperling FBAR plea

Kashfi’s co-conspirator, also plead guilty and agreed to a huge FBAR penalty:

Zvi Sperling of Beverly Hills, Calif., appearing before United States District Judge John F. Walter, pleaded guilty to conspiring to defraud the United States in connection with back-to-back loans obtained in Los Angeles that were secured by funds in undeclared bank accounts in Israel. For tax years 2005 through 2008, Sperling failed to report income of approximately $381,563. The highest balance in Sperling’s undeclared accounts was approximately $4 million.

 

Zvi Sperling effective FBAR penalty rate

Assume that the $381,563 of his unreported income was taxed at the then-highest marginal tax rate of 35% and that would mean he did not pay $133,547.05 in taxes he owed to the government.

For evading $133,547.05 in taxes associated with income from unreported foreign accounts, he agreed to a penalty of $2 million — 50% of his highest account value of $4 million.

So the FBAR penalty is almost fifteen times the amount of tax evaded.

And like Kashfi, he is subject to criminal penalties and jail time.

If he used the 2009 program he would have has an FBAR offshore penalty of $800,000, if he used the current rules (under the 2012 OVDP), his maximum FBAR penalty would have been $1.1 million. and he also would not have been subject to any criminal penalties.

 

One last observation

Did you know the IRS could have sought bigger FBAR penalties than these? These FBAR penalty rates, while exorbitant, were not the maximum available under the law. Believe it or not, they gave this California duo a break. The IRS could have assessed a penalty of 50% of the highest value of each account for each year. Meaning that it would be a penalty amount that would exceed their net worth.

The press release does not mention which banks in Israel and Luxembourg were involved. That, I find strange, so I made a note of it.  Why is this? My speculation is that there are a LOT of pending investigations that IRS is going to unleash for bank accounts in Israel and Luxembourg and the IRS doesn’t want to tip its hand. Not just criminal investigations, but also to give the auditors at the new IRS Offshore Super-centers in California, New York and Florida something to do. Like impose 50% FBAR penalties…for each year.

So my question is, did Kashfi & Sperling give up information on others for this — reduced — FBAR penalty?

 

And some great advice from a great Californian

Kind of sad this is what tax compliance comes down to. 100 years of the 16th Amendment and now the IRS is imposing penalties of 1500% — because they can.  The IRS wants money is is getting it by confiscatory penalty schemes vastly out of proportion with the crime committed. So what to do about this.

We must get rid of the IRS. It’s a bureaucracy fraught with totalitarianism.

— Sonny Bono

And this just is further evidence for bigger truths:

  • Always wear a helmet for snow sports.
  • When I listen to the song below, the “pretty baby” was actually Sonny. It was always Sonny. 


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3 Comments
  1. The pretty baby was NEVER the IRS.

  2. I do not believe that anyone can conduct his affairs, other than very minor manners, in secrecy or privacy. Any "private" or "secret" account that is recorded electronically is subject to view and disclosure. What the government fails to get through legal means, a hacker will eventually find and disclose for all to see.

    The lesson, for anyone who wishes to avoid losing both his property and liberty, is to review his affairs, make the disclosures and clean up the mess. Is so doing painful?
    Yes! But it is not nearly so painful as being sent to Federal Prison and losing everything.

  3. your post about :Department of Justice continues to hammer those with unreported foreign bank accounts” very good and nice website.

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