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Even the Pope is Cracking Down on Tax Fraud

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    The Cahuzac scandal involving the French former budget minister and evidence he committed fiscal fraud remain a thorn in President Hollande’s side, as he struggles to crack down on tax evasion and avoidance. With a dispute over hidden funds still embroiling Switzerland and the United States, a court in Geneva this week stopped the Credit Suisse Bank from handing over data on its employees to the Americans.

    There is also a current of reform running through the Vatican. Pope Francis ordered a committee to investigate the activities of the bank of the Holy See. It is supposed to get access to all documents, including those classified as secret. And in Italy, 41 football teams fell under suspicion of tax evasion and money laundering – infuriating Italians struggling with the recession.


    According to court documents, Alexei Iazlovsky, a U.S. citizen, maintained an undeclared bank account held in the name of a foreign corporation at the Luxembourg branch of an Israeli bank. Iazlovsky owned a corporation that produced documentaries for Russian television stations. A tax return preparer suggested to Iazlovsky that he could reduce his taxes by keeping money out of the United States and diverting payments from his Russian clients to a foreign bank account held in the name of a foreign corporation. Iazlovsky met with a banker from the Israeli bank at a New York hotel to open the Luxembourg account.

    According to court documents, Iazlovsky diverted a total of $2.6 million in untaxed payments from his Russian clients to his undeclared bank account in Luxembourg. From 2002 through 2009, Iazlovsky filed false individual and corporate tax returns that failed to report his authority over and ownership of the bank account in Luxembourg. He also omitted the income diverted to and generated by the undeclared account in Luxembourg. Iazlovsky has admitted that the tax loss is more than $400,000.

    Iazlovsky is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with failing to report income from undeclared accounts held at Israeli banks.


    While U.S. citizens with foreign accounts are feeling the pinch from the IRS, foreign investors in U.S. real estate could be seeing a bit of a break – President Obama recently released his 2014 budget proposal, and the budget proposes an exemption from U.S. taxation on gains realized by foreign pension plans on U.S. real estate investments. This proposal is projected to reduce tax revenue, and as a result, it will be challenging to enact at a time when there is considerable pressure to reduce budget deficits. However, if enacted, this proposal would make investing in U.S. real estate much more attractive for non-U.S. pension funds.

    The United States generally requires foreign investors (under the Foreign Investment in Real Property Tax Act, or FIRPTA, regime) to pay taxes on, and file tax returns reporting, gains from the sale of U.S. real estate–in the case of a foreign corporation, the applicable effective federal tax rate on such gain may be as high as 54.5%. The President’s budget proposes to exempt foreign pension plans from the FIRPTA regime, which it describes as an effort to establish tax parity between U.S. and foreign pension plans. In spite of this general description, however, the proposal seems to suggest an even more favorable tax treatment for foreign pension plans than the current law treatment of U.S. pension plans (for example, it does not mention the tax currently imposed on U.S. pension funds for gains realized from debt-financed real estate).

    The proposed exemption would be effective for sales of U.S. real estate occurring after December 31, 2013. Any such exemption could of course significantly increase the potential after-tax returns for investments in U.S. real estate by certain foreign investors.


    Whether you hold foreign assets in the U.S. or U.S. assets abroad, it is always important to consult a tax attorney whom you trust to ensure your full compliance with IRS requirements. Even inadvertent tax evasion can come with stiff penalties. To avoid such a situation, contact the experienced attorneys at the Tax Law Office of David W. Klasing, who can give you an honest and fair assessment of the tax implications of your domestic or foreign dealings.

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