Dr. Baruch Fogel of Laguna Beach, California, is a physician who operated a number of managed care health facilities. At some point in 2008 or 2009, Dr. Fogel met with his then-accountant David Kalai. Mr. Kalai was tax preparer and principal of United Revenue Services (URS). Apparently acting on advice provided by Mr. Kalai, Dr. Fogel moved assets to a foreign account held in the name of a foreign corporation in order to reduce his income tax liability. Mr. Kalai arranged, facilitated and attended a meeting with bank officials at the Beverly Hills branch of Bank Leumi where financial documents were executed that opened financial accounts, based in Luxembourg, and where at least $8 million was diverted from US accounts to the foreign accounts. This transaction and transactions like these resulted in both the taxpayer and the tax preparer facing extremely serious civil and criminal tax charges.
US citizens, green card holders and others who fall under the jurisdiction of US taxing authority are required to disclose foreign accounts. The Banking Secrecy Act (BSA), also known as the Currency and Foreign transactions Reporting Act, was originally passed in 1970 to help combat money laundering, tax evasion schemes and other criminal enterprises. The BSA requires a number of disclosures for certain types of transactions and for certain types of accounts. One of these mandatory disclosures is for US taxpayers who hold signature authority over or an interest in foreign financial accounts where the balance or aggregate balance, at any time in the tax year, exceeds $10,000. US taxpayers must also disclose the existence of these accounts on their individual 1040 income tax return Schedule B, Part III. The failure to make required disclosures of accounts of this type via a Report of Foreign Bank and Financial Accounts (FBAR) (FinCen Form114) can lead to extremely harsh consequences.
In general, the penalties for non-compliance with FBAR reporting can lead to severe civil or criminal consequences. For a non-willful failure, a penalty of $10,000 per an account per a year where the account was undisclosed may be imposed. A willful failure, as was found to be the case for Dr. Fogel, can result in even more severe penalties being imposed. The IRS considers a willful failure to be one that involves “a voluntary, intentional violation of a known legal duty.” Under 31 U.S.C. § 5321(a)(5)(C), willful non-compliance with the BSA’s FBAR filing requirement can lead to penalties of the greater of $100,000 or 50% of the account value for each year the account was undisclosed. A taxpayer can also face additional criminal charges from an FBAR compliance failure.
In the case of Dr. Fogel, he faced both criminal and civil charges for his participation in the tax scheme. As for the civil charges, he pleaded guilty to willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) in the U.S. District Court for the Central District of California on February 2, 2015. Dr. Fogel agreed to pay about $4.2 million to resolve the civil aspect of the charges.
Dr. Fogel also still faces criminal charges for tax evasion under 26 U.S.C. § 7201. Tax evasion is a felony and can be punished with a fine of up to $250,000 ($500,000 for corporations) and up to 5 years in federal prison. As per the Criminal Fine Enforcement Act of 1984, the maximum permissible fine for an attempt to evade taxes was increased.
The tax preparer for Dr. Fogel had previously been convicted of conspiracy to defraud the United States in December 2014 in the Central District of California. These charges stemmed from Mr. Kalai’s efforts to set up foreign corporations holding undeclared bank account to evade the assessment of US income taxes. Furthermore, Mr. Kalai was also convicted for his failure to file FBARs for the accounts that was under his organization’s control.
This should give taxpayers with foreign accounts pause for several reasons. First, this matter shows that the IRS is willing and able to follow the trail from a convicted or investigated tax preparer to his or her clients. Second, your tax preparer will not be able to defend you and is likely to be government witness #1 against you should civil or criminal charges be filed. And if you thought that your conversations would be privileged, the accountant-client privilege is extremely limited and does not protect communications that are made to promote the direct or indirect use of a tax shelter. Finally, those with undisclosed accounts in financial institutions already under investigation or in institutions forced to supply information to the US government regarding US account holders face an increased risk of severe FBAR consequences.
In short, if you have foreign accounts and have yet to disclose them or if your tax advisor or preparer has attracted attention from the IRS you need an experienced Tax Attorney. David W. Klasing is a CPA and Tax Attorney who has worked to mitigate the civil and criminal consequences of tax non-compliance for more than 20 years. To schedule a reduced rate consultation, call (800) 681-1295.