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Story Update: Former U.S. Citizen and Founder of Russian Bank Pleads Guilty to Tax Fraud

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    According to a Department of Justice press release, a former U.S. citizen recently pleaded guilty to filing a false tax return and agreed to pay a penalty of more than $500 million dollars. This story should serve as a lesson to those Americans who choose to expatriate that such an emigration strategy can result in serious tax consequences if your affairs are not carefully planned. If you have recently renounced your U.S. citizenship or have otherwise failed to become a U.S. tax resident, you should consider speaking with an experienced international tax lawyer to ensure that your current and future earnings are being appropriately treated from a U.S. tax perspective.

    Defendant Evaded U.S. Exit Taxes After Renouncing His Citizenship

    This story is an update from a prior blog posting that we brought you last year. If you recall from that story, a federal indictment alleged that Oleg Tinkov, the founder and former majority shareholder of a virtual bank, filed a false U.S. tax return in 2013. Prior to the initial public offering of Tinkov’s bank, he was a U.S. citizen and was required to pay taxes in the U.S. on his worldwide income. Immediately after his bank was listed on the London Stock Exchange, the value of his ownership (both directly and indirectly) in his bank shares was valued at over $1 billion.

    Three days after the Initial Public Offering, Tinkov renounced his U.S. citizenship as part of a structuring plan involving the British Virgin Islands. Under U.S. tax law, renouncing your citizenship generally creates a realization event whereby the former U.S. citizen is taxed as if they had sold their assets for fair market value via an “exit tax”. Thus, the IRS and Department of Justice argue that Tinkov should have included the income derived from the fictional sale of his bank shares, which would have included an extremely large gain, considering the post-IPO valuation.

    Authorities allege that Tinkov did file a 2013 individual income tax return in the U.S. and reported income of just over $200,000. The filing also included an Initial and Annual Expatriation Statement that indicated that his net worth was only $300,000. Obviously, the IRS and Department of Justice are of the opinion that Tinkov should have taken into account the full value of his bank shares. As a part of his guilty plea, Tinkov faces up to three years in prison for each count of filing a false tax return. Additionally, Tinkov faces a period of supervised release upon the end of any physical incarceration. As a part of his plea agreement, the defendant agreed to pay over $500 million, representing the tax loss that he caused, a civil fraud penalty, interest, and other back taxes. He still faces an additional fine of $250,000 at sentencing.

    Consulting With an International Tax Attorney Before Renouncing Your Citizenship

    Although a $500 million tax liability is uncommon upon exiting the U.S. tax system, the “exit tax” mechanism employed by the U.S. tax law can result in a substantial tax being due upon renouncing U.S. citizenship or otherwise failing to be a U.S. tax resident. If you have recently renounced your U.S. citizenship or are considering doing so, it is in your best interest to contact an experienced international tax lawyer to discuss options to mitigate a potential exit tax cost and to help better understand your tax obligations in the future.

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