Tax Problem Attorney Blog

Important Offer in Compromise (OIC) Tip from a Senior IRS Collection Official

November 6, 2013 | by Dennis N. Brager

An Offer in Compromise (OIC) can be one of the best ways to avoid an IRS tax levy, and to reduce your tax debt if you have fallen far behind. Earlier this month I was speaking with a senior IRS collection official about Offers in Compromise, and he brought up an i Money Pic.jpg nteresting point. First, a little background. The IRS will allow taxpayers to reduce the amount of their tax debts if the IRS concludes that it is unlikely that the tax debt will be paid during the remaining time the IRS has to collect. This time period is referred to as the Collection Statute Expiration Date or CSED. If the tax can’t be paid during the CSED then the IRS may accept a settlement amount.

The IRS calculates this settlement amount, by adding the taxpayer’s net realizable equity in assets to the amount collectible from future expected income after payment of “necessary” living expenses. This is known as the reasonable collection potential or RCP. The amount collectible from future expected income is determined based upon the period over which the taxpayer proposes to make payments. If the payment period is from 1 to 5 months then the future income is determined over a 12 month period. On the other hand, if the taxpayer wishes to make payments over more than 5 months (up to a maximum of 24 months) then the future income is calculated over the entire 24 month period.

To take a simple example. Assume a taxpayer owes the IRS $300,000, and has assets of $25,000. In addition, she has monthly income, after necessary living expenses, of $2,000. If the taxpayer can pay the offer amount in 5 months or less than the RCP, the amount offered, would be $49,000 ($25,000 + 12 months x $2,000). On the other hand, if the taxpayer needs more than 5 months, then the RCP would be $73,000 (25,000 + 24 months x $2,000).

The Family That Commits Tax Evasion Together May Go to Prison Together

October 4, 2013 | by Dennis N. Brager

While offshore tax evasion can sometimes be a family affair as well. U.S. Attorney Preet Bharara recently announced a prosecution of an offshore tax evasion case involving multiple family members. This case illustrates the dangers involved when an older family member passes on without cleaning up his Report of Foreign Bank Account (FBAR). Henry Seggerman, of New York and Los Angeles, pled guilty this summer to one count of conspiracy to defraud the U.S., as well as two counts of filing false tax returns in connection with his family’s Swiss bank accounts. While the DOJ did not say that either Henry Seggerman or any of his siblings actively assisted the late Harry Seggerman with his offshore tax fraud during his lifetime, Henry Seggerman allegedly filed false tax returns after his father’s death that grossly underreported the value of his father’s estate. Furthermore, the tax return that Henry filed on behalf of his father’s estate failed to disclose the over $12 million hidden in Swiss bank accounts.

According to the DOJ, Henry Seggerman and his family continued this offshore tax fraud scheme for over a decade after their father’s death. Seggerman was accused of taking further steps to set up new Swiss bank accounts to conceal the funds inherited by himself and his siblings. Aside from controlling his own offshore bank account, Seggerman was accused of helping his brother repatriate funds from a Swiss bank account to the U.S. under the guise of loans from a foundation that he controlled.

Similar to many others who have been accused of committing offshore tax evasion, Seggerman is expected to fully cooperate with U.S. authorities in exchange for the possibility of a reduced sentence. Seggerman is expected to testify on behalf of the U.S. in the trial of Michael Little, an attorney who advised the Seggermans on financial issues. Little, who is accused of operating an 11-year offshore tax fraud conspiracy, has pleaded not guilty and is awaiting trial. Additionally, three of Seggerman’s siblings have already pled guilty to conspiracy to defraud the United States and filing fraudulent tax returns. All three siblings are currently awaiting sentencing.

While no sentencing date has been set for Seggerman, he faces a maximum penalty of 11 years in federal prison. Additionally, he has already agreed to make a $600,000 restitution payment at the time of his sentencing; if the case follows past patterns it would not be surprising if the total restitution payments are in the 6 million dollar range.
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78-year-old Illinois Businessman Sentenced to Prison for Multi-Year Offshore Tax Evasion Scheme

August 12, 2013 | by Dennis N. Brager

Tax fraud is not limited to the young. The IRS has once again demonstrated that its pursuit of American citizens who commit tax evasion through the use of offshore bank accounts does not diminish when taxpayers of advanced age are involved. Seventy eight- year-old Peter Troost, of Skokie, Illinois, recently pled guilty to tax fraud charges stemming from his use of a Swiss bank account to evade more than $1 million in taxes dating back to 1999. Earlier this year, the TaxProblemAttorneyBlog discussed the prosecution and ultimate acquittal of Hawaiian auto mogul James Pflueger for offshore tax evasion and other criminal tax charges, noting that despite his age of 87 years old, the Department of Justice vigorously prosecuted the case arising from his offshore bank accounts.

Now, Peter Troost, the owner of Troost Memorials, a seller of gravestones and other cemetery markers, has pled guilty to an offshore tax evasion scheme in which he diverted income from both his business and various rental properties into a Swiss Bank Account located at UBS. According to his plea agreement, Troost diverted taxable income into his UBS account for at least 10 years, beginning in 1999. Troost admitted to intentionally failing to report both interest income and income from his business throughout his offshore tax evasion scheme. The timing of the end of Troost’s offshore arrangement (and its discovery) is unsurprising, considering the IRS’ increased scrutiny of offshore banks accounts resulting from UBS’ deferred prosecution agreement to provide information about U.S. account holders that began in 2009.

According to the Department of Justice, Troost is the first taxpayer to be charged in Federal Court in Chicago arising out of the United States’ 2009 agreement with UBS and other Swiss banks for those banks to provide information about U.S. taxpayers holding offshore bank accounts. Given the Department of Justice’s vigorous prosecution of taxpayers who commit offshore tax fraud, Troost may not be the last Chicago-area businessperson to be investigated for use of an overseas bank account. Although Troost’s involvement with UBS lasted for at least 10 years, given the IRS’ increased enforcement efforts against individuals who own undeclared offshore bank accounts it is unlikely that many taxpayers will remain undetected for that long in the future.

Offshore Account Holders Beware. More Swiss Bank Account Information to Be Turned Over to the IRS

July 15, 2013 | by Dennis N. Brager

In a move which should send shivers through the spines of delinquent FBAR (Foreign Bank Account Report) filers the Swiss Federal Supreme Court has granted the IRS’ request for the names of U.S persons holding “secret” Swiss bank accounts. The IRS had originally submitted a so-called group request in September 2011, but an account holder brought an appeal to the Swiss Federal Administrative Court which held that the group request was too vague and amounted to a fishing expedition. The IRS amended its group request, and the Federal Administrative Court ruled the amended request was allowable under the provisions of 1996 Convention between the United States and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income (the “Treaty”).

Under the Treaty, the Swiss will supply information if the IRS can show a suspicion of “fraud or the like.” Since Swiss and U.S. law are very different in terms of defining tax fraud it is sometimes difficult for tax attorneys in the U.S. to understand whether a particular set of factual circumstances will be considered fraud or the like. Indeed, “mere tax evasion” is not a crime in Switzerland. The key issue in the Credit Suisse case, however, was whether a “group request” i.e. one which describes a particular set of persons by their characteristics as opposed to providing a specific name could ever be honored.

According to its press release the Swiss Federal Supreme Court held that:

[R]equests for administrative assistance in relation with fraud and the like are in principle admissible under the 1996 Double Taxation Agreement with the United States, regardless of whether the suspicion falls on one or more persons and whether the said persons are explicitly named in the request.

In another words in the future the IRS can describe a class of individuals, and a Swiss Bank will be required to turn over their bank records. It wouldn’t be a bit surprising if the IRS already has group requests in the works at other Swiss banks including those reportedly under investigation such as Julius Baer, Basler Kantonalbank, Zuercher Kantonalbank, HSBC, and Pictet.

It is hard to believe that anyone with a Swiss bank account is still laboring under the belief that their offshore accounts will remain secret from the IRS. The penalties for failure to file FBARS are very severe, and can include criminal convictions, as well as civil penalties which can reach 300% of the offshore account balances. In addition, criminal tax evasion charges could be brought by the IRS. Anyone with an offshore account needs to give serious consideration to whether or not they should enter the IRS’ Offshore Voluntary Disclosure Program (OVDP). With the IRS racking up continued success in obtaining the cooperation of foreign banks it could decide to close the OVDP at any time, and therefore waiting may not be an option.

IRS Slams Offshore Account Holder with 200% FBAR penalty for Willful Failure to File Foreign Bank Account Reports

July 10, 2013 | by Dennis N. Brager

The IRS has assessed FBAR penalties against Carl R. Zwerner for willfuly failing to file an FBAR (Foreign Bank Account Report) on Form TDF 90-22.1. The news here is that the IRS is seeking to impose a willful failure to file an FBAR penalty against Zwerner for multiple years. Specifically the IRS seeks to impose a separate 50% penalty for each of four years that Zwerner failed to file an FBAR. According to the Complaint the IRS assessed four separate penalties totaling over $3 million as follows:

2004 – $723,762, assessed on June 21, 2011 2005 – $745,209, assessed on August 10, 2011 2006 – $772,838, assessed on August 10, 2011 2007 – $845,527 assessed on August 10, 2011

Perhaps not surprisingly Zwerner didn’t pay the FBAR penalties and the Department of Justice has filed suit to collect the penalties. These penalties, are civil penalties, and separate and apart from any criminal FBAR penalties that could be imposed, or criminal tax fraud charges that could be brought. As a practical matter though it would be unusual for the IRS to bring criminal tax or FBAR charges after a civil suit has been filed.

87 Year Old Hawaiian Auto Mogul Acquitted of all Tax Fraud and Conspiracy Charges after District Court for District of Hawaii Finds Lack of Intent and Willfulness

May 2, 2013 | by Dennis N. Brager

The U.S. District Court for the District of Hawaii recently acquitted an 87-year-old auto dealership mogul of all tax fraud and conspiracy charges that the U.S. Government had brought against him. James Pflueger, who was facing multiple counts of both tax fraud and conspiracy to defraud the government, had been indicted on those charges in 2010 based on his alleged involvement in two separate tax fraud schemes. On March 20th, 2013, however, Pflueger was acquitted of all charges in what his criminal tax attorneys called “the Justice Department’s first unsuccessful prosecution relating to the use of foreign bank accounts in the Government’s ongoing international enforcement efforts.”

Pflueger was initially indicted on tax fraud and conspiracy charges related to two separate incidents, the first of which involved a situation where Pflueger’s company allegedly improperly paid for personal expenses of Pflueger’s family, and the second of which involved alleged underreporting of gain from Pflueger’s sale of one of his properties, known as Hacienda. The government also initially charged Pflueger with the failure to file a Report of Foreign Bank and Financial Accounts (FBAR), but dropped that charge before trial.

Dennis Duban, the accountant who handled Pflueger’s financial affairs, had pled guilty in October 2012 to conspiracy and aiding in the filing of a false tax return. According to the government, Duban and Pflueger engineered the Hacienda sale to effect offshore tax evasion by transferring the proceeds from the sale to a Swiss bank account in order to prevent the proceeds from being used to pay civil claims arising from a 2006 accident at another of Pflueger’s properties. However, Pflueger’s criminal tax attorneys were successful in arguing that Pflueger was not responsible for his IRS tax problems, and that Duban was the sole mastermind of the tax fraud.

Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return

April 11, 2013 | by Dennis N. Brager

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax dispute began, as the IRS’ records stated that the envelope containing the Stockers’ amended 2003 return was postmarked four days late. Compounding the Stockers’ tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS’ motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers’ attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS’ records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker’s failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the “date of registration shall be deemed the postmark date”. The court rebuffed the Stockers’ attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS’ failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers’ mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers’ own mistakes precluded them from receiving relief, despite their innocent nature. While calling it “unfortunate” that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.
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Prominent Tax Attorney Found Liable for Civil Tax Fraud Penalties Due to Finding of “Willful Blindness” to Underreporting of Income

March 20, 2013 | by Dennis N. Brager

After being convicted of criminal tax fraud and serving 18 months in federal prison, a prominent former California tax attorney recently found himself again the subject of an IRS investigation into his alleged tax fraud. After a criminal tax case that culminated in Owen G. Fiore’s guilty plea to tax evasion for the 1999 tax year, the IRS began to seek civil tax fraud penalties against Mr. Fiore for 1996 through 1999. Although Mr. Fiore conceded the tax disputes and the tax fraud charges for 1998 and 1999, he disputed his fraud liability for 1996 and 1997. While the Tax Court felt that it was unclear whether some of Mr. Fiore’s actions weighed in favor of a finding of tax fraud, the court took a novel approach and ultimately held that Mr. Fiore had been “willfully blind” to his unreported income, and consequently found him liable for tax fraud for the 1996 and 1997 tax years.

Borrowing heavily from criminal law principles and discussing relevant appellate jurisprudence on the issue, the Tax Court applied the infrequently-used (at least in the area of civil tax fraud) willful blindness concept to Mr. Fiore’s actions in the years in question. Specifically, the court stated that if the IRS could prove by clear and convincing evidence that Mr. Fiore was “aware of a high probability of unreported income or improper deductions” and “deliberately avoided steps to confirm this awareness,” the standard for civil tax fraud would be met.

Ultimately, the Tax Court found that Mr. Fiore met both prongs of the test for willful blindness. Discussing Mr. Fiore’s extensive work experience and education, the court found that such experience ensured that he was aware of the risk of underreporting his income through generally neglecting firm administration. Furthermore, the court discussed Mr. Fiore’s significant use of funds during the period in question, and inferred from this that he consciously chose to not pay taxes in order to have more funds on hand. As to the second prong of the test, the court found that since Fiore had access to bank statements, bills and deposit slips for each taxable year, yet failed to check them when preparing his tax returns, this constituted “deliberate” avoidance of steps to confirm the underreporting of his income.

After this discussion of Mr. Fiore’s tax return problems, the Tax Court concluded that the finding of willful blindness not only weighed in favor of tax fraud, but deserved “particular weight” in determining whether Mr. Fiore had committed tax fraud. When added to other factors such as Mr. Fiore’s repeated failure to cooperate in his IRS tax audits, consistent underreporting of income, and haphazard recordkeeping (none of which conclusively weighed in favor of a finding of tax fraud on their own), the court found that the IRS had met the burden of proof to show that Mr. Fiore committed tax fraud in 1996 and 1997.

Streamlined Foreign Bank Account Report (FBAR) Filing Compliance Procedure FAQs Issued by IRS for Non-Resident Taxpayers

March 6, 2013 | by Dennis N. Brager

Last year the IRS announced an alternative to its Offshore Voluntary Compliance Program (OVDP) which was being made available to a limited group of non-resident individuals who failed to file Foreign Bank Account Reports (FBARs) on Form TDF 90-22.1. Our tax lawyers blogged about the Streamlined Program previously, taking a look at some of the pros and cons. Now the IRS has issued six Frequently Asked Questions about the Streamlined Compliance Program.

The most important FAQ is the first one. It makes clear that taxpayers who have a tax liability greater than $1,500 may apply to the Streamlined Program. It cautions that if a taxpayer exceeds the $1,500 threshold he or she may be classified as higher risk, and under FAQ No. 2 may be subject to higher penalties. It appears that the Streamlined Program may be a good bet for those individuals whose liability exceeds the threshold by a relatively small amount, perhaps $1,000 or $2,000, or even as much as $3,500. In the judgment of our tax attorneys going over that amount could be problematic, although as with tax problems in general and FBAR problems in particular, there is no substitute for a review of all of the facts. Simply put, a case by case determination is necessary before making the decision.

FAQ No. 3 provides that an individual who is already in the 2011 Offshore Voluntary Disclosure initiative (OVDI) or the earlier or later OVDP, who qualifies under the

San Diego Used Car Dealer Sentenced in Tax Fraud Case

January 28, 2013 | by Dennis N. Brager

Many people have the preconceived notion that used car salesmen are less than scrupulous and Mohammad Jafar Nikbakht didn’t do anything to help that stereotype. Late last year in the United States District Court for the Southern District of California, Mohammad Nikbakht aka Freydoon Nikbakht was sentenced to 15 months in prison for criminal tax fraud by filing fraudulent Forms 1040 for the years 2002, 2003 and 2004, again purposely understating his income. For the years 2006 and 2007 he didn’t file tax returns even though they were required. In his attempt to further criminally evade the income tax due and owing he operated a wholesale auto dealership under another dealer’s license and had all of his income payments made payable to either cash or his ex-wife in an effort to hide his income. He moved money into, out of and between various bank accounts to hide the money from the IRS and created a sham corporation, opening a bank account in that corporation’s name that he used to pay his personal expenses, again in a concerted effort to conceal his income.

Mr. Nikbakht eventually pled guilty to one count of the criminal tax indictment for 2007 with the remaining counts dismissed on the motion of the United States. In addition to 15 months in prison, Mr. Nikbakht was ordered to pay the IRS $124,454 in restitution and upon his release from prison will be on supervised release for three years. He will also be prohibited from opening checking accounts or incurring new credit card charges or opening additional lines of credit without approval of his probation officer.
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