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University Professor Sentenced to Prison with $100 Million FBAR Penalty

On February 10, 2017, the IRS scored yet another victory in its fight against secret offshore accounts with the imposition of a $100 Million FBAR Penalty. Mr. Dan Horsky, a 71-year old retired university professor (he used to teach at a business school), was a spectacularly successful investor and a very unsuccessful tax evader. After making a fortune, he decided to conceal his earnings through secret offshore accounts in Switzerland. Now, not only will this university professor pay an enormous $100 Million FBAR penalty, but he will also go to prison.

Facts of the Case: From University Professor to a $100 Million FBAR Penalty

Let’s first explore how did a simple professor ended up paying a $100 Million FBAR penalty.

According to court documents and statements made during the sentencing hearing, Mr. Horsky is a citizen of the United States, the United Kingdom and Israel. For over 30 years, he worked as a professor of business administration at a university located in New York. Around 1995, this university professor invested in numerous start-up companies. All of them but one failed; however, the one that succeeded (“Company A”) was spectacularly profitable.

In 2000, Mr. Horsky consolidated all of his investments into a nominee account in the name of a shell entity, Horsky Holdings. The account was opened at a Swiss bank in Zurich in order to conceal his financial transactions and accounts from the IRS and the US Treasury Department (the “DOJ”).

In 2008, Mr. Horsky received approximately $80 million in proceeds from selling Company A’s stock. However, he filed a fraudulent 2008 tax return, under-reporting his income by more than $40 million and disclosing only approximately $7 million of his gain from the sale. Then, the Swiss Bank opened multiple accounts for the university professor to assist him in concealing his assets. The university professor decided to trick the IRS and opened one small account for which Horsky admitted that he was a US citizen and another much larger account for which he claimed he was an Israeli citizen and resident.

As a university professor who loved business, Mr. Horsky could not stay away from temptation of further investments. He re-invested some of his gains from selling Company A’s stock into Company B’s stocks. Again, the university professor was enormously successful – by 2015, his secret offshore holdings exceeded $220 million.

In 2012, after learning about the IRS efforts to fight offshore tax evasion, Mr. Horsky engaged in a new scheme. He arranged for an individual (“Person A”) to take nominal control over his accounts at the Swiss Bank because the bank was closing accounts controlled by US persons. Interestingly, the Swiss Bank went so far as to help Person A relinquish his US citizenship. In 2014, Person A filed a false Form 8854 (Initial Annual Expatriation Statement) with the IRS that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.

By 2015, however, the IRS already conducted an investigation (probably triggered by information received as a result of the Swiss Bank Program) and identified Mr. Horsky’s tax evasion scheme. The IRS special agents actually raided Mr. Horsky’s home and confronted him about his concealment of his foreign financial accounts.

The IRS estimated that, during this entire 15-year old tax evasion scheme, Mr. Horsky evaded more than $18 million in income and gift taxes.

Punishment: $100 Million FBAR Penalty, Imprisonment and Other Penalties

Mr. Horsky faced a large array of penalties for filing fraudulent federal income tax returns, failure to disclosure his beneficial interest in and control over his foreign financial accounts on FBARs through the year 2011, and filing of fraudulent 2012 and 2013 FBARs.

The court sentenced Mr. Horsky to seven months in prison, one year of supervised release and a $250,000 fine. As part of his plea agreement, Mr. Horsky also paid over $13,000,000 in taxes owed to the IRS and a $100,000,000 FBAR penalty.

Lessons to be Learned from this $100 Million FBAR Penalty Case

So, how did this become a $100 Million FBAR Penalty Case? What qualified this case for criminal prosecution?

First, the very sophisticated nature of the tax evasion scheme made it very easy for the IRS to pursue criminal penalties in this case. Mr. Horsky went from one tax evasion trick to another, believing that he could avoid IRS detection. Using a shell corporation to hide his identity was definitely a big factor here. However, other strategies (like the use of a nominee who gave up his US citizenship) employed by him also made it an easy target for criminal prosecution.

Second, the amounts involved. With over $200 million in assets, Mr. Horsky should have known that he would be a valuable target for the IRS criminal prosecution.

Third, income evasion was done here on a grand scale. Not only did Mr. Horsky conceal the income from his accounts, but he also tried to evade the taxation of his very large capital gains. Every time that there is a combination of FBAR violation with a large-scale income tax violation, the chances of a criminal prosecution increase exponentially.

Finally, the willfulness of Mr. Horsky’s entire behavior was particularly made evident with the filing of fraudulent tax returns. A partial disclosure is one of the most dangerous patterns of tax behavior, because it discloses the knowledge of a tax obligation on the part of the taxpayer and points to the willfulness of the violation with respect to the noncompliant part of the obligation.

In fact, looking at this case, one can say that Mr. Horsky’s $100 Million FBAR penalty was definitely not the worse outcome. It is probably thanks to the skillful work of his criminal tax attorneys that the worst was avoided.

There is one more lesson that needs to be learned from this case. It appears that Mr. Horsky had plenty of opportunities to enter into any of the IRS offshore voluntary disclosure programs to avoid his $100 Million FBAR penalty and a prison sentence. He could have entered the 2009 OVDP, 2011 OVDI, 2012 OVDP and probably even 2014 OVDP.

If he would have entered into any of these programs, Mr. Horsky could have avoided the $100 Million FBAR penalty, saved tens of millions of dollars in potential penalties and eliminated any serious chance of a criminal prosecution.

Contact Sherayzen Law Office for Professional Help With the Voluntary Disclosure of Your Foreign Accounts

If you have undisclosed foreign accounts outside of the United States, you are in grave danger of IRS detection and the imposition of draconian FBAR penalties, including incarceration. This is why you need to contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options.

Sherayzen Law Office is an international tax law firm that specializes in offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers to avoid or reduce draconian FBAR penalties and bring their tax affairs into full compliance with US tax laws. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Higher OVDP Penalties May Affect More US Taxpayers

As of August 25, 2015, and as a result of increasing number of DOJ Swiss Bank Program Non-Prosecution agreements, 2015, higher OVDP penalties (50 %) apply to US account holders of 43 banks. Between August 1 and August 20, 2015, six more banks were added to the 50% penalty list. In this article, I would like to discuss this trend of higher OVDP penalties and analyze how it affects US taxpayers with undisclosed foreign accounts.

2014 OVDP Background

The 2014 IRS Offshore Voluntary Disclosure Program (“OVDP”) is a sequel to at least six prior voluntary disclosure initiatives since 2003. In reality, 2014 OVDP most closely resembles 2012 OVDP, but there are some crucial differences between 2014 OVDP and 2012 OVDP.

2012 OVDP was a voluntary disclosure program created by the IRS to allow U.S. taxpayers with undisclosed foreign accounts to come forward and settle their US tax problems related to foreign accounts under specific terms. The biggest advantage to participating in the 2012 OVDP (and it remains the same for 2014 OVDP) was the reduction of civil penalties (especially in a willful situation) and avoidance of criminal liability.

Over the years, the offshore voluntary disclosure programs have gotten more and more demanding in terms of information that needed to be submitted by the participating taxpayers and penalties that needed to be paid. Since 2012 OVDP never considered the difference between willful and non-willful taxpayers, many international tax lawyers considered it unfair for non-willful taxpayers to participate in the OVDP.

Learning from these experiences, the IRS realized that it could get better and more widespread compliance if it is able to effectively process non-willful taxpayers while, at the same time, imposing harsher penalties on willful taxpayers. Hence, the IRS implemented dramatic changes to the 2012 OVDP; from these changes, the Streamlined Options and 2014 OVDP with higher OVDP penalties were born.

Higher OVDP Penalties under 2014 OVDP

Since most of the non-willful taxpayers were likely to follow the Streamlined options, the IRS felt that it could impose higher OVDP penalties on the more stubborn willful taxpayers, particularly taxpayers with undisclosed Swiss accounts who did not heed the IRS warnings and did not enter the 2014 OVDP timely.

From this desire, the dual-tier OVDP penalty system was born. The first tier imposes a regular 27.5% (of the” OVDP penalty base”) penalty if the foreign accounts of US taxpayers who entered the OVDP program were not held in the banks on the IRS list. Also, there was a limited opportunity to enter the OVDP at 27.5% penalty rate even the “listed” foreign bank accounts if the taxpayer filed the preclearance request prior to August 4, 2014.

The second tier imposes higher OVDP penalties of 50% if the taxpayer filed the preclearance request after August 4, 2014, and the foreign accounts were held at a bank which is on the IRS list of foreign banks/facilitators.

DOJ Swiss Bank Program and the Expansion of the IRS List of Foreign Banks/ Facilitators

Initially, the IRS List of Foreign Banks consisted of a dozen banks already under investigation as of June 18, 2014, which included such big names as UBS, Credit Swiss, Zurcher Kantonalbank, et cetera. This means that higher OVDP penalties were imposed on US taxpayers with undisclosed foreign accounts at these banks if these taxpayers did not file the preclearance request timely.

On August 29, 2013, the US Department of Justice announced an unprecedented initiative – The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (“Swiss Bank Program”) – which was intended to allow Swiss banks avoid DOJ prosecution in exchange for disclosure of their non-compliant US account holders and payment of monetary penalties. In essence, this was a voluntary disclosure program for Swiss banks similar to OVDP for US individuals (and, similarly to higher OVDP penalties, the Swiss Bank Program also had its own graduated scale of penalties).

More than one hundred Swiss banks decided to participate in the DOJ Swiss Bank Program and complied with December 31, 2013 filing deadline. Starting March of 2015, the Swiss Bank Program entered its final stage in which the DOJ and the Swiss banks entered into individualized Non-Prosecution Agreement.

As these banks enter into the Non-Prosecution Agreements, the IRS adds each bank to the IRS List of Foreign Banks. This directly results in higher OVDP penalties for US taxpayers who owned foreign accounts at the “listed” banks and did not file the OVDP preclearance requests prior to the relevant Non-Prosecution Agreement.

As of August 26, 2015, this list consists virtually exclusively of Swiss banks and includes 43 foreign banks:

UBS AG
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
BSI SA (effective 3/30/15)
Vadian Bank AG (effective 5/8/15)
Finter Bank Zurich AG (effective 5/15/15)
Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
MediBank AG (effective 5/28/15)
LBBW (Schweiz) AG (effective 5/28/15)
Scobag Privatbank AG (effective 5/28/15)
Rothschild Bank AG (effective 6/3/15)
Banca Credinvest SA (effective 6/3/15)
Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
Berner Kantonalbank AG (effective 6/9/15)
Bank Linth LLB AG (effective 6/19/15)
Bank Sparhafen Zurich AG (effective 6/19/15)
Ersparniskasse Schaffhausen AG (effective 6/26/15)
Privatbank Von Graffenried AG (effective 7/2/15)
Banque Pasche SA (effective 7/9/15)
ARVEST Privatbank AG (effective 7/9/15)
Mercantil Bank (Schweiz) AG (effective 7/16/15)
Banque Cantonale Neuchateloise (effective 7/16/15)
Nidwaldner Kantonalbank (effective 7/16/15)
SB Saanen Bank AG (effective 7/23/15)
Privatbank Bellerive AG (effective 7/23/15)
PKB Privatbank AG (effective 7/30/15)
Falcon Private Bank AG (effective 7/30/15)
Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
Bank EKI Genossenschaft (effective 8/3/15)
Privatbank Reichmuth & Co. (effective 8/6/15)
Banque Cantonale du Jura SA (effective 8/6/15)
Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15)
bank zweiplus ag (effective 8/20/15)
Banca dello Stato del Cantone Ticino (effective 8/20/15)

Possible Future Scenario: Higher OVDP Penalties for Non-Swiss Bank Accounts?

Given the success of the Swiss Bank Program, I expect that this experience maybe applied by the IRS in another country and even worldwide. If this happens, higher OVDP penalties may affect a larger percentage of US taxpayers with undisclosed foreign accounts outside of Switzerland. Israel, Singapore, the Caribbean islands (e.g. the Cayman Islands) and other tax shelter and low-tax jurisdictions are all good candidates for the expansion of the Swiss Bank Program.

Impact on US Taxpayers

Given the continuous expansion of the IRS List of Foreign Banks (as a result of Swiss Bank Program Resolutions), more and more US taxpayers are likely to be affected by the higher OVDP penalties. Moreover, in light of the potential expansion of the Swiss Bank Program to other countries, it is very likely that higher OVDP penalties will commence to impact more US taxpayers with non-Swiss foreign accounts. Finally, there is a possibility that the almost worldwide implementation of FATCA may lead to higher OVDP penalties in the future.

Thus, in light of these developments, US taxpayers with undisclosed foreign accounts should contact an experienced international tax attorney to review their offshore voluntary disclosure options. Failure to do so may lead not only to higher OVDP penalties down the road, but also to the total loss of the possibility of doing a voluntary disclosure (for example, if the IRS commences an investigation) and imposition of willful FBAR penalties.

Contact Sherayzen Law Office for Professional Help With Your Offshore Voluntary Disclosure

This is why you should contact the experienced legal team of Sherayzen Law Office lead by the founder of the firm – Eugene Sherayzen, Esq. Mr. Sherayzen is a highly experienced international tax attorney who has helped hundreds of US taxpayers worldwide to bring their US tax affairs in full compliance with US tax laws. He can help you!

2011 Form TD F 90-22.1 (FBAR) is Due on June 30, 2012

Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN form 114 formerly Form TD F 90-22.1 (the FBAR form) must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2012). Thus, 2011  FBAR must be received by the DOT on June 30, 2012.  This rule is contrary to your regular tax returns where the mailing date determines whether the filing is timely.  There are no extensions available – the FBAR must be received by June 30 or it will be considered delinquent.

If the FBAR becomes delinquent, it may be subject to severe penalties.

Contact Sherayzen Law Office for FBAR Assistance

If you have any questions or concerns regarding whether you need to file the FBAR or how to prepare the form, please contact Sherayzen Law Office directly.  If you have not previous filed the FBARs and you were required to do so, contact our experienced international tax firm to schedule a consultation now.  We will assess your situation, determine your potential FBAR liability, explain the available options and guide you through this complex process of voluntary disclosure.