On August 1, 2016, the IRS scored another victory in a case involving Israeli Bank Accounts; the IRS and the DOJ announced that Mr. Masud Sarshar, a California businessman, was charged with one count of conspiracy to defraud the United States and one count of corruptly endeavoring to impair and impede the due administration of the internal revenue laws. Mr. Sarshar already signed a plea agreement agreeing to plead guilty and pay more than $8.3 million in restitution to the IRS. If the court accepts the parties’ agreement, Mr. Sarshar will be sentenced to 24 months in prison. Additionally, Mr. Sarshar agreed to pay a civil FBAR penalty in the amount of 50 percent of the high balance of his undeclared accounts for failure to disclose his Israeli bank accounts.
Facts of the Sarshar Case
Mr. Sarshar owned and operated Apparel Limited Inc., a clothing design business. Under his plea, he admitted that, between 2006 and 2009, he used unreported bank accounts at Bank Leumi and two other Israeli banks to hide $21 million of business revenue from the IRS. The accounts were owned by him personally and in the name of entities that he created with assistance of at least two relationship managers at the Israeli banks.
Between 2007 and 2012, Mr. Sarshar also earned more than $2.5 million in interest income from these accounts; none of this income was reported on his individual and corporate tax returns. No FBARs were ever filed.
In order to use the funds on his accounts, Mr. Sarshar utilized a creative stratagem where Bank Leumi would loan funds to Mr. Sarshar through its U.S. branch while the funds in Israel were used as a collateral. Mr. Sarshar was able to bring back to the United States approximately $19 million of his offshore assets without creating a paper trail or otherwise disclosing the existence of the offshore accounts to U.S. authorities.
What is particularly surprising about this case is the creativity of the Israeli bankers in getting the information to Mr. Sarshar. At Mr. Sarshar’s request, none of the banks sent him account statements by mail; rather, they provided them to him in person in Los Angeles. In order to conceal the statements, a Bank Leumi banker would upload the account statements on a USB drive which she concealed in necklace worn during her U.S. trips. Sometimes, the meetings with bankers occurred in Mr. Sarshar’s car. Moreover, the Israeli bankers also advised Mr. Sarshar to obtain Israeli and Iranian passports to prevent him from being flagged as a U.S. citizen by the compliance departments at both banks.
Lessons of the Sarshar Case
Several lessons and conclusions can be drawn from this case. The first conclusion is that the IRS continues to focus on Israeli banks in its tax enforcement efforts. The focus on Israel is something that Sherayzen Law Office has repeatedly stated in the past. Again, we want to repeat our prediction that we will see more cases involving Israel and other countries outside of Switzerland. This means that, if you have undeclared bank accounts in Israel, you are at an increased risk of detection and prosecution by the IRS. This lesson can be expanded into a general statement that you run a high risk of getting caught by the IRS if you have undisclosed foreign accounts in any country that has implemented FATCA.
The second lesson that can be drawn from the Sarshar case is that he should have entered into a voluntary disclosure program while he had a chance to do it. It is very important to understand that, in a willful situation, using the IRS offshore voluntary disclosure program is indispensable to prevent the imposition of higher penalties and a criminal prosecution.
The third lesson is that Sarshar case reaffirms the most common fact pattern that leads to IRS criminal prosecution – willful divergence of U.S. earnings to overseas accounts to avoid taxation, the usage of entities to hide the ownership of foreign accounts and persistence in violation of U.S. laws. Even one of these factors might have been sufficient for the IRS to commence a criminal investigation; in this case, all three were present.
Contact Sherayzen Law Office if You Have Undisclosed Foreign Accounts in Israel or Any Other Country
If you have undisclosed foreign accounts in Israel or any other country, contact Sherayzen Law Office for legal help. Our experienced team of international tax professionals, headed by our founder and international tax attorney Eugene Sherayzen, can help you resolve all of your tax problems in the United States.