South Korean Inheritance Leads to Criminal Sentence for FBAR Violations
On January 25, 2018, a South Korean citizen and a US Permanent Resident, Mr. Hyong Kwon Kim, was sentenced to prison for filing false tax returns and willful FBAR violations; additionally, he had to pay over $14 million in FBAR willful civil penalties. I already discussed Mr. Kim’s guilty plea and the main facts of his case in an earlier article last year, but I would like to come back to another aspect of this case: South Korean inheritance. In particular, I would like to trace how a South Korean inheritance led to Mr. Kim’s guilty plea and a criminal sentence for FBAR violations.
From South Korean Inheritance to Swiss Account FBAR Violations
According to the US Department of Justice (“DOJ”), Mr. Kim became a US permanent resident in 1998. The DOJ describes him as a sophisticated business executive who ran family businesses with operations in the United States and internationally.
At some point after he became a US tax resident, Mr. Kim inherited tens of millions of dollars from his family in South Korea. Instead of properly reporting his South Korean inheritance (which would not have been subject to US taxation at that time), he decided to hide it in foreign accounts. You can find the details of his efforts to hide his accounts in this article.
In the end, despite his ingenuous efforts, the IRS was able to identify Mr. Kim as a willfully noncompliant taxpayer who deliberately failed to file FBARs and filed false income tax returns for the years 1999 through 2010. As a result of his willful FBAR and income tax noncompliance and as part of Mr. Kim’s guilty plea, U.S. District Court Judge Brinkema sentenced Mr. Kim to six months to prison, imposed a fine of $100,000 and ordered him to pay $243,542 in restitution to the IRS. Moreover, Mr. Kim already paid $14 million in willful FBAR penalties.
In other words, as a result of his actions, Mr. Kim lost the majority of his South Korean inheritance and all earnings on that inheritance in addition to going to be jail.
Failure to Report South Korean Inheritance Was the First Step that Led to Criminal FBAR Violations
While, undoubtedly, the entire history of willful failures to file FBARs and report foreign income on tax returns is the primary cause of Mr. Kim’s imprisonment in 2018, it is important to understand that his noncompliance was only possible because Mr. Kim did not properly report his South Korean inheritance.
In other words, had Mr. Kim disclosed on Form 3520 that he had received an inheritance from South Korea in the last 1990s, he would not have been tempted to hide his inheritance from the IRS. In fact, the disclosure of his South Korean inheritance, would have made it impossible for him to hide his foreign assets in Swiss banks afterwards.
Primary Lesson from Mr. Kim’s South Korean Inheritance Case
This is an important lesson from this case that many observers and tax attorneys have missed – Mr. Kim’s noncompliance began with failure to report South Korean inheritance, not from the failure to file FBARs and foreign income (even though, he was sentenced and penalized for the latter two activities).
In fact, a very high number of my offshore voluntary disclosure clients came from a similar background – they received an inheritance from a foreign country (and it could be any foreign country: Australia, Canada, China Colombia, France, Germany, Italy, Russia, South Korea, Thailand, et cetera) and they failed to report the foreign inheritance first (usually, due to lack of knowledge about proper reporting of foreign inheritance). This failure to report foreign inheritance later led to significant US tax noncompliance that could have only been corrected through a voluntary disclosure.
Starting in 2013-2014, I have also seen the steady rise in the “reverse discovery” inheritance cases – i.e. clients would receive a foreign inheritance and would come to me to discuss on how to best disclose it. Then, as a result of my due diligence checklist, we would uncover prior FBAR or other tax noncompliance with respect to other foreign assets my clients had prior to their foreign inheritance.
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