Concealed Foreign Accounts Send Businessman to Prison
When a California businessman's Israeli bank accounts came to light, it revealed a decades-long conspiracy to hide assets that has aspects of a Hollywood movie. When the case was closed, the taxpayer was looking at 24 months in prison and millions of dollars in fines and FBAR penalties.
IRS FBAR Reporting Requirements Must Be Taken Seriously
The Internal Revenue Service requires U.S. taxpayers to disclose assets and income from foreign financial accounts. Taxpayers must complete a Report of Foreign Bank and Financial Accounts (FBAR), now FinCEN Form 114, if they have a cumulative value of $10,000 in any foreign accounts at any time during the year. The IRS does have voluntary disclosure programs for taxpayers who inadvertently fail to meet the disclosure requirements. These programs allow taxpayers to substantially reduce the cost of FBAR penalties. But willful non-disclosure of foreign financial accounts can lead to more than fines and penalties. In the most severe cases, it can lead to time in a federal prison. The Justice Department recently issued a press release about just such a case.
California Businessman Hides Assets Overseas
Masud Sarshar, a U.S. citizen, owned and operated Apparel Limited Inc., which designed, manufactured, and sold clothing and apparel. Sarshar opened and maintained several bank accounts in Bank Leumi and two other Israeli banks in his name and the business name. Over the years, the accounts grew to tens of millions of dollars. Between 2006 and 2009, Sarshar deposited more than $21 million in untaxed business income into and between those accounts. But his FBARs, individual and corporate tax returns didn't disclose those assets.
Smuggled Statements and In-Person Bank Services
To keep the IRS from discovering his foreign bank accounts, Sarshar asked all his Israeli banks not to send him account statements by mail or email. Instead, the banks brought his account information to him in person. One bank representative went so far as to smuggle his statements on a USB drive hidden in her necklace. The representative managers would sometimes even meet Sarshar in his car to avoid discovery.
Hiding Assets Through Transfers and Loans
The bank representatives would bring Sarshar offers for other bank products to help grow his assets. These included "back-to-back" loans, authorized through U.S. branches and collateralized with the offshoe funds. This gave Sarshar access to $19 million in America without creating a paper trail back to the undisclosed Israeli funds.
When it appeared the IRS may have learned about the accounts, one representative advised him to transfer his remaining funds from one Israeli bank to another, and then an additional $5.8 million to an account in Hong Kong. The funds were then transferred to the United States disguised as a loan to Apparel Limited.
Avoiding Bank Reporting with False Passports
The IRS has the power to gather information from international banks and other financial institutions to track down taxpayers who fail to report foreign financial assets or income. Because of this, Sarshar and others like him avoid identifying themselves as U.S. citizens to their foreign financial institutions. To avoid detection, Sarshar obtained Israeli and Iranian passports, which he used to open the foreign bank accounts.
Willful Non-Disclosure Leads to Prison Time
Even with all his efforts, Sarshar's accounts were eventually brought to the attention of the U.S. Departments of Treasury and Justice, which led to federal tax evasion charges. On March 13, 2017, he was sentenced to 24 months in prison, followed by three years of supervised release. He will also have to pay $8.3 million in restitution, plus penalties and interest to the IRS. In addition, Sarshar faces $18.2 million in FBAR penalties for failing to disclose his Israeli bank accounts. IRS Criminal Investigation Chief Richard Weber said:
“Mr. Sarshar’s conduct was both egregious and staggering. . . . He knew the laws and purposefully hid his income to avoid paying taxes, cheating not only the U.S. government, but other law abiding tax payers who uphold their tax obligations. Hiding income in offshore banks is not tax planning, it’s fraud."
U.S. Taxpayers don't need to anxiously wait for the IRS to track down their foreign assets and risk getting sent to federal prison. By working with an experienced tax attorney and making use of the IRS's voluntary disclosure programs, you may be able to take prison time off the table, relieve your fear of exposure, and cut your tax consequences down to size.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding willful FBAR violations and criminal penalties, contact Joe Viola to schedule a consultation.