IRS Seeks Prison Time for Willful Tax Fraud

It can sometimes feel like the Internal Revenue Service (IRS) is out to get taxpayers who don’t know the rules. But a recent federal court indictment, if proven true, will show that sometimes taxpayers know exactly what they are doing when they commit willful tax fraud. When that happens, the IRS and the Department of Justice can file criminal charges that result in prison time.

Department of Justice Files Criminal Tax Fraud Charges Against California Resident

In July, the Department of Justice announced that a Grand Jury indicted Teymour Khoubian, a resident of Beverly Hills, California for tax fraud. The indictment said that between 2006 and 2014, Khoubian filed false tax returns, false Reports of Foreign Bank and Financial Account forms (FBARs), and made false statements to the IRS agents assigned to his case. Unlike many FBAR violation cases, the allegations showed that Khoubian knew exactly what he was doing when he concealed bank accounts in Israel and Germany.

Foreign Account Reporting Requirements

The Internal Revenue Code requires U.S. taxpayers to disclose all their worldwide income each year on their IRS tax returns, if that income exceeds a certain amount. Schedule B on an individual tax return asks:

“At any time during [the calendar year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?”

If the answer is yes, taxpayers must disclose the country where those accounts are located on their tax return. They must also state any interest earned from those accounts.

As the balances of those accounts increase, so do the reporting requirements. If a taxpayer has a financial interest in, or signature authority over, any foreign bank account with a balance over $10,000 at time during the year, the taxpayer must also file FBARs disclosing the account, its location, and the balances of those accounts.

A Case Study in Willful Tax Fraud

Often, when the IRS investigates FBAR violations and tax fraud it is because unsophisticated taxpayers don’t understand how the law works. This is why the IRS has implemented voluntary reporting programs for these taxpayers to minimize their penalties. Khoubian is on the other end of the spectrum.

The Department of Justice alleges that in addition to filing false tax statements, Khoubian worked to deceive everyone from IRS agents to bank representatives and took advantage of tax credits based on a much lower reported income. The criminal indictment says Khoubian:

• Failed to disclose accounts held in Bank Leumi el-Israel B.M. in Tel-Aviv, Israel, and Commerzbank AG in Frankfurt, Germany, with balances up to $20,000,000
• Obstructed Bank Leumi Israel’s efforts to obtain taxpayer identification information, falsely claiming he lived in Iran
• Provided an Iranian passport to Commerzbank to prevent the German bank from reporting his account to the IRS
• Made false statements to the IRS Criminal Investigation Special Agent assigned to his case

When questioned, he said he did not own a bank account in Germany between 2005 and 2010. He said the account had been closed years earlier, and the money transferred to the U.S. In fact, the IRS determined that in 2007 and 2008, Khoubian had transferred over $600,000 from his German account to accounts in Israel.

It appears Khoubian did all of this to take advantage of several U.S. tax credits only available to low- and middle-income taxpayers and families. Over the years, Khoubian had claimed and received thousands of dollars in Earned Income Tax Credits and Child Tax Credits, as well as falsely claiming the Making Work Pay credit in 2009. Each of these credits have caps on the adjusted gross income taxpayers can claim. Even though he allegedly owned millions in foreign assets, Khoubian was able to receive these credits based on the willful tax fraud on his returns.

Willful Tax Fraud Comes with Steep Criminal Consequences

Willful tax fraud and FBAR violations go beyond financial consequences. In addition to fines and penalties, if convicted, Khoubian could find himself in federal prison. The grand jury in the United States District Court Central District of California issued an indictment including statutory maximum sentences of three years in prison for impeding the internal revenue laws and filing false tax returns, as well as five years for each count of willfully filing a false FBAR and making a false statement.

IRS criminal investigations can result in serious, even life-changing consequences for U.S. taxpayers who commit willful tax fraud. If you are worried the IRS may be looking too closely at your tax returns and FBARs, it is wise to speak with an experienced tax attorney now. Through a careful review of your financial and tax situation, you may be able to reduce your tax liability and avoid federal prison time.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years’ experience. If you have questions regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.