Criminal Bribery Charges Lead to $1 Million FBAR Penalties
For many taxpayers, the failure to file reports of foreign financial accounts happens by accident, or at least inadvertently. Even many penalties issued for willful violations are the result of a taxpayer's negligence rather than any complex tax avoidance scheme. But for John Alfay Salama Markus, a federal tip scheme and criminal bribery charges led to over $1 million in willful FBAR penalties.
Hiding Federal Criminal Bribery Money
John Alfay Salama Markus was an employee of the United States Army Corps of Engineers while stationed in Iraq. Between 2006 and 2009, Markus accepted bribes for confidential bid information about government contracts. In exchange for providing confidential information about the Unite States government's contracting needs, Markus received kickback based on a percentage of the money made from the contract.
To avoid criminal bribery charges, Markus had the contractors transfer money into foreign financial accounts in his father and brother's names in Jordan and Egypt. Markus would then direct his family to transfer the money into his own U.S. accounts. Between 2007 and 2009, the accounts each had over $10,000 in them, making them elligible for disclosure under the Bank Secrecy Act (BSA). But Markus did not report the accounts, since doing so would have exposed him to criminal bribery charges.
Criminal Bribery Charges Reveal Willful FBAR Violations
Markus's scheme was discovered by the Department of Justice, and he was charged with 54 separate crimes connected to the bribery scheme, including willfully failing to report his interests in the Jordanian and Egyptian accounts. He pled guilty to several of these charges, creating a factual record that laid the basis for the IRS to levy penalties against Markus for willful FBAR violations in United States v John Alfay Salama Markus, No. 1:16-cv-02133 in United States District Court for the District of New Jersey.
Proving Willful FBAR Violations
Willfully failing to file FBARs with the IRS adds up quickly. For each year, and each account, a taxpayer can be required to pay up to $100,000 or 50% of the balance of the account at the time of the violation. To levy these penalties, the IRS must be able to prove:
- The person is a U.S. citizen
- He or she had an interest in or authority over a foreign financial account
- The account had more than $10,000 in it at some point during the reporting period
- The person willfully failed to disclose the account.
Control of Family Members' Bank Accounts
Markus did not have his name on the foreign financial accounts in question. They were officially titled to his father and his brother. In order to impose willful FBAR penalties against Markus, the IRS needs to demonstrate that he had control or authority over the accounts. In its Memorandum in Support of Motion for Summary Judgment, the government said this standard was met when Markus:
- Directed his buyers to deposit money in those accounts
- Directed his father and brother to transfer funds out of the account for his benefit
- Controlled the deposit and distribution of funds in the accounts
According to the government, this triggered the "signature or other authority" portion of the Bank Secrecy Act, and imposed a duty to report the accounts on Markus.
Criminal Scheme Demonstrate Willfulness
The IRS imposes penalties for any FBAR violation, whether or not they are willful. But willful FBAR penalties are far higher, sometimes 10 times as much. As of November 13, 2017, the IRS had assessed $1,052,101.29 against Markus including all three accounts and interest. They are the basis for the civil lawsuit.
For an FBAR violation to be willful, the IRS must demonstrate a knowing or willful violation of the reporting standard. It must be voluntary, not just accidental or unconscious. Willful blindness or reckless disregard for the duty to report are enough to trigger the additional penalties.
In Markus's case, the IRS argues that the criminal bribery scheme itself demonstrated the willful nature of the violation. In its Memorandum, the IRS argues that Markus was hiding his illegal bribes and kickbacks in the accounts. Filing FBARs that disclosed the accounts would expose him to possible criminal consequences, so he chose not to do so. The criminal activity was the motive for non-disclosure and was itself enough to demonstrate willfulness.
Foreign account reporting failures aren't always accidental or inadvertent, as it may seem. Sometimes, intentional tax evasion is part of a larger criminal scheme. When that happens, the criminal charges and admissions that come with the guilty plea can lay the foundation for civil penalties for willful FBAR violations adding up to thousands, and even millions of dollars.