Friday, May 9, 2014

Another UBS Related Offshore Account Conviction (5/9/14; 5/12/14)

The caption on a new DOJ press release, here:  Florida Doctor Sentenced for Federal Tax Crimes, with a subcaption:  Doctor Maintained Multiple Offshore Bank Accounts at UBS and Other Foreign Banks That Concealed More Than $60 Million in Income and Assets.

Key excerpts:
Dr. Patricia Lynn Hough, of Englewood, Florida, was sentenced today to serve two years in prison and three years supervised release by U.S. District Court Judge John Steele in Fort Myers, Florida, for conspiring to defraud the Internal Revenue Service (IRS) by concealing millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks, and for filing false individual income tax returns which failed to report the existence of those foreign accounts or the income earned in those accounts, the Justice Department and the IRS announced.   Hough was also ordered to pay $15,518,382 in restitution and $42,732.27 for the costs of prosecution .  Hough was convicted by a jury on Oct. 24, 2013. 
 According to court documents and court proceedings, Hough owned two Caribbean-based medical schools, Saba University School of Medicine located in Saba, Netherlands Antilles, and Medical University of the Americas located in Nevis, West Indies.  Hough conspired to defraud the IRS with her husband, Dr. David Fredrick, who is awaiting trial.   They carried out the conspiracy by creating and using nominee entities, including a foundation, and by using undeclared accounts in their names and the names of nominee entities at UBS and other foreign banks to conceal assets and income from the IRS.   Both schools and the associated real estate were sold on April 3, 2007, for more than $35 million, all of which was deposited into undeclared accounts in the names of the nominee entities.   The majority of the proceeds from the sale were not reported to the IRS on their tax returns and no tax was paid.   In total, between 2003 and 2008, Hough and Fredrick failed to pay more than $15 million in taxes.
The evidence at trial further proved that Hough and Fredrick used emails, telephone calls and in-person meetings to instruct Swiss bankers and asset managers to make investments and transfer funds from their undeclared accounts at UBS.  The evidence also established that Hough and Fredrick caused funds from the undeclared accounts in the names of the medical schools to be transferred to undeclared accounts in their individual names or in the names of nominee entities.   Hough and her husband then used the funds in their undeclared accounts to purchase an airplane, two homes in North Carolina and a condominium in Sarasota, Florida.     
 Hough was also convicted of three counts of filing false tax returns for 2005, 2007 and 2008.   The evidence at trial showed that Hough filed false tax returns that substantially understated her total income because she failed to report substantial interest and investment income and because she failed to report her half of the proceeds from the sale of the medical schools in 2007.   In addition, Hough failed to report that she had an interest in, or signature or other authority over, bank, securities or other financial accounts located in foreign countries.  
JAT Comments:

1. I have no time to comment now, other than say that the very recent sentencings have involved significant incarceration time.  But as one practitioner noted at a recent meeting, Ms. Hough's sentencing was well below the Sentencing Guidelines range, which even the low point was likely over double what her sentence was.  I haven't seen the calculations, but my rough and ready calculations suggest a range with a low-end exceeding 100 months.  She received only 24 months.  Hence, Dr. Hough benefited substantially from a Booker variance.  As with Ty Warner (Beanie Baby fame), I speculate that that reflects well on the lawyers.

2. The tax loss is addressed in 1 sentencing order.  United States v. Hough, 2014 U.S. Dist.LEXIS 63660 (MD FL 5/8/14).  As readers know, the tax loss is the principal factor in calculating the offense level which sets the Guidelines Range.  Hence, the first order of business in the order is to address the parties' claims on tax loss.  Here are key excepts:
The government asserts that the tax loss for the years 2003 through 2008 is $7,771,972 for Hough and $7,746,410 for Fredrick, for a total of $15,518,382. Defendant asserts that the total tax loss for these years is $0.\ 
* * * * 
Where the criminal activity is jointly undertaken, the district court may consider "all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity, that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense." U.S.S.G. § 1B1.3(a)(1)(B). Since the offenses in this case involved the filing of tax returns in which gross income was underreported, the tax loss is equal to 28% of the unreported gross income "unless a more accurate determination of the tax loss can be made." U.S.S.G. § 2T1.1(c)(1)(A).
Dr. Hough and her husband ran their offshore operations through entities, Saba Foundation and Medical University of the Americas.  The Government sought to ignore the entities and attribute the income to Dr. Hough and her husband as Schedule C income for tax loss purposes.  Defendant argued that the entities must be respected.  The Court found that the entities met the minimum / minimal requirements of Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).  However, the Court then determined that the entities' attributes made them for tax purposes entities other than corporations.  Under the U.S. rules, such entities are treated as partnerships rather than corporations and the income flows through.  The Government won this argument.

3. In the order, the Court also rejected Dr. Hough's claim that, because her husband had the more active role, she should be given a downward role adjustment, reasoning:
While Fredrick clearly had a more active role in many of the activities in the conspiracy, Hough's role cannot be properly described as either minimal or minor. She was an active participant in the conduct which led to her convictions, including the conspiracy, and could reasonably foresee the conduct of co-defendant Fredrick. Additionally, the tax loss attributable to Fredrick's individual returns had no impact on the base offense level, since defendant's tax loss exceeded $7 million by itself but the combined tax loss was less than $20 million. U.S.S.G. § 2T41. Tax Table (K), (L). Defendant's request for a minimal or minor role adjustment is denied.
4.  I posted on her conviction here:  Another UBS U.S. Depositor Convicted (10/25/13), here.


  1. In addition to paying attention I’d like the see the global political reaction if the US starts using the 30% sanction tax to enforce FATCA. Please remember in the late 1940s the US dollar was the logical choice for a reserve currency. However, today the US dollar is being ‘allowed,’ by the rest of the world to continue this privilege. If the 30% sanction tax is used what is the US going to do about the BRICs doing work around the $ ? Answer not very much.
    If the US dollar becomes a ‘pain the neck,’ to use for trade, governments/corporations of the world will start voting with their feet rather than submit to all the red tape and regulation.
    So do I use the US dollar with all the bulls**t attached or use the trade friendly Yuan or Euro?

    That countries so willingly give up their sovereignty and shred hard-wrought constitutionality (US or other country) is so unbelievable. Always brings to mind:
    WAKE UP !! – Nobody cares about you !! (George Carlin) “The American Dream”:

  2. Doug Shulman, the Worst IRS Commissioner Ever ?
    He took office with a reputation as an information systems maven. He then presided over an historic IT debacle. Tax refund fraud — fundamentally a systems failure — has let two-bit grifters like Rashia Wilson steal tens of billions of dollars in fraudulent refunds over the years.
    International tax enforcement is considered Doug Shulman’s greatest success — but there was no reason the pursuit of wealthy international money-launderers had to also terrorize American expatriates whose offenses were to commit everyday personal finance. Many folks have been hit with ridiculous penalties for not filing FBAR reports that they had no idea existed. These folks are often people who married overseas or moved out of the U.S. as children, but were presumptively treated as international money-launderers when they tried to come into the system, and were hit with enormous penalties — often when little or no tax had been avoided.
    It’s hard to imagine that an agency that can find ways to simply wave away the ACA employer mandate couldn’t find a way to allow expats and individuals without criminal intent to come into the international reporting system without risking financial disaster. The states that
    allow non-resident non-filers to come in by paying five years of back taxes provide an obvious model.

    Now the party controlling the House of Representatives is on notice that the agency wants to see it lose. That agency can hardly expect generous appropriations as long as that perception remains (and the new Commissioner has done nothing reassuring on that score). This will damage the agency’s effectiveness for years — all because The Worst
    Commissioner Ever was unwilling or unable to run a professional, non-partisan agency.

    This is a record of administrative ineptitude and negligence that is unbeaten. No IRS commissioner has so squandered agency resources and reputation. If another Commissioner has even come close, I’d sure like to know who it was.

  3. Here is an interesting question : What if the148 Non-IGA countries don’t agree to an IGA by July 1? I assume that the Treasury is faced with following up its threats and proceeding with
    sanctions of 2/3s of the world. However, those countries are a smaller part of the world economic activity and are the ones that don’t speak English, probably can’t read or understand the complex regulations, so what does Treasury care! They are creating a new financial order and global dragnet for the elite institutions. TBTF banks and the FCC (FATCA
    compliance complex) will profit from all of this, and the smaller financial institutions from smaller countries, well they could become a relic of history unable to comply, compete or thrive. They will be regulated into non existence.
    Carpet bombing the globe with Financial Sanctions have become the American weapon of mass economic destruction under this Administration! So, we will soon see how well they work, and what defenses will be created as countries adjust to this over use of a destructive weapon. If you have NO stake in this war, it is an interesting development to watch. Just
    too bad it is NOT carried on CNN, NBC, ABC, CBS, PBS, FOX or NPR. There are too many celebrity wardrobe malfunctions, and correspondence ball red carpets to cover to pay attention to this story!!

    Watchdogs in tuxedos…

  4. FATCA compliance type notices start making inroads into the online media or smaller communities inside the US:

    This is from a community in NY

  5. Here's a video on the rise of American expatriations due to the mounting burden felt by US citizens through taxation

  6. Today the over 7 million U.S. citizens living outside the U.S. has or will experience one or more of the following things for the sole reason that he or she is an American: limited or no access to basic banking services, limited employment opportunities, the inability to marry (or stay married) to the one you love, the possibility of complete financial ruin and (this is the real kicker) a government (you know, one that ostensibly exists to protect American citizens the world over) that won't lift a finger in your defense.
    The people in Washington are well aware of the banking and discrimination problems but won't actually do anything about it. This is in spite of the fact that the agreements between the US and individuals countries (the FATCA IGAs) have language that forbids those banks from discriminating against US Persons. Under the agreements the U.S. government could raise a stink about those banks and put pressure on local governments to do something about it. So, my U.S. friends, where is that much vaunted "protection" that you seem to think Americans
    abroad should be paying for?

  7. Is it getting worst before it gets better ? Are Sole Executive Agreements Next on the Roberts Court Chopping Block?

    two questions:

    1. In many of the IGAs there is a clause that prohibits discrimination against US Persons (US citizens, Green Card holders and the like). As a result of FATCA many foreign banks are
    either closing the accounts of US citizens or they are limiting the kinds of accounts they can have or the products they can purchase. This is a clear violation of the agreement. So who exactly is responsible for enforcing it? By what process can a US citizen experiencing this
    kind of descrimination seek redress?

    2. Under the IGAs banks are required to find all their US citizen clients. However it is often not clear at all if someone is a US citizen or not. US citizenship law is complex and even a child born abroad to two American parents may still not be a US citizen by birth.
    So in a situation where the bank says that X is a US citizen but the individual in question disagrees, who makes the final determination that his individual is or is not a US citizen? Can the bank do it on their own authority? From the IGA it certainly sounds like it which would mean that foreign banks are not only doing the IRS’ work for them but the State Department’s as well.

  8. FATCA.... evacuating before exits are blocked ?

    While the U.S. government pitches it as a way to catch all those imagined tax cheaters, FATCA is much more than that. By forcing U.S. tax law on every country around the globe, the IRS has
    evoked a reaction leading to restrictive currency and financial controls. The U.S. government, especially the IRS, is doing all it can to keep Americans and their money at home, where they can control it.

  9. The American Diaspora Tax War which is now in its fourth year and so far no one (I repeat no one)
    is winning. The American homeland will never see the billions it hopes
    to gain from this exercise because they don't exist - for every
    so-called "rich tax evader" at home or abroad there are tens of
    thousands of teachers, IT workers, retirees, au pairs, translators, stay
    at home mothers and fathers and the like who already pay taxes to the
    countries they live in and just don't have the resources to hire
    expensive tax lawyers to stay compliant, much less pay taxes to the
    United States on top of what they already pay in their countries of
    residence. IRS resources have already been diverted to pay for the
    implementation of FATCA which means less IRS enforcement at home and
    fewer resources for US taxpayers in the United States who desperately
    need help coping with the cumbersome US tax code. These are some of the
    casualties we can quantify but the untangible ones may be ever greater.

  10. On a personal note, after going through OVDI and needing to keep foreign accounts for family reasons I have searched in two EU countries for a bank account; after contacting dozens of Swiss banks. I found ONE in country X (only currency and individual stocks no mutual funds) and ONE in country Y (though they report to FATCA they will have NO phone, mail or email contact with me in the US. I must go there in person every year to get the info I need for taxes and FinCen form 114.) If my relatives lived in a house instead or apartment I would have requested permission to bury my money in their back yard.

  11. Recent figures show about 30,000 disclosures through the 2009, 2011 and 2012 OVDI combined. What are the rest of the 7 million USPs abroad doing about their accounts? I suspect they've either taken steps to not have to comply with FBAR in the future legally (take out the money and keep it as cash under the mattress, keep only one account under $10K to deposit salary and pay bills) or illegally (have foreign relative hold money.) The 20% to 27.5% penalty on the 30,000 who came in voluntarily scared off the millions of others.

  12. Israeli are smart and doing the right thing:

    See that article

    In the wake of the OECD exchange of information, they give the
    opportunity to people to come into compliance free of penalties and
    anonymously for a year. Now, that’s the right thing to do!

  13. Germany did something similar. Taxpayers can do a voluntary disclosure of taxes for the past 10 years, and pay the unpaid taxes plus interest. No foreign account penalty. This makes sense because it is proportionate to the unpaid tax. The US 27.5% penalty is not.

    Italy had an even much simpler system. Pay 5% of unreported funds abroad. The 5% is rough justice of back taxes, with no requirement to collect years of statements and pay return preparers to do amended returns.

    The Italian system was an unmitigated success because of the reasonable penalty and lack of complications. Italy got 5% from a huge percentage of previously unreported accounts. The US got 27.5% (plus back taxes, interest and penalty) from 30,000 disclosures (less opt outs) out of what, 5 to 7 million Americans abroad, plus another few million US residents with foreign accounts.

  14. I am not familiar with the amnesty programs in other countries, except in a general sense. I will say that the cultures in other countries are different than in the U.S. The myth in the U.S. -- I don't mean myth as a falsehood but a cultural myth -- is that U.S. taxpayers have greatly more voluntary compliance than in other countries. Accordingly, consistent with that myth, people who evade their obligations of voluntary compliance are subject to greater civil and criminal penalties than is the norm in other countries. So, I am not sure that treating lenient amnesties in other countries is the right model for what is best for the U.S.

    Still, it is worth considering even if we (as a country) decide that some variation works better for us.

    Jack Townsend

  15. Jack, do you mean that Americans are more likely to comply voluntarily or that they have wider latitude in terms of the voluntary nature of their compliance? If the former, I wonder why higher rates of voluntary compliance would require stiffer penalties (since the tax gap is narrower). If the latter, I wonder if that is true (99% of personl tax comes from income tax withholding) or even if true, if it comes at too high a price. On the one hand, Americans seem to tout voluntary disclosure as the bedrock of financial liberty; on the other, the IRS has unprecedented administrative power to monitor and enforce the "voluntary" compliance. Furthermore, with the advent of the informational age, that enforcement includes a tremendous amount of reporting. Indeed, with FATCA and FBAR, it would be very difficult for a US citizen to realise a gain or earn income and not have it somehow or in some form reported to the IRS.

  16. Jack, if no offshore assets are involved, there is the traditional domestic voluntary disclosure practice that you're talked about: file amended returns before the IRS is aware of the unreported income and you pay back taxes and interest, with no penalty since these are QARs.

    There is a huge difference between that and foreign accounts, especially the FBAR penalty. The back taxes, interest, and accuracy related penalty already reimburse the IRS for previously unpaid taxes. The FBAR penalty applies to harm done by filing FBARs a few years late, and I don't see where the harm lies there, since the FBARs typically were filed and forgotten (virtually never used by the IRS.)

    Just like there are those who innocently failed to report the accounts and income, there are those with the bad facts. But that would be true on the domestic side as well: women who take care of children at home and don't report the income, or people who rent out a room and don't report the income. Yet they are not faced with a penalty of 27.5% (under threat of up to 300%) of the value of their home, certainly not after they've filed QARs.

  17. All:

    I opted out under OVDI 2011 and finally have a settlement with IRS. I am happy I decided to withdraw from OVDI. I am really thankful to others who helped me through detailed information about their case. Here is a summary of my case. I will add more details as I find time.

  18. Thanks for sharing your experience. Couple of questions:
    1) Did your original lawyer recommend optout or not, if not, what facts did he cite as against it?
    2) I'm assuming you had around $1.4 million in the accounts plus 360K for your daughter. I'm asking this to see whether size of accounts in and of itself points against opting out.
    3) Which IRS office (what city) handled certification and optout? I'm asking because I've heard very negative things about a particular office.
    Oh and one suggestion, would you consider having Jack put this as a guest post instead of your own blog? It's not possible to post anonymously on your blog, and it might be better to have all the optouts in one place instead of separate blogs.

  19. I changed the blog settings to allow anonymous postings. No issues posting it here as well.

    1) The original lawyer had not opposed it. He was someone who would give me facts and pros and cons and let me decide. The second lawyer had actual experience with opting out. I will post his name later after checking with him.

    2) Yes, roughly accurate.

    3) The IRS office that handled my opt out case was in Vernon Hills, IL. The supervisor of the examiner seems to be from Wisconsion

  20. Jack i am wondering i was duped the same way as some of the user's here to join ovdp when i should have done a Go forward filing. My case has been send to CI. I am wondering if i get clearence can i just not proceed to step 2? and just do a go forward filing. I am wondering if their are any concequences in this case my account balance is less then 100k and i am working on a visa in the US

  21. First, let me state that full compliance from this day forward is required for any strategy. Full compliance now means filing the FBAR by 6/30 and filing a good 2013 return (I assume that you are on extension, but if not you should have filed a good 2013 return or file an amended 2013 return as soon as possible).

    Whether or not you should have joined OVDP to start with requires nuanced consideration of all your facts. Whether or not you should now "drop out" is a big issue, the principal concern being whether you have material criminal risk. Determining criminal risk requires a lot of understanding of the facts that bear on that issue. So, if you have material criminal risk, you should not drop out or withdraw. I will say that on the bare facts you present, I don't recall any criminal prosecutions with those facts (almost all involved intervening entities which would not have been done at the amounts you have involved and all involved higher amounts in the account and, by projection, higher amounts of underpaid tax). That is not advice that opting out is for you. That requires consideration of facts and nuances not offered here.

    The steps OVDP usually take are: (1) preclearance request and approval (Step 1); OVDL intake letter and approval (Step 2); and (3) complete package submission (original returns, amended returns, delinquent or amended FBARs, etc). Assuming your reference to step 2 is the same, the answer is that you can not do step 2. However, at that point, you are on the IRS's radar screen. So, rather than just fail to complete a step and hope the problem would go away, if it were me, I would write a letter formally withdrawing, with just a general statement that you had improvidently joined the program, without the audit arguments you would make when / if you are audited. Of course, with the letter you hope the problem would go away also. But, I think that the letter withdrawal sets the tone and suggests that you do not fear an audit. Whether the IRS would then audit, is the IRS's choice. But, provided you withdraw is before Step 2, you have not given the IRS any information other than, at one time, you thought the program was the one for you. You have not given the IRS any indication of the issues and amounts involved.

    Now, what the consequences would be is unknown. With less than $100k in a foreign account, the amount of income tax underpaid cannot be that significant over the years that would be open for income tax audit (perhaps 6 years under the relatively new statute for omissions of the income related to assets reportable on Form 8938 (even for years that Form was not required). And then the issue is what FBAR penalty you would pay. Doing a risk assessment on the FBAR penalties requires understanding a lot of facts as well.

    But assuming that you are comfortable that the risks of the willful penalty are acceptable to you, then just taking the regular audit when and if it occurs -- and however it occurs, whether by OVDP opt out, QD or GF -- seems like an acceptable strategy.

    As I have told people before, the only certain result is to join OVDP and not opt out. In most cases, the participant will know what the costs of the program are. All the other strategies involve uncertainty and, perhaps redundant, uncertain risk assessment. You must understand the risks in choosing any other strategy.

    Jack Townsend


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