Wednesday, August 12, 2015

Two U.S. Return Preparer Enablers Sentenced for Offshore Account Conspiracy (8/12/15)

DOJ Tax announced here Monday the sentencing of two tax return preparers for "for facilitating an offshore tax fraud scheme.  They had been previously convicted of one count of conspiracy and two counts of FBAR violations.  For each, the maximum sentences (stacking all counts of conviction) was 15 years.  Key excerpts from the press release are:
David Kalai was sentenced to serve 36 months in prison to be followed by three years of supervised release, with a condition of home confinement to last the entire term of release, and ordered to pay a $286,000 fine, and Nadav Kalai, David Kalai’s son, was sentenced to serve 50 months in prison to be followed by three years of supervised release, and ordered to pay a $10,000 fine.  * * * *  
On Dec. 19, 2014, a federal jury in Los Angeles convicted the Kalais of one count of conspiracy to defraud the Internal Revenue Service (IRS).  The Kalais were also each convicted of two counts of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR).  An alleged co-conspirator, David Almog, who is charged in the second superseding indictment, remains a fugitive.  The Kalais advised and assisted their high net-worth clients in concealing millions of dollars of assets and income in secret foreign bank accounts and filing false federal income tax returns.  The defendants also maintained a secret offshore account of their own at Bank Leumi in Luxembourg in the name of a foreign sham corporation and failed to disclose the account to the IRS or the U.S. Treasury.  
* * * *  
According to the second superseding indictment and evidence introduced at trial, the Kalais were principals of United Revenue Service Inc. (URS), a tax return preparation business with 12 offices located throughout the United States.  David Kalai worked primarily at URS’ former headquarters in Newport Beach, California, and later at URS’ location in Costa Mesa, California.  Nadav Kalai worked out of URS’ headquarters in Bethesda, Maryland, as well as the locations in Newport Beach and Costa Mesa.  
* * * *  
Evidence introduced at trial established that the co-conspirators purposefully prepared false individual income tax returns for their URS clients that did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts.  In order to conceal the clients’ income, ownership and control of assets from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two Israeli banks, Bank Leumi and Bank B.  Bank Leumi is a large financial institution headquartered in Tel-Aviv, Israel, with worldwide branches.  Bank B is also a financial institution headquartered in Tel-Aviv with a worldwide presence. 
The sham corporations that the co-conspirators incorporated in Belize and elsewhere were used to act as named accountholders on the secret Israeli bank accounts.  The co-conspirators then recommended and facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense, or entirely omitted any income earned by a client from a foreign source.  The Kalais also failed to disclose the clients’ secret accounts on tax returns that they prepared, and caused the clients to fail to file FBARs with the U.S. Treasury as required.  
Three URS clients who testified at the Kalais’ trial have pleaded guilty to tax felonies arising from their participation in the scheme.  On July 1, 2013, Alexei Iazlovsky, a client of URS and Nadav Kalai, pleaded guilty in U.S. District Court in Los Angeles to signing and filing a false federal income tax return for tax year 2008.  According to court documents and evidence introduced at trial, Nadav Kalai facilitated the incorporation of a nominee Belize corporation for Iazlovsky, assisted Iazlovsky with setting up an offshore account in Luxembourg at one of the Israeli banks that was held in the name of the Belizean corporation and prepared false federal income tax returns, which Iazlovsky signed and filed with the IRS, that concealed the existence, assets and income of Iazlovsky’s offshore account.  On Nadav Kalai’s advice, Iazlovsky diverted a total of $2.6 million in untaxed business receipts from Russian clients to his undeclared bank account in Luxembourg.  
On July 17, 2013, Moshe Handelsman pleaded guilty in U.S. District Court in San Jose, California, to signing and filing a false income tax return for the 2007 tax year.  According to court documents and evidence introduced at trial, Handelsman was David Kalai’s client since the 1990s.  On David Kalai’s advice, Handelsman used three foreign bank accounts held in the names of two different sham foreign corporations to reduce his taxes.  The last of those accounts was held at the Tel-Aviv branch of one of the Israeli banks.  Nadav Kalai was Handelsman’s tax return preparer from 2003 through 2007.  During those years, Handelsman sent approximately $1.47 million offshore, which was fraudulently deducted as a business expense on corporate tax returns prepared by Nadav Kalai.  
On Feb. 2, Baruch Fogel pleaded guilty in U.S. District Court in Los Angeles to failing to file an FBAR declaring his Bank Leumi account in Luxembourg.  According to court documents and evidence introduced at trial, David Kalai devised a scheme to reduce Fogel’s income taxes in 2002 and 2003 by using a sham offshore corporation and a secret offshore bank account at Bank Leumi Luxembourg held in the name of the offshore corporation.  David Kalai’s scheme involved obtaining $8 million in loans from Bank Leumi USA and transferring that money through one or more of Fogel’s U.S. businesses to Fogel’s Luxembourg bank account.  The $8 million in transfers were designed to make it appear that one or more of Fogel’s U.S. businesses incurred business expenses by paying Fogel’s offshore corporation.  Once the paper trail was created, $8 million was fraudulently deducted as business expenses on Fogel’s corporate tax returns prepared by URS.  David Kalai told Fogel not to disclose his control of the foreign bank account to U.S. authorities.   
The evidence at trial also established that the Kalais each failed to file an FBAR for calendar years 2008 and 2009 with respect to a foreign account held at Bank Leumi in Luxembourg.  According to the bank’s internal records from Luxembourg, the Kalais were the true owners of the account, which was held in the name of Anack Ltd., a nominee Belizean corporation.  In 2008 and 2009, their offshore bank account had more than $300,000 on deposit. 
Bank B is apparently Bank Hapaolim.

The key prior blogs on Federal Tax Crimes are:
  • Tax Return Preparers Convicted of Conspiracy and Failure to File FBARs (12/23/14), here.
  • New Superseding Indictment of U.S. Enablers of Foreign Bank Noncompliance (10/19/13), here.
I suspect that, even though the sentences are significant, the judge made substantial downward variances.  I will try to determine the sentencing findings and the basis for the sentence.  If a reader has that information or some of that information, I would appreciate the reader forwarding it to me.

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