Tuesday, May 10, 2011

An Outlier Foreign Bank Account Sentencing (5/10/11)

I recount below the key objective facts in the most recent sentencing, but caution that this sentencing is outside the mainstream for the current initiative -- i.e., more or less ordinary high net worth U.S. tax cheats who have legal source income stashed in overseas banks. The defendant in this case, one Arthur Allen Ferdig, operated a Ponzi Scheme through Tradex. The plea agreement is for the tax offense only but appears animated chiefly by his nontax skullduggery.  The plea agreement describes the nature of his tax offense as:


4. Defendant understands that for defendant to be guilty of attempting to evade and defeat income tax, in violation of Title United States Code, Section 7201, defendant must have willfully attempted to evade or defeat the assessment and payment of a tax due and owing with respect to income received by defendant during the year 2002 by, among other things, committing an affirmative act of evasion. Defendant admits that during the year 2002, defendant knowingly received income from Tradex, a business that defendant operated and failed to report that income. Defendant admits that his failure to report income resulted in a tax due and owing to the Internal Revenue Service. Defendant acted with the specific intent to violate the law. Defendant admits that defendant is, in fact, guilty of this offense as described in the first superseding information.
Ferdig claims on his Unity in the Pines web site here that:

Art is an Author, Teacher, Student as well as many other things. He has published many books as well as e-books, booklets and other informative pamphlets.

Art is a natural born truth-seeker, an outside-the-box thinker, seldom satisfied with traditional answers to life's pressing questions. Little did he know that his quest for understanding would bring him into direct contact with the magnificent and loving Angel Metatron, plus other powerful angels and other wonderful beings of light.
I guess his search for truth did not extend to taxes (or perhaps the investors in the Ponzi scheme).  But still, perhaps he will change his web site to acknowledge that he is now a tax cheat.

Having said that, I will recount the objective factors from the plea agreement and other sources and then have some comment below (Note some of the factors are blank now pending further information).

Taxpayer: Arthur Allen Ferdig
Offshore Banks : Unknown, but presumably in Caribbean
Entities: Yes
Legal Source Income: No
Guilt: By Plea Agreement - one count of evasion for 2002
Charges Given Up: All criminal charges from pattern of conduct, including money laundering.
Acceptance of Responsibility: Yes
Tax Loss: $148,000 for 2002 only (on unreported income of $529,000)
Stipulated Offense Level: 15 (BOL 16, Sophisticated Means +2, Acceptance of responsibility -3)
Sophisticated Means: Yes because of use of foreign banks.
Criminal History: No agreement
Civil Fraud Penalty: Agreed
Incarceration (in months): 18
FBAR penalty: Not a condition of the plea and sentence
Age at sentencing: 71

The Plea Agreement has the following provisions which I note without comment since readers will be able to reach their own conclusions:

Defendant gives up any and all objections that could be asserted to the Examination Division of the Internal Revenue Service receiving materials or information obtained during the criminal investigation of this matter, including materials and information obtained through grand jury subpoenas. [Plea p. 3]

[The U.S. agrees that it will] Not seek a sentence of imprisonment above the high end of the applicable Sentencing Guidelines range, provided that the offense level used by the Court to determine that range is level 15 and provided that the Court does not depart downward in offense level or criminal history category. [Plea p. 4]

9. Defendant understands that, if defendant is not a United States citizen, the felony conviction in this case may subject defendant to removal, also known as deportation, which may, under some circumstances, be mandatory. The court cannot, and defendant's attorney also may not be able to, advise defendant fully regarding the immigration consequences of the felony conviction in this case. Defendant understands that by entering a guilty plea defendant waives any claim that unexpected immigration consequences may render defendant's guilty plea invalid. [Page 6]
Thanks to a reader identified as JonF who called this sentencing to my attention.

I will incorporate this sentencing into my spreadsheet, but will have to make some changes so that users can interpret the statistics for outlier cases such as this.  This may take a few days because of the press of other matters.


  1. It seems more about the source of the income in offshore banks.

    In the eyes of IRS, there are only three types of source.

    1. legal income (US taxed or not subject to US tax)

    2. illegal income (evaded US tax)

    3. No way to prove either 1. or 2. -- would they assume it is legal or illegal ? I think in the OVDI program, IRS imposes 25%, 12.5% implicitly meaning it is illegal, but no evidence to prove it like the this case, they just want to get the same amount money like tax.

  2. I think the issue that Anonymous raises, legal versus illegal source income, is an issue before the tax issue. In other words, what is the source of income, legal-source (e.g., wages for labor, bank interest, sale of real estate) or illegal-source (drug sales, Ponzi schemes, as in the Ferdig case). Both legal and illegal source income are subject to income tax, i.e., drug dealers must pay income tax on their drug income, and the fact that their business is illicit is immaterial to the fact that taxes are still due on that drug income (recall that Al Capone was sent to jail not for bootlegging but for tax evasion).

    Once past the legal versus illegal income question, then we can ask whether taxes were paid on that income. So, you can have legal source income upon which taxes were paid or not paid, and illegal-source income, upon which taxes were paid or not paid.

    Of course, illegal source income is not eligible for the Offshore Voluntary Disclosure Initiative.

  3. And, of course, illegal source income involved in tax crimes is less favorable at sentencing (2 level increase and negative Booker factor).

  4. Thanks you both for your comments. I am in OVDI and I see questions from IRS (source of the fund), that means the orginal source of the money deposited offshore banks.

    The better policy for OVDI is to treat the fund differently based on source.

    For example, earn income (taxed by US and sent to oversea, or taxed by home country before becoming US person) should have a better treatment.

    Of course, it is hard to prove in most cases, and that is what IRS is using same rule to all, with few exception 5% (also needs to prove the source).

  5. If the original funds were post-tax in the OVDI period (2003-2010), then there would be no taxes, accuracy penalty and interest asessed.

    I'm not sure what happens if the funds were pre-tax and deposited prior to 2003. The FAQ seems to indicate that those funds would not be taxed. The 25% FBAR penalty would then be a reasonably good deal for someone who has decades of non compliance.

  6. Jonf,

    Here are two different kind tax,

    1. Source being taxed
    2. Earning from offshore bank (interests) being taxed.

    FBAR penalty does not apply to kind 2. and treat all most the same for kind 1 with exception 5% (on 3 conditions, owner does not open, no major activity (less than 1K transaction), and 3 (source being taxed income -- which is kind 1).

    Certainly 25% is a good deal for someone who made a lot money before 2003.


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