Saturday, April 4, 2020

Offshore Account Related Plea After Quiet Disclosure (4/4/2020)

On April 3, 2020, DOJ Tax issued this press release:  Lake Worth Businessman Pleads Guilty to Evading Taxes on Millions in Income, Stashing Funds in Secret Accounts Around the World, here.

The key excerpts are (with bold face supplied by JAT to highlight the taxpayer’s attempt to hide the ball through a false quiet disclosure):
A Lake Worth, Florida, businessman pleaded guilty today to tax evasion and willful failure to file a Report of Foreign Bank or Financial Account * * * *. 
According to court documents and statements made in court, Dusko Bruer owned and operated a company that bought U.S.-made agricultural machinery and parts and sold them throughout the world. Beginning in 2003, the company did not pay Bruer a salary. Instead, Bruer used millions of dollars from the company’s bank accounts to pay his personal expenses, make investments abroad, and make transfers to an employee and his family. From 2007 through 2011, Bruer transferred over $5.8 million of the company’s profits to foreign financial accounts. Bruer used the company’s profits to buy a yacht, purchase a waterfront home for his girlfriend and himself, purchase a home for an employee, and buy real property in Serbia. Between 2007 and 2014, Bruer failed to report more than $7.7 million in income and did not pay taxes of more than $2.7 million that were due to the United States. 
Although Bruer’s company had a number of employees and reaped millions of dollars in profits, Bruer never filed a corporate tax return for the company nor did the company ever pay taxes on its income. Bruer also never filed employment tax returns during those years reporting wages that the company paid to its employees nor did the company withhold and pay over payroll taxes. 
From 2007 through 2015, Bruer maintained financial accounts in Croatia, Germany, Serbia, and Switzerland. He did not report his ownership of the accounts to the Financial Crime Enforcement Network (FinCEN) by filing a Report of Foreign Bank or Financial Account (FBAR), despite knowing he had an obligation to do so. In 2010, an account he held at a subsidiary of Credit Suisse AG in Zurich, Switzerland reached a year-end high value of $6,177,586. Bruer used the assets in his foreign accounts for personal use, including the purchase of a yacht for $1,350,000 and a 3,200 square foot home in Lake Worth, Florida, with 100 feet of waterfront frontage for approximately $1,650,000. 
From 1999 to 2014, Bruer never filed a personal tax return nor did he pay tax on his income. In 2015, Credit Suisse closed his account in Switzerland and advised him to enter the IRS’s Offshore Voluntary Disclosure Program (OVDP), by which taxpayers could avoid criminal prosecution by making a voluntary disclosure directly to IRS-Criminal Investigation, filing six years of delinquent or amended income tax returns, as well as delinquent or amended FBARs, paying back taxes, interest, and certain penalties on the six tax years in the disclosure period, and paying a penalty on the highest aggregate account balance of their noncompliant offshore assets. Bruer did not enter into the OVDP because he determined that the cost would be too high. Instead, Bruer made a “quiet” disclosure that involved filing several delinquent tax returns with the IRS, not flagging the returns in anyway or paying the taxes, penalties and interest that would be paid in OVDP. 
The returns Bruer filed as part of his “quiet” disclosure were false because they disclosed only the funds he held in the Credit Suisse account and not the funds he held in the accounts in Croatia, Germany, Serbia, nor did they report the income he earned from his company.
I offer the following:
  • The information, here.
  • The Plea Agreement, here.
  • The Factual Agreement, here.
  • The CourtListener Docket Entries, here.
JAT Comments:
1. I think this the first “quiet disclosure” prosecution for offshore account income that I am aware of.  Quiet disclosure is sending in delinquent or amended tax returns to the Service Center without further ado.  The notion is that, so long as the delinquent or amended returns are regular in form and do not draw unnecessary attention (other than the lateness or amounts involved), they might just be processed without further ado, particularly if payment is made with the filings.  (Bruer did not make full payment, but in my practice I have almost always succeeded in convincing the clients to make payment with quiet disclosures.)

2.  Quiet disclosure has been a key part of the tax practitioners' tool kit for a long time.  Publicly, the IRS states that quiet disclosure does not achieve the type of benefit offered by its voluntary disclosure practice (including the OVDP iterations) which requires that the taxpayer out himself or herself to CI (called a noisy disclosure and take the civil tax lumps (including penalties) accordingly).  Everyone who intentionally underpaid or underreported or did not file at all is not a good candidate for quiet disclosure, because quiet disclosures do not give taxpayers the certainty they can usually obtain through the formal voluntary disclosure processes.  In my opinion, those with ugly facts (such as Bruer per the Factual Agreement) should not do a quiet disclosure.  They may have some criminal prosecution exposure if they were to do nothing, but the quiet disclosure will practically disincline the IRS from investigation and DOJ from prosecuting the more benign (less ugly) tax cheats. those who are not toward the bad end of the ugly facts spectrum might consider a quiet disclosure.  My reading of the cases (necessarily anecdotal) over the years is that cases of quiet disclosures that get prosecuted have some really, really ugly facts, particularly false returns in the quiet disclosure or attempts to evade or hide after the quiet disclosure or egregious failure to cooperate.  Quiet disclosure for taxpayers who have facts that are not dog ugly might consider the quiet disclosure.

3.  Those reading through the facts should recognize that the IRS had a plethora of potential charges that it could make against Bruer.  The charges made were tax evasion for 2008 and FBAR violation for calendar year 2014.  But the facts clearly show violations for other years.  As usual with plea agreements, particularly in ugly charges, two major felony counts are required for the plea and agreement not to prosecute other charges that could have been made under the facts.  A two felony plea will cap the sentence at 10 years, and the sentence will likely be less.

4.  I presume that the year 2008 was open for the tax evasion count because of some act that refreshed the statute for that year, probably the quiet disclosure false return.

5.  The plea to both tax evasion and FBAR violation highlights an issue as to the proper Guideline calculations.  In the past, this blog has discussed how the Guidelines are calculated for FBAR violations where the underlying criminal conduct is tax evasion.  In earlier years of the DOJ/IRS offshore initiative, a plea to an FBAR violation was sentenced under the tax Guidelines if tax was the focus of the crime.  DOJ changed the recommendations it made and the courts accepted that the FBAR count of conviction would be sentenced under Guideline 2S1.3.  Guideline 2S is titled Money Laundering and Money Transaction Reporting, which seems to best fit an FBAR violation.  Bruer’s plea agreement thus states the two separate Guidelines – the tax Guideline for the tax evasion count, and the Money Transaction Reporting Guideline for the FBAR count.  The plea agreement (¶ 8; see also attachment at end) states:
  • As to the tax evasion count, that the tax loss for the tax violation is between $1,500,000 and $3,000,000 (which produces an initial level of 22) and a sophisticated means 2 level increase (producing an offense level of 24.
  • As to the FBAR count, the value of funds is between $3,500,000 and $9,500,000 (which produces an initial offense level of 24) and a pattern of unlawful activity which adds a 2 level increase (producing an offense level of 26).
The plea agreement also provides for a 2 level reduction acceptance of responsibility and an additional 1 reduction if Bruer behaves and cooperates.  See Plea Agmnt ¶ 7.

So the resulting calculations (assuming no other adjustments) produce sentencing ranges as follows with acceptance of responsibility:
  • Tax Evasion - 37 to 46 months
  • FBAR violation - 46 to 57 months
Readers should note the differences in the calculations under the tax Guidelines and the Monetary Transaction Reporting Guidelines.

Then the Sentencing will be based on the Grouping provisions which I think will in this case of closely connected counts of conviction result in sentencing under the FBAR violation.

6. Restitution to the IRS is $2,629,927.  (Plea Agmnt ¶ 9.)  That amount will be automatically assessed.  But, the IRS may seek additional tax, penalties and interest.  (Plea Agmnt ¶¶ 11 & 16.)

7.  Since the restitution did not include the civil fraud penalty, the plea agreement provides that the civil fraud penalty applies for 2008 - 2014.  (See Plea Agmnt ¶ 21.)

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