HOW NOT TO VOLUNTARILY DISCLOSE AN UNREPORTED OFFSHORE FINANCIAL ACCOUNT

A Wall Street Journal of March 14, 2015 by Laura Saunders reveals how Gregg Kaminsky and his tax advisors violated the cardinal rule of voluntary disclosure practice, “Don’t make things worse than they already are.”

Kaminsky, now a 46 year-old entrepreneur with two young children, had opened a Swiss account at UBS in 2000. Kaminsky’s stated reason for opening the account: His grandfather having helped Jews escape during Holocaust, had told him to always have a secret stash.  Kaminsky made deposits to the account after it was opened.  By mid-2005 the account value had risen to $1.15 million.

Kaminsky did not file the required FBARS and did not include income from the accounts in his income tax returns.  Moreover, he left the assets off federal financial tuition aid forms he’d filed in 2007 and 2008 to obtain low-interest loans for an MBA program.

Making things worse

In 2009, after the UBS scandal became public, Kaminsky closed the UBS account and wired his funds from the account to a HSBC bank account in Hong Kong thus becoming one of what IRS calls “The Leavers.” (Those who fled UBS for other banks thought to be not yet on the IRS radar screen).  In leaving he’d instructed UBS that he expected them to keep   “details regarding the account over its history … entirely confidential.”  Unfortunately for Kaminsky UBS, trying to save its own neck, gave him up to the Department of Justice.

Making things yet more worse

In 2010, Kaminsky decided to come clean.  He claims he was advised to forego the Offshore Voluntary Disclosure Initiative, as it was called at the time.  Instead he made an ill-advised “quiet disclosure” by filing amended returns for the years 2009 through 2012 reporting his previously unreported offshore earnings.  Kaminsky’ s quiet disclosure was ill-advised because his failure to file FBARS and report income from his Swiss and Hong Kong accounts was clearly not due to reasonable cause and almost certainly not non-willful, at least from 2009 when his movement of funds to Hong Kong created pretty compelling evidence of knowledge and intent to conceal.

Making things yet even more worse

Not only was the quiet disclosure ill-advised, but worst of all his errors of judgment, the amended returns did not include all of Kaminsky’s gross income earned.  He left out of the amended returns income earned from the second life virtual world. SL members buy and sell goods and services using a currency called Linden Dollars (L$). Linden Labs. The income earned from such activities is gross income that must be reported on a member’s tax return. Whether or not the SL income omission was intentional, it was a fatal nail in the coffin.

Result

A DOJ press release (12/18/14)

“Gregg A. Kaminsky has pleaded guilty to one count of willfully failing to file a Foreign Bank Account Report with the U.S. Department of Treasury in connection with his concealment of income and assets in accounts in Switzerland, Hong Kong, and Thailand over several years, as well as his failure to report certain income earned in the virtual world, “Second Life.”

Kaminsky was sentenced this month and his punishment seems not overly harsh in relation to his offenses (In total he’d failed to report over $400,000 in income and evaded tax of about $125,000):

  • Four months in prison followed by two years of supervised release.
  • Two months of home confinement.
  • 200 hours of community service.
  • Pay restitution in the amount of $91,983 to the IRS.
  • Pay an FBAR civil penalty of $250,635.20, which was about fifty percent of the balance in Kandinsky’s HSBC account in Hong Kong as of June 30, 2009.  The penalty could have been much higher had not the FBAR penalty statute of limitations run on the earlier years when his bank account value had peaked.

Lessons to take from the plight of Mr. Kaminsky

  1. Filing amended returns for offshore transgressions, whether in a “quiet disclosure” or under the “Streamlined Filing Compliance Procedures” is dangerous and must be undertaken with great care and only after a thorough analysis whether the taxpayer’s conduct in failing to comply with the tax law and Bank Secrecy Act was willful.
  2. The willfulness analysis is not the end of the process requiring great care. The amended returns must be prepared scrupulously and must capture all income earned and claim only those deductions clearly allowed under the Internal Revenue Code. Such returns are not ordinary returns in which aggressive filing positions should be taken. With hindsight errors or aggressive, unsustainable deductions may look like more evidence of criminal intent to conceal a prior tax crime, reduce the tax owed on the prior tax crime, or of yet another tax crime.

© 2015 by Robert S. Steinberg, Esquire All rights reserved

This entry was posted in 2014 OVDP, AMENDED RETURNS, LESSONS FOR OFFSHORE TAX COMPLIANCE, ROBERT S STEINBERG, STREAMONED FILING COMPLIANCE PROCEDURES, WRONG WAY TO VOLUNTARILY DISCLOSE OFFHORE ACCOUNTS and tagged , , , , . Bookmark the permalink.

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