Published on: July 1, 2016 Last modified: August 20, 2019

Entrepreneur ordered to pay $1.1 billion in taxes/penalties

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    This week was the deadline for filing FBAR disclosures on foreign accounts. Fittingly, a Texas federal judge also ordered an entrepreneur, of the arts-and-crafts chain Michael’s, to pay significant taxes and penalties for schemes that utilized offshore tax havens.

    A breakdown reported by the Wall Street Journal shows the severe impact of penalties. The back tax bill was an estimated $135 million for tax years spanning from 1992 through 2013. Interest tacked on at the rate of almost $223 million. But the penalties more than doubled the amount owed at approximately $745 million.

    No relief in bankruptcy

    The entrepreneur had filed bankruptcy protection under Chapter 11. While some tax debt can be discharged in bankruptcy. The rules are complicated and any indication of tax fraud will prevent a discharge.

    In a three-week trial earlier this year, the entrepreneur argued he had no idea that his financial service providers had used offshore accounts to avoid taxes. The federal judge didn’t buy the argument and had this to say:

    “To accept [his] explanation requires the court to be satisfied that it is appropriate for extraordinarily wealthy individuals to hire middlemen to do their bidding in order to insulate themselves from wrongdoing so that, when the fraud is ultimately exposed, they have plausible deniability.”

    The “mind-numbing[ly]” complex schemes utilized layers of domestic and foreign entities to avoid tax payments on annuity income. The judge was able to trace the strategy to a seminar offer by a trust promoter all the way back in 1991.

    Uncooperative during IRS investigation

    Part of the reason cited for the escalating tax bill was that the entrepreneur did not cooperate with an IRS audit in 2004. There offshore activities continued even after the investigation started.

    At this point it is questionable whether the IRS will collect the full tax bill. Financial statements filed as part of the bankruptcy showed his assets now worth around $380 million. In our next post, we will talk about some of the collection tools the IRS has at its disposal.

    This case offers a word of caution when dealing with foreign assets. The U.S. taxes all income regardless of whether it is earned in Florida or Dubai. Failure to report offshore accounts is a crime in itself that can prompt audits, investigations and serious penalties.

    Seek counsel from a tax attorney about reporting requirements for foreign assets before the IRS starts asking questions.

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