Credibility in Offshore Fraud/Foreign Account FBAR Cases is Crucial

Credibility in Offshore Fraud/Foreign Account FBAR Cases is Crucial

Why Credibility in FBAR Penalty Cases is Critical: When it comes to international information reporting penalties,  FBAR penalties (Foreign Bank & Financial Account Reporting aka FinCEN Form 114) and offshore fraud penalties can both be severe — especially the situation involves willfulness. When it comes to determining whether a Taxpayer was willful vs non-willful — or had reasonable cause — the Taxpayer must present a totality of the circumstance analysis – with a key issue being whether or not the taxpayer is credible. If an IRS examiner or judge does not believe that a witness is credible, then they may not consider the testimony as believable — which will make it very difficult for the Taxpayer to show that they should not be subject to FBAR penalties or offshore tax fraud penalties — and if they are subject to such penalties that they should be non-willful. One recent case at the United States Tax Court (US v Harrington) shows the importance of credibility when it comes to Offshore Fraud & FBAR Penalties:

Harrington vs. IRS

In Harrington, the Petitioner filed suit in Tax Court, in order to dispute the fact that he was found to be fraudulent with respect to outstanding tax liabilities involving offshore investment income. The total amount of unreported income was close to $800,000. There were several moving parts when it came to the analysis — with the Internal Revenue Service taking the position that since it was a civil fraud case, there was no statute of limitations — and that Taxpayer could be subject for several years of Offshore Tax Fraud Penalties. One key issue was that the court did not believe he was credible.

Here are some excerpts below from Harrington:

What is Fraud?

• • • Circumstances that may indicate fraudulent intent, often called “badges of fraud,” include but are not limited to: (1) understating income, (2) keeping inadequate records, (3) giving implausible or inconsistent explanations of behavior, (4) concealing income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) supplying incomplete or misleading information to a tax return preparer, (8) providing testimony that lacks credibility, (9) filing false documents (including false tax returns), (10) failing to file tax returns, and (11) dealing in cash. See Schiff v. United States, 919 F.2d 830, 833 (2d Cir. 1990); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664-665; Recklitis v. Commissioner, 91  T.C. 874, 910 (1988); Morse v. Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir. 2005). No single factor is dispositive, but the existence of several factors “is persuasive circumstantial evidence of fraud.” Vanover, 103 T.C.M. (CCH) at 1420-1421.

Lack of Credibility of Taxpayer’s Testimony

• • • We did not find petitioner to be a credible witness. He was often evasive or dismissive of questions that respondent’s counsel and the Court asked of him. We have noted above numerous points on which we found his testimony to lack credibility.

    • Petitioner acknowledges inconsistencies in his testimony. But he urges that these lapses were attributable to the fact that he “was 88 years old at the time of trial” and that “many of the events at issue occurred 10 to 35 years before the trial began.” We are not persuaded. Petitioner testified intelligently at trial; he did not simply misremember a few trivial facts, but mischaracterized facts and events of critical importance. He may have conceivably forgotten that he signed a particular document in 2003, but he cannot have “forgotten” that he had control over offshore investments worth $3 million.

    • In sum, we find that petitioner has not carried his burden of proving that respondent’s determinations of unreported income are “arbitrary or erroneous.” See Erickson, 937 F.2d at 1554-1555. We accordingly sustain the deficiencies to the extent assessment is not barred by the period of limitations.

    • Petitioner testified that he lent this $350,000 to EWH as part of his effort to stabilize the company, by showing “potential creditors that * * * [EWH] had money in the bank.” There is no evidence that petitioner executed a loan agreement with Mr. Glube or EWH, and we did not find petitioner’s testimony credible. We find that petitioner was impressed with Mr. Glube’s proficiency at secreting assets in the Cayman Islands and wished to secure the same treatment for his $350,000 nest egg.

    • A UBS document dated May 2002 identified petitioner and his wife as the “beneficial owners” of the Reed Account. In 2003 he traveled from New Zealand to the Cayman Islands and signed a variety of documents, one of which gave him a “power of attorney for the management of [Reed International’s] assets.” Despite being a beneficial owner of the Reed Account and having a power of attorney to manage the company’s assets, petitioner testified that he did not have “any access or control * * * to get the money back.”

    • We did not find that testimony credible.  In 2007 the Reed Account was closed, apparently because Reed International was being dissolved. That same year Malta, Ltd., was dissolved, and the RBC Malta Account, in which petitioner had an interest, was also closed. Petitioner testified that he was promised “an allocation” from these accounts and that “the allocation occurred in 2007.” Funds from both offshore accounts were then transferred to a UBS “conduit account” in Switzerland.

    • A UBS document dated May 2002 identified petitioner and his wife as the “beneficial owners” of the Reed Account. In 2003 he traveled from New Zealand to the Cayman Islands and signed a variety of documents, one of which gave him a “power of attorney for the management of [Reed International’s] assets.” Despite being a beneficial owner of the Reed Account and having a power of attorney to manage the company’s assets, petitioner testified that he did not have “any access or control * * * to get the money back.”

Credibility is Important to Fight Fraud

While the court makes it clear that credibility is just one factor, it is clear from the ruling that credibility was a key factor in the decision.

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