Archive for the ‘Department of Justice’ Category

Federal Judge: Offshore Online Gambling Accounts Are Reportable Foreign Financial Accounts

June 6th, 2014 No comments

A federal district court judge in California has ruled that FirePay, PartyPoker, and PokerStars online gambling accounts are subject to the foreign financial account reporting rules.

Ok, so who cares?

Any U.S. taxpayer who has or had offshore online gambling accounts. If a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a tax year, he must file FinCEN Form 114, formerly known as the FBAR.

In the case United States v. Hom, the defendant had online gambling accounts with PokerStars, PartyPoker, and FirePay in 2006 and 2007. The defendant acknowledged that the aggregate amount of the funds in these accounts exceeded $10,000 in U.S. dollars during 2006 and 2007. But, he contended that they were not foreign financial accounts.

The judge disagreed. Because FirePay, PokerStars, and PartyPoker all functioned as banks, said the court, they fall within the scope of the definition for a reportable account. The judge granted the IRS’s motion to impose against the taxpayer FBAR penalties of $10,000 per account not reported per year.

We’ve discussed this issue before. I said:

1. It is possible Treasury could at some point view offshore online casino accounts as subject to FBAR disclosure, and

2. It is becoming more and more likely the IRS will have access to the records of offshore online casinos if and when offshore online casinos bring their operations to U.S. soil.

That was written two weeks before the Department of Justice seized the U.S. domains of Absolute Poker, Full Tilt Poker, and PokerStars on April 15, 2011.

As for (1):

Our judicial branch is tasked with interpreting the law. Our executive branch, including the Department of Justice, is tasked with enforcing the law. Will the DOJ suddenly allocate resources to penalize taxpayers who didn’t report offshore online gambling accounts because of this one decision?

Perhaps not, unless the violation also involves a serious offense such as tax evasion or it’s simply convenient to. Which brings us to (2):

I had suspected the federal government might obtain access to the records of offshore online gambling companies sometime in the future. Turns out I was correct, just for the wrong reason: Full Tilt Poker and PokerStars agreed to maintain all records relating to its business in the United States in connection with their domain seizures in 2011.

In order to retrieve funds on their offshore online gambling accounts that were frozen by the Department of Justice, some U.S. taxpayers had to provide their social security numbers. It’s clear the government can easily look into whether these U.S. taxpayers with larger balances filed FBARs. The questions remains of whether they will.

As Russ Fox notes, this is one court decision in one district. A federal district court decision is mandatory authority only on some lower specialized courts in that particular district. This case was decided in the Northern District of California. The court is headquartered in San Francisco and covers fifteen northern California counties.

If Mr. Hom appeals to United States Court of Appeals for the Ninth Circuit and the Ninth Circuit affirms the lower court’s decision, then the decision is mandatory authority on all district courts within the Ninth Circuit.

In all districts other than Northern California, the case is merely persuasive authority for now. This means all the other district courts may follow the decision but do not have to.

How should implicated U.S. taxpayers respond to the decision?

As I’ve said before, I don’t see the downside to playing it safe and filing the Form 114 going forward.

For taxpayers with prior years at issue, there are some options to consider. One is by coming forward through the IRS Offshore Voluntary Disclosure Program. This option may not be most appropriate for all taxpayers, as each taxpayer’s particular situation is different. A taxpayer should consult a tax professional to discuss specific facts and circumstances.

We’ll see if Hom decides to appeal or if the DOJ issues a statement on this…

The Billion Dollar Issue in the NJ Sports Betting Case is Commandeering

February 10th, 2013 3 comments

The last time I wrote about sports betting and New Jersey was last May, and I said the following:

Late last week, New Jersey Governor Chris Christie announced his State will proceed to take the steps necessary to offer sports betting at Atlantic City casinos and the State’s four horse tracks.

New Jersey is far ahead of New York in the process, as Governor Christie signed a bill into law in January 2012 that authorizes professional sports wagering in NJ. New Jersey will likely encounter in the near future efforts by federal authorities challenging such legislation on the basis of the Supremacy Clause. NJ will argue PASPA is unconstitutional.

My prediction held true, sort of.

Last August, the NCAA and the four major professional sports leagues filed suit against NJ Governor Christie, et al., in an effort to prevent the expansion of legalized sports betting in the United States.

Then in December, U.S. District Court Judge Michael Shipp held that the leagues have legal standing to sue NJ over the State’s sports betting law.

About a month later, the U.S. Department of Justice filed papers to intervene as a co-plaintiff in the case and defend the constitutionality of the Professional and Amateur Sports Protection Act of 1992.

Since then, the parties exchanged and filed legal briefs outlining their positions, ahead of this Thursday’s oral argument on the merits before Judge Shipp in federal court in Trenton, NJ.

What will the parties focus on during oral argument?

The leagues and the DOJ will argue that PASPA is constitutional and thus NJ’s sports betting law violates PASPA. NJ, in turn will argue that PASPA is unconstitutional under any of three theories, as articulated in New Jersey’s brief filed on Friday:

  1. PASPA Impermissibly Commandeers The Legislative Authority Of The States
  2. PASPA’s Lack of Uniformity Exceeds Congress’s Commerce Clause Power by Depriving States of Equal Sovereignty
  3. PASPA Violates Due Process and Equal Protection Rights

I find theory #1 the most compelling argument of the three. It’s clear NJ feels the same, as the substantial majority of its brief focuses on the commandeering issue.

What is commandeering? The 10th Amendment to the U.S. Constitution:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

The U.S. Supreme Court has struck down federal laws as unconstitutional for violating the 10th Amendment only a handful of times. The basis for the findings was that the federal statutes in question commandeered the states to enforce them.

The issue narrows to, again: What is commandeering?

Unsurprisingly, the parties fiercely disagree on the answer to this question.

Does the 10th Amendment merely prohibit federal statutes that compel the states to take some affirmative action, as the DOJ argues? Or, as NJ argues, does it also extend to federal statutes that do not necessarily compel the states to do anything, but instead prevent them from taking some action?

In this case, that’s the billion dollar question.

NJ may have a tougher time prevailing on the issue merely because there is no Supreme Court case on point factually to support its interpretation of the 10th Amendment’s reach. But, the 10th Amendment cases decided by the Supreme Court are not even roughly analogous to this case, so that is the opening NJ is seeking to exploit.

In its brief, NJ comes out firing in the opening two paragraphs. Citing New York v. United States, the State emphasizes that under the Constitution, Congress lacks the power directly to compel the States to require or prohibit certain acts pursuant to a federal statute. And of course, argues the State, PASPA prohibits States from offering sports betting.

The entire brief is a worthy read, as the State picks apart the 10th Amendment characterizations presented by the leagues and the DOJ. In short, the State takes the position that the anti-commandeering doctrine has been applied to federal statutes that command the States to maintain a certain state of affairs.

There’s some great additional commentary on the commandeering issue in this Pokerati post and its comments.

No matter how Judge Shipp rules in this case, an eventual appeal to the U.S. Supreme Court seems inevitable. There’s simply too many dollars at stake for either the leagues or New Jersey to back down until the Supreme Court says to do so.

PokerStars and Full Tilt Poker Settle Civil Suits

July 31st, 2012 No comments

Last September, the likelihood that customers would retrieve their frozen funds from the online poker site Full Tilt Poker was grim at best. At the time, the Department of Justice alleged that the site was $330 million short in funds owed to its players.

Fast-forward to today. The Department of Justice announced it has entered into settlement agreements with Full Tilt Poker and PokerStars, two of the three online poker companies accused of money laundering in a civil forfeiture complaint unveiled in April 2011.

The mechanics of the agreements are a bit complex. Full Tilt has agreed to forfeit its assets to the DOJ in exchange for settling the forfeiture and civil money laundering claims against the company. PokerStars, meanwhile, has agreed to forfeit $547 million to the DOJ and to reimburse non-U.S. Full Tilt customers the approximately $184 million owed to them. In exchange, PokerStars settles its forfeiture and civil money laundering claims and will acquire the forfeited Full Tilt assets.

It’s quite remarkable that one company accused of money laundering (PokerStars) obtained DOJ approval to acquire the assets of its formerly primary competitor (Full Tilt), which also happened to be accused of similar conduct (to a more egregious degree) in the same civil complaint.

Several reasons come to mind why the DOJ would sign off on this. The most critical reason, to me, relates to a rather significant component to the deal that I’ve yet to mention: The DOJ has agreed to enable U.S. Full Tilt customers to retrieve their balances by submitting a claim to the government. The government plans to use the funds collected from PokerStars to make the payouts.

To this point, few details have emerged regarding the DOJ payout process. What we do know is that victims of a judicial forfeiture can make a claim for lost funds by submitting a “petition for remission.” A sample form looks like this.

I think the DOJ is waiting to release payout details because it first must receive the funds from PokerStars to make the payouts. According to the agreement, PokerStars must transfer $225 million to the U.S. Marshals Service within six business days of the court’s entry of the Stipulation and Order. Six business days from today is August 8. Because $225 million is enough to cover the alleged $150 million owed to U.S. Full Tilt customers, we could see a follow-up DOJ press release addressing player payouts as soon as next week. But that’s pure speculation.

I doubt players will simply be permitted to log into their Full Tilt account and request a withdrawal because a petition must first be submitted to the DOJ and approved by the Attorney General through the Asset Forfeiture and Money Laundering Section.

This leaves the following open-ended questions:

  • Will the DOJ implement a screening process for each petition (e.g. tax compliance)? If so, will the level of scrutiny, if any, depend on the amount claimed?
  • If a petition is approved, how will the DOJ verify the person submitting a petition is in fact the person who controlled the account claimed on Full Tilt?

Keep in mind Full Tilt and PokerStars are represented by reputable law firms. I’d be beyond shocked if these questions haven’t already been asked and answered by the parties involved. But I’m not privy to that information, so I, like the rest of us, must wait to find out.

DOJ: Beware of Lottery Fraud

July 16th, 2012 No comments

Lottery fraud seems to be getting around these days. Earlier today the Department of Justice shared a blog post to warn the public of these scams.

The scam is simple. Perpetrators inform target victims via telephone or e-mail they’ve won a contest. But in order to obtain the prize, the recipient must first pay taxes and other fees. In the more severe cases, victims have lost their life savings by seeking to obtain a prize that doesn’t actually exist.

Last August, for example, I wrote about a story of two individuals who sent several hundred thousand dollars overseas in order to redeem their alleged prize.

The Department of Justice Consumer Protection Branch provides some common signs of lottery fraud:

  • You should not have to pay fees or taxes in advance to receive lottery or sweepstakes winnings. Beware of checks or wire transfers sent to you by the lottery. The fraudsters will tell you to cash these payments and forward the money, but after you have sent this money, the payment you originally received will bounce.
  • Lottery fraudsters use technology to mask their telephone number. Your caller-ID may identify a call as coming from the United States that is actually coming from a foreign country.
  • Lottery fraudsters impersonate officials from federal agencies in order to convince victims that the scam is legitimate. The United States government does not participate in the distribution of prize money from lotteries and sweepstakes.
  • You should never give your Social Security number, bank account number or any other personal identifying information to these callers. Fraudsters promise to use this information to pay the “fees” for your prize, or they offer to pay off your debts. In reality, they use this information to steal your identity and your money.
  • Lottery fraudsters are particularly successful with victims who live alone or suffer cognitive impairment. Fraudsters befriend victims to create trust and to convince victims to hide the payments from family members.

Pure with Tax Fraud

June 22nd, 2012 No comments

Yesterday, Kelly Doll, a former employee at the popular Las Vegas nightclub Pure, pleaded guilty to one count of filing a false tax return, reports the Las Vegas Review-Journal.

Tip income is taxable. Over $220,000 in tips he received between 2005 and 2006 didn’t make its way onto his income tax returns.

You may think I sound like a broken record. That’s because this is the third time I’ve written about former Pure employees/owners committing tax fraud. See here and here. I think I’m running out of catchy headlines.

Doll’s sentencing date is September 24.

Offshore Tax Investigations: First Switzerland, Is Israel Next?

June 19th, 2012 No comments


The strongest indication emerged last week when a superseding indictment was unsealed, charging three American tax preparers for assisting their clients with concealing assets and income in unidentified Israeli banks.

U.S. residents must report all income earned to the IRS. U.S. residents must report whether they have a financial interest in a foreign financial account worth more than $10,000 in a particular year.

According to the Department of Justice press release:

The superseding indictment alleges that the co-conspirators prepared false individual income tax returns which did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ ownership and control of assets and conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel-Aviv, Israel, with more than 300 branches across 18 countries worldwide. Bank B is a mid-size financial institution also headquartered in Tel-Aviv, with a worldwide presence on four continents.

The federal government has aggressively pursued offshore tax evaders since 2008, when Swiss-based financial firm UBS was accused of assisting U.S. residents with committing tax evasion by shielding assets in offshore accounts. In 2009, UBS agreed to pay $780 million to the U.S. in fines, penalties, interest and restitution.

Over the four years since then, the IRS has run three offshore voluntary disclosure programs (in 2009, 2011, and 2012) to encourage taxpayers with undisclosed financial accounts to come forward and pay stiff penalties.

A benefit to participating in the program, if eligible, is that criminal charges will not be pursued against taxpayers making complete and truthful disclosures. Read more about the pros and cons of a voluntary disclosure here.

Undoubtedly the IRS and DOJ have collected a lot of information from these programs. “Enablers” such as those indicted above have not been eligible for the programs, however. It’s very possible these enablers were discovered through disclosures of their own clients.

CNBC is reporting the recent indictment may be the first of a series involving U.S. tax evasion by shielding assets in Israeli banks via “cash-transfer banking,” by which an offshore banker is set up with an American taxpayer seeking to withdraw and deposit the same amount of cash with the foreign bank:

The bankers appear in the U.S., typically at a hotel, and arrange for couriers to bring the cash to the hotel from the depositing customer, and later turn it over to the withdrawing customer, only later crediting each account for the transaction back in the foreign bank offices.

In somewhat related news, yesterday Israeli authorities arrested nine individuals and questioned fifteen more in connection with the possibly largest tax fraud scheme in Israeli history. I don’t see any connections aside from the nature and location of the crimes, however.

Hat tip: Federal Tax Crimes

Another Former Madoff Employee Pleads Guilty

June 5th, 2012 No comments

In his plea allocution, Bernie Madoff strongly implied he ran the largest Ponzi scheme in history all by himself.

Craig Kugel used to work in human resources at Madoff’s firm, Bernard L. Madoff Investment Securities LLC (“BLMIS”). Earlier today, he became the seventh individual to plead guilty in connection with the federal investigation into Madoff’s former firm, according to Bloomberg.

Kugel was charged with, among other things, making false statements in relation to documents required by the Employee Retirement Income Security Act (known as “ERISA”), and subscribing to false income tax returns.

From the U.S. Attorney’s Office press release:

KUGEL was aware that there were individuals on BLMIS’s payroll who did not work for the firm but who nevertheless received salaries and benefits, and he created and maintained false BLMIS employee records on their behalf.  Specifically, KUGEL was responsible for submitting an Annual Return (“Form 5500”) concerning BLMIS’s employee benefit plan to the United States Department of Labor (“DOL”).  Form 5500 required KUGEL to identify accurately the number of employees at the firm, but instead, he included a number of employees who in fact did not work there.

During his tenure at BLMIS, KUGEL also charged more than $200,000 in personal expenses, including luxury clothes, jewelry, and vacations for himself and his family, to a corporate American Express card, but did not report it as income on his tax returns.

He faces up to 19 years in prison, and will pay at least $2.3 million in restitution. The monies will be used to compensate victims of the fraud. His sentencing is scheduled for December 13.

At today’s hearing Kugel said, “I want to make clear I had nothing to do with the Madoff Ponzi scheme and I was never involved in the Madoff trading operation.”

Kugel’s father, David, was a supervisory trader in Madoff’s operation. Last November, he pleaded guilty to six criminal counts, including falsifying trading and business records, and securities and bank fraud.

It’s rather hard to believe Madoff did not have co-conspirators.

Lacking the Wisdom To Pay Taxes

April 18th, 2012 1 comment

The Doctor of Philosophy (Ph.D) typically takes several years for one to acquire. The term “philosophy” is in reference to its Greek meaning, “love of wisdom.”

Apparently, not all Ph.D recipients have the widsom to pay their taxes. Earlier this week, the Department of Justice announced its charges brought against David Gilmartin, an economist with a Ph.D, including tax evasion, obstruction of the IRS, failure to file a tax return, and failure to pay taxes.

From the DOJ press release:

Despite being paid compensation for every year between 1989 and 2010, Gilmartin failed to file tax returns with the IRS as required, and failed to pay more than $500,000 that he owed in taxes. As alleged, Gilmartin took various steps to evade his tax obligations and obstruct the IRS’s ability to collect back taxes, including:

  • Submitting IRS forms to certain employers in which he falsely and fraudulently claimed to be exempt from taxes, in order to cause the employers not to withhold taxes;
  • Providing someone else’s Social Security number to his employer and representing that it was his;
  • Refusing to provide an employer with his Social Security number, citing a purported “religious objection,” in an attempt to prevent the employer from withholding taxes;
  • Causing checks paid to him as compensation to be made payable to a finance company, in order to pay down a personal line of credit and to prevent the IRS from seizing, pursuant to bank levies, the funds paid to him as compensation;
  • Causing checks that were paid to him as compensation to be cashed against a personal bank account rather than be deposited; and
  • Causing checks paid to him as compensation to be endorsed directly to a bank rather than deposited in a personal bank account, in order to pay outstanding balances on his credit card with that bank and to prevent the IRS from seizing, pursuant to bank levies, the funds paid to him as compensation.

Of course, Mr. Gilmartin is presumed innocent unless proven guilty. You may view the indictment detailing the charges here.

The indictment alleges Gilmartin refused to provide an employer his social security number, citing a purported “religious objection.” We may have a tax protester before us. Cases involving tax protesters do not end in the taxpayers’ favor.

Hat tip: TaxProf Blog

A Pure Celebration

March 27th, 2012 1 comment

Just over a year ago, I wrote about Ali Olyaie. Mr. Olyaie was a “VIP host” at the popular Las Vegas nightclub Pure. He pleaded guilty to failing to report income earned while working at the popular club in 2006.

Mr. Olyaie is not the only Pure employee who pleaded guilty to a tax crime. Today we add Steve Davidovici and Mikel Hasen to the list.

Steve Davidovici used to be a part-owner and manager of Pure. Mike Hasen used to be the head doorman at Pure. Earlier today they both pleaded guilty to one count of filing a false federal income tax return for the 2006 year. From the U.S. Department of Justice press release:

[D]uring the years 2005, 2006 and 2007, in addition to fees charged for admission to the nightclub, some of Pure’s patrons made cash payments to Pure door personnel and “VIP hosts” to bypass the general admissions line and to obtain more desirable seating. This money was collected, pooled and generally distributed on a weekly basis to the door personnel and VIP hosts, as well as to managers of Pure such as Davidovici and Hasen. In Hasen’s case, distributions from this “tip pool” comprised the bulk of his compensation during the time he worked at Pure. Davidovici and Hasen each concealed large amounts of this income from the IRS.

Davidovici’s and Hasen’s sentencings are set for June 27, 2012, at 9 a.m.

You would think the club may crumble as a result.

You thought wrong.

In just a couple of hours, Pure is throwing a party to celebrate its 7th birthday. Of course, patrons will continue to pay large sums of cash to bypass the admissions line and land a comfortable spot to hang out.

Let’s hope Pure personnel who take home the cash learn from the mistakes of their predecessors.

Slip into a Cell

March 18th, 2012 No comments

In February, the IRS released its Dirty Dozen Tax Scams for 2012. One of the scams is called False Form 1099 Refund Claims:

In this ongoing scam, the perpetrator files a fake information form, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that he federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Today we meet Ronald L. Brekke. Last Thursday, Mr. Brekke was convicted of conspiracy and wire fraud. Promoting the “1099 OID” fraud, Brekke assisted nearly 1,000 people claim over $763 million in fraudulent tax refunds by preparing bogus tax forms on their behalf. Mr. Brekke had told prospective clients at a seminar that “some of the filings would slip through resulting in a big payout for some of the filers.”

When a tax preparer uses the words “slip through” during a seminar on tax preparation, you probably want to slip out of the seminar immediately and not look back.

Mr. Brekke faces up to 20 years in prison. His sentencing is scheduled for June 15, 2012.

Categories: Department of Justice, Tax Fraud Tags:
COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.