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Prison sentence handed down in tax fraud case

Recently, a judge sentenced a San Jose medical device inventor to six months in prison following an October 2013 jury conviction. He will spend another six months and a day confined to his home.

The sentence comes after a jury found him guilty of tax fraud based on the failure to report or pay taxes on foreign bank accounts owned by his family. Prosecutors provided evidence that from 2007 and 2009 he failed to pay taxes on $1.2 million of interest income generated by HSBC accounts in India and Dubai.

In addition to the criminal sentence and back taxes, the Internal Revenue Service assessed a civil penalty of $14,229,744. This stems from the failure to file a Report of Foreign Bank and Financial Account (FBAR or FinCEN 114) form. The agency can fine an individual up to 50 percent of the highest value of the account for each violation. The fine can easily compound to more than the value of the account over several years.

Some of the accounts listed his wife and adult children as the owners; however, he controlled and invested the funds in them. The certificates of deposit paid as much as nine percent interest. Prosecutors showed that he funded the accounts with checks and undisclosed accounts in other countries. On one occasion, he directed an international customer to send payment for medical devices directly to an HSBC India account.

In 2008, he reported earning approximately $115,000 on his tax return, yet he deposited more than one million dollars in foreign accounts that same year. Another piece of evidence against him was that he directed HSBC not to send bank statements to his U.S. home address.

IRS investigations into offshore accounts will likely only increase as a new information sharing law takes effect. This case illustrates the draconian penalties available following a willful failure to file investigation.

Source: Imperial Valley News, "Medical Device Inventor Senteced to Prison for Tax Fraud," July 8, 2014.

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