Ty Warner
Ty Warner, founder/owner of the Beanie Babies line, was sentenced in July 2015 for tax evasion.The panel of three U.S. District Court judges gave him 2 years of probation and 500 hours of community service. The sentencing guidelines ranged from 46 months up to a maximum of 57 months. He agreed to pay back taxes and interest of $16 million as well as a $53.5 million penalty (the full FBAR penalty of 50% of the balance of the highest account-$107,000,000). According to Melissa Harris (author of this article that appeared in the Chicago Tribune, July 15, 2015) Warner’s sentence was “a punishment that reduces evading millions in taxes to a speeding ticket,” and that the sentence “flies in the face of both reason and justice”.
Warner had an estimated net worth of $2.5 billion, and was the 209th richest American. According to Janet Novak of Forbes:
He admitted that around Jan. 31, 1996, he flew to Zurich and deposited about $80 million at UBS AG, instructing that no account statements be sent to him in the U.S., and that he kept the account secret until November 2007. During that period he failed to report at least $24.4 million in interest income on the account to the Internal Revenue Service, evading at least $5.6 million in taxes. He also failed to file with the Treasury the required annual “FBAR” report on his foreign accounts
What beggars belief is that Mr. Warner never provided any explanation for:
- why he opened the account
- the origin of the funds
- audits of his books & records show the funds did not come from his company
- his personal domestic accounts showed no signs of the origin of the funds
In fact the evidence suggested that the funds may have been pre-tax payments of some sort. To this day, the extent of his willful tax evasion is in reality, unknown.
So why did Mr. Warner get off so lightly? Was it because his lawyer Mark Matthews used the Olenicoff Defense?
Was it because his creation, the Beanie Babies line of stuffed toys, was just too cute for anyone to believe he was guilty of such evasion?
Peter Henning a Wayne State University Law School Professor and co-author of ‘Securities Crimes ”said in an interview, “I don’t want to say anything goes,….Clearly you can’t consider race or wealth. But you are looking at character. That is something judges can take into account. The question is how much should it weigh into the decision?”
This is where Mr. Warner hit the jackpot. He received 70 letters of support from friends, employees and recipients of his charity, actions which had nothing to do with the charges and only someone with money could do.
U.S. District Judge Charles Kocoras (of the panel) based his sentence on:
…..a reading of 70 letters, Kocoras found that “Mr. Warner’s private acts of kindness, generosity and benevolence” were “overwhelming,” with many occurring before he was under investigation and, in Kocoras’ words, motivated by “the purest of intentions.” Most were done “quietly and privately.” The judge concluded: “Never have I had a defendant in any case — white-collar crime or otherwise — demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.”
So a man guilty of many years of tax evasion, who did not even account for the origin of the account nor any records of it, received an incredibly light sentence based upon support from his family, friends and beneficiaries of his kindness. Where is the law here?
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Dan Horsky 
The second case is that of retired university business professor Dan Horsky. He amassed a $220 million dollar fortune, hidden in secret foreign accounts. He was a citizen of the United States as well as Israel and the United Kingdom. He spent thirty years teaching at the University of Rochester in Rochester, New York.
According to the Justice Department report:
One investment in a business referred to as Company A, however, succeeded spectacularly. In 2000, Horsky transferred his investments into a nominee account in the name of “Horsky Holdings” at an offshore bank in Zurich, Switzerland (the “Swiss Bank”) to conceal his financial transactions and accounts from the IRS and the U.S. Treasury Department.
In 2008, Horsky received approximately $80 million in proceeds from selling Company A’s stock. Horsky filed a fraudulent 2008 tax return that underreported his income by more than $40 million and disclosed only approximately $7 million of his gain from the sale. The Swiss Bank opened multiple accounts for Horsky to assist him in concealing his assets: including one small account for which Horsky admitted that he was a U.S. citizen and resident and another much larger account for which he claimed he was an Israeli citizen and resident. Horsky took some of his gains from selling Company A’s stock and invested in Company B’s stock. By 2015, Horsky’s offshore holdings hidden from the IRS exceeded $220 million.
Horsky willfully filed fraudulent federal income tax returns that failed to report his income from, and beneficial interest in and control over, his foreign financial accounts. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed fraudulent 2012 and 2013 FBARs. In total, in a 15-year tax evasion scheme, Horsky evaded more than $18 million in income and gift tax liabilities.
Professor Horsky’s willfulness was more involved than simply failing to report income. In 2011, He had another individual gain signature authority over the Zurich accounts. Horsky provided instructions to this individual. Then this individual was to relinquish his U.S. citizenship. In 2014, this operson filed a false 8854, did not disclose his net worth or his foreign assets and he falsely certified five years of compliance with all tax obligations.
Mr. Horskey’s sentence consisted of:
- seven months in prison
- one year of supervised release
- fine of $250,000
- $100 million penalty
- over $13 million in taxes owed
- $500 for 2006;
- $2,500 per year for 2007, 2008, 2009, and 2010,
- for a total penalty of $10,500;
- $500 for 2006;
- $10,000 per year for 2007, 2008, 2009, and 2010,
- for a total penalty of $40,500.
Again, the prison sentence was far below the maximum of five years. I guess committing an intensely willful crime which included outright fraud (and no letters attesting to his character), Professor Horsky failed to even receive one year of prison.
An interesting observation of Eric Rasmussen at thetaxprof site : (Scroll down to “comments”)
Interesting settlement. He’s paying just $13 million of the $18 million in taxes he owes, but $100 million more in penalties? Is this a whistleblower case? The IRS used to say the whistleblower gets a percentage only of the taxes recovered not the criminal violation penalties. They lost a big case on that in Tax Court. Is the idea going to reappear here?
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Milo & Lois Kentera
NB: all printscreens in the Kentera account are from the Complaint filed August 13, 2016
A more complete account of the Kentera’s situation is here
The third case is that of Milo and Lois Kentera. This is much closer to the “minnow” level of FBAR “violation.” Even though this is not an expat case as the Kenteras live in the US, I am sure we all can identify with them.
Milo Kentera was a pharmacist and inherited a Swiss bank account when his father died in 1984. At this time, the account was under $10,000 USD and remained so for twenty years. During that time, Milo added his wife Lois (a homemaker) to the account. Starting in 1984, he always advised his tax advisors/accountants of the account and he reported it on 1040 Schedule B. So far so good.
In 2005, the account gained enough to be over the FBAR filing threshold. However, the accountant did not prepare or file an FBAR. In 2007, Milo received $257,112 (a portion of the sale of his parents’ property in Montenegro; his siblings received the other $371,536). He put this money into the Swiss account. A second accountant did not ask if any interest was earned on the account so that was omitted and again, no FBAR was filed. In 2010, yet another accountant failed to prepare or file an FBAR even though he/she included the interest and the account on Schedule B.
Mr. Kentera came forward on his own, having heard of the OVDI on the radio.
By then the “2011 IRS Reign of FBAR Terror was going full throttle. Toward the deadline of the program, the Kenteras entered the 2011 OVDI program. They filed six years of FBARs for 2005-2010 (inclusive) and amended their returns to include the interest income from the account. The following printscreens show the amounts of money involved in terms of omitted tax income, balance of the account etc.
Nearly two years later, in August 2013, the IRS assessed a miscellaneous penalty of $90,092. The Kenteras then chose to opt out of OVDI. The agent who had their case then advised that they should receive non-willful FBAR penalties, which were as follows:
Lois Kentera:
Milo Kentera:
The Kenteras were understandably upset and did not want to accept this fine of $60,000 either as they felt they had reasonable cause. Virginia la Torre Jeker defines what is involved in establishing reasonable cause when one has relied upon a tax adviser:
“…various cases have noted that the taxpayer must prove three elements. First, the adviser must be a competent professional with sufficient expertise (for example, you cannot rely on an insurance agent for tax advice); second, the taxpayer must provide necessary and accurate information to the adviser; and finally, the taxpayer must rely in good faith on the adviser’s judgment.
The Kenteras then filed a complaint in District Court alleging that the IRS had incorrectly calculated their penalties.
The end result was unchanged; they still had to pay the penalties.
It would appear obvious from the get go that the Kenteras did not belong in the OVDI program. However, “quiet disclosures”* were discouraged and Streamlined was not yet available (began Sept 1, 2012); the FactStatement 2011-13 came out during the first week of December. The Kenteras were put in a program they did not belong in; they clearly satisfied the three conditions for “reasonable cause” and most of all, they are an example of “those that are hurt the worst are the ones who try to come into compliance.”
**it was not entirely clear at that time whether a “quiet disclosure” was simply filing going forward OR filing amended returns (presumably changed by FBAR accounts’ earnings). In any event, while the IRS insisted people enter the programs, there is no law that indicates one must do so.
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These three cases present some interesting observations about the treatment of those who had not filed FBARs.
First of all, the first and second cases are Homelanders who had very large offshore accounts. Both took very deliberate steps to conceal the accounts. Mr. Holsky even went so far as to include fraudulent attempts as to ownership and citizenship of the person with signing authority for the account. Neither of them came forward on their own. Neither were able to enter the “amnesty” program, yet Mr. Warner received no jail time and Mr. Horsky received less than a year. The amounts of money involved for both are staggering to those of us who will never have anywhere near that kind of money.I can’t really evaluate their impact but I’d be willing to bet, that in proportion to their total wealth, both were able to absorb the loss without a major change in their style of living.
In contrast, the Kenteras, also Homelanders, had a very modest account which they inherited. They always advised their accountants of its existence. Three professionals in the tax compliance community failed to prepare or file FBAR even though two of them did report the interest and existence of the account on Schedule B. They received very bad (I would say criminal) advice and went into OVDI coming out with an original penalty assessment of $90,092. So they opt out and the IRS agent then gives then a non-willful penalty totalling $60,000.
Was it really necessary for Mr. Kentera to receive the maximum non-willful penalty for 4 years? It seems their honesty in pointing out the existence of the account counted for nothing. The fact remains that their situation clearly QUALIFIES FOR REASONABLE CAUSE. Yet the intent of Mr. Warner and even more so for Mr. Holsky, was clearly to conceal yet neither of them received anywhere near the maximum penalty; they did not come forward on their own and could not take part in the amnesty program.
In the past (scroll down to “Statistics on Minnows in the OVDP”) we have seen demonstrations that the least wealthy pay the highest percentage of penalties, the comparison of the three cases cannot fail to boil your blood and make the average person seriously consider not becoming compliant due to obvious treatment of “minnows” as nothing short of appalling. Why does the IRS continually fail to see this? Is it really a surprise that 7 out of 8 million #Americansabroad have yet to become compliant in spite of Streamlined?
And yet, posters here claim that the IRS is only going after the whales and we minnows have nothing to fear.
In light of these and other reports, such a belief would be laughably foolish if not for the seriousness of the situation.
One of several possible Lessons here, no good deed goes unpunished. I wonder if that is the IRS’s motto.
The intent of every law becomes distorted when we depend on Judges to see whose actions clearly fit into the intent of the law. Instead the judges appointed by certain presidents, see every person living abroad as a criminal. Those presidents who have criminal intent, see the very rich person who have evaded taxes as a source of a lot of money for their family to issue a pardon, in the waning days of their presidency.
FBAR was passed to aid the criminal and penalize the people already in compliance, just as the whole Marxist Income Tax Code is not a revenue law but a Social Engineering Law that would have been repealed if it were not for the ”campaign contributions” each congress person on the Ways and Means Committee receives to ”amend” the law to favor the contributor and penalize the rest of us. This is a reason to pass the FairTax. But alas this only fair taxing system law never is even discussed in committee hearings. They demonize it if it is ever mentioned in public calling it a VAT when they know full well it is not a VAT (value added tax). the republic is in trouble as long as the Marxist Income Tax and FBAR are in force.
Whoever said this world is fair was a liar. Some people survived a war just because they were not in the wrong place at the wrong time.
But as for jail time- I think American jails are so overfull, that financial penalties are enough.
In a rush – bye for now!
@JapanT
You have to remember with regard to the Kenteras, they entered the 2011 OVDI program. They are not in the same situation as people coming forward today.
They simply represent the fact that those who come into compliance are hurt the worst. Nobody “came after them.” They came forward on their own. They also represent another aspect which is pointed out often:
The only FBAR penalties given to minnows we are aware of are those who entered the OVDI.
@PM
I was thinking that was the good deed. But it does provide some comfort knowing that it is just the poor souks who entered that program who have been hit with FBAR fines thus far.
Great post based on great research and a great analysis. Title is perhaps a bit misleading because the Kentera’s were clearly NOT involved in tax evasion. In their case it’s one more example of the principle that:
The greatest punishment is reserved for those who try the hardest to comply!
You should send your post to them.
@USCitizenAbroad
Thank you!
I didn’t think of that; will change it ever so slightly so Kenteras are not wrongly labelled….
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OK done at all sites……..really appreciate you pointed that out;would never intend to put that label on the Kenteras…….
I still wonder if the IRS will decide to make a harsh example of an expat minnows via FBAR fines or attack a recent former citizen by trying to catch them out on some obscure technicality on form 8854.
It seems to me with hindsight that they lack the resources to go after everyone ; they will thus focus on either very wealthy expats, especially ones still with US-cited assets the IRS can easily attach, or mainly target offshore accounts owned by homelanders, as was the case for this unfortunate couple with the Swiss account.
It’s probably all the more why the IRS uses scare tactics to make people feel panicked into coming into compliance . I especially remember the 2011 ‘reign of terror’ and the compliance industry were the main part of the racket. I’m sure though that they will want people like ourselves to continue feeling scared. But I must admit that I am much less afraid than I used to be.
@monalisa
And we should remember, this happened to “minnows” (including the Kenteras) because they entered OVDI.
As suggested in a previous post, it was pointed out:
@Patricia Moon, I completely agree that their entering into OVDI was deadly for them. I’m so glad that I did NOT enter into that program. They could have made mince meat of me on technicalities but, thankfully , they haven’t.
“Was it really necessary for Mr. Kentera to receive the maximum non-willful penalty for 4 years? It seems their honesty in pointing out the existence of the account counted for nothing.”
Wrong. As I’ve learned by experience in several courts, honesty counts against you.
Honest declarations impede the administration of US federal taxes and result in penalties for frivolousness. Honest declarations, along with failure to fabricate a social security number, result in courts denying refunds of withholding and leaving the stolen money in possession of the IRS’s embezzlers.
As others have observed on this site, the only members of the US’s diaspora who have been hurt are those who tried to comply. The more honest you are, the worse you get hurt.
Honesty counts all right. When dealing with the US, you’d better avoid it.
Here is why I find it hard to ignore FBAR fines when thinking about passport revocation policy.
I’ll try an analogy.
Up until a year ago, I had a job which I drove to, taking the Gaikan expressway. The speed limit on the Gaikan is 80 KPH but most drive at least 120 KPH on it. Generally, the police will not stop you unless you drive over 120 KPH. However, getting caught driving more than 30 KPH above the posted speed limit carries extra penalties for wreckless driving, so I drove just under 110 KPH. Still speeding but far less than most.
Many, perhaps all, highways in Japan also use traffic cameras to catch speeders. With these too, they usually only issue citations for those caught driving over 120 KPH.
Now. let us say that someone in the J Gov. decides to increase revenue by reviewing the last ten years of trafic camera footage and sends out speeding tickets for each and every infraction. Let’s also assume that the same extra penalties for multiple infractions will be applied. Now, I, and everyone else who drove on the Gaikan the last ten years, am at risk of receiving a speeding ticket for each time I drove in excess of 80 KPH. I am also at risk of permanantly losing my drivers license for I will be caught violating the speed limit in access of the allowed instances given a specified period of time.
If this were you, would you find comfort in the fact that so far they have any been ticketing motorists driving red sports cars?
The one glaring difference between this analogy and FBAR fines is that I and everyone else speeding knew we were speeding. I and I believe most of us in violation of FBAR had no idea that FBAR COULD exist. Many still do not.
The analogy is a good analogy even though …
There’s no point talking about traffic enforcement in Japan. Drivers run red lights anywhere, including the intersection right next to the Shinjuku police station.
And you know those red triangular signs that say とまれ? It doesn’t mean what you think it means. They didn’t have room to spell out とまれない in full on the signs, but that’s what it means.
(とまれ： the most grammatically rude, arrogant, offensive way to command “stop”.
とまれない： grammatically plain, neither polite nor rude, way to observe “cannot stop”)
Just wondering if all the facts on the Kentera case are presented. Like : what about inheritance tax? Should they have had to pay it? And if they didnt get such a bill – were they quiet about it? That would be quite incriminating. There are a lot of things that could have happened which they didn’t notice? I dunno. Doesn’t one have to sign the tax return, no matter who made it for you? And if so, doesn’t one have to notice if something like this big is missing on it?
But then why report on 1040 schedule B if they were trying to hide it?
Just guessing here, but as tax rules change, could he have inherited it during a time when there were no taxes in such cases? But then again, how do we know he did not pay inheritance tax.
I agree through that there may be missing info here.
@ND
I learned long ago as a pedestrian in Japan that the painted lines on the street were mere suggestions at best. Same with traffic signals. I supposed the same to be true of traffic signs and learned through driving here that I was correct.
@Polly &Japan T
It is my understanding there are no taxes on inheritances. And while I did not read the court documents in their entirety, there was no mention of other types of income not reported.
Also, as far as I am aware the only time there is tax on an inheritance is when a US person receives from a person who was a covered expatriate.
http://estate.findlaw.com/planning-an-estate/how-us-tax-rules-apply-to-inheritances-and-gifts-from-abroad.html
Mr. Kentera was a pharmacist & Mrs. Kentera a homemaker. Nothing to indicate they would have knowledge of tax rules; they disclosed the information and like anyone else, trusted a professional. While technically IRS can claim one is liable for having signed the return, their action is covered under “reasonable cause.”
Interesting thanks. I am surprised that inheritance from abroad is not taxed, unless the deceased was an American.
A question remains, if their action is covered under “reasonable cause”, why did two courts say no to this? Did their lawyer not argue that point or did the tax court just not allow it, or what?
@JapanT
Not quite…….the basic rule is that inheritance is not taxed, it does not matter whether the money comes from the US or outside. The only thing in the way is if the DONOR (not the recipient) is a former US citizen who was covered when they expatriated.
Apparently it was the IRS, not the judge. They have the discretion to honor an argument of reasonable cause or not. Virginia La Torre Jeker:
It runs in my mind that I have seen references to the Administrative Procedure Act with regard to the Bopp case but I don’t remember the reason for that.
The Ty Warner excuse of being a nice guy is especially fascinating. Nothing new, but to this point and in a court of law… If ever I get into legal trouble I’ll have to remember to trot out all the people who think I’m a nice guy. The overal take-home message here, though, is if you’re going to evade, do it big time. If you’re small fry, stay under the radar.
@Fred (B)
Trott out all of your fans, and have Mark Matthews as your lawyer.
Mark Matthews is so well respected that even the Canadian government asked his help in how to best implement FATCA in Canada:
http://isaacbrocksociety.ca/2012/06/26/a-response-from-john-weston-mp-on-fatca/
@Bubblebustin
Indeed, having a legal dream team always helps!!!
And obviously dropping a couple hundred thousand on a legal team is easier when there’s a hundred million lying around. Money well spent.
Thank you for the link. Pretty optimistic mood back then, … oh well.
@Fred (B)
I guess many of us lost most of that optimism when the Canadian government after showing signs of strength ended up capitulating. For me, it shattered what turns out to be the naive belief that the Canadian government would put the protection of its citizens over that of the banks, and blamed the Harper government entirely. Now that the promise that a Liberal government doing anything has faded to disappointment, it’s amazing we haven’t lost our minds entirely. Thank goodness we have the ADCS lawsuit and the courage of our plaintiffs to “keep our peckers up”, a silly little saying my mom used to say. I don’t even want to think about a negative outcome at this point.
@Fred (B)
Apparently this is the new thing with high-level white collar crime. You submit letters, you get less time/fines.
Bernie Madoff got no letters. And 150 years in prison.
Expat gets nailed for not reporting ownership in two foreign corporations. Is it a failure to report or the cover-up that proved to be more troublesome for him?
“In a new decision, the Tax Court upheld heavy penalties imposed by the IRS on a U.S. expat taxpayer who failed to report his ownership in two foreign corporations. The decision certainly serves as a cautionary tale for expats – the IRS is serious about foreign reporting and the U.S. court system has its back.”
https://www.taxconnections.com/taxblog/tax-court-upholds-penalties-on-expats-failure-to-disclose/#.WK2nZJH9ehA