So after waiting all weekend for the other shoe to drop on the promised indictment in the Mueller investigation, it turns out that it is a tax story. The District of Columbia Grand Jury indictment charges that Paul Manafort and Richard Gates hid millions of dollars paid to them by the Ukrainian Party of Regions in foreign corporations, partnerships and bank accounts. According to Wikipedia, the Party of Regions is pro-Russia. Its most prominent member President Viktor Yanukovych fled to Russia in 2014.
It’s The Disclosure
That’s real exciting stuff, but I’m a tax blogger you know so I am more drawn to the mundane. And the most intriguing part of the whole indictment to me comes on page 21:
For instance, on October 4, 2011, Manafort’s tax preparer asked Manafort in writing: “At any time during 2010, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” On the same day, Manafort falsely responded “No”. Manafort responded the same way as recently as October 3, 2016, when Manafort’s tax prepaer again emailed the question in connection with the preparation of Manafort’s tax return: “Foreign bank accounts etc.?” Manafort responded on or about the same day: “None.”
The questions on Schedule B of Form 1040 about whether you have authority over foreign bank accounts have been around a long time, at least as long as I have been in the business as you can see from this copy of the 1979 form. Back in the day, at least in the circles, I moved in, we didn’t really worry too much about those questions. It didn’t affect the size of the refund or the amount of the balance due. As the years went by there was a reference in the instructions to Form TD 90-22.1. But nobody was hiring us to do those forms and besides who the heck has a foreign bank account anyway?
It has not been that way for the last ten years or so. There were more and more reports of people getting hit with horrendous penalties for failing to report interests in foreign bank accounts and failure to file Form 5471 which related to ownership of foreign corporations, which also has very painful penalties. At any rate, for the last few years, I break out in hives anytime any return I get near has any hint of any possibility of anything foreign being connected with it. It is now a lot easier to file the return to disclose about the bank accounts, which is called FBAR, as you can do it online. It is still a real pain to do accurately as you have to find the highest balance for the year. When it comes to Form 5471, don’t get me started. That thing is a nightmare.
What Was He Thinking?
At any rate, I am very intrigued by the the scenario outlined in the little bit from the indictment above. I’m wondering if the tax preparer’s asking in writing was part of a thirty or forty page “organizer” that had been sent to Manafort. Reading between the lines of the description of the 2016 email exchange, it seems likely that Manafort might not have thoroughly filled out his organizer and the preparer was trying to confirm that there were no foreign bank accounts. I have to say that if I had been doing Manafort’s return, I probably would have tried to communicate to him how very bad it is to inadvertently fail to report control of a foreign bank account. Given all the running around he was doing consulting with various misunderstood rulers of foreign countries , it would strike me as likely that he would have needed a foreign account to do business.
Of course, the indictment indicates that all those foreign accounts, apparently mostly in Cyprus, were part of a scheme to avoid paying taxes and cover up the existence of the income. Assuming the indictment is accurate it is a pretty clever scheme. The accounts were used to buy real estate and then he could tap into the equity tax free by borrowing against the property. That’s only pretty clever. Real estate creates a pretty large paper trial. My inner villain is coming up with better ways to do it. but I don’t want to share them.
FBAR Makes For FUBAR
As it works out, in the 12 count indictment seven of the counts are for failure to file FBAR. For Manafort it was 2011, 2012, 2013 and 2014. For Gates it was 2011, 2012 and 2013. You may read in some stories, like this one in the Washington Post, that Manafort and Gates are facing a combined potential of 150 years in prison. If that were true the FBARs would account for 70 of those years. That is not, however, how sentencing actually works. The United States Sentencing Commission has a manual on how to compute guideline sentences. It is a fairly complicated process involving the determination of an “offense level” that is then cross-referenced with a criminal history. There is a chapter on how multiple counts enter into determining the offence level. That is also complicated, but, bottom line, it is not additive. Of course, Manafort is nearly seventy years old, so even a much more modest guideline sentence might intimidate him.
Back in the day, there was this joke that when somebody said they were getting audited, the remark would be “That’s how they got Al Capone.” Federal authorities had found it easier to convict Capone of income tax evasion than of whatever various crimes he had committed in gathering all that income. Prosecutors have honed that technique. Although, the indictment might imply there was some income tax evasion going on, that is not being charged. Most of the counts are not filing FBARs and that is really easy to prove – kind of like shooting fish in barrel.
If the charges are true Manafort has manifested a pretty foolish arrogance. The indictment lists out numerous payments for personal type items including $520,440 to clothing stores in Beverly Hills, paid out of foreign accounts – mostly Cyprus. If that is what turns out to be the truth then next to Reilly’s Second Law of Tax Planning, there will be a picture of Paul Manafort. The Second Law, by the way, is “Sometimes it’s better to just pay the taxes.”