Tax Return Preparers Sentenced to Prison for Hiding Offshore Account and Assisting Wealthy Clients to Hide Millions in Secret Accounts at Israeli Banks
Two tax return preparers with offices located in California, Maryland and New York were sentenced today in Los Angeles for facilitating an offshore tax fraud scheme, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.
David Kalai was sentenced to serve 36 months in prison to be followed by three years of supervised release, with a condition of home confinement to last the entire term of release, and ordered to pay a $286,000 fine, and Nadav Kalai, David Kalai’s son, was sentenced to serve 50 months in prison to be followed by three years of supervised release, and ordered to pay a $10,000 fine. The defendants’ sentences were imposed by U.S. District Judge Terry J. Hatter Jr. of the Central District of California.
On Dec. 19, 2014, a federal jury in Los Angeles convicted the Kalais of one count of conspiracy to defraud the Internal Revenue Service (IRS). The Kalais were also each convicted of two counts of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR). An alleged co-conspirator, David Almog, who is charged in the second superseding indictment, remains a fugitive. The Kalais advised and assisted their high net-worth clients in concealing millions of dollars of assets and income in secret foreign bank accounts and filing false federal income tax returns. The defendants also maintained a secret offshore account of their own at Bank Leumi in Luxembourg in the name of a foreign sham corporation and failed to disclose the account to the IRS or the U.S. Treasury.
“The sentences imposed today make it clear that the department is aggressively prosecuting financial professionals like the Kalais, who assist U.S. taxpayers in concealing assets offshore and evading their tax and reporting obligations,” said Acting Assistant Attorney General Ciraolo. “The days of hiding behind numbered accounts and sham corporations are over; accountholders are coming in, accepting responsibility and cooperating against their accountants, attorneys and advisors who actively facilitated their criminal conduct.”
“Today’s sentencing of David and Nadav Kalai is another victory for American taxpayers as IRS-Criminal Investigation (CI) continues its pursuit to stop offshore tax evasion schemes and bring these criminals to justice,” said Chief Richard Weber of IRS-CI. “It is becoming increasingly difficult for criminals to hide their money offshore and IRS-CI will continue to level the playing field for all taxpayers by ensuring we are all playing by the same rules.”
According to the second superseding indictment and evidence introduced at trial, the Kalais were principals of United Revenue Service Inc. (URS), a tax return preparation business with 12 offices located throughout the United States. David Kalai worked primarily at URS’ former headquarters in Newport Beach, California, and later at URS’ location in Costa Mesa, California. Nadav Kalai worked out of URS’ headquarters in Bethesda, Maryland, as well as the locations in Newport Beach and Costa Mesa.
U.S. citizens, resident aliens and permanent legal residents have an obligation to report to the IRS on Schedule B of the U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They are further obligated to report all income earned from the foreign financial account on the tax returns. Separately, U.S. citizens, resident aliens and permanent legal residents with a foreign financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year must also file an FBAR with the U.S. Treasury by June 30 of the following year disclosing such an account.
Evidence introduced at trial established that the co-conspirators purposefully prepared false individual income tax returns for their URS clients that did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ income, ownership and control of assets 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 Leumi and Bank B. Bank Leumi is a large financial institution headquartered in Tel-Aviv, Israel, with worldwide branches. Bank B is also a financial institution headquartered in Tel-Aviv with a worldwide presence.
The sham corporations that the co-conspirators incorporated in Belize and elsewhere were used to act as named accountholders on the secret Israeli bank accounts. The co-conspirators then recommended and facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense, or entirely omitted any income earned by a client from a foreign source. The Kalais also failed to disclose the clients’ secret accounts on tax returns that they prepared, and caused the clients to fail to file FBARs with the U.S. Treasury as required.
Three URS clients who testified at the Kalais’ trial have pleaded guilty to tax felonies arising from their participation in the scheme. On July 1, 2013, Alexei Iazlovsky, a client of URS and Nadav Kalai, pleaded guilty in U.S. District Court in Los Angeles to signing and filing a false federal income tax return for tax year 2008. According to court documents and evidence introduced at trial, Nadav Kalai facilitated the incorporation of a nominee Belize corporation for Iazlovsky, assisted Iazlovsky with setting up an offshore account in Luxembourg at one of the Israeli banks that was held in the name of the Belizean corporation and prepared false federal income tax returns, which Iazlovsky signed and filed with the IRS, that concealed the existence, assets and income of Iazlovsky’s offshore account. On Nadav Kalai’s advice, Iazlovsky diverted a total of $2.6 million in untaxed business receipts from Russian clients to his undeclared bank account in Luxembourg.
On July 17, 2013, Moshe Handelsman pleaded guilty in U.S. District Court in San Jose, California, to signing and filing a false income tax return for the 2007 tax year. According to court documents and evidence introduced at trial, Handelsman was David Kalai’s client since the 1990s. On David Kalai’s advice, Handelsman used three foreign bank accounts held in the names of two different sham foreign corporations to reduce his taxes. The last of those accounts was held at the Tel-Aviv branch of one of the Israeli banks. Nadav Kalai was Handelsman’s tax return preparer from 2003 through 2007. During those years, Handelsman sent approximately $1.47 million offshore, which was fraudulently deducted as a business expense on corporate tax returns prepared by Nadav Kalai.
On Feb. 2, Baruch Fogel pleaded guilty in U.S. District Court in Los Angeles to failing to file an FBAR declaring his Bank Leumi account in Luxembourg. According to court documents and evidence introduced at trial, David Kalai devised a scheme to reduce Fogel’s income taxes in 2002 and 2003 by using a sham offshore corporation and a secret offshore bank account at Bank Leumi Luxembourg held in the name of the offshore corporation. David Kalai’s scheme involved obtaining $8 million in loans from Bank Leumi USA and transferring that money through one or more of Fogel’s U.S. businesses to Fogel’s Luxembourg bank account. The $8 million in transfers were designed to make it appear that one or more of Fogel’s U.S. businesses incurred business expenses by paying Fogel’s offshore corporation. Once the paper trail was created, $8 million was fraudulently deducted as business expenses on Fogel’s corporate tax returns prepared by URS. David Kalai told Fogel not to disclose his control of the foreign bank account to U.S. authorities.
The evidence at trial also established that the Kalais each failed to file an FBAR for calendar years 2008 and 2009 with respect to a foreign account held at Bank Leumi in Luxembourg. According to the bank’s internal records from Luxembourg, the Kalais were the true owners of the account, which was held in the name of Anack Ltd., a nominee Belizean corporation. In 2008 and 2009, their offshore bank account had more than $300,000 on deposit.
Acting Assistant Attorney General Ciraolo commended the special agents of IRS-CI, who investigated the case, and Trial Attorneys Christopher S. Strauss and Ellen M. Quattrucci of the Tax Division, who prosecuted the case. Ciraolo also thanked Assistant U.S. Attorney and Chief of the Tax Division Sandra R. Brown of the U.S. Attorney’s Office of the Central District of California and her office for their substantial support and assistance.
Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.