Mr Smith, the founder of Vista Equity Partners, had hidden $ 200 million from offshore tax authorities and evaded some $ 43 million in taxes from 2005 to 2014, he admitted in a settlement this week.
But between 2017 and 2019, Mr. Smith filed claims for $ 182 million in tax refunds with the IRS – all related to the same unpaid tax for which he faced criminal charges.
The maneuvers came to light on Thursday as the Justice Department announced that Mr Smith, who is the richest black American with an estimated net worth of $ 5 billion, will pay $ 140 million but avoid being put indicted for what he admitted to be years of willful tax evasion.
“You can think of it as chutzpah, or you can think of it as a proactive defense strategy,” said Matthew Mueller, former DoJ tax attorney now in private practice at Wiand Guerra King, of the complaints filed by Mr. Smith. .
He noted that one of the factors prosecutors weigh in bringing criminal tax evasion cases is whether they can prove that the target owes the government money. Claims for tax refunds in addition to any liabilities can be a useful defense.
Mr Smith has waived the requests as part of his deal with the DoJ which also requires him to cooperate. “He may have the right to make those deductions, but it was clear it was worth stepping away from them to avoid prosecution,” Mueller said.
The 57-year-old private equity executive had become well known for his philanthropy and business acumen. Mr Smith made headlines in 2019 when he pledged to repay student loans that year from Morehouse College, a historically black men’s college in Georgia.
In April, he was among a list of “esteemed leaders” announced by the White House who would help the administration revive the US economy from the damage caused by the coronavirus pandemic.
He has yet to comment publicly on the matter, but told investors in a letter on Thursday: “I should never have put myself in this situation. Mr. Smith apologized to investors “for any problem or concern this may have caused you.”
“I am relieved that this has been fully resolved and is now behind me,” he added. A spokesperson for Mr. Smith and Vista Equity declined to comment.
The announcement of his no-prosecution agreement on Thursday came as prosecutors laid tax charges against Robert Brockman, a Houston billionaire whose money launched Mr. Smith’s private equity career in 2000. Mr. Brockman denies the charges against him.
As prosecutors indict Mr. Brockman in a $ 2 billion personal tax evasion case, the largest of its kind in U.S. history, they said Mr. Smith would not face any charges for his tax avoidance ploy by hiding some of his Vista Equity profits overseas. In exchange, he had agreed to continue to cooperate.
“He got a lot,” said Scott Schumacher, a University of Washington law professor and criminal tax expert. He noted that the government typically rewarded co-operators with their own criminal exposure by promising to seek leniency in sentencing, calling Mr Smith’s settlement “unusual to say the least.”
Mr Smith’s deal contrasted with the treatment of Ty Warner, the toy entrepreneur who created Beanie Babies, who pleaded guilty to a criminal charge in 2013 for evading $ 5.6 million in federal taxes in hiding millions of dollars in income abroad. He paid $ 80 million in penalties.
When the judge in Mr Warner’s case sentenced him to probation, the Justice Department appealed, arguing that “many people who escaped significantly less tax were sent to jail for their crimes. crimes ”.
Last week, the DoJ indicted the owners of three Dippin Donuts stores in New York state for allegedly evading $ 1 million in taxes.
On Thursday, David Anderson, the American lawyer from San Francisco, insisted that Smith’s deal was the result of his cooperation with the government.
“This non-prosecution agreement underscores the importance of cooperation with a federal criminal investigation. This is the message we intend to send, ”he said.
Richard Zuckerman, head of the Justice Department’s tax division, was absent from the press conference. A spokeswoman for the division, who played a key role in the investigation into Mr. Smith, did not respond to repeated requests for comment.
Mr. Smith’s tax avoidance program spanned 15 years and began with the founding fund of Vista Equity in 2000.
Mr. Brockman was the sole investor in that first fund, providing $ 300 million, according to the narrative in Mr. Smith’s settlement.
As a result, half of Mr Smith’s carry-over was in his own name and the rest in the name of a Nevis LLC called Flash Holdings, which was held through bearer shares by a Belize foundation called Excelsior.
Mr Smith secretly controlled the two entities through a Houston lawyer recommended by Mr Brockman, according to the narrative.
The settlement document states that Mr. Smith paid the lawyer approximately $ 800,000 from 2000 to 2014 for services, including “assistance in creating a false paper trail, relating to the maintenance and operation of ‘Excelsior and its related entities’, according to the statement of facts.
In his letter to investors on Thursday, Mr Smith said: “The decision taken twenty years ago has unfortunately led to this turmoil, which has put undue stress and burden on too many people.”
Mr. Brockman has pleaded not guilty to the charges against him.
Mr Smith used a portion of the untaxed funds on properties for his personal use in the United States and France, and sometimes to fund his charitable activities in the United States, he admitted in the settlement.
The scheme began to crumble in late 2013 and early 2014, when a Swiss bank Mr. Smith had used, Banque Bonhôte, told him it intended to participate in a program. leniency that required her to notify the U.S. government of any U.S. citizen who had banked with her. .
Bonhôte advised him to seek leniency with the IRS as part of a voluntary disclosure program at the time for Americans with hidden offshore accounts. Mr. Smith applied and was rejected.
The IRS typically rejects applicants if it is already aware of their offshore accounts.
In December 2014, Mr. Smith donated all of his overseas income, approximately $ 200 million, to a charitable foundation he heads, the Fund II Foundation. The following May, he again attempted to seek leniency from the IRS.
He has filed amended foreign bank account reports and tax returns with the IRS through a different program that allows taxpayers to correct foreign asset reporting failures by attesting that any errors were accidental and by paying a 5% penalty.
Mr. Smith admitted in the settlement that these amended filings were also “willfully” false. He only claimed signing authority over his foreign bank accounts, rather than disclosing that he was the true beneficiary, and did not report the $ 200 million in offshore partnership income despite knowing he was taxable.
Settlement documents show that in 2017, Mr. Smith filed for protection with the IRS for a refund of the money he paid when he filed the amended but still false tax returns and deposits from foreign bank accounts in 2015.
In 2018 and 2019, he filed for charity deduction refund protection claims for donating his hidden assets to his foundation in 2014.
A person familiar with the case said Mr Smith made the claims “on the advice of a lawyer in order to protect any claims he might ultimately have, before any decision was made as to whether if the assets belonged to him ”.
Mr. Smith’s deal with the Justice Department requires him to pay $ 139 million in back taxes and penalties. Half was due immediately, with the remainder paid in quarterly installments over 18 months.