District Court Rejects Argument that JDS Seeking Law Firm Client Identities Violates Attorney-Client Privilege (5/25/19)

In Taylor Lohmeyer Law Firm PLLC v. United States, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex 2019), here, the district court (i) dismissed a law firm ("Firm") challenge to an IRS John Doe Summons (JDS) for client identities and (ii) enforced the JDS.

Based on information from an audit which resulted in substantial tax liability, the IRS obtained the JDS, which is an ex parte proceeding, seeking "names of and other information related to the Firm's clients between 1995-2017 to investigate the tax liability of those who used the Firm to 'create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.'" 

The Court held that the JDS easily met the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) which it stated as:

the Government must establish that the summons: (1) is issued for a legitimate purpose; (2) seeks information which may be relevant to that purpose; (3) seeks information that is not already within the IRS's possession; and (4) satisfies all administrative steps required by the Internal Revenue Code.

The Court recounted the evidence as follows:

But the bar for "reasonable basis" is not high and the affidavit of Russell-Hendrick from the ex parte proceeding establishes a reasonable basis. She details her conclusion that Taxpayer-1 concealed his connection to offshore structures—for which Taxpayer-1 remained the beneficial owner—created under the advice of the firm. Taxpayer-1 entered an agreement with the IRS in June 2017, admitting that Taxpayer-1 owned all assets owned by the offshore trusts and earned over $5 million in unreported income between 1996 and 2000. Taxpayer-1 accepted liability for civil fraud penalties and penalties for failing to file the required forms for reporting foreign income. 

Russell-Hendrick then states the basis for her opinion that the Firm provided similar advice to other clients. Among other pieces of evidence, she states that in an interview with John Taylor, former partner of the firm, Taylor estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. Russell-Hendrick states in part that: 

Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices. 

The information obtained by the IRS and discussed in this Declaration suggests that the still-unknown U.S. taxpayers doing business with Taylor Lohmeyer PLLC may not have reported their offshore accounts, entities, or structures. Instead, they have likely relied on the assistance of Taylor, and the fact the structures are hidden offshore to support a decision not to report the existence of those entities and accounts, expecting  that the IRS would not discover the accounts, omitted income, and/or the existence of the entities. 

18-MC-1046, docket no. 1-2 at 37. Thus, assuming for argument that the Firm could challenge the ex parte proceeding at this stage, issuance was proper.

The minimal Powell standards were clearly met.  The real issue was not whether the IRS abused the JDS process (per the Powell factors) but whether the information sought--the identities of clients--implicated the attorney-client privilege.  Normally, client identity is not within the purview of the attorney-client privilege because, except in rare circumstances, the mere identification of the client does not disclose any client confidential communication for obtaining legal services.  The law firm argued that this was a rare circumstance where the facts indicate that identifying the client will identify the client communications regarding the advice, then the attorney-client privilege may apply.  One now rather old tax case so held.  United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).  The court rejected the argument as follows:

IRS 2018 Data Book Release; Table 18 on Criminal Investigation Program Statistics (5/201/19)

The IRS has released its 2018 Data Book.  The Data Book may be accessed here. 

For readers of this blog, the key data are presented in Table 18: Criminal Investigation Program, by Status or Disposition.

The link to Table 18 for each of the years 1995-2018 is here for those wanting a deep dive into the data from year to year.

The Table 18 spreadsheet for 2018 for may be downloaded on that page.   Here is a cut and paste of the data.  (Note that the formatting is a little off, but the data should be easily understood.

Table 18.  Criminal Investigation Program, by Status or Disposition, Fiscal Year 2018
Status or disposition [1]	Total	Legal source tax crimes [2]	Illegal source financial crimes [3]	Narcotics-related financial crimes [4]
	(1)	(2)	(3)	(4)
Investigations initiated	2,886	1,099	1,064	723
Investigations completed	3,051	1,197	1,086	768
Referrals for prosecution	2,130	680	816	634
Investigations completed without prosecution	921	517	270	134
Indictments and informations [5]	2,011	636	765	610
Convictions	1,879	668	725	486
Sentenced	2,111	774	787	550
Incarcerated [6]	1,732	614	635	483
Percentage of those sentenced who were incarcerated [6]	82.0	79.3	80.7	87.8
[1]  Investigations may cross fiscal years. An investigation initiated one fiscal year may not be indicted, convicted, or sentenced until a subsequent fiscal year. Therefore, the disposition (completions, indictments/informations, convictions, sentences) of investigations shown in this table may be related to investigations initiated, completed, indicted, or convicted in prior fiscal years.
[2]  Under the Legal Source Tax Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving legal industries, legal occupations, and, more specifically, legally earned income associated with the violation of Title 26 (tax violations) and Title 18 (tax-related violations) of the U.S. Code. The Legal Source Tax Crimes Program also includes employment tax cases and those cases that threaten the tax system, such as Questionable Refund Program cases, unscrupulous return preparers, and frivolous filers/nonfilers who challenge the legality of the filing requirements.
[3]  Under the Illegal Source Financial Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving proceeds derived from illegal sources other than narcotics. These encompass all tax and tax-related violations, as well as money laundering and currency violations under the following statutes: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. The utilization of forfeiture statutes to deprive individuals and organizations of illegally obtained assets is also linked to the investigation of criminal charges within this program.
[4]  Under the Narcotics-Related Financial Crimes Program, IRS Criminal Investigation seeks to identify, investigate, and assist in the prosecution of the most significant narcotics-related tax and money laundering offenders. The IRS derives authority for this program from the statutes for which it has jurisdiction: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. IRS Criminal Investigation also devotes resources to high-level multiagency narcotics investigations warranting Organized Crime Drug Enforcement Task Force (OCDETF) designation in accordance with OCDETF Program reimbursable funding.
[5]  Both “indictments” and “informations” are accusations of criminal charges. An “indictment” is an accusation made by a Federal prosecutor and issued by a Federal grand jury. An “information” is an accusation brought by a Federal prosecutor without the requirement of a grand jury.
[6]  The term “incarcerated” may include prison time, home confinement, electronic monitoring, or a combination thereof.
SOURCE:  Criminal Investigation, Communications and Education Division.
JAT Comments: 1.  On the 2018 data, I have no comments. 2.  I have a spreadsheet whereby I compare certain of the line items from year to year.  The caveat is that statistics may be misleading.  All I do is compile the data (and in two lines derive the percentages which compares in the one percentage the IRS offers).  Here it is Total 2005-2018 Total 2012-2018 2005-2018 Average 2012-2018 Average 1 Indictments 13,816 987 8,264 1,181 2 Convictions 12,445 889 7,688 1,098 3 Percentage Convicted (l. 2 / l. 1) 90.1% 90.1% 93.0% 93.0% 4 Sentenced 12,419 887 7,678 1,097 5 Incarcerated 9,862 704 6,108 873 6 Percentage Incarcerated (l. 4 / l. 5) 79.4% 79.4% 79.6% 79.6%

First Circuit Pattern Criminal Jury Instruction on Willful Blindness (5/6/19)

I have expressed concern about the willful blindness instruction (which also goes by other names, such as deliberate ignorance, conscious avoidance and ostrich instruction).  So, I decided to look through the pattern jury instructions on willful blindness for the Circuits that have them to see what they may offer.  Among the ones I could find, I think the best one is the First Circuit's from the document titled "2019 Revisions to Pattern Criminal Jury Instructions for the District Courts of the First Circuit, pp. 47-49, from the District of Maine web site,here.  I bold face the part that I recommend readers pay attention to:

2.16 “Willful Blindness” As a Way of Satisfying “Knowingly”
[Updated: 12/15/17]

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that [he/she] deliberately closed [his/her] eyes to a fact that otherwise would have been obvious to [him/her]. In order to infer knowledge, you must find that two things have been established. First, that [defendant] was aware of a high probability of [the fact in question]. Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made [himself/herself] blind to that fact. It is entirely up to you to determine whether [he/she] deliberately closed [his/her] eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence, recklessness or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

Comment 

(1) This instruction is drawn from the instructions approved in United States v. Gabriele, 63 F.3d 61, 66 n.6 (1st Cir. 1995), and United States v. Brandon, 17 F.3d 409, 451-52 & n.72 (1st Cir. 1994). The First Circuit quoted and approved the last seven sentences (without mention of “recklessness”) in United States v. Jesús-Viera, 655 F.3d 52, 59 (1st Cir. 2011). The instruction was also approved in United States v. Denson, 689 F.3d 21 (1st Cir. 2012), where the court reiterated: “[t]he focus of [a] willful blindness instruction must be on the particular defendant and not on the hypothetical reasonable person.” Id. at 24 (quoting United States v. Griffin, 524 F.3d 71, 80 (1st Cir. 2008)). Indeed, it is erroneous to use “reasonable person” language. United States v. Bray, 853 F.3d 18, 24, 30 (1st Cir. 2017) (Although not finding plain error, the court stated that an instruction that a “reasonable person in [the defendant’s] shoes would certainly have known” mistakenly suggested that the jury could find the defendant guilty even if the defendant had not “consciously and deliberately avoided learning” about the violation.). 

(2) Although in United States v. Anthony, 545 F.3d 60, 66 (1st Cir. 2008), the First Circuit said that it was not error to omit reference to “recklessness,” we have nevertheless added the statement that “recklessness” in failing to learn a fact is not enough because of the Supreme Court’s decision in Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011). Although GlobalTech was a patent case, it described the doctrine of willful blindness as “well established in criminal law,” id. at 2068, and spoke approvingly of the circuits’ approach as “giv[ing] willful blindness an appropriately limited scope that surpasses recklessness and negligence.” Id. at 2070. In Denson, 689 F.3d at 24-25, the First Circuit recognized the authority of Global-Tech for a willful blindness instruction, but the issue there was not about recklessness. Following Global-Tech, the Fourth Circuit has agreed that recklessness is not sufficient. United States v. Jinwright, 683 F.3d 471, 480 (4th Cir. 2012); see also United States v. Goffer, 531 Fed. Appx. 8, 20-21 (2d Cir. 2013) (endorsing the standard that recklessness is insufficient, but finding that the jury instruction satisfied that standard without using the term “reckless”).  

(3) The rule in the First Circuit is that: A willful blindness instruction is warranted if (1) the defendant claims lack of knowledge; (2) the evidence would support an inference that the defendant consciously engaged in a course of deliberate ignorance; and (3) the proposed instruction, as a whole, could not lead the jury to conclude that an inference of knowledge was mandatory. Gabriele, 63 F.3d at 66 (citing Brandon, 17 F.3d at 452, and United States v. Richardson, 14 F.3d 666, 671 (1st Cir. 1994)); accord United States v. Valbrun, 877 F.3d 440, 445 (1st Cir. 2017); United States v. Figueroa-Lugo, 793 F.3d 179, 191 (1st Cir. 2015); United States v. Appolon, 695 F.3d 44, 63 (1st Cir. 2012); United States v. Mitrano, 658 F.3d 117, 123 (1st Cir. 2011); United States v. Coviello, 225 F.3d 54, 70 (1st Cir. 2000); United States v. Camuti, 78 F.3d 738, 744 (1st Cir. 1996). “The danger of an improper willful blindness instruction is ‘the possibility that the jury will be led to employ a negligence standard and convict a defendant on the impermissible ground that he should have known [an illegal act] was taking place.’” Brandon, 17 F.3d at 453 (quoting United States v. Littlefield, 840 F.2d 143, 148 n.3 (1st Cir. 1988)). “[T]he government is not required to prove willful blindness by direct evidence.” United States v. Valbrun, 877 F.3d 440, 446 (1st Cir. 2017). The government “may satisfy its burden of production by adducing evidence that red flags existed that the defendant consciously avoided investigating.” Id. 

Sixth Circuit Approves "Slight Connection" Conspiracy Instruction (5/2/19)

 In United States v. Daneshvar, 2019 U.S. App. LEXIS 12773 (6th Cir. 2019) (unpublished), here, involving healthcare fraud, Daneshvar complained about the following jury instruction (emphasis supplied by JAT):

If you are convinced there was a criminal agreement, then you must decide whether the government has proved that the defendant knowingly and voluntarily joined that agreement. To convict the defendant, the government must prove that he knew the conspiracy's main purpose, that he voluntarily joined it intending to help or achieve its goals.
This does not require proof that the defendant knew everything about the conspiracy or everyone else involved or that he was a member of it from the very beginning. Nor does it require proof that the defendant played a major role in the conspiracy or that his connection to it was substantial. A slight role or connection may be enough.

As I note at the bottom of this blog, the bold-faced language, although a variation of one often used in the past, is now disfavored.  That was the complaint that Daneshvar raised.  Here is the Court's discussion:

This instruction is identical to the Sixth Circuit Pattern Jury Instruction 3.03. Daneshvar  argues that we "should take this opportunity to disavow the jury instruction" (Appellant Br. at 40), and in doing so, he makes the same argument as in United States v. Mahbub, 818 F.3d 213, 230 (6th Cir. 2016), where the defendant contended that the jury instruction lowers the burden of proof.  

In Mahbub, we held:  

[The defendant's] contention lacks merit. The instruction states, and the district court read, "[a] slight role or connection may be enough" to link a defendant to a conspiracy, which is an accurate legal proposition. See United States v. Price, 258 F.3d 539, 544 (6th Cir. 2001) ("The connection of the defendant to the conspiracy need only be slight, if there is sufficient evidence to establish that connection beyond a reasonable doubt."); United States v. Betancourt, 838 F.2d 168, 174 (6th Cir. 1988) ("The existence of a connection to the conspiracy must be shown beyond a reasonable doubt, but the importance of the connection need not be great."). To the extent that the disputed language lowers the burden of proof to support a conviction, we note that "no single provision of the jury instruction can be read in isolation;" instead, "the charge must be considered as a whole." United States v.Horton, 847 F.2d 313, 322 (6th Cir. 1988).
Id. We determined that "the district court made it abundantly clear that the reasonable-doubt standard applied in determining whether [the defendant] should be found guilty of criminal conspiracy" by using the phrase "beyond a reasonable doubt" in the jury instructions. Id.  

Daneshvar argues that unlike in Mahbub, "the rest of the jury instructions in this case combined to relieve the government of its high standard of proof and replace it with speculation and probabilities." (Appellant Br. at 39.) We do not find that Daneshvar's argument has merit, let alone establishes that the district court committed plain error. As in Mahbub, the district court here repeatedly used the reasonable-doubt standard. Before beginning the conspiracy section, the court stated: "A conspiracy is a kind of criminal partnership. For you to find the defendant guilty of the conspiracy charge, the government must prove each and every one of the following elements beyond a reasonable doubt . . . ." (Trial Tr. Vol. 8, R. 121, Page ID # 1816.) Again, the court stated, "You must be convinced that the government has proved all of these elements beyond a reasonable doubt in order to find the defendant guilty of the conspiracy charge." (Id. at Page ID # 1817.) 

Although Daneshvar points out that other circuits do not use the phrase "slight evidence," our circuit continues to do so, so long as, considering the jury instructions as a whole, the instructions do not lower the burden of proof. See Mahbub, 818 F.3d at 230; see also United States v. Price, 258 F.3d 539, 544 (6th Cir. 2001)("The connection of the defendant to the conspiracy need only be slight, if there is sufficient evidence to establish that connection beyond a reasonable doubt."). Upon reviewing the jury instructions as a whole, including the district court's repeated use of the reasonable-doubt standard, we find that the instructions did not lower the burden of proof. Thus, we find no error in the use of the conspiracy jury instruction.

JAT Comments:

Fifth Circuit on Willful Blindness / Deliberate Ignorance as Circumstantial Evidence of Intent Element (5/2/19)

In United States v. Ricard, ___ F.3d ___, 2019 U.S. App. LEXIS 12598 (5th Cir. 2019), here, "Ricard was convicted by a jury of one count of conspiracy to pay and receive kickbacks for referring Medicare patients to a particular health care provider, three counts of receiving such kickbacks for such referrals, three counts of identity theft, and one count of making false statements to a federal agent."  Although this is a nontax case, the case has some good discussion on issues that arise in criminal tax cases, particularly regarding the willful blindness jury instructions.

The Court explained the crime involved:

Willfulness in the Medicare kickback statute "means that the act was committed voluntarily and purposely with the specific intent to do something the law forbids; that is to say, with bad purpose either to disobey or disregard the law." United States v. Davis, 132 F.3d 1092, 1094 (5th Cir. 1998) (quoting United States v. Garcia, 762 F.2d 1222, 1224 (5th Cir. 1985)). Under this definition of willfulness, "knowledge that the conduct is unlawful is all that is required." n8 Bryan v. United States, 524 U.S. 184, 196, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998).
   n8 In contrast, a heightened willfulness standard applies in certain tax and currency structuring cases. Those statutes "carve out an exception to the traditional rule that ignorance of the law is no excuse and require that the defendant have knowledge of the law." Bryan, 524 U.S. at 195 (internal quotation marks and footnotes omitted).

At this point, I am not sure what the Court means by "In contrast."  The Court says the crime is a "specific intent" crime requiring that the defendant know the law and intend to violate it.  I am not sure that, as articulated, it is distinguishable from the tax and currency structuring cases.  I don't think this need detain us, other than those digging into the issue might want to dig deeper on that.

The willful blindness / deliberate ignorance instruction the trial court gave was from the Fifth Circuit's Pattern Jury Instructions § 1.37A (2015).:

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

The trial court also gave an "inferring mental state" charge as follows (this time from the Sixth Circuit pattern jury instruction § 2.08 (2013 ed.):

But a defendant's state of mind can be proved indirectly from the surrounding circumstances. This includes things like what the defendant said, what the defendant did, how the defendant acted, and any other facts or circumstances in evidence that show what was in the defendant's mind. 

You may also consider the natural and probable results of any acts that the defendant knowingly did or did not do, and whether it is reasonable to conclude that the defendant intended those results. This, of course, is all for you to decide.

At trial:

Ricard objected to the deliberate ignorance instruction, arguing that it was "covered by" the instruction concerning "inferring [the] required mental state" and that only one or the other charge should be given. The district court overruled the objection, saying that "while they both deal with the mental element" the deliberate ignorance instruction "is a different charge."

On appeal, Ricard made a different argument -- that the elements required for the deliberate ignorance instruction were absent, so that Court reviewed for plain error, noting that, in any event, "even if a deliberate ignorance charge is error, it is harmless where substantial evidence of actual knowledge exists." (Internal quotation marks omitted.)

Another Case Holding that Marinello's Pending or Expected Proceeding Requirement for Tax Obstruction Does Not Apply to the Defraud / Klein Conspiracy (5/2/19)

In United States v. Herman, 2019 U.S. Dist. LEXIS 70151 (W.D. Tex. No. AU-17-CR-301-XR 4/24/19) [no link available], the somewhat cryptically rejected the defendant's argument that the pending or expected proceeding reasoning of Marinello v. United States, 138 S. Ct. 1101 (2018) on the tax obstruction crime (§ 7212(a)) applied to the defraud / Klein conspiracy under 18 USC § 371(a).  The Court's holding on that issue is:

Defendants argue that Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018) mandates the dismissal of count one. In Marinello, the Supreme Court interpreted 26 U.S.C. § 7212(a) and concluded that "to secure a conviction under the Omnibus Clause [of that statute], the Government must show (among other things) that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action." Id. at 1109. "In addition to satisfying this nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant." Id. at 1110. Defendants argue that "it is now clear that with regard to 'obstruction conviction[s], the government would need to prove beyond a reasonable doubt that a person, acting with corrupt intent, engaged in obstructive conduct with a sufficient nexus to a pending or contemplated proceeding.'" Defendants further argue that the Indictment fails to include this essential element. This Court rejects Defendants' argument for the same reasons as stated by the Court in United States v. Flynn, No. CR 16-347 ADM/KMM, 2019 U.S. Dist. LEXIS 3317, 2019 WL 135701, at *7 (D. Minn. Jan. 8, 2019). The limitations on the substantive offense of 26 U.S.C. § 7212(a) do not apply to Klein conspiracies charged under the general conspiracy statute of 18 U.S.C. § 371. See also United States v. Parlato, No. 15-CR-149-FPG, 2019 U.S. Dist. LEXIS 33035, 2019 WL 988450, at *2 (W.D.N.Y. Mar. 1, 2019) (declining to apply Marinello to a statute the Supreme Court did not consider). The motions are denied (docket nos. 73 and 76).

I previously reported on Flynn: Two Cases Involving Marinello (Federal Tax Crimes Blog 1/15/19), here.  I also reported on Parlato. District Court Rejects Argument that Marinello Applies to Defraud / Klein Conspiracy (3/7/19), here.

10th Circuit Rejects Affirmative Act Challenge to Tax Evasion Convictions (5/2/19)

In United States v. Gorrell, ___ F.3d ___, 2019 U.S. App. LEXIS 12758 (10th cir. 2019), here, "Gorrell was convicted of three counts of wire fraud, 18 U.S.C. § 1343, and three counts of tax evasion, 26 U.S.C. § 7201."  Gorrell appealed only his convictions of tax evasion.  As interpreted by the Court, his argument on appeal was that "the jury was improperly instructed because the alleged affirmative acts contained in the jury instructions (as set forth in the Superseding Indictment) are legally insufficient in light of the evidence presented at trial."  The Court concludes that the alleged affirmative acts were sufficient to support the general jury verdict of guilt on the tax evasions charges.

The instruction on tax evasion was:

To find the defendant guilty of tax evasion, you must be convinced that the government has proved each of the following elements beyond a reasonable doubt: 

FIRST: The Defendant owed substantial income tax in addition to the tax liability which he reported on his income tax return for the year charged in a particular Count; 

SECOND: The Defendant intended to evade and defeat payment of that additional tax; 

THIRD: The Defendant committed an affirmative act in furtherance of this intent, as charged in the Superseding Indictment; and 

FOURTH: The Defendant acted willfully, that is, with the voluntary intent to violate a known legal duty.

The Court of Appeals presents the separate jury instruction on the affirmative acts of evasion as follows:

Jury Instruction Number 19 defines an "affirmative act of evasion" and further explains that "[t]he government needs only to prove one act of evasion to satisfy this element of the offense, but you must unanimously agree on which act or acts were committed." Id. at 118. Jury Instruction Number [*8]  17 lists six actions which the government asserts satisfy the affirmative act element of tax evasion. The same six affirmative acts are found in each count of tax evasion. n4 Gorrell argues that four of these alleged affirmative acts are legally insufficient to sustain a conviction for tax evasion based on the evidence produced at trial. The four affirmative acts at issue are:

a. GORRELL caused investor funds to be deposited into various accounts at banks and E*TRADE that he maintained in his own name and in the name of his financial services company, Gorrell Financial, Inc., thereby commingling the investor funds with his personal funds and converting them to his own use;
b. GORRELL caused the payment of personal expenses from investor funds that had been deposited into the various financial accounts that he maintained at banks and at E*TRADE;
c. GORRELL caused the withdrawal of large amounts of cash from the various financial accounts that he maintained at banks and at E*TRADE;
d. GORRELL stopped using tax preparation services provided to him for free by his father, who was an accountant in Tulsa, Oklahoma, and instead engaged new tax preparers, located in Florida, who were previously unfamiliar with his business ventures, financial accounts, personal income, and expenses . . . .

[Note that the latter listing is from the Superseding Indictment.]

The Court describes the argument as follows:

DOJ Tax Obtains a John Doe Summons for U.S. Bank Information at Treaty Request by Finnish Tax Administration (5/1/19)

DOJ Tax announced that it had obtained a district court order to serve John Doe Summonses (JDS) on Bank of America, Charles Schwab, and TD Bank.  See press announcement here.  The JDS's were sought at the request of the Finnnish Tax Administration pursuant to the tax treaty between Finland and the U.S., which has an exchange of information and commitment to use each country's tax enforcement processes (such a summonses).  The following are key excerpts:

“The Department of Justice and the IRS are committed to working with the United States’ international treaty partners to identify and stop individuals using hidden offshore accounts to evade tax laws,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. “The United States does not tolerate offshore tax evasion, nor does it sanction tax evasion committed through U.S. financial institutions.” 

“Our continued success in combatting offshore tax noncompliance has been helped by the assistance we receive through the network of tax treaties around the globe,” said IRS Commissioner Charles Rettig. “Yesterday’s effort reflects that the U.S. will return this help by working under the law with tax administrators in other nations to help them in their fight against tax evasion and avoidance. A global economy should not be allowed to serve as a possible vehicle for tax evasion in any country.” 

The United States petitioned the United States District Court for the Western District of North Carolina to authorize the summons at the request of the government of Finland under the tax treaty between Finland and the United States. That treaty allows the two countries to cooperate in exchanging information that is necessary for carrying out each country’s tax laws. The IRS summons seeks the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the Finnish government can determine if those persons have complied with Finnish tax laws. Finland has advised the IRS that, in circumstances where the payment cards are used only at ATMs or in other transactions where authorization is by PIN code, and the cardholder need not identify himself or herself to the merchant, the cardholders cannot be identified from sources in Finland. 

The filing does not allege that Bank of America, Charles Schwab, or TD Bank violated any U.S. or Finnish laws with respect to these accounts. 

As described in the petition and supporting documents filed by the United States, the request is part of a foreign payment project being conducted by the Finnish Tax Administration (FTA), in which information on the use of payment cards issued by foreign financial institutions is used to identify non‑compliant Finnish taxpayers. Earlier FTA investigations of approximately 120 to 150 Finnish taxpayers who used foreign payment cards in a similar manner have yielded extremely high rates of tax non-compliance, as noted in the United States’ memo in support of the petition, which indicates that it is likely that the John Does sought by the summons are Finnish residents who are failing to report these foreign accounts and associated income. 

The court order in this case authorizing this enforcement action is part of ongoing international efforts by the United States and its treaty partners to stop persons from using foreign financial accounts to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations, and have also approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade foreign tax obligations.

The Ex Parte Petition for Leave to Serve "John Doe" Summonses and Memorandum in Support are linked on the announcement and are here.

Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19)

I write today on two cases which are the first I am aware of that has sustained FBAR NonWillful penalties on a per account basis rather than per FBAR basis.  One of the cases is a default judgment case that did not discuss the issue of whether the NonWillful penalty should be per account or per FBAR.  United States v. Gardner, 2019 U.S. Dist. LEXIS 68032 (CD CA 2019), here.  I will not discuss that decision (but those who do read it will see that there is some odd wording in it.)

In United States v. Boyd (CD CA CV 18-803-MWF) Order (4/23/19), here, the Court did directly address the issue.  Boyd joined OVDP and then opted out.  The IRS then assessed a mitigated NonWillful penalty for 2010 on each of 13 accounts, for an aggregate NonWillful penalty of $47,279.

Just pausing right there, it appears that Boyd's opting out of OVDP penalty structure achieved a substantial savings.  Even at the lowest OVDP rate of 20%, the OVDP penalty would have been $155,943 (considering 2010 as the high unreported year with $779,716 aggregate high amount in the accounts).

Boyd felt that the penalty exceeded the amount legally allowed based on the purely legal claim that the NonWillful penalty statute required that the pertinent violation on which the maximum $10,000 penalty is based is the FBAR rather than per account.  The statute, 31 U.S.C. 5321(a)(5)(A), bases the penalty on the violation.  The maximum penalty is $10,000 per violation.  § 5321(a)(5)(B)(i). So the question is what is the violation -- the failure to file the FBAR or the failure to report each account on the FBAR not filed.

The Court resolves the issue as follows:

Fifth Circuit Sustains Willful Blindness / Deliberate Ignorance Jury Instruction As Harmless Error (4/26/19)

In United States v. Martinez, ___ F.3d ___, 2019 U.S. App. LEXIS 11121 (5th Cir. 2019), here, "the defendants were convicted of conspiracy to commit health care fraud and several substantive counts of health care fraud. Individual defendants were convicted of different additional offenses."  They raised several arguments on appeal.  I address here only the deliberate ignorance instruction.  I usually in this blog use the term willful blindness rather than deliberate ignorance, but both terms refer to the same concept; accordingly, I will use the term willful blindness except when quoting.

Readers of this blog will recall that I have expressed concern about the willful blindness instruction.  In summary, my concern is whether the willful blindness instruction should require that the jury find the requisite specific knowledge element of a crime where the jury only determines facts of acts of willful blindness. I believe that, more properly, the willful blindness instruction should permit the jury to infer the requisite knowledge but not require the jury to find the requisite knowledge.  In other words, the acts of willful blindness are circumstantial evidence that the defendant had the requisite knowledge, but are not a substitute for a jury to find the requisite knowledge from finding only the acts of willful blindness.

The Martinez court addresses some of my concerns but I am not certain  that it got it right.

The Court starts with the Fifth Circuit pattern jury instruction which, I think, gets it right (bold face supplied by JAT):

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Notice that willful blindness permits the finding of knowledge but does not compel that finding.

The district court did not give that Fifth Circuit pattern instruction but fashioned its own as follows:

The defendants must be found to have acted knowingly and willfully. "Knowingly" means that an act was done intentionally and not because of mistake, accident, or another innocent reason. "Willfully" means an act was done with a conscious purpose to violate the law.
. . . .
Circumstantial facts tend to be the only kind available [*41]  for subjective facts, something about which the jury lacks direct access to the defendant's mind. For instance, the jury may infer knowledge and intent from conduct or context.
Attempts to eliminate or minimize evidence of knowledge may justify an inference of it. Knowledge does not require certainty. The law permits inferred, expected judgments to count as knowledge. These inferences must be beyond a reasonable doubt.

The defendants claimed that this instruction, as given, permitted conviction for negligence.  Two defendants urged that the instruction essentially directed verdicts against the defendants.  One defendant argued that there was no evidence of "purposeful avoidance."

Obstruction Conviction Affirmed for Presentation of False Documents to AUSA Serving as Attorney for Government for Grand Jury (4/26/19)

In United States v. Sutherland, ___ F.3d ___, 2019 U.S. App. LEXIS 11448 (4th Cir. 2019), here, Sutherland was convicted of "three false tax returns and obstructing a grand jury proceeding."  The obstruction charge was under 18 U.S.C. § 1512(c)(2).  On the obstruction charge, the facts were that, through his lawyer, he submitted false documents to the AUSA who was the attorney for the government for the grand jury proceeding.  E.g., FRCrP 6(d)(1). Sutherland's argument was that the crime required a nexus to the grand jury investigation but the documents were not presented to the grand jury.  The Court easily handled the nexus argument under the key authority -- United States v. Aguilar, 515 U.S. 593 (1995) and Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018).  Marinello was a tax obstruction case, but dealt with Title 18 obstruction concepts, particularly the nexus to a pending proceeding.

The Court offers an interesting discussion, probably digression, about some distinction between the AUSA's role as attorney assistant to the grand jury.  The Court starts with the proposition that an FBI investigation is not an official proceeding subject to obstruction.  A grand jury investigation is an official proceeding.  The Court said (cleaned up):

A.

Sutherland contends that the government failed to prove a nexus between his conduct and an official proceeding. He was, he says, only "attempting to influence the U.S. Attorney's Office," not the grand jury. He correctly notes—and the government does not contest—that the U.S. Attorney's investigation is not by itself an official proceeding. The term "official proceeding" is defined by 18 U.S.C. § 1515(a)(1) to include, inter alia, "a Federal grand jury" or "a proceeding before a Federal Government agency which is authorized by law." FBI investigations, for example, are not official proceedings because the statutory language including "a proceeding before a Federal Government agency which is authorized by law," § 1515(a)(1)(C), implies 'some formal convocation of the agency in which parties are directed to appear, instead of any informal investigation conducted by any member of the agency. The same logic equally applies to the investigation by the U.S. Attorney's office in this case, meaning that its investigation was not an official proceeding. 

The term "official proceeding" thus implies something more formal than a mere investigation. That limiting term prevents a statutory sprawl in which the countless communications of citizens with one agency or another of the federal government lay the groundwork for a potential obstruction prosecution. See Marinello, 138 S. Ct. at 1109-10 (reading tax obstruction statute not to extend to "routine, day-to-day work carried out in the ordinary course by the IRS," id. at 1110). This back and forth between citizens and government works as a general matter to the benefit of both. Much of this activity is a wholly legitimate effort to "influence" the government. See 18 U.S.C. § 1512(c)(2). And indeed it is not far-fetched to think that an obstruction statute encroaching too aggressively on innocent citizen/agency interactions would infringe the basic right to petition guaranteed by the First Amendment of our Constitution. See U.S. Const. amend. I ("Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances."). Then, too, a statute that chills or burdens excessively the right of persons to protest or prove their innocence in the face of a government investigation would run counter to the operation of criminal justice as we have known it. 

There are thus important safeguards to prevent the abuse of § 1512(c)(2). As the Court held in Aguilar, "it is not enough that there be an intent to influence some ancillary proceeding, such as an investigation independent of the court's or grand jury's authority." Providing materially false documents with an intent only to influence the U.S. Attorney's investigation, therefore, would not amount to a violation of § 1512(c)(2). See Young, 916 F.3d at 387 ("[T]he Government has similarly failed to provide evidence demonstrating that Young . . . designed his conduct to thwart [the grand jury] investigation, rather than designing his conduct to obstruct an FBI inquiry . . . ."). To be clear, knowingly giving false documents to a prosecutor without the intent to obstruct a grand jury may violate other federal statutes. E.g., 18 U.S.C. §§ 1001(a), 1519. Just not § 1512(c)(2). 

Section 1512(c)(2) also requires proof that a particular grand jury proceeding was "reasonably foreseeable" to a defendant who has been charged with obstructing that proceeding. While the grand jury does not yet have to be convened, it is not enough for the government to argue that a defendant could have speculated that some official proceeding lies somewhere in the offing. The Young case illustrates the point. In that case, the defendant had intentionally misled FBI agents. But this court vacated defendant's conviction because "the only way the jury could have concluded he foresaw a particular grand jury investigation would be through speculation."  

As so often in law, there is a balance to be struck. Though obstruction statutes are susceptible to abuse, they also exist for good reason. Official proceedings are crucial to the conduct of government. They are entitled to go forward free of corrupting influences that not only delay them but increase the chances of false and unjust outcomes. The federal grand jury investigation in this case is but one example of such an "official proceeding." See J.A. 1066 (jury instruction that the grand jury was an "official proceeding"). The government has every right to prosecute those who would corrupt it. Compromised proceedings in turn diminish public confidence in the workings of government and lead to the sort of creeping cynicism toward it that affects so many nations. Section 1512(c)(2) and other like statutes help to protect against that eventuality here. 

B. 

Zurich Life Enters NPA with DOJ Tax (4/25/19)

DOJ Tax announced here that it has reached a nonprosecution agreement ("NPA") with Zurich Life Insurance Company Ltd (Zurich Life), headquartered in Zurich, Switzerland, and Zurich International Life Limited (Zurich International Life), headquartered in the Isle of Man (collectively Zurich).  Zurich will pay a penalty of $5,115,000 and agrees to cooperate in any related criminal or civil proceedings.

The description of the conduct is long, but I just cut and paste:

From Jan. 1, 2008, through June 30, 2014, Zurich issued or had certain insurance policies and accounts of U.S. taxpayer customers, who used their policies to evade U.S. taxes and reporting requirements. In particular, Zurich had approximately 420 U.S. related policies, 127 with Zurich Life and 293 with Zurich International Life, with an aggregate maximum value of approximately $102 million, for which the U.S. taxpayer customers did not provide evidence that they had declared their policies to U.S. tax authorities. 

To qualify for favorable tax treatment under the U.S. tax code, insurance must meet certain minimal requirements. The policies offered by Zurich Life and Zurich International Life did not meet these requirements. The increase of the principal in these policies was therefore subject to taxation, and the policies were required to be disclosed to the Internal Revenue Service (IRS) on FinCEN Form 114 Foreign Bank Account Report, commonly referred to as an FBAR. In issuing or having undeclared U.S. related policies, Zurich knew or should have known that they were helping U.S. taxpayers conceal from the IRS ownership of undeclared assets, maintained as insurance policies or accounts. 

Zurich International Life, in particular, sold insurance products to U.S. taxpayers that were “unit linked,” meaning the cash surrender value and death benefit amount were linked to the value of specified investments. With such policies, the U.S. taxpayer had a suite of specialized investment options, allowing them to access potentially higher returns by taking on the market risk associated with the policies. Some of these unit-linked policies offered a base death benefit that was nearly equivalent to the cost of the policy itself, and in some instances was fully funded by transfers from offshore bank accounts. Upon redemption, the U.S. taxpayer would receive the premium amount plus any investment earnings on the policy less a very small percentage for putative risk and fees. 

Despite knowing that some of these policies, which had minimal-to-no risk mitigation function and specialized investment options, were held by U.S. taxpayers, Zurich International Life failed to act appropriately to ensure timely compliance by the policyholders with U.S. tax laws. In at least one instance, uncovered during the course of Zurich Life’s internal review, a former U.S. citizen, who pled guilty to a federal fraud offense after purchasing a Zurich International Life policy, used that insurance policy to hide substantial assets, despite owing approximately $900,000 in restitution to his victims. 

Following the commencement of the Department’s Swiss Bank Program, the Zurich Group initiated a global review of the life insurance, savings and pension business sold by all of its non-U.S. operating companies to identify policies or accounts with U.S. indicia. This review prompted an extensive customer outreach to current and former customers with a possible nexus to the United States to confirm the customers’ status as U.S. taxpayers, assess their compliance with applicable U.S. tax and reporting rules, and encourage participation in an IRS voluntary disclosure program. 

In July 2015, Zurich contacted the Department to inform it of the initial findings of the self-review. Prior to the self-reporting, Zurich was neither a subject nor a target of any investigation being conducted by the Tax Division. Since this self-disclosure, Zurich has conducted a thorough investigation and reported substantial findings to the Tax Division, including dozens of detailed summaries of account information and comprehensive reports for the U.S. related policies. 

In addition to these efforts, the Companies have worked closely with non-U.S. regulators to ensure full disclosure to the Department. For instance, in 2016, Zurich Life applied to the Swiss Federal Department of Finance and received approval to waive Article 271 of the Swiss Criminal Code, which restricted the disclosures that Zurich Life could make to the Department, thereby facilitating Zurich Life’s production of certain information that would have otherwise been prohibited.

Tax Court Holds that IRS on Restitution Based Assessment Is Not Subject to Restitution Schedule Ordered by Sentencing Court (4/20/19)

In Carpenter v. Commissioner, 152 T.C. ___, No. 12 (2019), here, the Tax Court held (according to the syllabus):

P pleaded guilty to violating I.R.C. sec. 7206(1) by willfully filing false returns for 2005 and 2006. At sentencing, the District Court ordered P to pay restitution to the IRS, ordered that restitution was due immediately, and set a schedule of payments. The District Court also ordered that P pay all outstanding tax as an additional condition of his supervised release. Though P made each scheduled payment, he did not pay the full restitution amount. 

R assessed against P the full amount of restitution ordered in reliance on I.R.C. sec. 6201(a)(4). When P did not pay the assessed amount R began collection action. Before the first payment was due under the schedule set by the District Court, R sent a final notice of intent to levy and filed a notice of Federal tax lien. Following a CDP hearing IRS Appeals sustained the proposed collection actions. P contends that I.R.C. sec. 6201(a)(4) does not grant R independent administrative authority to collect amounts of criminal restitution. P also contends a schedule of restitution payments limits the amount R may administratively collect absent a further order by the sentencing court.  

Held: I.R.C. sec. 6201(a)(4) grants R independent authority to collect administratively amounts of criminal restitution assessed under that section.  

Held, further, a payment schedule included in an order for criminal restitution that is due immediately does not limit R’s authority to collect administratively unpaid amounts of such restitution. 

Held, further, Appeals did not abuse its discretion in sustaining the collection actions at issue. 

The following excerpt is important:

Petitioner failed to take advantage of the opportunities made available to him through the CDP hearing. During the CDP hearing petitioner was free to propose an installment agreement whereby he would potentially end up paying a relatively small amount per month. He might even have convinced the officer that he could in fact afford to pay no more than the $100 per month set forth in the sentencing court’s order. (Petitioner is not limited to the CDP hearing and may propose an installment payment agreement anytime. See sec. 6159). In order to secure a collection alternative like this, however, petitioner needed to do three things: (1) make an actual proposal of a collection alternative, (2) submit financial information establishing that this was all he could afford to pay, and (3) become current in his tax filing obligations. Petitioner did none of these things.  

Instead of making the required factual showings, petitioner took the extreme legal position that the IRS simply could not collect from him. That was a mistake. Petitioner, like any other taxpayer in a CDP case, must affirmatively establish what is his limited ability to pay. He cannot rely on the sentencing court’s payment plan to establish that for Federal income tax purposes. In rejecting his position, we are not ruling that the IRS can always levy to collect 100% of the restitution regardless of the taxpayer’s financial circumstances. 

New Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (4/16/19)

I have previously written on the IRS's revised Voluntary Disclosure Practice announced in November 2019.  See New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (Federal Tax Crimes Blog 11/29/18; 11/30/18), here.  The announcement anticipated a revised Form 14457 (previously used for Offshore Voluntary Disclosure Procedure, OVDP) to be used for the general Voluntary Disclosure Practice.

The form is now out.  See Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here.  (The Form is a fillable pdf that may not show in some browsers and may need to be downloaded to actually view and fill out the form.)

The following are my quick observations.

1.  The Form consists of two Parts.  Part I is submitted as the request.  Part II is submitted after preclearance is granted.  The Form is for both domestic and offshore issues.

2.  General comments.  The disclosures required are quite robust and are of the type that can be databased with appropriate fields that will likely permit computer analytics in the process of identifying which disclosures may need extra attention by the IRS and permit some cross-checking for identified persons and entities.

3.  Part I Disclosures (L. refers to the numbered items, e.g.,L. 3):

a.  L. 3 asks for "Disclosure special features" with check boxes related to common types of noncompliance but with an  "Other Issues" check box that, if checked, need to provide a textual description.

b. LLs. 4-7 asks for detailed identity information for the taxpayer making the request plus any entities for whom the request is being made.

c.  L. 8 asks "Do you believe that the IRS has obtained information concerning your tax liability."  Since a taxpayer is not qualified for VDP if the IRS is already on the trail, this question is designed to flush out the taxpayer's knowledge about that early on.

d.  L. 9 asks "Disclose if you, your spouse or any related entities are currently under audit or criminal investigation by the Internal Revenue Service or any other law enforcement authority and if any income is sourced from an illegal activity."  This is a pretty broad question but seems to apply only to the spouse (not siblings, parents or children or others) and "related entities."  Related entities may need some definition, but certainly entities in which the taxpayer is title or beneficial owner would be included, although the quantum of the title or beneficial ownership relative to others is not stated.  Interestingly, the question as asked does not include related individuals (other than spouse), such as partners who, under prior iterations of the VDP might be a disqualified.

e.  L. 10 asks for a list of "ALL noncompliant financial accounts you owned or controlled or were the beneficial owner of, either directly or indirectly."  The period covered is the six year disclosure period.

f.  Interestingly, the taxpayer is not required on Part I to quantify the tax amounts involved.

4.  Part II Disclosures (to be completed only after preclearance based on Part I):

a.  L. 3 provides check boxes similar to Q. 3 of Part I.

b.  L. 4 asks if the taxpayer has taken a position that he or she was a bona fide resident of a U.S. territory (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands) or did you file an income tax return with a U.S. territory?" and explain if yes.

c.  Ls. 5&6 ask about the quantum of unreported income and graduated brackets (e.g., 0-$50,000, $50,000 to $100,000, etc.) and for the high aggregated balance in offshore accounts.

d.  L. 7 for Offshore Issues only asks about "anyone including a foreign government or a foreign financial institution" advised the taxpayer "that your offshore account records, which are the subject of this voluntary disclosure, were susceptible to being turned over to the U.S. Government pursuant to an official request?"  If yes, then the taxpayer must disclose whether anyone submitted documents in opposition to disclosure and notified the Attorney general as required by 18 USC §3506.

e.  L. 8 requires, for the disclosure period, a list of ALL entities you owned or controlled or were the beneficial owner of, either directly or indirectly for which you reported noncompliant financial accounts in the Part I preclearance request.

Article on Commissioner Rettig Comments on College Admission Scandal (4/13/19)

Laura Davison, IRS Head Says College Admission Scandal Parents May Face Hefty Tax Bills (Bloomberg News 4/10/19), here. 

Excerpts:

IRS Commissioner Chuck Rettig told the Senate Finance Committee his agency anticipates that “numerous other individuals” will be charged with criminal tax violations as a result of the investigation into alleged bribes paid to test examiners and college sports coaches to guarantee spots for students at elite U.S. universities. 

People charged with criminal tax violations could be required to correct their tax returns and pay back taxes, plus interest and penalties, Rettig told the panel Wednesday. Many tax crimes carry a maximum five-year prison term and a fine of $100,000. Fines for civil tax violations can run as high as 75 percent of the unpaid tax, plus interest. 

Last month, 33 parents were charged with conspiring with college admissions strategist and confessed ringleader William Rick Singer to pay $25 million in bribes to entrance exam administrators, a surrogate test-taker and university sports coaches to get their children into Yale, Georgetown, Stanford and other exclusive schools. 

The U.S. alleges that some parents made payments to Singer through the nonprofit Key Worldwide Foundation, which they claimed as charitable contributions to get a tax deduction. 

* * * * 

The IRS’s criminal investigations unit initiated about 3,000 cases in 2017, according to agency statistics. About 66 percent of the cases it completed that year resulted in jail time for the defendant.

JAT Comments:

1.  I doubt that all of the persons who played some role in the college admission scandal will be prosecuted for crimes (either tax or other crimes).  I am sure the detailed facts will show some type of spectrum -- from the worst offenders to the less culpable offenders.  The less culpable offenders while perhaps prosecutable may be able to avoid criminal prosecution because the Government will -- at least should -- focus prosecution and systemic resources on the more culpable.

2.  The civil tax consequences, though, could be significant for all of the culpable actors and the less culpable may not be able to avoid those.  The civil tax consequences are the tax arising from the improper charitable contributions, civil fraud penalty (75%), and interest on both from the due date off the return(s).  Some, perhaps, on the less culpable end of the scale might avoid the civil fraud penalty because of the high burden the Government must bear (clear and convincing evidence of fraud), but would be liable for the accuracy related penalty (20% to 40%, depending upon how the "contribution" was structured).

3.  I also included the excerpt on the IRS CI statistics above showing about 2/3 of cases that the IRS CI "completed" resulted in incarceration.  I have not tried to break the statistic down, but I infer that "completed" means forwarded to DOJ Tax with a recommendation for prosecution (or perhaps the IRS recommended prosecution after further grand jury work).  Then, of course, not all IRS CI recommendations for prosecution result in DOJ Tax seeking indictment.  I do not recall the statistics, but perhaps 10% of IRS CI recommendations are not prosecuted.  So, those that are prosecuted have a higher percentage incarcerated than 66%.  And, of the number that are not incarcerated, we don't have the breakdown between between (i) those who were prosecuted and acquitted and (ii) those who were prosecuted, convicted but received no incarceration.

GAO Report on Foreign Asset Reporting and Related Issues (4/4/19)

GAO Released this report:  Foreign Asset Reporting, Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad (GAO-19-180 April 2019), here.

Excerpts from opening summary:

What GAO Found 

Data quality and management issues have limited the effectiveness of the Internal Revenue Service’s (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under the Foreign Account Tax Compliance Act (FATCA). Specifically, IRS has had difficulties matching the information reported by foreign financial institutions (FFI) with U.S. taxpayers’ tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by FFIs.  Further, IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. persons, in part, because some IRS databases do not store foreign asset data reported from paper filings.  IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance  campaigns. Ensuring access to consistent and complete data collected from U.S. persons—and employing a plan to leverage such data—would help IRS better  leverage such campaigns and increase taxpayer compliance. 

Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN)—both within the Department of the Treasury (Treasury)—collect duplicative foreign financial account and other asset information from U.S. persons. Consequently, in tax years 2015  and 2016, close to 75 percent of U.S. persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN. The overlapping requirements increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Modifying the statutes governing the requirements to allow for the sharing of FATCA information for the prevention and detection of financial crimes would eliminate the need for duplicative reporting. This is similar to other statutory allowances for IRS to disclose return information for other purposes, such as for determining Social Security income tax withholding. 

According to documents GAO reviewed, and focus groups and interviews GAO conducted, FFIs closed some U.S. persons’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements. According to Department of State (State) data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above.  

Treasury previously established joint strategies with State to address challenges U.S. persons faced in accessing foreign financial services. However, it lacks a collaborative mechanism to coordinate efforts with other agencies to address ongoing challenges in accessing such services or obtaining Social Security Numbers. Implementation of a formal means to collaboratively address burdens faced by Americans abroad from FATCA can help federal agencies develop more effective solutions to mitigate such burdens by monitoring and sharing information on such issues, and jointly developing and implementing steps to address them. 

The following is from the Background (some footnotes omitted):

Senate Finance Committee Begins Investigation of Abusive Conservation Easement Appraisals (4/2/19)

The Senate Finance Committee Chair and Ranking Member announced here that they have started

an investigation into the potential abuse of syndicated conservation easement transactions, which may have allowed some taxpayers to profit from gaming the tax code and deprived the federal government of billions of dollars in revenue. For several years now, the IRS has been investigating these transactions. They appear to involve promoters selling interests in tracts of land to taxpayers looking for large tax deductions. In such an arrangement, the taxpayers then get inflated appraisals of those tracts of land and grant conservation easements on that land. The resulting inflated charitable deductions are then split among the taxpayers.

The SFC sent letters to 14 "individuals who appear to be associated with these investor groups that might have unfairly profited from conservation easements."  The names are listed on the press release.

I have written on conservation easement bullshit tax shelters:

• Peter Reilly on Conservation Easement Donations as Bullshit Tax Shelters (Federal Tax Crimes Blog 7/24/17), here.
• IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (Federal Tax Crimes Blog 1/2/17), here.

Peter Reilly has a very good update on this development:  Peter J. Reilly, Grassley Wyden Take On Sketchy Conservation Tax Shelters (Forbes 3/28/19), here.

The type of investigation appears somewhat like the investigations by the Senate's Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, see here.  Criminal investigations sometimes are in process when such investigations occur or, as I think occurred in the KPMG situation, arose from the commotion of the investigation.

Robert H. Jackson's Famous Speech on the Role of the Prosecutor (4/2/19)

I am on the "Jackson List," an email list by Professor John Q. Barrett, here, who studies and writes about Robert H. Jackson, former Assistant Attorney General (Tax and Antitrust), then Attorney General, then Supreme Court Justice, from which he took a break to be the Chief United States Prosecutor at the Nuremberg Trials of Nazi war criminals following World War II.  (Jackson's Wikipedia page is here.

Today, Professor Barrett sent the list Jackson's famous speech of April 1, 1940 titled "The Federal Prosecutor."  Well worth a read, so I pass it on.

The Federal Prosecutor

By Robert H. Jackson

Attorney General of the United States

April 1, 1940

            It would probably be within the range of that exaggeration permitted in Washington to say that assembled in this room is one of the most powerful peace-time forces known to our country.  The prosecutor has more control over life, liberty, and reputation than any other person in America.  His discretion is tremendous.  He can have citizens investigated and, if he is that kind of person, he can have this done to the tune of public statements and veiled or unveiled intimations.  Or the prosecutor may choose a more subtle course and simply have a citizen’s friends interviewed.  The prosecutor can order arrests, present cases to the grand jury in secret session, and on the basis of his one-sided presentation of the facts, can cause the citizen to be indicted and held for trial.  He may dismiss the case before trial, in which case the defense never has a chance to be heard.  Or he may go on with a public trial.  If he obtains a conviction, the prosecutor can still make recommendations as to sentence, as to whether the prisoner should get probation or a suspended sentence, and after he is put away, as to whether he is a fit subject for parole.  While the prosecutor at his best is one of the most beneficent forces in our society, when he acts from malice or other base motives, he is one of the worst.

            These powers have been granted to our law-enforcement agencies because it seems necessary that such a power to prosecute be lodged somewhere.  This authority has been granted by people who really wanted the right thing done—wanted crime eliminated—but also wanted the best in our American traditions preserved.

            Because of this immense power to strike at citizens, not with mere individual strength, but with all the force of government itself, the post of Federal District Attorney from the very beginning has been safeguard by presidential appointment, requiring confirmation of the Senate of the United States.  You are thus required to win an expression of confidence in your character by both the legislative and the executive branches of the government before assuming the responsibilities of a federal prosecutor.

            Your responsibility in your several districts for law enforcement and for its methods cannot be wholly surrendered to Washington, and ought not to be assumed by a centralized Department of Justice.  It is an unusual and rare instance in which the local District Attorney should be superseded in the handling of litigation, except where he requests help of Washington.  It is also clear that with his knowledge of local sentiment and opinion, his contact with and intimate knowledge of the views of the court, and his acquaintance with the feelings of the group from which jurors are drawn, it is an unusual case in which his judgment should be overruled.

            Experience, however, has demonstrated that some measure of centralized control is necessary.  In the absence of it different district attorneys were striving for different interpretations or applications of an Act, or were pursuing different conceptions of policy.  Also, to put it mildly, there were differences in the degree of diligence and zeal in different districts.  To promote uniformity of policy and action, to establish some standards of performance, and to make available specialized help, some degree of centralized administration was found necessary.

            Our problem, of course, is to balance these opposing considerations.  I desire to avoid any lessening of the prestige and influence of the district attorneys in their districts.  At the same time we must proceed in all districts with that uniformity of policy which is necessary to the prestige of federal law.

            Nothing better can come out of this meeting of law enforcement officers than a rededication to the spirit of fair play and decency that should animate the federal prosecutor.  Your positions are of such independence and importance that while you are being diligent, strict, and vigorous in law enforcement you can also afford to be just.  Although the government technically loses its case, it has really won if justice has been done.  The lawyer in public office is justified in seeking to leave behind him a good record.  But he must remember that his most alert and severe, but just, judges will be the members of his own profession, and that lawyers rest their good opinion of each other not merely on results accomplished but on the quality of the performance.  Reputation has been called “the shadow cast by one’s daily life.”  Any prosecutor who risks his day-to-day professional name for fair dealing to build up statistics of success has a perverted sense of practical values, as well as defects of character.  Whether one seeks promotion to a judgeship, as many prosecutors rightly do, or whether he returns to private practice, he can have no better asset than to have his profession recognize that his attitude toward those who feel his power has been dispassionate, reasonable and just.