DOJ Tax Promo Piece to House Oversight Subcommittee (6/1/12)

Kathryn Keneally, the recently anointed AAG Tax, has promoted the Tax Division's efforts and accomplishments before a House subcommittee on oversight.  See Statement of Kathryn Keneally, Assistant Attorney General, Tax Division, before the Subcommittee on Courts, Commercial and administrative Law Committee on Judiciary, U.S. House of Representatives, Regarding Oversight of the Tax Division (May 31, 2012), here.

Here are excerpts related to criminal tax matters that are the focus of this blog:

Tax Division prosecutors authorize and prosecute cases after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged.  

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Criminal Investigation and Prosecution 

Criminal Trial In addition to our extensive civil practice, the Tax Division authorizes all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. In most cases, Division attorneys either conduct or supervise these prosecutions, often in partnership with prosecutors from the United States Attorneys' Offices. The Division's twin criminal goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Tax Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Tax Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Tax Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,800 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a United States Attorney's Office, by a Tax Division prosecutor, or by a team of prosecutors from both. Tax Division prosecutors also conduct training for IRS criminal investigators and Assistant United States Attorneys, and provide advice to other federal law enforcement personnel, such as the DEA and the FBI.

The crimes investigated and prosecuted by the Tax Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means -- as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other -- used for tax purposes -- showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.

Another UBS Related Taxpayer Plea Agreement (5/31/12)

DOJ Tax has announced yet another taxpayer plea agreement regarding UBS accounts.  The DOJ Tax press release is here.  The plea agreement is here.  Here are the key features based on these documents.

Defendant:  Wolfgang Roessel
Banks:  UBS, Wegelin, Bank A
Entities:  Yes (Cyan United A)
High Balance:  $11,501,868 (derived from statement that penalty was 50% of high balance)
FBAR Penalty: 5,750,933.99
High Balance:  Derived from penalty - $11,501,868
Count of Plea:  Tax perjury, Section 7206(1) with 3 year max sentence
Tax Loss: $312,802.95
5K1 Departure Possibility:  Yes
Judge:  Kathleen Williams

Fact Summary (from press release because these are not covered in the plea agreement; apparently they were stated in  court at the plea hearing or otherwise put in writing in the record):

[D]ating back to the 1980s and up through the late 2000s, Roessel held accounts at different times at Bank Wegelin and another Swiss bank (Bank A) into which he deposited foreign proceeds from his business, yet which he neither reported on his tax returns nor on the required FBARs. In the early 2000s, the foreign account at Bank A was put into the nominee name of Cyan United. A Swiss money manager made investments on Roessel’s behalf and met with the defendant periodically to discuss the performance of the account. In 2008 and 2009, during which period the defendant was aware of the government’s grand jury investigation into his foreign UBS accounts, the defendant disclosed only the existence of the UBS accounts on his tax returns for those years and did not report the other Swiss account.

Tea Party and Tax Compliance (5/31/12)

Richard Lavoie, a professor at the University of Akron, here, has posted an interesting article, here.  Here is the introduction (cut and paste):

PATRIOTISM AND TAXATION:
THE TAX COMPLIANCE IMPLICATIONS
OF THE TEA PARTY MOVEMENT 

Richard Lavoie* 

Given the rise of the tea party movement, which draws strength from the historical linkage between patriotism and tax protests in the United States, the role of patriotism as a general tax compliance factor is  examined in light of the extant empirical evidence. The existing research suggests that patriotism may be a weaker tax compliance factor in the United States than  it is  elsewhere. In light of this possibility, the tea party movement has the potential to weaken this compliance factor even more. Further, when considered in light of the broader tax morale factors that contribute to tax compliance, the tea party movement also poses a risk of destabilizing the social contract framework that underlies our established taxpaying ethos. In order to strengthen the impact of patriotism on tax compliance and lessen any adverse impact of the tea party movement on the country’s taxpaying ethos, the government should take steps to disentangle American patriotism from its anti-tax roots. Important first steps in this regard are outlined in this Article, including the creation of a voluntary “Patriotic Remittance Tax.” Making such changes will strengthen the bond between taxpayers and the government and help promote a vision of American patriotism that is positively associated with taxation rather than antithetical to it

Thanks to the Tax Prof Blog posting on the article here, I do recommend to my readers, particularly professionals, with an interest in tax that they read the Tax Prof Blog daily here.  Paul Caron is author of the Tax Prof Blog and does not limit his blogs to just tax.

Kevin Downing Resigning (5/31/12)

Reports are circulating that Kevin Downing is resigning effective June 4, 2012.  See David Voreacos, Tax Division’s Downing Said To Resign From Justice Department  (5/31/12), here.  Kevin Downing, an attorney in DOJ Tax CES, has been a key player in the DOJ offshore juggernaut since the John Doe Summons proceeding against UBS.  Downing has been frequently mentioned in this blog.  See collection of blogs based on "Downing" search, here.  I would normally have posted this item on the page for "News / Rumors on Offshore Evasion,." I thought that some readers may want to comment on this news, and thus needed a dedicated place to make those comments.  I remind readers to keep the comments appropriate.  I will not approve them if they are not appropriate.

Before stirring up trouble in the offshore account arena, Mr. Downing stirred up trouble over the KPMG tax shelters in SDNY which is where I first encountered him.  He has been busy in his DOJ Tax CES career.  I'll just say that I encountered Mr. Downing in the KPMG individual defendant criminal prosecution.  I observed that he is a zealous advocate and true believer in the righteousness of his cause.  At least in the KPMG matter, as the court ultimately held, the ends sought by the prosecution team on which Mr. Downing served did not justify the means the team chose to achieve the ends.  United States v. Stein, 541 F.3d 130 (2d Cir. 2008).

Plea for Defendant Charged with Tax Crimes (including FBAR) (5/30/12)

I previously reported on the criminal case involving Charles Alan Pflueger.  See Court Holds FBAR Duty is Clear and Willfulness Is a Trial Issue (4/10/12), here.  The gravamen of the case was a traditional tax crimes case, although an FBAR violation was charged as well.  Mr. Pflueger and others recently pled guilty.  See DOJ Tax Press Release, here.  The pleas were to traditional tax crimes.  Mr. Pflueger, who had the offshore account and was the defendant charged with the FBAR violation, pled to a single tax perjury, Section 7206(1), here, charge for the year 2005.  His plea agreement is here.  This gravamen of this case was not the offshore account charge, so I will not spend much time on it here.

I do point out the following with respect to Mr. Pflueger's plea agreement:

1.  The plea agreement imposes contractual restitution for the tax loss, including relevant conduct as determined by the Court.  Except for the plea agreement, the sentencing court would not be authorized to order restitution for a Title 26 crime of conviction, except perhaps as a condition of some sentencing benefit (such as probation).  The court will be authorized to order restitution pursuant to the plea agreement.  The amount of the restitution will be determined by the time of sentencing.  Once determined at sentencing, the amount of the restitution may be immediately assessed under Section 6201(a)(4), here.   The IRS may use its tax collection authority with respect to the assessments (including the fraud assessment), regardless of any restitution schedule ordered by the sentencing court.

2.  The defendant also consents to the assessment of the fraud penalty for the year of conviction and agrees not  to contest the fraud penalty.  Technically, the fraud penalty would not be restitution and the plea agreement is careful not to call it restitution.  The fraud penalty is a penalty, rather than recompense.  Presumably, this agreement for immediate assessments operates like a Form 870, Waiver of Restrictions on Assessment, although I am surprised that the Government did not require that Pflueger execute that form.

Why We Cheat and Lie -- Taxes Included (5/29/12)

In an excellent article adapted from an upcoming book, Dan Ariely,  James B. Duke Professor of Behavior Economics at Duke University, offers insight from his research about why people lie.  Dan Ariely, Why We Lie (WSJ 5/26/12), here.  The name of the book is The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves (Harper June 5, 2012), here.  Dan Ariely's Duke bio is here.

Here are some quotes easily applied to taxes that might entice readers to read the article and then, when published, the book.

What we have found, in a nutshell: Everybody has the capacity to be dishonest, and almost everybody cheats—just by a little. Except for a few outliers at the top and bottom [the top and bottom are those small percentages who will not cheat at all and those at the other extreme who will cheat big], the behavior of almost everyone is driven by two opposing motivations. On the one hand, we want to benefit from cheating and get as much money and glory as possible; on the other hand, we want to view ourselves as honest, honorable people. Sadly, it is this kind of small-scale mass cheating, not the high-profile cases, that is most corrosive to society. 

* * * * 

"[T]he level of cheating was unaffected by the probability of getting caught." 

* * * * 

The results of these experiments should leave you wondering about the ways that we currently try to keep people honest. Does the prospect of heavy fines or increased enforcement really make someone less likely to cheat on their taxes, to fill out a fraudulent insurance claim, to recommend a bum investment or to steal from his or her company? It may have a small effect on our behavior, but it is probably going to be of little consequence when it comes up against the brute psychological force of "I'm only fudging a little" or "Everyone does it" or "It's for a greater good." 

* * * * 

Another set of our experiments, conducted with mock tax forms, convinced us that it would be better to have people put their signature at the top of the forms (before they filled in false information) rather than at the bottom (after the lying was done) 

* * * * 

In short, very few people steal to a maximal degree, but many good people cheat just a little here and there. We fib to round up our billable hours, claim higher losses on our insurance claims, recommend unnecessary treatments and so on.

Pastor Going to Trial for Tax Charges Predicts Jesus Will Come Today (5/27/12)

I have previously blogged on Ronald Weinland.  See Controversial Pastor, Self Proclaimed Prophet, Indicted re Income from Church Offerings and Offshore Accounts (11/21/11), here.  My impression from afar is that he is just a charlatan (see here) in the guise of a religious person.  Just in case he has some connection with God (maybe a prophet?), I thought I would inform readers of this blog that he is predicting that Jesus will return to the Earth today.  Church of God pastor indicted for tax evasion, predicts coming of Christ (Fox 19 5/22/12), here.  Sorry for being late on this report.

If Jesus does come, I suppose, Weinland will miss his upcoming trial for tax charges.  And, I will have to give up my blogging.  I also suppose that, although the time is nigh, those who are concerned might want to get right with Jesus. Just a variation of exploiting Pascal's Wager, see Wikipedia entry, here.  There is always the last minute come to Jesus moment.  See the story of the penitent thief on the cross alongside Jesus, at Wikipedia, here.  (It is unclear whether the penitent thief was exploiting Pascal's Wager or really had an epiphany. The point is that there's still time, that is, if you read this blog in time (or otherwise get the news).  Readers can rest assured that I am doing all that is appropriate.

Update 5/28/12:  Jesus did not come yesterday.  Let me clarify, I do not have any credible report that Jesus  did come yesterday.  Even Mr. Weinland has changed his prediction, though, so that the prediction is not inconsistent with the facts.  It now appears that Mr. Weinland  has recalibrated and has announced that Jesus will come next year. Ron Weinland: Oops! My Bad! Jesus Is Coming Next Year, or Maybe After That, or Maybe..... (Armstrongism Blog 5/28/12), here.  (This may be viewed as an application of Bayesian analysis, although it seems to me that he does not have the right prior.)   So, Mr. Weinland will go to trial after all (unless he chooses to plead guilty or the Government drops the charges, neither of which seem likely at this point)..

It seems to me that in addition to not looking at the right time for Jesus, Mr. Weinland is looking for Jesus in all the wrong places such as foreign bank accounts.

And the King shall answer and say unto them, Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.

Matthew 25:40 (King James Version), here.

Has DOJ Tax Crossed the Line in its Press Releases? (5/25/12)

Press releases are an important component of the Government's war on tax crime.  The notion is that, for maximum general tax enforcement bang for the limited criminal enforcement buck, the public needs to hear that tax crimes are enforced and thereby encourage better tax behavior.  Hence, publicity of criminal tax charges, convictions and sentences, by the IRS and by DOJ Tax is standard, almost daily, fare.  For the IRS's publicity policy statement, see IRM 1.2.19.1.9  (Approved 05-23-1986), Policy Statement 1-183, here; for DOJ Tax's Policies, see AAG Memo of 9/8/2000, here; For DOJ Tax's 2012 press releases, see here.  U.S. Attorneys also issue press releases in selective tax cases.

DOJ Tax recently issued a press release that has drawn controversy.  The title of the press release is:  Georgia Tax Cheats Indicted for Conspiring to Defraud the United States (5/23/12), here,  The White Collar Crime Prof Blog questions the ethical propriety of the release.  See DOJ Press Release Treads on Presumption of Innocence (White Collar Crime Prof Blog 5/24/12), here.  Not only does the author of the blog call out DOJ Tax, but, via a comment to that blog (see the blog), so does Professor Monroe Freedman, a law professor and noted expert on ethics, see here.  The point is that by calling them tax cheats DOJ has pronounced their guilt in a way that impairs the presumption of innocence.  It would have been better to just say that the individuals were charged rather than calling the tax cheats or, alternatively, calling them alleged tax cheats.  But alleged tax cheats may not have the same punch as just tax cheats.

I would appreciate comment from this community on the issues raised as to press releases.

I am aware of no response yet from DOJ Tax.  I will post one if I hear of it.

Family Member Enabler Charge Dismissed re Offshore Accounts (5/24/12)

The USAO SDNY dismissed charges against Samuel Phineas Upham.  David Voreaco, U.S. Drops Case of Man Accused of Helping Mom Hide Money (BloombergBusinessweek 5/23/12), here.  The charge was that he had assisted his mother, Sybil Nancy Upham, in hiding offshore accounts.  I have previously blogged on the son's charges, Another UBS Related Defendant is Charged for Offshore Accounts (12/9/10), here.

Not much to say, at least for now, except that it is refreshing to see prosecutors, while not admitting that they made a mistake, are willing to update their conclusions based on new information rather than stick to the conclusions.  Good Bayesian approach.

The mother pled guilty in November 2010.  I don't have information on her sentencing.  If someone has that information, I would appreciate them emailing me the information or a link to the information.

Tax Due and Owing, Tax Loss, Restitution, Civil Tax (5/23/12)

Today, I make an offering on some legal jargon all having to do with tax evaded in a criminal case.  This article is inspired by the following article:  Jeremiah Coder, ABA Meeting: DOJ Officials Discuss Calculating Tax Loss for Restitution and Sentencing, 2012 TNT 94-8 (5/15/12), here.  Thanks to Tax Analysts for permission to post the case for review and downloading.

This article reports a discussion at the ABA Tax Section Meeting in mid-May 2012 regarding the relationship between tax loss numbers, restitution, and civil tax numbers.  For example, some courts hold that unclaimed deductions are not included in the sentencing tax loss so that, conceivably at least, the Court will calculate sentencing on a tax loss that exceeds the real tax due whereas for restitution purposes, it is the real tax loss and for civil tax purposes it is the real tax loss.  The notion is that the Sentencing Guidelines defines the tax loss as the tax loss that was intended -- the object of the offense (USSG § 2T1.1(c)(1)); where the taxpayer does not claim the deductions he or she would have been otherwise entitled to, his object or intent, presumably, is to save the tax due without the benefit of the deductions.  I certainly see the textual basis for that notion, but I personally think it is stupid.

I understand the sentencing courts and appellate courts do not want to get slowed down over tax computations.  I suppose that, since most taxpayers claim deductions that they are entitled to, the odds are that, in the bulk of the cases, there are not really credible unclaimed deductions.  But, a taxpayer desperate to lower the tax loss for the sentencing benefit will be tempted to throw marginal claims on the table and force the courts to deal with them.  So, for courts buying into this notion, it is better just not to have to deal with them.  But they thereby create the anomaly noted where the tax loss can materially exceed the restitution amount.

Even worse, at least conceptually, the tax loss can exceed the criminal tax number that the Government would have to prove in the first case in a tax evasion trial.  Let me use an example:  Say the real civil tax deficiency is $50 after all components entering the calculation (including unclaimed deductions) are considered, but that, if the unclaimed deductions are not considered, the sentencing tax loss is $100.  At the guilt or innocence phase of the trial, the Government would have to allow real unclaimed deductions (and would probably tilt in doubt in favor of the taxpayer in making the tax calculation).  The use of the real tax due is the Spies element of the offense.  So the taxpayer would be found guilty on a tax loss of $50, but will be sentenced on a tax loss of $100 and, if restitution is imposed (usually not without consent in tax crimes), at $50.

IRS Warning Letters May be Sufficient for Some NonWillful Violations (5/18/12)

In a Tax Notes Today report of statements made at the Eastern Pennsylvania Working Together Conference in Malvern, PA, Jason Kuratnick, IRS Associate Area Counsel (Philadelphia), Small Business / Self-Employed Division is reported to have said:

The IRS may send a warning letter in lieu of asserting penalties for failure to file a Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts," if it would be sufficient to bring the individual into compliance, an IRS official said May 17.

Matthew Dalton, IRS May Issue Warning Letters on FBARs Instead of Penalties, 2012 TNT 97-3 (5/18/12).

The report is too cryptic to draw any firm conclusions and certainly is not a definitive statement of the IRS position.  I do  think, however, that the statement is a helpful indication that the IRS will be reasonable in applying the nonwillful penalty in audits (whether on opt out, quiet disclosure or go-forward) and, with other indications, may allay some of the fears in the community of taxpayers who had nonwillful violations.

I think that for most taxpayers an IRS warning letter would in fact do the job of getting them into compliance.  Indeed, I think that if the IRS were to give more assurance to taxpayers of reasonableness, the IRS might find much more willingness in taxpayers to correct some past years' income tax underreporting and thus bring at least some marginal revenue into the Treasury for income tax.  In other words, it could become really win-win for the IRS and at least the minnow taxpayers -- they get the assurance of moving into compliance with some correction of past years at the cost principally of income tax and perhaps and income tax penalty, but with no draconian FBAR penalty.

Indeed, I think the IRS and the country would be well served to announce that persons who will not be subject to the willful FBAR penalties (they will have to take the risk of making the right determination here) and who desire to join the OVDI program will get an FBAR penalty of no more than 1/2 the amount of the regular audit FBAR penalty.  Of course, if the regular audit penalty for a nonwillful violator is zero, the program penalty would be zero.  But, what this would do is to offer an incentive to these taxpayers to correct the income taxes for 2003 forward with some assurance that they will not be hammered by the FBAR penalty for coming into the program.  And, keep in mind that the taxpayers submits all of the information to the make the income tax assessments, so that the IRS devotion of audit resources could be light.  Win-Win.

Renunciation of U.S. Citizenship to Save U.S. Tax (5/17/12; Revised 5/20/12)

There is a good article on renunciation of U.S. citizenship to save U.S. tax in this mornings Tax Notes Today.  Marie Sapirie, Facebook Expat Is Latest Billionaire Without Borders, 2012 TNT 96-1 (5/17/12).  I do and have a link to the article.

This article discusses the brouhaha over Eduardo Saverin's renunciation of citizenship.  Saverin is a Facebook founder with a minority interest in the company going public.  His renunciation of citizenship is speculated to save him millions in U.S. tax.

Ms. Sapirie has some very good comments on the tax aspects of renouncing citizenship.  I have exerpted them and present those exerpts here

Section 877A, enacted as part of the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, revised the exit tax consequences imposed under section 877 by establishing a mark-to-market regime in which the property of covered expatriates is treated as being sold for fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale, less an exclusion amount that is indexed for inflation. An expatriating taxpayer may elect to defer payment of the tax until the property that was marked to market is disposed of.  

* * * * 

Regardless of whether they meet the 877(a) tests, before expatriating all individuals must certify that their past five years of U.S. tax returns are fully compliant. Before that certification can be made, many nonresident citizens must file returns and foreign bank account reports, Mehany said. Part of the analysis in that step is to determine whether it is in the taxpayer's interest to enter the offshore voluntary disclosure initiative or to explore other planning alternatives before starting the expatriation process to allow the taxpayer time to become compliant, she said.

Good Case on Grouping for Tax Crimes for Sentencing Purposes (5/16/12)

In United States v. Register, ___ F.3d ___, 2012 U.S. App. LEXIS 9409 (11th Cir. 2012), here, the Eleventh Circuit held that grouping under SG § 3D1.2(d), here, is required for counts of conviction for failure to pay over,  §  7202 (13 counts), and tax perjury,  §  7212 (4 counts).  Generally, for a defendant, grouping is good and not grouping is bad.  Bottom line, the Court on the facts found sufficient nexus between the two crimes to group.  The opinion is very good and I highly recommend it to readers.

Because the opinion is so good and reasonably succinct, I don't try to summarize.  Rather, I refer readers interested in the grouping concept to read the opinion.  For persons not that familiar with the concept, I offer the following from my Federal Tax Crimes book (as revised for the Register case, but omitting the footnotes).

To Group or Not to Group - That is a Question.

I noted repeatedly in the crimes section that a pattern of criminal activity that is essentially a unified crime may violate more than one criminal statute and thus could give rise to several or even many criminal counts in an indictment drafted at the discretion / whim of the prosecutor.  For example, a pattern of conduct might constitute tax evasion and tax perjury – i.e., the taxpayer files a false return underreporting his or her tax liability.  Should the prosecutor be able to squeeze out a greater sentence by charging tax evasion and tax perjury for the same pattern of activity?

New Comments Features - How to Post Anonymously (5/16/12)

To the Readers:

I have changed the comment engine to the Disqus comment engine in order to try to resolve some of the technical problems some readers have encountered with the Blogger comment engine (principally encountered when comments approached 200 in number).  For more information on this change, please read the page at the right named Notes on the New Comments Feature (5/16/12), here.

Thanks for your patience and continued interest in this blog.

Jack Townsend

How to Post Anonymously:  See the steps in the Notes on the New Comments Feature (5/16/12), here.