Monday, August 17, 2009

Get in Line Brother #18a - the McCarthy Plea

We have another plea in the UBS mess. One John McCarthy has pled. In this blog and some subsequent blogs, I discuss a few points from the plea that I think are interesting.

1. Most importantly for those with foreign accounts who are considering joining the voluntary disclosure program, in announcing the plea, the IRS CI Chief cautioned that the McCarthy prosecution is "the tip of the iceberg." The IRS already has a number of names from UBS and is about to get many thousands more UBS names. Moreover, as I have previously noted, the Swiss justifications under the Swiss-U.S. double tax treaty would seem to permit similar disclosures by other Swiss banks. And, of course, the problem is not just a Swiss problem. All undeclared foreign bank accounts create great risk. I think it would be imprudent to assume that this is a Switzerland only or UBS only initiative.

2. The plea is in the Central District of California rather than in Florida which has been the center of DOJ's juggernaut against UBS, at least in terms of public activity. I speculate that this is an attempt by the Government to disperse these cases for even greater publicity and perhaps logistical reasons of just processing the number of defendants that will ultimately be involved. The current round of cases all appear to arise from the disclosures UBS made earlier in February. So, with these disclosures, the IRS and DOJ Tax can deliver up to a local U.S. Attorney office a package sufficient to coax an easy and relatively quick plea from the target, soon to be defendant. Indeed, I would not be surprised if DOJ Tax is not wanting to get as many pleas as quickly as possible to bolster the voluntary disclosure initiative and therefore may be making plea deals now that will not be available later.

3. Unlike the earlier pleas which were to tax perjury (§ 7207(1)), this plea is to one count "charging a violation of 31 U. S. C. §§ 5314 and 5322(a) , and 31 C. F. R. § 103. 24 for the year 2004." (Plea ¶ 2.) The elements of the FBAR failure to file crime are (Plea ¶ 2):
(1) defendant must have had a financial interest in, or signature or other authority over, a financial account in a foreign country with an aggregate value of more than $10, 000 at any time during 2004; (2) defendant must have failed to file, with the Department of Treasury, a Report of Foreign Bank and Financial Accounts (Form TD F 90-22. 1 "FBAR") , for the calendar year 2004, on or before June 30, 2005; and, (3) in failing to file the FBAR for 2004, defendant must have acted willfully.
4. In this context involving legal source income, the FBAR serves as a complement to the income tax system by encouraging taxpayers to report income from the foreign accounts. Not surprisingly, McCarthy's conduct implicates several tax crimes (evasion § 7201, tax perjury § 7206(1), probably tax obstruction § 7212(a), and others), as well as FBAR failure to file crimes for other years. McCarthy thus agreed to pay the civil tax fraud penalty on his income understatements (civil tax fraud is the same as tax evasion with a lower clear and convincing burden of proof) and admitted he had willfully failed to file the FBAR for his UBS Swiss bank accounts during the years from 2003 through 2008 (meaning, I think, for the tax years 2002 through 2007). These uncharged crimes will undoubtedly be considered at sentencing, but I will address sentencing in a later blog. I should note, however, at this point that uncharged or dropped counts as a result of a plea bargain often does not affect sentencing at all.

5. The maximum period of incarceration for the count of conviction (FBAR failure to file) is 5 years. The fine can be up to the greater of $250,000 or twice the gross gain or loss resulting from the offense. Id. In the prior pleas that I have discussed in this blog, the plea was to one count of tax perjury (§ 7206(1)) which carried a maximum period of incarceration of 3 years. Facially, therefore, the McCarthy plea carries the risk of a longer sentence (5 years rather than 3). The sentence will actually be governed by the sentencing court using the § 3553(a) factors and considering the Guidelines calculations. I will talk about these sentencing considerations in a subsequent blog, but for now I just want to emphasize that this plea ups the incarceration ante. Whether the potential for a 5 year sentence term as opposed to a 3 year term is material, of course, depends upon the sentencing factors. I shall cover them in the next blog.

To Be Continued . . . .

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