Monday, September 28, 2009

DOJ Tax's Further Attempts to Drum Up Business / Revenue (12/26/09)

Notice: This Blog will be supplemented from time to time as I receive reports of the occurrences at the ABA Tax Section that I feel worthy of passing on.

DOJ Tax is on a public relations blitz to drum up business / revenue by incentivizing taxpayers with unreported offshore bank accounts to join the IRS voluntary disclosure initiative ending 10/15. A key facet of the blitz is the high profile indictments recently obtained. At last week's ABA Tax Section meeting, DOJ Tax rolled out its mouthpiece, Kevin Downing himself at the forefront of the prosecution side of this juggernaut, to remind practitioners and, through them and the press attendin, the public that they should pony up in the voluntary disclosure program. Here are a few highlights from the ABA Tax Section meeting (which I will supplement as more come to my attention):

1. Announcements of new prosecutions -- probably coupled with guilty pleas -- will be "a few every couple of weeks," according to Downing. Obviously, DOJ Tax wants to keep the matter in the public eye to encourage the mass of offshore account holders to open their pocketbooks and come into the fold of the voluntary disclosure initiative which expires October 15.

2. DOJ Tax and the IRS will target U.S. enablers such as banks and financial advisors. Reuters reports that, "on the sidelines," Downing advised Reuters specifically "that U.S. banks that helped U.S. clients hide money off-shore are a target."

3. The U.S. is making headway with a lot of foreign banks other than UBS. He is reported to have said: "Let your clients know if they think it's just UBS they are mistaken."

Items beginning at par. 4 were added on 9/29/09

4. Another good snippet reputedly from Downing consistent with his man on a righteous mission persona is: "I want to go after the privileged people who've had the benefits of this country and are cheating their taxes, get them in front of local juries and convict them." Lee A. Sheppard, The UBS Endgame, 2009 TNT 186-1 (9/29/2009). Even the crusty Lee Sheppard is enthralled by Himself, following up with: "It is reasonable to assume that the blasé Swiss and the complacent rich American tax cheats never counted on meeting up with a guy like Kevin Downing, senior trial counsel in the Justice Department's Tax Division, who has been leading the prosecutions against Swiss bank UBS AG. Downing, a former Marine."

5. Jeff Neiman, an AUSA for SD Florida who is prominently involved in these prosecutions, said that he wanted to "avoid technical tax issues." Sheppard paraphrased: "Whether the defendant is lying, cheating, and stealing is what the argument to the jury boils down to for Neiman." See my earlier blogs on The Lie. This statement echoes the theme of the Enron prosecutions: "This is a simple case. It is not about accounting. It is about lies and choices." John C. Hueston, Behind the Scenes of the Enron Trial: Creating Decisive Moments, 44 Am. Crim. L. Rev. 197, 207 (2007). See also Stuart P. Green, Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime 246-48 (2006).

6. DOJ "has 150 UBS customer cases headed to grand juries." Sheppard, supra. JAT Comment: I guess non-UBS customers should get some comfort from this -- at least UBS customers are keeping them busy. And perhaps all of the other regular tax cheats should be happy that the Government is devoting a major portion of its criminal tax enforcement efforts elsewhere.

7. Banks other than UBS will be targeted. This includes both Swiss banks and non-Swiss banks such as Hong Kong, Panama and Singapore (mentioned specifically). Sheppard, supra. See my point above; is this just a token threat designed to incentivize those non-UBS tax cheats to get into the program? How many cases like this can the Government really prosecute?

8. Downing countered the rumor that some non-UBS Swiss banks are actively seeking the tax cheat business by touting their lack of U.S. presence which brought UBS down. "Downing reported the opposite -- that some Swiss banks are coming forward proactively, offering to push American account holders to disclose in order to protect their qualified intermediary status." Sheppard, supra.

9. Further, Downing reported: "The Swiss government is now willing to be much more cooperative. They really appear to be committed, at least at this point in time." Sheppard, supra. As I have reported previously, the key is whether the Swiss Government will use the UBS template for disclosures under the treaty by the other Swiss banks.

10. Downing announced that DOJ honors voluntary disclosures, although it does not have to do so. Sheppard, supra. Now, isn't that nice. But, I wonder whether DOJ can really prosecute a tax crime if the IRS does not approve? Maybe the man on the mission will test that notion some time.

11. On the subject of quiet disclosures, Sheppard reports:

Practitioners and government speakers agreed that choosing quiet disclosure is risky. The IRS is mining returns to look for quiet disclosures to pursue for civil violations. And quiet disclosure does not protect the filer from criminal prosecution -- that is the promise of the IRS amnesty program. "You might as well go noisy," said [Mark] Matthews.
One of the key points to note is that the quiet disclosures are being mined "for civil violations." Does that mean the quiet disclosure is still effective for avoiding criminal prosecution, with the only risk of the quiet disclosure in the current context being no certainty as to the quantum of civil penalties? See my prior blog here. And, of course, the IRS's panoply of civil violations alternatives may be limited. At least as to the returns, aren't these qualified amended returns subject to penalty only if the IRS establishes fraud (a very difficult burden that would require even greater use of limited IRS resources)? And to get the more onerous FBAR penalties, the IRS would have to prove the equivalent of civil fraud -- willfulness (same standard) -- although resource intensive.

12. Downing also warned that U.S. UBS clients who invoke Swiss legal procedures to try to stave off disclosure of their names to the U.S. should not be tempted to forego notifying the U.S. of that action (which, of course, would defeat the major purpose of taking the Swiss action). He is reported to have announced: "We'll prosecute that as an overt act of conspiracy or an affirmative act of evasion." Id. Ah, the ubiquitous conspiracy charge. Permit me one final quote: In United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990), Judge Easterbrook lamented that the conspiracy add-ons are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.”


  1. With the Oct. 15th deadline approaching, what do you think are the legal implications for someone who makes a full, complete, and voluntary disclosure on Oct. 16th? The IRS administrative guidelines state it will be rejected and the IRS will have the list of names, so they can be prosecuted. There does not seem to be any clear guidelines about how people who make untimely voluntary disclosures will be treated. And all the caselaw seems to involve people who had specific knowledge they were being investigated, so their disclosures were not in good faith. I'm interested in your thoughts on good faith, but untimely disclosures after the deadline and names are out.

  2. JAT Reponse to Anonymous.

    This is an excellent question. I am not sure that a quiet disclosure after April 15 is really any different from a quiet disclosure before April 15. Neither is the voluntary disclosure contemplated by the current voluntary disclosure practice.

    I think a hint can be drawn from the quote and discussion in paragraph 11. I emphasize that that is a hint; the only certainty a risk averse taxpayer can get is to get into the program.

    But, for practitioners advising taxpayers about a quiet disclosure outside the program (whether before or after April 15), the practitioner should conclude that the taxpayer is risk tolerant and will have to help the client reach a conclusion that the the risk of criminal prosecution in his or her unique facts is low enough to be acceptable to that particular client. In considering that risk, and for whatever it is worth, I personally think that, except in an egregious case, the IRS will lose far more than it gains from criminally prosecuting a quiet disclosure. To state that another way, if the IRS does prosecute otherwise qualifying quiet disclosures (whether related to offshore accounts or not), the increased revenue -- quite substantial -- from quiet disclosures will be seriously and negatively impacted and, of course, the chance of convicting after the taxpayer has paid his taxes and is willing to pay any poenalties may be seriously impaired. (A review of the few cases where the taxpayer claims wrongful prosecution after a voluntary disclosure will show that the cases showed continuing attempts to obstruct the IRS, and thus no inference of prosecution can be drawn when the taxpayer fully complies in all respects and cooperates (as he is required to do).)

    Assuming the risk-tolerant taxpayer after adequate counseling could perceive an acceptable level of risk with respect to prosecution, the practitioner should then focus the taxpayer on the civil penalty risk. I will address now the simplest of fact patterns: a U.S. taxpayer who had a directly owned Swiss account (no entities or material enablers) and neither filed the FBAR nor reported the income or answered the question yes on Schedule B. The applicable penalties will be the income tax civil fraud penalty and the FBAR delinquency penalty. I have addressed elsewhere the difficulties the IRS might have in proving civil fraud, and the need for an investigation and devotion of substantial resources in order to do so. Perhaps, if in an audit the agent made noises about trying to develop a civil fraud case, the taxpayer could "agree" to the 20% accuracy related penalty that the IRS could not otherwise collect because, absent fraud, the return is a qualified amended return. (Note that the 20% amount is the same as would be paid under the current program.) Then the only other penalty is the FBAR penalty, which absent the equivalent of fraud (willfulness), maxes at $10,000 per year which, even for all years (count carefully) might be substantially less than the 20% "in lieu of" penalty the IRS is demanding in the program. Note that the statute of limitations for the FBAR penalty is 6 years from the date the FBAR was due.

    Let me caution at the end that this strategy is not for risk averse taxpayers because nobody can guarantee the results hope for. Any taxpayer slugging through the legal jargon in this post and comments must have them interpreted for him by a qualified practitioner. Taxpayers should not rely upon anything they think they perceive in this blog or comments, becuase it is not legal advice given to them. These comments are solely to assist my students and tax practitioners.

  3. Jack,

    I would agree that Careers Are Being Made here, in reference to item 4 above. :-)

    I too am curious about what happens after October 15. I will not reveal statistics but at this point we have a large sample of clients with whom we have consulted about FBAR problems, and a rather smaller group of people who have decided to do something about it.

    In an August session of the Tax Section of the Beverly Hills Bar Association we had the prosecutor who took down the Gentleman from Malibu (John McCarthy) as well as a couple of Special Agents from the Santa Ana Criminal Investigations office. The unanimous messages was "There's a rain of bricks a-comin' atcha!" if you don't beat the deadline.

    I don't know whether the government has the resources to do that. I do know that the current voluntary disclosure program has pushed a number of people deeper underground.

  4. Jack,

    I would like to offer you, your readers and, especially, your students, the article entitled "Advising a Client With Secret Offshore Accounts -- Current Filing and Reporting Problems" authored by Scott D. Michel, President of Caplin & Drysdale, and published in the September 1999 Issue of the Journal of Taxation (Here is the link to the Caplin & Drysdale website containing a reprinted copy of that article:

    In my humble opinion, Mr. Michel carefully balances a taxpayer's duties to file a 1040 and FBAR with his or her fundamental right and privilege not to be compelled to be a witness against him/herself. Indeed, Mr. Michel presents a rather compelling case for the assertion of that right/privilege as an alternative to disclosure. Accordingly, I believe that a close reading of Mr. Michel's article and the applicable law is required in order for a tax/white collar defense attorney to present viable legal solutions to his or her clients.

  5. Anonymous,

    Mr. Michel's article is very good and does present the issues, if not the answers (at least not crisp answers). While the possibility of asserting the Fifth Amendment as a defense for failing to file the FBAR is possible and perhaps not laughable, the other factor to consider is whether it is persuasive. I realize that the line of persuasiveness cannot be predicted in advance, but I think in this case that the argument ultimately would not be persuasive when it matters most -- when a court must hear it. This is not like the Gosso-Marchetti cases dealing with inherently suspect activity. U.S. ownership of foreign bank accounts is not inherently suspect and serve many legitimate purposes.

    On the other hand, of course, I do think that, if a client being advised by an attorney, truly believed he had a reasonable basis (that worda again) for Fifth Amendment privilege to fail to file the FBAR, he could not be prosecuted for failing to file. I don't think it could be said that, in those circumstances, he willfully failed to file. I know there is the Cheeck distinction between good faith interpretations that the law does not apply and assertions of constitutional reasons that the law does not apply. Still, the Fifth Amendment is so fundamental that putting the client at jeopardy when he asserts it in good faith in a case where the application of the Fifth Amendment may be the subject of some uncertainty (as Mr. Michel's article posits) should avoid a criminal prosecution for failure to file. At least that is my reasoning, although I am not sure courts would accept it.

    But this latter defense could be joined with a reliance on counsel defense. If indeed the lawyer were to discuss the defense and hold out some reasonable possibility of its success, the combination of the defenses may work. In this regard, the Supreme Court's concern in drawing the line in Cheek was with those cases that any lawyer would have given negative advice, not where the constitutional claim was sufficiently uncertain to the facts at hand that the attorney could in good faith hold out some constitutional hope for the client. And, if that were the case, I am not sure a judge would let it gett to the jury or, if it did, the jury would convict.

  6. Jack,

    Thank you for sharing your views about Mr. Michel's article.

    I have a few things I would like to add and commend to your's and your readers' (especially, your students') careful consideration.

    1. The persuasiveness of a Fifth Amendment objection to responding to any inquiry, request for documents or, in the context of completing, authenticating and singing 1040s and FBARs is governed by the time-honored standard of "reasonable fear of self-incrimination" first enunciated by the US Supreme Court in Hoffman v. US, 341 U.S. 479, at 486-87 (1951). In that regard, I believe that a judge (including a federal district judge or federal magistrate judge) must sustain and uphold a witness's (Per the US Supreme Court's 1976 decision in Garner v. US, the completion of a tax return is the testimony of a witness) Fifth Amendment objection unless and until, having searchingly evaluated all the facts, circumstances and the setting of the inquiry, the judge has come to an abiding conviction to a moral certainty that the inquiry or request (proceeding on a item-by-item, line-by-line basis) has absolutely no potential to incriminate the witness. As a leading author on Fifth Amendment jurisprudence makes abundantly clear, this is, for all intents and purposes, impossible for a judge to do, especially, in the early stages of an investigation. See Prof. Robert Heidt, The Conjurer's Circle - The Fifth Amendment Privilege In Civil Cases, 91 Yale L.J. 1062 (1982) (Note: most law professors and many federal judges consider Professor Heidt's article to be the "Gold Standard" of Fifth Amendment jurisprudence).

    2. A trial judge has a clear legal duty to conduct a careful evaluation of a witness's Fifth Amendment claim, and for the most part, this should (perhaps even must be done in camera). See Estate of Fisher v. Commissioner of Internal Revenue Service, 905 F. 2d 645 (2nd. Cir. 1990); US v. Argomaniz, 925 F. 2d 1349 (11th. Cir. 1991). Indeed, it appears that the district judges and magistrates in the 11th. Circuit, especially, in the Southern District of Florida and in the Northern District of Georgia call these in camera inquiries "Argomaniz Hearings." Compare US v. Melchor-Moreno, 536 F. 2d 1042 (5th. Cir. 1976) (expressing reservations as to the question of whether in camera proceedings are any kind of substitutes for use/derivative use immunity); 373 F. 2d 622 (3rd. Cir. 1967) (expressing serious reservations as to whether in camera hearings promote maximum disclosure in derogation of a witness's Fifth Amendment right/privilege); In re: Grand Jury Subpoena, 836 F. 2d 1468 (4th. Cir. 1988) (holding that grand jury subpoena trumps confidentiality/sealing order); In re: Grand Jury Proceedings (Williams), 995 F. 2d 1013 (11th. Cir. 1993) (following the 4th. circuit, rejecting the 2nd. circuit's decision in Martinell, and holding that a grand jury subpoena trumps a district court's confidentiality order); In re: Grand Jury Subpoena Served on Meserve, 62 F. 3d 1222 (9th. Cir. 1995). See also Maness v. Meyers, 419 U.S. 449 (1975) (in a case originating in Texas and raising the clear and distinct possibility that a witness waives his or her 5th amendment right if he or she testifies, even with a compulsion order, without an actual grant of use/derivative use immunity in accordance with applicable federal or state law).

    3. The relevant case law clearly holds that a witness cannot be lawfully convicted based on the good faith but mistaken exercise of his or her Fifth Amendment right. See US v. Goetz, 746 F. 2d 705 (11th. Cir. 1984). I would also strongly suggest that Cheek could (or, at least, rationally speaking, should) stand for this very proposition.

    The Bottom Line: I firmly believe that the invocation of the Fifth Amendment right/privilege is a very viable option that should, out of an abundance of caution, be carefully considered by an experienced tax/white collar criminal defense lawyer.

  7. Anonymous,

    Another excellent set of comments, complete and replete with analysis, citations and, of course, the conclusion.


    Jack Townsend

  8. Jack,

    There are two other articles authored by Mr. Michel I would like to bring to your's, your readers' and, especially, your students' attention:

    1. Strategies for Filing a Tax Return While Under a Criminal Tax Investigation, published in the September 1996 Issue of the Journal of Asset Protection (Here is the link to that article on the Caplin & Drysdale website:

    2. Criminal Tax Investigations and Current Year Returns: New Thoughts on a Perennial Issue, published in the December 2004 Issue of the White Collar Crime Reporter (Here is the link to that article on the Caplin & Drysdale website:


    I would certainly commend both of Mr. Michel's articles to your reading, especially, pp. 2-6 of the latter (2004) article.

    As for pp. 2-6 of Mr. Michel's 2004 article, I would especially like to call to your's and all your readers' attention to Mr. Michel's opinions expressed under the following headings and sub-headings:

    New Questions. Id. at 2-4.

    Implications. Id. at 4.

    Recognize that advice concerning the current return may not be privileged. Id. at 4-5.

    While the correct strategy is based on the facts and circumstances, assertion of the Fifth Amendment may create fewer problems that a "fraud proofing" disclosure. Id. at 5.

    One final caveat. Id. at 5-6.


    Overall, I believe that Mr. Michel has done an excellent job. However, I need to point out that resort to "anonymous returns" and "anonymous payments" should be considered by experienced tax/white collar criminal defense counsel. See Baird v. Koerner, 279 F. 2d 623 (9th. Cir. 1960), wherein the late Mr. Alva C. Baird, the IRS's long-time Chief Counsel for the Western US Region, literally paved the way for future generations of tax/white collar defense attorneys to carefully use the "anonymous payment" method.

    Indeed, Mr. Baird's letter to the IRS's Baltimore office is replicated in the Opinion, cited above.

    Moreover, I believe that, if we look hard enough, we will find that, while there is very little published on the subjects of "anonymous returns" and "anonymous payments", a few things come to mind:

    1. First, sometimes the best answers are certainly not in the back of the book. In my humble opinion, the "anonymous return" and "anonymous payment" methods are two examples.

    2. Secondly, some of the country's finest tax/white collar defense attorneys (including some former trial attorneys with the US DOJ's Tax Division) are willing to talk about these methods "off the record".

    3. Finally, there are some rarely-cited law review articles that could, conceivably, give astute tax and white collar criminal defense practitioners excellent clues about these and other effective methods of complying with the requirements of federal and tax tax laws without exposing one's self to the hazards of criminal prosecution, which in light of the current federal sentencing guidelines, could well lead to the loss of one's freedom. One such article is the one I cited in a previous posting--Professor Robert Heidt's "The Conjurer's Circle: The Fifth Amendment Privilege in Civil Cases," 91 Yale L. J. 1062 (1982). See Professor Heidt's Profile (Link:

  9. Anonymous,

    Thanks for the reference to Baird. I am not sure of the continuing validity of Baird but I like the result. E.g., In re Shargel, 742 F.2 61, 62 n. 2 (2d Cir. 1984), although the cases hold out the possibility of there being an identity privilege in some narrow cases.

    Thanks for the citataion to Professor Heidt's article.

    Jack Townsend

  10. Jack,

    You are very welcome.


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