Questions Re Voluntary Disclosure and Prudential Prosecution Practice

A reader who posted a comment here suggested that I do a separate blog good faith attempts to do a voluntary disclosure. Historically the voluntary disclosure practice here invited taxpayers in but had certain disqualifiers based on timeliness where the IRS was already aware or involved with the specific taxpayer's misconduct. 

The reader makes the following points with respect to the Chernick plea:

Specifically, Chernick's Defendant Sentencing Memorandum clearly states on pg. 3 of 17 the he began the Voluntary Disclosure process on February 5th, prior to the DOJ having his name. Now his paperwork was not submitted to the IRS on February 24th, which is actually pretty fast, but the point is that he made a good faith attempt at a Voluntary Disclosure. Actually this highlights a subtle point - that there are two might be two types of untimely voluntary disclosures - those begun before the government had a subject's name and those begun after they had a subject's name. While both might be good faith, clearly someone who began the process before the government had his name has a much stronger good faith defense. Yet not only is there no recognition of that in the charges that Chernick faced, but he faced the same charges as Rubinstein who presumably did not do this.

After this startling discovery, I am wondering how many of the other early pleas involved people who made good faith, but untimely voluntary disclosures. It terms out Moran submitted a Voluntary Disclosure on March 17th, and presumably began much earlier. Cittadi also submitted a Voluntary Disclosure in early March 2009 (Defendant's Sentencing Memorandum, pg. 6 line 8).

Jack, I think this is worth of an entirely new post because it means that despite the IRS Commissioner's public statements that people who came in to "get right" would not be prosecuted, the DOJ is prosecuting them using their own Voluntary Disclosures. While the letter of the law is on the side of the DOJ and they have the right to prosecute even timely Voluntary Disclosures, their actions clearly violate the spirit of the IRS Commissioner's words, and maybe even the letter of his words.

On the facts posited by the reader, it is not clear that this taxpayer should have been kicked out of the IRS voluntary disclosure practice.

But, practitioners should keep in mind that DOJ Tax has a separate voluntary disclosure policy. That voluntary disclosure policy is in the CTM here and is in full:

4.01[1] Policy Respecting Voluntary Disclosure

Whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person’s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution. See generally USAM, § 9-27.220, et. seq.

If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure practice, n1 the Tax Division may consider that factor in its exercise of prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary disclosure, what prompted the person to make the disclosure, and whether the person fully and truthfully cooperated with the government by paying past tax liabilities, complying with subsequent tax obligations, and assisting in the prosecution of other persons involved in the crime.
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n1. See United States v. Knottnerus, 139 F.3d 558, 559-560 (7th Cir. 1998) (holding that prior visit by special agent disqualified defendant from voluntary disclosure program); United States v. Tenzer, 127 F.3d 222, 226-28 (2d Cir. 1997), vacated in part and remanded on other grounds, 213 F.3d 34, 40-41 (2d Cir. 2000) (taxpayer must pay or make bona fide arrangement to pay taxes and penalties owed to qualify for consideration); and United States v. Hebel, 668 F.2d 995 (8th Cir.), cert. denied, 456 U.S. 946 (1982).
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A person who makes a “voluntary disclosure” does not have a legal right to avoid criminal prosecution. Whether there is or is not a voluntary disclosure is only one factor in the evaluation of a case. Even if there has been a voluntary disclosure, the Tax Division still may authorize prosecution. See United States v. Hebel, 668 F.2d 995 (8th Cir.), cert. denied, 456 U.S. 946 (1982).

This raises several questions.

First, the obvious one is whether Chernick should have been prosecuted on the facts presented. (We always have to recognize the possibility that we may not have all the relevant facts, so I presume for discussion purposes that the relevant and material facts are as stated by this reader.) The issue is whether the Government is defeating much of the good that can come from have a voluntary disclosure policy or practice by prosecuting in circumstances where it appears the target qualified? The voluntary disclosure practice is generally considered win-win for the Government and the taxpayer. That Government's win from voluntary disclosure could quickly dissipate if taxpayers are not reasonably assured that, by opening the kimono in good faith, they will not be prosecuted. Certainly, in this UBS / offshore account fiasco, the Government has enough criminal targets who clearly did not qualify that the Government can easily meet criminal enforcement priorities and should not be prosecuting those who made a good faith attempt to qualify.

Second, I am not sure it should make a difference, but I do note DOJ Tax's policy is not the same as the IRS practice. The DOJ policy starts with the IRS practice but then says that qualifying for the IRS practice is just a factor it considers in making the prosecutorial judgment call on whether to seek indictment. Now, generally when the taxpayer qualifies for the IRS practice, he or she is reasonably assured that he or she will not be prosecuted simply because DOJ Tax will never hear of that taxpayer. Normally, DOJ Tax only hears of a taxpayer if the IRS forwards the matter to DOJ Tax for criminal prosecution or possibly grand jury investigation, but where the taxpayer qualifies for the IRS's practice, the IRS will not forward the matter to DOJ Tax and that is the end of the matter regardless of the DOJ Tax policy.

In this case, because of the heavy hammer DOJ Tax laid on UBS through the combined John Doe summons and grand jury, DOJ Tax apparently became aware of Chernick independently of the IRS and thus could apply its policy. So, assuming that Chernick did qualify under the IRS practice, DOJ Tax would not be bound and could consider other factors in the prosecution equation. Of course that still raises the issue of whether it is prudential to prosecute where the public perceives that the taxpayer qualified for the IRS practice without any further explanation for why the taxpayer was prosecuted anyway.

I want to come back to the IRS practice timeliness requirement again in a later blog to test out whether there are internal inconsistencies that the IRS seems to be mishandling in applying the policy in this offshore account initiative.  But for present purposes, I would appreciate hearing from readers on the question of whether, although the DOJ policy clearly allows prosecution even if the taxpayer qualifies for the IRS practice, it is or is not counter productive to do so because of the negative message to practitioners and taxpayers.

Finally, being somewhat stubborn, I am still not certain that, if the IRS were to refuse to recommend prosecution because of a taxpayer compliance with its practice (or any other legitimate reason), DOJ Tax could still prosecute.  DOJ Tax attorneys have assured me in several conversations that DOJ Tax does not need IRS's concurrence in prosecution to prosecute a tax case, and that DOJ Tax can thumb its nose at the IRS even when the IRS sincerely believes prosecution is counterproductive.  That seems odd if the criminal tax enforcement program exists to undermine the tax system which is administered by the IRS.  If the IRS determines that criminal prosecution of a taxpayer is counterproductive to the tax system, it seems to me to be counerproductive for DOJ Tax to be prosecuting.  And, I am not sure that is just a prudential factor.  Maybe I will return to this issue in another blog.