Wednesday, April 21, 2010

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.
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).
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.


  1. The Bloomberg report on Barouh, who just received a sentence of 10 months in prison, notes that he voluntarily disclosed his account as well.

  2. With all due respect does anyone think the Government abides by the spirit of anything if it does not want to? There is no fair dealing (what ever that means) just insiders benefiting if such insiders have the right connections to the Government or the appropriate lawyers with Government connections. If the Government deems you to be a bad guy (which usually is the case for those without Government connections), it is ball game over, the Government will claim you lied about something in your disclosure (many times based on the word of a self serving lying Government rat). Of course most times the Government will just lie about the lie it claims was made by the one providing the disclosure. Birkenfeld the UBS rat (who himself is a lying government rat), is the best example, the Government claims (as it usually does) he lied and therefore his deal was pulled out from under him. And you think I am wrong about Government connections, then please explain why in 1999 Ted Turner was given an $80 million deduction for a Treasury Note Repo Transaction the DOJ claimed in its civil filings was a sham with no economic substance (see Fulcrum Financial Partners) and others are spending life in prison for transactions with much more economic substance (or at least some instead of none) or check out the Enron Report, all the tax shelters Enron engaged had no economic substance but were crafted by former IRS/Treasury officials (and all the Senate investigators said was the law had to be changed).

  3. Mr. Barouh's name was known to the Justice Department before the VD procedure was initiated. He was one of the 255 human sacrifices that UBS used to get off the hook. The Statement of Facts filed with the plea agreement states that a Swiss attorney talked him out of doing a VD earlier. The Sentencing Memorandum set forth a number of arguments, including the argument that Booker allowed the Court to depart downward for a frustrated VD.

    One of the problems with many of the Internet blog comments on the UBS prosecutions, including the sentencings, is that posters have not read the key documents in the respective Court files. As a result, many comments are not accurate.

  4. The IRS Commissioner made clear public statements in Fall 2008 and Spring 2009 that if people came in to "get right" they would not be prosecuted. To get right, under the OLD rules, they had to file 6 years of corrected tax returns which might take 5 or 6 months to do. So, there are two possibilities: 1) Either the IRS Commissioner made his offer in bad faith knowing that people like the 255 could never complete all of the steps necessary to take advantage of his offer by the time they were to get the names in February, or 2) he made the offer in good faith, but the DOJ is ignoring that and just prosecuting anyway.

    The fact that people started a 6-7 month journey to make a good faith voluntary disclosure is PRECISELY the point. In fact, that's highlighted by the fact that the IRS simplified the voluntary disclosure process later on, or most of the 14,000 who came in would never have made the September/October deadline either!

  5. The legal keystone for prosecuting voluntary disclosures is United States v. Hebel as Jack points out. It is worth re-reading the basis of the opinion which rests on the idea that the non-prosecution policy had been abandoned. The judges note that "Taxpayers and their attorneys cannot rely on a long-since abandoned policy of non-prosecution when a taxpayer voluntarily discloses violation of the tax laws." The key question is whether the IRS Commissioner's well publicized public statements fly in the face of this and actually demonstrate that the policy was for all intents and purposes renewed by the IRS Commissioner's public statements. It's pretty easy to get the newspaper quotes from late 2008 and early 2009. In this context, Hebel, which had been a bedrock case for the government, could get turned on its head.


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