Saturday, October 16, 2010

Can Signatories Filing FBARs During the Administratively Extended FBAR Filing Period Be Prosecuted for Failure to File? (10/16/10)

Readers will recall that the IRS administratively granted U.S. persons with signatory only authority (i.e., no financial interest) relief provided they filed the FBARs first by June 30, 2010 and then by June 30, 2011. See Administrative Notice 2010-23, March 13, 2010; and Notice 2009-62, (August 31, 2009). The relief was specifically made retroactive. I think most practitioners viewed this as assurance that no untoward result would be forthcoming if the U.S. persons qualifying as signatories only filed by the extended date (now June 30, 2011).

In United States v. Simon, 2010 U.S. Dist. LEXIS 108079 (ND IN 2010), the defendant was indicted for various tax crimes, including failure to file FBAR reports for several years. As to the FBAR counts, the defendant urged that he was a signatory with no financial interest and thus, having filed delinquent FBARs within the extended filing period but before indictment, qualified for the relief, so that the indictments for the FBAR violations must be dismissed. The Government argued that he had a financial interest and thus did not qualify for the relief. In any event, the Government argued, even if he qualified for the signatory relief, the contemporaneous failure each year to file by the statute's due date (June 30 of the year following) was a crime, that crime could not be forgiven by administrative pronouncement, and thus the indictment must stand.

The court agreed. The following is its reasoning:

As the government sees it, Mr. Simon doesn't qualify for relief under the IRS notices because he had a financial interest, not just signature authority, in the foreign accounts. Even if he did qualify, the government argues, administrative relief can't change any criminal liability incurred before amendment of the regulation. The government further contends that the notices haven't become final regulations under the Administrative Procedures Act, and that Congress didn't expressly grant retroactive rule-making authority to the Treasury Department under Title 31. Mr. Simon's January 2010 filing of FBARs for 2005-2007, the government says, doesn't absolve him of criminal liability because under the regulations existing at the time the FBARs had to be filed by June 30 of the following year (June 30 of 2006, 2007, and 2008). The government also notes that Mr. Simon never filed an FBAR for 2003 or 2004.

In reply, Mr. Simon argues that he doesn't have a financial interest in Ichua, JS Elekta or Elekta, that 31 C.F.R. § 103.55 gives the Treasury Secretary authority to make exceptions to the reporting requirements, that the exceptions made by the administrative notices were expressly retroactive, and that he wasn't required to file a FBAR for 2004 because the account balance was less than $10,000. No documentation supports his factual assertions.

Whether Mr. Simon had a financial interest in a foreign account is a matter for resolution at trial, not on pretrial motions. The court agrees with the government, though, that if Mr. Simon committed a crime by failing to file an FBAR when the regulations required him to do so, a later regulatory amendment can't absolve him of criminal liability without retroactive modification of the underlying statute. See United States v. Hark, 320 U.S. 531, 64 S. Ct. 359, 88 L. Ed. 290 (1944); United States v. Uni Oil, Inc., 710 F.2d 1078, 1086 (5th Cir. 1983); City & County of Denver v. Bergland, 695 F.2d 465, 480 (10th Cir. 1982); United States v. Resnick, 455 F.2d 1127, 1134 (5th Cir. 1972); United States v. Masciandaro, 648 F. Supp. 2d 779, 784 (E.D. Va. 2009). The statute hasn't been changed.

Mr. Simon argues that the government is mistaken because none of these cases (or the several others the government cites) involved expressly retroactive regulations. Mr. Simon's description of the cited cases is accurate, but the court disagrees with Mr. Simon as to where that distinction leads. To agree with Mr. Simon that a regulation's self-declaration of retroactivity requires a different outcome would be to hold that an agency acquires the power to forgive crimes already committed by simply declaring its intent to exercise that power. The cited cases teach that even if an agency's regulations becomes intertwined in a crime's definition, it is Congress and not the agency that creates the crime, and only Congress can forgive the crime. See also United States v. U.S. Coin and Currency, 401 U.S. 715, 737-38, 91 S. Ct. 1041, 28 L. Ed. 2d 434 (1971); Allen v. Grand Central Aircraft Co., 347 U.S. 535, 553-555, 74 S. Ct. 745, 98 L. Ed. 933 (1954); United States v. Curtiss-Wright Export Corp., 299 U.S. 304, 332, 57 S. Ct. 216, 81 L. Ed. 255 (1936).
The court denies Mr. Simon's motion to dismiss counts 5 through 8 of the indictment.
I am concerned about this analysis. I think most practitioners working in the voluntary disclosure area have felt comforted by the Notices that the filings by the extended date of June 30, 2011 would solve any criminal problem for signatories. The Court says no; the Government can choose to prosecute despite the Notices.

Of course, there are potential defenses that one might invoke to perhaps prevent the Government from relying upon the FBARs thus elicited from U.S. persons with apparent assurance that all is and will be well.

Of course, the whole issue is really moot in the case if the defendant really had a financial interest rather than just a signatory interest (which appears likely reading between the lines). But, quite frankly, I am still concerned about the Court's holding that a signatory who files by the extended filing date can still be prosecuted.

Any thoughts from readers?


  1. Does this mean that one who completed the Special 2009 Voluntary Disclosure and entered into a 906 Closing Agreement with the IRS can still be prosecuted? If so, it stinks of trickery and bad faith. Some tax practioners already feel that the intiative in 2009 with its FAQ's was deceptive in some regards.

  2. The question is whether DOJ Tax can prosecute a tax crime after the IRS has accepted a U.S. taxpayer into the voluntary disclosure "practice" (either the general one or the specific initiative under the general VD "practice" for foreign accounts) and the taxpayer has met all conditions for compliance in that program. I would have thought the answer to that question would be no. Recently in a group to which I belong, a variation of the question was asked and the following comment made by someone who could speak authoriatively on the subject (I have revised the comment very slightly for clarity]:

    The simple fact is that the IRS policy is not "amnesty" as some of our clients initially tend to think, but simply an IRS agreement not to refer the matter to DOJ Tax for investigation or prosecution if the TP meets the program's terms. DOJ Tax's policy, on the other hand, says that depending upon the circumstances, it may authorize a prosecution -- even where there has been a voluntary disclosure [under the IRS program]. Anyone who has been doing this type of work for a while knows that it is highly unlikely that DOJ Tax would actually try a legitimate voluntary disclosure case [under the IRS program], but the door is specifically left open to prosecutors and, thus, there is a quantum of risk. So, if the client cooperates with the IRS and the IRS honors its agreement not to refer the matter to DOJ for prosecution, it is still theoretically possible that DOJ could receive incriminating evidence about the TP's conduct from a source other than the IRS and still bring a criminal tax case.


    This is very troubling indeed.

    The DOJ Policy referred to is in the DOJ Tax's Criminal Tax Manual par. 4.10[1] (2008) which says (footnote omitted):

    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,1 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.

    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).

  3. Source:
    Document # 2009-21470
    Lee A. Sheppard

    "An account holder who enters and is admitted to the IRS amnesty program will
    generally not have to be concerned about DOJ action. "We honor voluntary disclosures,"
    said Downing, noting that there is no legal requirement for the DOJ to do so. "There is
    no assurance about what we do," he said, arguing that account holders should file
    amended returns no matter what."

    My understanding is that Mr. Downing has been the lead DOJ/Tax prosecutor involved in the offshore investigations of the last few years.

    I have a feeling that many people do not realize this.

    Do you know of any successful(closed) voluntary disclosures to IRS that subsequently were prosecuted by DOJ?

  4. The question raised is whether DOJ Tax can prosecute a taxpayer who has completed an offshore account voluntary disclosure. Hebel (cited in DOJ Tax CTM (par. 4.01)) is dubious authority without some extrapolation that not commanded by the text of the opinion). Subsequent cases are perhaps more direct authority. United States v. Tenzer, 127 F.3d 222, 226 (2d Cir. 1997); and United States v. Hebel, 668 F.2d 995 (8th Cir.), cert. denied, 456 U.S. 946 (1982). But even they do not present a straight-forward voluntary disclosure where the conditions have been satisfied.

    The relevant portions of the current practice is (IRM & (2)) providing:

    (1) a voluntary disclosure “will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended,” with no “substantive or procedural rights for taxpayers;” and
    (2) While not guaranteeing “immunity from prosecution,” “a voluntary disclosure may result in prosecution not being recommended.”

    Parse this language carefully. It says only that a voluntary disclosure "may result in prosecution not being recommended." “May” makes any seeming promise illusory – paraphrased "I'll not recommend prosecution if I chose not to recommend prosecution."

    Now, let's go to the FAQs explaining the special iteration of the voluntary disclosure program for offshore accounts. Q&A 4 says in straightforward language of commitment (and not illusion): “When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.”

    In terms of the contract, "will" is an imperative – the stuff of commitment – and "may" is a choice – the stuff of illusory commitment. (I should note that it is not clear that the IRS is limiting that statement to the special program or the general program, but won't discuss that further here.) The FAQs do have some fuzz words in them ("generally eliminate the risk of criminal prosecution" ) But taking the IRS at its words (at least the words drafted for taxpayers to rely upon for this special program), the IRS commits itself not to recommend prosecution.

    But we still loop back to the issue of whether DOJ Tax can prosecute without an IRS recommendation. Prudential factors alluded to by Mr. Downing suggest that it not do so, but can it? If DOJ Tax determines that it wants to prosecute a tax crime independent of a referral with recommendation from the IRS, it will have to seek the IRS's recommendation before seeking the indictment. As noted, the IRS has committed itself not to recommend prosecution period, so the recommendation will come back negative. The question is whether DOJ Tax can proceed without an IRS recommendation for criminal prosecution. I will probably address that issue in a future blog.

  5. You would think that prosecutions of attempted voluntary disclosures and quiet disclosures would run counter to Attorney General Eric Holder's May 19, 2010 memorandum.

    To quote "...Charging decisions should be informed by reason and by the general purposes of criminal law enforcement: punishment, public safety, deterrence, and rehabilitation. These decisions should also reflect the priorities of the Department and of each district. Charges should ordinarily be brought if there is probable cause to believe that a person has committed a federal offense and there is sufficient admissible evidence to obtain and sustain a conviction, unless "no substantial Federal interest" would be served, the person is subject to "effective prosecution" elsewhere, or there is "an adequate non-criminal alternative to prosecution"."

    First, there is no federal interest in criminally punishing voluntary disclosures - timely, untimely, noisy, quiet, or even bungled. Yet, most of the UBS cases brought involved people who attempted voluntary disclosures which turned out to be untimely (Moran, Chernick, Cittadini, Robbins). Instead of these cases being a deterrent to non-compliance though, it is raising questions and doubts about the wisdom of participating in the Voluntary Disclosure Program. And with the courts recognizing defendants good faith, but untimely or bungled VD efforts at sentencing, the result has been a string of oddly contrasting headlines of multi million dollar offshore accounts with sentences of home detention for the most part. One wonders what message the man in the street who doesn't know the details imparts from that?! Surely there are enough people who did not attempt VDs to go after to protect federal interests.

    Secondly, there are clearly adequate non-criminal alternatives to prosecution - the civil FBAR penalties are such exorbitant multiples of the actual tax loss that one wonders about their constitutionality under the excessive fines clause. Those civil fines clearly fulfill the functions of punishment and deterrence in spades.

    Thirdly, you wouldn't think that any kind of voluntary disclosure (timely, untimely, noisy, quiet, or bungled) would even meet the standard of "sufficient admissible evidence to obtain and sustain a conviction", since any sort of voluntary disclosure to an attorney prior to a government investigation would severely negate the key criteria of willfulness to most juries and therefore the likelihood of sustaining a conviction. Even in egregious cases, the federal interest in promoting voluntary disclosures should still trump this.

    In short, most of the offshore charging decisions which have been made public so far seem to run contrary to the Holder Memo (with the exception of the Miami hotel developers who never attempted VDs). But maybe with the memo just coming out on May 19, 2010 they haven't had a chance to review their charging strategy in light of the AG's memo...

  6. Jack, to your comment about the extension of the FBAR deadline for certain fillers ("I think most practitioners viewed this as assurance that no untoward result would be forthcoming if the U.S. persons qualifying as signatories only filed by the extended date"), I would add the additional pre-requisite ". . . provided that the filer is otherwise in tax compliance." In other words, the extension of time and the absence of an untoward result would apply to otherwise "clean" filers.

    In addition, the discussion above about whether the IRS "will" or "may" refer prosecution to DOJ, is inapplicable to the Simon defendant. He was not a Voluntary Disclosure participant, hence no guarantee of non-referral. His FBARs alone do not constitute a voluntary disclosure, thus no guarantee of non-referral.

  7. I just read United States vs Tenzer. Ultimately Tenzer lost on appeal and was convicted and sentenced. However, the ultimate reason the court found to convict was that they did not find that he made a bona fide good faith attempt to settle/pay the IRS. The case did seem to indicate that the court had expectations that the IRS comply with their Voluntary Disclosure Policy of not seeking prosecution even though the policy does not promise nonprosecution. I am not a lawyer or a law student but I understood this case to give voluntary disclosers some expectations as to nonprosecution in a binding way as long as they perfect the voluntary disclosure as per published IRS guidelines. Am I off base on this?

  8. I think that Anonymous immediately above provides a fair reading of Tenzer. I think that none of the reported cases that have addressed the voluntary disclosure issue have lost on the facts. The question really is whether someone who made a voluntary disclosure and carefully met all conditions for voluntary disclosure could nevertheless be prosecuted. I suspect that a court might find some way to give him relief. And, of course, since the Government only seems to prosecute those who really did not make a voluntary disclosure, perhaps the issue just will never surface.


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