Friday, April 27, 2012

Credit Suisse Data Turn Over to IRS (4/27/12) reports that Credit Suisse CEO, Brady Dougan, has stated that Credit Suisse has turned data over to the IRS.  Credit Suisse hands client data to US ( 4/27/12), here.  I don't have any more information than in the article, but will post any material information I receive here.

Wednesday, April 25, 2012

The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (4/25/12)

I write today on the Supreme Court's decision in United States v. Home Concrete, 2012 U.S. LEXIS 3274 (2012), here.  The bottom line is that the Supreme Court held that overstating basis, thereby reducing income from a transaction in the property, is not an omission of income subject to the extended six-year statute of limitations in Section 6501(e), here.  That section provides the a 6  year period for tax assessments rather than the usual 3-year period if the taxpayer omits 25% of the gross income reported on the return.

There are some interesting aspects of the opinion that only lawyers -- preferably paid, well paid  lawyers -- could love.  (I'm not sure judges love this stuff, but they do have to decide it.)  I am sure that over next few months there will be a lot of discussion of those nuances.  (I plan to add some discussion in the next version of my Federal Tax Procedure book that will be posted by early August 2012 for the next UH Law School class.)  But, I won't discuss here the reasoning -- some plain; some twisted -- that the majority Justices used to justify their bottom-line holding (nor will I discuss the minority's reasoning for a different conclusion).  For more timely analysis, see Robert W. Wood, HUGE Taxpayer Win: Supreme Court Tells IRS 3 Years to Audit is Plenty (Forbes 4/25/12), here. See also the quick but studied opinions of two experts on this blog,
Kristin Hickman & Steve Johnson: Initial Observations on Today's Supreme Court Decision in Home Concrete (Tax Prof Blog 4/25/12), here.

I do note editorially that this is another case in a line of Supreme Court cases where the Supreme Court proves once again that tax cases are too important to let the Supreme Court play with them.  Poster children for this editorial statement are Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978); Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991); United States v. Consumer Life Insurance Co., 430 U.S. 725 (1977); and Gitlitz v. Comm'r, 531 U.S. 206 (2001).

This is a Federal Tax Crimes blog, so I will try to relate my further comments to the subject of the blog.  (There is some editorial comment in the entire blog, so bear with me.)

Wegelin U.S. Bank Assets Forfeited (4/25/12)

We have previously blogged that Wegelin and Co., a now defunct Swiss bank, had been indicted in the Southern District of New York and a contemporaneous forfeiture proceeding had been instituted against Wegelin's deposits in a U.S. correspondent account.  See Wegelin Indicted in SDNY with Money Laundering Forfeiture (FTCB 2/2/12), here.  Wegelin is defunct because of the reputational and other pressures arising from the U.S. investigation of Swiss banks' U.S. tax evasion enabler activities.

Yesterday, the Judge Swain of USDC SDNY entered a default judgment for the U.S. in the forfeiture proceeding.  See USAO SDNY press release, titled Manhattan U.S. Attorney Forfeits Over $16 Million Seized from Indicted Swiss Bank's U.S. Account (4/24/12), here.  There is a parallel DOJ Tax press release, in pretty much the same language, but it has not yet been posted on the DOJ Tax press release web page.  I will post the link when it is available.

Addendum 4/18/12:  Asher Rubinstein has a good post on the forfeiture:  Wegelin’s US Account Taken by US Treasury: Global Implications and What it Means for Non-Compliant Foreign Accounts (4/27/12), here.

Tuesday, April 24, 2012

Trust Fund Tax Convictions Affirmed (4/24/12)

In United States v. DeMuro, 677 F.3d 550 (3d Cir. 2012), here, the Demuros, husband and wife, were convicted of "conspiracy to defraud the United States, in violation of 18 U.S.C. § 371, here,, and 21 counts of failure to account and pay over employment taxes (employee income tax and employee FICA withheld), in violation of 26 U.S.C. § 7202, here.  The facts for the DeMuros were bad, very bad.  Which is the reason that a civil tax matter turned into a criminal prosecution.  I want attempt a comprehensive review.  The  opinion lays the facts and law out well, and at length.

1.  By way of background, employers are required to withhold and pay over income tax and the employee's share of FICA from the pay otherwise due employees.  I am sure that, almost all readers from the U.S., have encountered this system where our paychecks were less because of these withholdings.  The withheld amount is sometimes referred to as a "trust fund" because the employer is deemed to have withheld it from the gross payments and must turn the withheld amounts over to the IRS according to schedules that time the turn to the IRS over depending upon amounts.  The funds so withheld, although described as trust funds, are not required to be segregated by the employer until they are turned over to the IRS.  Nevertheless, the amounts involved are often referred to as trust fund taxes.

2.  Often, particularly in a down economy or even in an up-economy where the employer (or its responsible officers) wants to divert the money to other purposes, employers may raid the withheld trust fund taxes in order to use the amounts to pay other creditors or, even, themselves.  In DeMuro, the employer -- the DeMuro's corporation -- withheld the trust fund taxes from the employees gross pay as the law requires, but they did not pay over to the IS.  It is unclear precisely why they did not pay over, but there was proof at trial of lavish personal expenditures by the DeMuros well beyond the amount of the trust fund withholdings the employer was required to pay over but did not.

3.  The civil enforcement mechanism to "encourage" employers to meet the obligation consists of audits of the trust fund obligation (as well as other potential tax related obligations of the employer).  This includes examination and marshaling the full resources of the IRS, including liens and levies.  Additional encouragements to discourage trust fund defaults are:  (1) so-called trust fund penalty liability under Section 6672, here, for persons in the employer power structure that have responsibility to ensure that the withholding and pay over occur; and (2) Section 7512, here, which authorizes the IRS to give notice to establish a special trust account for the employer to deposit the withheld amounts pending payment to the IRS.  In DeMuro, this latter trust was created.  The proof indicated that the DeMuros wrongfully disbursed some of the monies and shut down the account without the permission of the IRS.

Saturday, April 21, 2012

Outlier Conviction for FBAR and Many Other Tax-Related Crimes (4/21/12)

DOJ Tax has announced the conviction of one Artistotle "Rick" R. Matsa, an attorney, on 22 counts "for numerous tax fraud and obstruction of justice related offenses, including witness tampering and making a false statement."  In addition, he and his mother were convicted of conspiracy to obstruct, commit perjury and make false statements.  The DOJ Tax press release is here.

The gravamen of the prosecution was for misdeeds that are atypical to the cases that DOJ Tax is prosecuting out of the current offshore account initiative.  Hence, I view the case as an outlier for many readers of this blog.  The Government's summary of the convictions in the press release is (with bold face for the FBAR information):
According to the indictment, which was returned on June 23, 2010, and the evidence admitted at trial, Rick Matsa, who in addition to being an attorney was also an architect, a real estate broker, and a licensed minister in Ohio, created and operated several nominee entities in order to disguise and conceal his income and assets from the IRS. The false trust return charges relate to filings for at least five separate trust entities during the tax years 2003 to 2005. In fact, the evidence at trial showed that the trusts had been filing similar returns dating back to 1990. Each of the trusts reported receiving significant amounts of interest income each year, generated from funds held in numerous bank accounts, yet no income tax was reported due as a result of fraudulently claimed deductions for distributions on the trust returns that were purportedly paid to a foreign beneficiary each year. However, the evidence at trial showed, instead, that Rick Matsa used funds from those trusts to purchase a 150-acre farm in Hocking County and a home in Worthington, both of which he used as a personal residence. 
The evidence at trial also showed that Rick Matsa violated FBAR, the foreign bank account reporting requirements, by failing to disclose his ownership and control over a foreign bank account held in The Netherlands. The evidence at trial was that Rick Matsa maintained more than $300,000 in funds in that undisclosed foreign bank during 2003. 

Father-Son Convictions Affirmed (4/21/12)

I have written earlier about the father and son duo who were convicted for traditional tax crimes (Klein conspiracy and Tax Obstruction), although they had foreign accounts.  See First Sentencing in Offshore Case that Went to Trial (2/5/11), here; and More Offshore Account Charges -- Of HSBC (Reputedly) and Recorded Conversations (4/21/10), here.  Their convictions and sentences were upheld in a cryptic per curiam affirmance.   United States v. Cohen Assor, 2012 U.S. App. LEXIS 7990 (11th Cir. 2012), here.  The offshore accounts involved were with HSBC.

Thursday, April 19, 2012

IRS OVDI: Holding the IRS to Proper Payment Application (4/19/12)

The following is a guest blog written by Asher Rubinstein, Esq., whose web site is here and his bio information is here.

IRS OVDI: Holding the IRS to Proper Payment Application

by Asher Rubinstein, Esq.

It has been said that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) corrected many of the hiccups of the 2009 Offshore Voluntary Disclosure Program (OVDP).  For instance, midway during the 2009 program, the IRS began to enforce PFIC tax methodology, required taxpayers to sign new and revised Powers of Attorney, required taxpayers to sign statute of limitations waivers, and transferred and re-transferred case files to IRS agents across the country, all of which caused confusion and delay in the resolution of OVDP cases.  In addition, the IRS revoked OVDP FAQ 35, to the detriment of many taxpayers who entered the OVDP in reliance upon FAQ 35.  By the time the 2011 OVDI program was introduced, the IRS seemed to have standardized and centralized its voluntary disclosure procedure, building upon the lessons learned during the OVDP.

However, as more OVDI cases now head toward resolution, it appears that the IRS is again wavering in certain policy decisions, again to the detriment of taxpayers.

Under the 2009 program, there were months of back-and-forth communications between IRS agents and taxpayers, as the IRS issued multiple Information Document Requests (IDRs) for the same case.  Once the taxpayer answered the questions in the IDR and provided the documents requested, the IRS would process the answers and documents, and then issue a new IDR, with additional questions and requests for documents.  This pattern was often repeated again and again, causing months of delays in the case.

Thus, under the 2011 OVDI, all documents were due in the initial submission, reducing the likelihood of a back-and-forth.  Along with the complete OVDI package (consisting of amended returns, FBARs, OVDI forms, etc.) taxpayers had to include payment of back taxes, interest and accuracy penalties.

Accordingly, for our OVDI clients, we submitted payment for each year on a separate check, noting the applicable year on each check.  Our cover letter also included a year-by-year itemization of tax, interest and penalties being paid, and corresponding check numbers.  We addressed tax liability, interest and accuracy penalty on a year-by-year basis and requested that the IRS apply the payments as we specified.

Wednesday, April 18, 2012

New Regs Require U.S. Bank Reporting of Interest Paid to Nonresident Aliens (4/18/12)

The IRS has issued final regulations requiring reporting of bank deposit interest paid to nonresident aliens.  The regulations are here.

A Tax Notes article today makes the following key points (Marie Sapirie, Final Regs Require Reporting on Nonresident Alien Deposit Interest, 2012 TNT 75-1 (4/18/12)):

1.   The regs  permit the IRS to offer a "quid pro quo" to foreign countries from whom the IRS desires cooperation in obtaining similar information relevant for U.S. tax purposes.  The article notes:
"These regs were expected and necessary to implement the intergovernmental agreements as part of FATCA. Based on the joint statement released with the FATCA regulations, reciprocity from the U.S. was going to be required," said Carol P. Tello of Sutherland Asbill & Brennan LLP. * * * * 
The preamble to the final regulations reasons that foreign countries are unlikely to want to hand over information on Americans with accounts in their countries if those countries don't stand to get anything in return. Other countries are "keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions," according the preamble.
2.  The banks and their mouthpieces cry foul because, they claim, this puts U.S. banks at a competitive disadvantage to banks in foreign countries who want to facilitate tax evasion.  Thus, one claims:
The problem for U.S. banks is that until all countries are on the same page regarding information collection, protection, and exchange, the rule that U.S. banks must report information on interest earned by NRAs puts those institutions at a competitive disadvantage to institutions in other countries where the banks are stable, there is no tax on interest income, and information sharing does not occur, said Mark J. Scheer of Gunster, Yoakley & Stewart PA. 
"At the end of the day, [the reporting requirement] doesn't affect anything other than where the depositor puts his money," Scheer said. That is because the United States does not collect any tax on interest earned by NRAs.
This notion is, apparently, that the United States banks can compete only if they engage in the same inappropriate behavior foreign competitor banks do.  Competition fueled by greed, thus, is the key moral value they claim.  That is strange.  I suppose on the same notion, we should not have the FCPA because our competitors pay bribes and kickbacks.  The better notion, adopted in this regulation initiative, is that gambits to erode the various countries' tax bases should be discouraged and mutual sharing of information to prevent such erosion is a good thing.

Wednesday, April 11, 2012

Swiss Federal Administrative Court Rejects Behavior Pattern Request Which Just Suggest Fraud (4/11/12)

In A-737/2012: Decision of the Federal Administrative Court in re Credit Suisse client v. Swiss Federal Tax Administration (Swiss Federal Administrative Court 4/10/12), here, the Court rejects one of four categories of a U.S. request for administrative assistance under the U.S.-Swiss double tax treaty (referred to in the opinion as DTC USA-Switzerland 96).  Apparently all four categories were behavior pattern requests.  In the request, as a  predicate for the pattern behavior requests, the U.S. (i) "accused Credit Suisse (CS) that their employees actively assisted their clients, subject to US tax law, to conceal their income and assets from the US tax authority," and (ii) does not mention client names but just refers to the CS employee conduct.

The decision identifies only one of the four categories - Category 2.  "Category 2 includes accounts held by a domiciliary company with a U.S. beneficial owner with U.S. securities and with which Form W-9 is not associated." The Court decided that the category did not fall under the "tax fraud or the like" required under treaty as the Swiss interpret the treaty.  Rather, the category request as framed "includes persons, who at the utmost could be suspected of having committed tax evasion."  Tax evasion is  lesser conduct than tax fraud required by the Swiss interpretation of the treaty.  The Court further concludes that
the “search criteria” are not sufficiently tailored to enable the bank to identify with a high degree of probability those clients who are suspected of fraudulent conduct triggering administrative assistance and to simply leave the task of examining whether the transmitted data are suitable to confirm the suspicion of fraudulent conduct to the SFTA. Such a procedure is inconsistent with the principle of proportionality, which – as a general principle of administrative law – also applies to proceedings regarding administrative assistance. 
The Court reaffirms its case law that under the DTC USA-Switzerland 96 administrative assistance shall not be granted for presumed tax evasion, even if high amounts are at stake. It also confirms that the mere failure to declare a bank account may be qualified – at the utmost – as a tax evasion, which is not subject to administrative assistance.
This result could be changed under the negotiated protocol now awaiting U.S. Senate approval.  But see my prior blog Swiss Continue Their Behavioral Patterns - Black is not White (4/9/12), here.

Klaus Wille and Giles Broom, Swiss Court Rejects Disclosure of Credit Suisse Client Data (Bloomberg 4/11/12), here.

Tuesday, April 10, 2012

GAO Briefing on Duplication in Form 8938 and FBAR (4/10/12)

US Government Accountability Office, Reporting Foreign Accounts to IRS: Extent of Duplication Not Currently Know but Requirements Can Be Clarified (February 2012), here.
The objectives of the briefing were to (1) determine to what extent, if any, the reporting requirements on the FATCA Form 8938 and FBAR are duplicative; (2) assess the potential effects that any duplicative reporting requirements have on filers; and (3) identify and assess opportunities, if any, to cost-effectively reduce or eliminate the burden that any duplicative reporting creates while maintaining the usefulness of the information for tax-administration and law-enforcement purposes. 
* * * * 
In summary, some of the information requested on the Form 8938 and FBAR is duplicative, but the number of filers affected is not currently known. Since the Form 8938 and FBAR were developed to meet two different governmental needs — tax administration and law enforcement — some filers have to report the same or similar information twice, but through different mechanisms and at different times. This increases the compliance burden and adds complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Currently, the instructions and guidance for both forms lack any explanation of why and where duplication exists. Actions to reduce duplicate reporting requirements while maintaining the usefulness of the data for tax administration and law enforcement purposes would benefit filers. However, since the Form 8938 is a new requirement beginning after 2011, data are not yet available to determine the number of filers subject to these duplicative reporting requirements. Without these data, it is not known whether the benefits of reduced duplication would exceed the costs. When filing data become available, Treasury’s Office of Tax Policy, IRS, and FinCEN would have the information needed to assess whether cost-effective steps could be taken, including allowing filers who would normally have to submit both forms to substitute the information reported on one to meet the requirements of the other. Hence, we are recommending that the Secretary of the Treasury direct the Office of Tax olicy, IRS, and FinCEN to (1) revise both the Form 8938 and FBAR instructions and related guidance to explain the extent to which duplication exists (for example, instances where account-related information requested on the two forms is the same or different) and the circumstances in which filers are, or are not, expected to comply with both reporting requirements; and (2) as data become available, determine whether the benefits of implementing a less-duplicative reporting process exceed the costs and if so, implement that process.

Funds Misappropriated from Credit Suisse Account Held Taxable (4/10/12)

In Bailey v. Commissioner, T.C. Memo. 2012-97, here, the petitioner, a lawyer of fame and infamy (Wikipedia entry here), represented himself in a Tax Court case where his own foreign account at Credit Suisse played prominently in one of the several issues involved.  I quote below from the Tax Court's summary of the opinion:
P, a lawyer, represented a criminal defendant who was cooperating with the Federal Government by facilitating the transfer of his foreign assets as restitution. In 1994 P entered into an unusual unwritten agreement with the Government, pursuant to which he would use an existing foreign account of his own to hold $6 million of the client's stock and make expenditures to facilitate the client's plan. P sold some of the stock and borrowed against the remainder, using some of the proceeds for the client's business but also transferring some to other accounts from which he made personal expenditures of his own. He later repaid the funds he had spent for himself. 
Held: P realized income not when he received the stock, sold it, or borrowed against it, but only when he transferred sale proceeds to other accounts from which he later made personal expenditures.
Basically, the holding is that, when the transfers from the advance account occurred to the other accounts (such transfers not contemplated by the agreement with the Government), the petitioner had misappropriate the funds, thereby causing the misappropriated amounts to be taxable.  See James v. United States, 366 U.S. 213, 219 (1961).

Court Holds FBAR Duty is Clear and Willfulness Is a Trial Issue (4/10/12)

In United States v. Pflueger, 2012 U.S. Dist. LEXIS 43945 (C. HI 2012), here, the district court denied the defendant's motion to dismiss the sole FBAR count in a multi-count indictment alleging tax crimes and conspiracy against various individuals and alleging an FBAR violation against one of them, James Henry Pflueger.  The opinion is cryptic, with the court basically stating the parties' positions and picking one of them (the Government;'s):
In the instant Motion, Defendant asks the Court to dismiss Count 14. Briefly, the Motion argues that: (1) as of June 30, 2008, the deadline for filing an FBAR for 2007, the law was not sufficiently clear as to whether Defendant was required to file an FBAR reporting his interest in the bank account in Switzerland; and (2) Count 14 requires the Government to prove that Defendant's failure to file an FBAR was "willful" and, because the law was unsettled at the time that the Government contends an FBAR should have been filed, the Government cannot, as a matter of law, prove that Defendant willfully failed to file a 2007 FBAR. 
In opposition, the Government argues that it can and will marshal evidence sufficient to prove Defendant's willfulness in failing to file the required FBAR, and points out that Defendant fails to provide any case authority for the proposition that the law surrounding the FBAR filing requirement is too vague to be enforced. The Government submits that it has successfully prosecuted others for FBAR violations and that a challenge to the failure to prove a defendant's willfulness is for appeal and not a matter for pretrial motions.
The Court adopts the Government's position.  The reasoning was little more than a statement of the Government's position (quoted above), with some citations.  Basically, the Court felt that the command to file was clear and that willfulness was a jury issue.

The indictment in the case is here.  The key parts of the indictment in terms of the FBAR are as follows:

Monday, April 9, 2012

Special Statute of Limitations Rules Regarding $5,000 Omissions from Foreign Accounts (4/9/12)

The IRS recently published a memorandum discussing the special 6 year statute of limitations rule for $5,000+ omissions of income from specified foreign financial assets enacted in FATCA which also contained Section 6038D special reporting on Form 8938.  See IRS Memorandum from Director, Examination Policy, dated 3/9/12, here.  The statute of limitations extension is independent of Form 8938, and thus applies to all open years on the date on the effective date of March 18, 2010.  Readers should review the linked memo for more detail (with some examples) but I offer here the guts of the discussion for present purposes:
The amendment to § 6501(e) applies to all returns as long as the period of time (determined without regard to the § 6501(e) amendments referenced above) for assessment of taxes has not expired as of March 18, 2010.  Therefore, if the income tax return was filed after March 18, 2010, or the assessment statute was otherwise still open as of that date, and more than $5,000 was omitted from gross income that is attributable to specified foreign financial assets, the statute remains open under § 6501(e) for a total of six years from the date the return was filed. 
In general, this new provision means that the year 2006, with a tax return due date is April 15, 2007, will be subject to a 6 year statute of limitations if there is a $5,000+ omission related to specified foreign financial assets.  Earlier years will be subject to the rule only if the statute were otherwise open on March 18, 2010.  Assuming the returns for those pre-2006 years were filed prior to March 18, 2007, the statute is not affected by this new 6 year statute unless (i) there were a 25% omission of gross income (whether foreign account related or not) which would have caused a 6 year statute under general rules (which would mean that the new 6 year statute would run contemporaneously with the 25% omission 6 year statute, so that the new statute of limitations applies but is irrelevant), (ii) the taxpayer timely consented to extend the statute of limitations to a date including March 18, 2010 (taxpayers in this circumstance should note that the end date of a Form 872 will not control), or (iii) the filed return was fraudulent (in which case the new 6 year statute of limitations is also irrelevant).

The memo also notes that, for years for which a Form 8938 required by Section 6038D is required (2011 forward), the statute of limitations remains open until three years after the date the taxpayer supplies the required information.  This statute extension applies to all items on the return but, upon showing of reasonable cause and not willful neglect, the extension applies only to income items associated with the failure.

Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)

This blog will offer a forum for readers of this blog to offer their comments regarding the administration of the the tax laws for offshore accounts, and specifically the IRS's offshore voluntary disclosure programs.  The hope is that some Congress members (or their staffs) and the IRS policy makers will read the comments and, to the extent that they state legitimate concerns, address those concerns.

Readers of this blog have made a number of comments that are worthy of consideration.  Unfortunately, they are scattered in various earlier blogs.  I do not have the time and patience to try to collect and repost those earlier comments.  So, I urge readers to restate their comments here.  Hopefully, with reflection, the comments can be stated more compellingly now.

I urge readers posting comments to consider them very carefully.  My goal is to offer readers an opportunity to post comments that have been well considered and well presented.  Please consider the intended audience for the comments -- policy makers who can affect the future administration -- and how best that the comments can be received and considered by that audience.  Your job is to persuade them that you are raising legitimate concerns that they should consider and should go out of their way to redress.  Polemics and ad hominens are not persuasive; indeed, as I note in the Rules for Comments, I will not approve intemperate comments.  Please moderate your comments for maximum effectiveness.

Please feel free to express the angst you have felt in considering your circumstances and what options to take, as well as the angst you have felt as you were processed through the voluntary disclosure program.  If you feel you have been treated unfairly, please state that.  For example, many of the persons who joined one of the programs are persons who many refer to as minnows and who should opt out of the program they joined for purposes of the civil cost results, but the IRS had made the obtainable results on opting out a black box where the prospect of draconian costs and uncertainty strike fear in taxpayers.  Angst about this  should be expressed to let these decision makers know that much of this is really counterproductive.

Thank all of you for your interest in this blogs and your comments to the various blog entries.

Jack Townsend

Swiss Continue Their Behavioral Patterns - Black is not White (4/9/12)

With the permission of Tax Analysts, I post a recent article by Lee Sheppard, a frequent tax commentator and critic.  Lee A. Sheppard, Don't Ask, Don't Tell: Swiss Behavioral Patterns, 135 Tax Notes 7 (Apr. 2, 2012), here.

Bottom line, Ms. Sheppard notes that the Swiss are up to its old behavioral patterns.  What it appears to give under international and, specifically, U.S. pressure, it takes away through the back door.  Specifically, the U.S. thought it had negotiated the power to make "behavioral pattern" requests for information from Swiss financial institutions about U.S. depositors.  Normally, treaty requests require that the requesting party (the U.S. here) name the individual for whom information is requested, but the nature -- by design -- of the Swiss banking system is that U.S. (and other countries similarly situated) will not know the names of depositors subject to its tax jurisdiction.  So the protocol allowing behavioral pattern requests seemed to be quite a break through.  So the U.S. could have reasonably thought.  But, the Swiss government has its ways.  As with religion (and cheating other governments may be a religious imperative for the Swiss), it is all about interpretation.

Ms. Sheppard also discusses issues relating to withholding and the EU savings directive, particularly in response to treaty protocols with Germany and the U.K.  The savings directive requires automatic exchanges of information regarding interest payments to accounts of EU residents or impose a withholding tax.

Saturday, April 7, 2012

Cheek, Good Faith Defense and Conscious Avoidance (4/7/12)

In United States v. Maga, 2012 U.S. App. LEXIS 6867 (6th Cir. 2012), here, in an unpublished opinion, the Sixth Circuit rejected a defendant's attempt to raise a Cheek good faith issue.  The defendant argued that certain IRS codes related to his computer account and correspondence with the IRS led him to believe, in good faith, that he did not have to file income tax returns.  The jury with proper Cheek willfulness and good faith instructions found him guilty.  The defendant was dissatisfied and appealed.  The Court concluded "When viewed in a light most favorable to the government, the record permits a factfinder to conclude, beyond a reasonable doubt, that Maga actually knew about his legal duty to file and only pretended to rely on an idiosyncratic reading of the IRS letter and documents."  The Court further concluded:
Maga responds that even unreasonable beliefs may negate the "willfulness" element, if held in good faith. See Cheek, 498 U.S. at 203. But a reasonable jury could also conclude that, the more "incredible" one's claimed belief, the less likely that one actually holds such a belief in good faith. See id. at 203-04 ("Of course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge."). Maga exerted every effort to verify that MFR-01 meant "1040 not required," yet made no effort to double-check his convenient inference of complete tax exemption. Given Maga's attitudes toward taxes, his familiarity with the IRS letter and manual, the "plainly incredible" nature of his interpretation, and the absence of any attempt to verify the accuracy of his risky interpretation, a factfinder could conclude beyond a reasonable doubt that Maga willfully disregarded his known duty to file returns. And because tax evasion has different elements than the crime of failure to file tax returns, his acquittal on the evasion charge fails to undermine our confidence in the reasonableness of his conviction for not filing. We therefore affirm the district court's denial of a motion for acquittal.
As discussed, absence of Cheek good faith and conscious avoidance can be pretty close.  The standard for conviction of a tax crime is still Cheek willfulness -- voluntary, intentional violation of a known legal duty.  If the jury believes that the defendant had a good faith belief that there was no legal duty, Cheek willfulness is not present.  In Maga, the Court of Appeals held that the jury could and apparently did not believe the good faith defense and, moreover, did believe that he intended to violate a known legal duty.

Friday, April 6, 2012

Shulman Recounts His Tenure and Comments on Offshore Initiatives (4/6/12)

IRS Commissioner Shulman has announced that he will not accept a second term.  See  Richard Rubin, IRS Commissioner Says He Doesn’t Want Second Term (Bloomberg 4/5/12), here.  In a speech, he recounted the IRS's achievements during his term.  Prepared Remarks Commissioner of Internal Revenue Douglas H. Shulman before the National Press Club (IR-2012-42 4/5/12), here.  Among the comments were the following regarding the IRS's foreign accounts initiatives:
Both corporations and individuals operate in the global economy. For example, many individuals have global exposure through their investments and 401Ks. Yet, this fundamental shift to a more global economy has created a real set of challenges for the IRS. On the individual front, we have made putting a big dent in offshore tax evasion a major priority. 
We view offshore tax evasion as an issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren’t paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack. 
Over the past four years, we have significantly increased our resources and focus on offshore tax evasion, and the results have been substantial. We upped the ante in a meaningful way with our work on Swiss financial institutions – where for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers. 
As we increased our enforcement efforts and gained significant momentum, we gave taxpayers a chance to come in voluntarily and avoid going to jail. In a typical year, we used to get 100 or so taxpayers who used our voluntary disclosure program. For this program, we thought that figure would rise to maybe 1,000.

Ownership of Joint Accounts - Whose Income; Whose Accounts? (4/6/12)

Robert Wood and Jamie Ogden, lawyers at Wood LLP in San Francisco, have published a very interesting article that I recommend to readers struggling with the consequences of foreign accounts where, for U.S. income tax and FBAR purposes, the U.S. reporting for the accounts and income is murky.  Robert W. Wood and Jamie K. Ogden, Who Pays Tax on Joint Bank Accounts?,  135 Tax Notes 113 (Apr. 2, 2012), here.

The authors focus on the income tax issues rather than FBAR and Form 8938, but the issues discussed should bear on FBAR reporting and Form 8938 reporting as well.  (See my comment below.)

Although the issues are complex, key general -- emphasis on general -- rules of thumb related to foreign accounts are:

1.  Beneficial ownership is the key to income tax consequences.

2.  Local law -- i.e., foreign law -- generally determines who is the beneficial owner of the account.

3.  Nominal local law ownership as opposed to real beneficial ownership cognizable as such under local law will not determine the U.S. income tax reporting obligation.  For example, agents are not taxed; principals are.  Where the taxpayer seeks to deflect U.S. income tax consequences to a foreign person, the taxpayer will have to prove that his or title ownership under local law is nominal, such as in the status of agent rather than principal.  Proof of the nominal relationship could be an issue.

Thursday, April 5, 2012

Weird Deals That Even People / Governments Thought to be Rational Make (4/5/12)

Here is one weird deal, although it has been in the making for some time now.  Andrea Thomas and Neil MacLucas, German, Swiss Officials Sign New Tax Plan (4/5/12), here.

The German Government has signed an agreement with the Swiss that would allow the Swiss to make some payment to Germany but keep the anonymity of German citizens with bank accounts in Switzerland.  So long as the German Government gets something with the agency / good offices of the Swiss pirates intermediating with German tax cheats, it does not need to know who, among its citizens, have tax cheating proclivities.  Just weird.

Of course, I have to presume that the German powers that be do not think this deal is weird.  Maybe they think -- if that is the right word -- that half a loaf is better than no loaf.  But it is the old game of chicken.  Germany perhaps blinked first and left the Swiss some opportunities to hide the ball for the Swiss monetary advantage.

[I just deleted one of my own rants; I apologize to readers who already had to read through it.]

Atypical Foreign Bank Account Related Sentencing (4/5/12)

Marlyn D. Hinders, a one-time fugitive for his actions with the Genesis Fund, has been sentenced based on a plea of one count of tax obstruction, Section 7212 (an charge consistent with but unrelated to his name).   The Plea Agreement is here.

I say this is an atypical sentencing principally because (1) the events predate the present offshore initiatives beginning in 2009 and (2) illegal income appears to be involved.

Other Key Details:

Taxpayer:  Marlyn D. Hinders
Sentence Date: 4/4/12
Bank: Banco Cuscatlan (Costa Rica)
Entities: Yes
Guilt: By Plea Agreement
Count(s) of Conviction: Tax Obstruction, 7212 (1 count unclear which year or years it was for, but the plea agreement says the obstruction was from September 1999 through March 2005)
Maximum Possible Sentence:  3 years.
Sentence Imposed: 21 months.
Probation: ?
Age at Sentencing:  72
Tax Loss: ? (Parties stipulated to a Guidelines Base Offense Level of 14 which has a tax loss range of $30,000 to $80,000; the amount stipulated is odd, since he agreed that during the years 1999 through 2002, he received "at least $925,060.64" in taxable distributions from the Fund; perhaps some had been previously taxed?).
Civil income tax with penalties and interest:  Defendant agrees to cooperate in IRS determination of liability for 1999-2001 and "will not file any claim for refund of taxes, penalties, or interest for payments made in connection with unreported income from the Genesis Fund, unless the Court or the government agree that he is due a refund.
Restitution:  None (Government agreed not to seek restitution; but defendant has obligation to assist in computation of tax liabilities and not contest them)
FBAR Penalty: ?
Court: Central District of California
Judge: Dale S. Fischer (Wikipedia entry here)

Michael Cohn, Foreign Exchange Fund Promoter Sentenced on Tax Charges (Accounting Today 4/4/12), here.

Wednesday, April 4, 2012

Experiences Inside OVDP / OVDI #2 (4/4/12)

I am creating a new blog for this subject because the first one is getting overloaded (over 300 comments) which means that, depending upon browser and speed of connection, some people are unable to view all comments.

The original Blog, titled Experiences Inside OVDP / OVDI (9/14/11), is here.

Just a reminder, this blog subject for users to share, by their comments, their experiences inside the OVDP / OVDI programs.  I know the IRS touts that there is little flexibility inside these iterations of the voluntary disclosure program, and that has concerned the practitioner and taxpayer communities.  However, I suspect that, in extreme cases, accommodations may be made inside the program without the necessity of opting out to obtain the just and fair result.

So, I encourage readers to post their experiences here to help persons in the program, particularly those who are not represented, to take affirmative steps, to avoid pitfalls or just to obtain some comfort from others' experiences.  Or even some amusing anecdotes "inside the program," if any, could be helpful.


Jack Townsend

Addendum 4/5/12:  In the first comment to this version # 2 blog immediately below, Just Me shares a link to an excellent and lengthy discussion of his journey in OVDP.  The link to that discussion at the Isaac Brock Society page is here. I strongly recommend that discussion.  As Just Me says in the comment, a lot of the story has been told in multiple threads on comments to various blog entries here.  Thanks to Just Me for pulling all this together and making it available.

Addendum 4/19/12; as amended on 4/21/12:  I previously had a link to a blog that offered information about the IRS's application of the non-willful penalty on audit.  I have subsequently determined that the information was not materially different from the IRM provision and felt that it would be better to link to the IRM provision rather than to the secondary source.  The IRM provision is Exhibit 4.26.16-2  (07-01-2008) Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004, here.  (See the table named Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 - Per Person Per Year.  Readers should remember that, upon a showing of reasonable cause, the FBAR penalty may be avoided altogether.  See my prior blog titled IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11), here.  I should also note that, based on anecdotal information I have received from some practitioners, this Guidance is not rigid.  Persons with compelling stories to tell can get substantially less than the Guidance suggests or even no penalty.

NYT Article on Easiest Way to Cheat on Tax (4/4/12)

The New York Times has an interesting article which, in title, sounds like a "how to" on cheating on your taxes.  Adam Davidson, Jacob Goldstein, Caitlin Kenney and Dan Kedmey, What’s the Easiest Way to Cheat on Your Taxes? (NYT 4/3/12), here.  It is an interesting read, but I don't recommend cheating on your taxes.  Actually, the article is broader than its title may suggest, and makes some editorial comment about the state of the tax universe.  This is one interesting quote:
Another thing that makes people more likely to be audited: being rich. Those with income of at least $1 million are 11 times as likely to be audited as the average taxpayer; those with incomes of $200,000 or more are 4 times as likely. Of the 1,000 biggest U.S. companies, more than half are being audited at any given time, says Mary B. Hevener, a partner at Morgan, Lewis and Bockius in Washington. The I.R.S. is drawn to giant corporations “for the same reason Willie Sutton robbed banks,” Hevener notes. “It’s where the money is.”

And another:
Who is the greatest accountant of all time? 
Many consider Luca Pacioli, a 15th-century Italian bookkeeper who hung out with Leonardo, as their standard-bearer. In his 1494 opus, “Summa de Arithmetica, Geometria, Proportioni et Proportionalita,” Pacioli described the system that Venetian merchants had begun to keep track of their far-flung businesses. That system, with some tweaks, is still in use today. “He’s the father of double-entry accounting,” Yeutter says, “the exciting world that we have.” 

"Opting Out" #3 (4/4/12)

At the request of readers who having difficulty accessing the comments and replies because of the large number of them, I start up another in the series on "Opting Out."

The two earlier posts with comments and replies in this series are
  1. "Opting Out" of OVDI and OVDP; What is Really Happening? (12/12/11), here.
  2. "Opting Out" #2 (3/2/12), here.
If readers use this new blog to comment or reply to comments on either of the first two blogs, it will be helpful if you cut and paste the material that you refer to so that the reader can understand the current comments and replies.

I also include below the following from #2:

Addendum 4/19/12; as amended on 4/21/12:  I previously had a link to a blog that offered information about the IRS's application of the non-willful penalty on audit.  I have subsequently determined that the information was not materially different from the IRM provision and felt that it would be better to link to the IRM provision rather than to the secondary source.  The IRM provision is Exhibit 4.26.16-2  (07-01-2008) Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004, here.  (See the table named Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 - Per Person Per Year.  Readers should remember that, upon a showing of reasonable cause, the FBAR penalty may be avoided altogether.  See my prior blog titled IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11), here.  I should also note that, based on anecdotal information I have received from some practitioners, this Guidance is not rigid.  Persons with compelling stories to tell can get substantially less than the Guidance suggests or even no penalty.


1.  A reader has posted opt-out documents here;  I think the author -- with the pseudonym of Moby -- has done a particularly good job with his opt out request.  Accordingly, I have bookmarked it for easier navigation and post it here.  I encourage readers who are considering opting out or are in the process of making submissions in support of lesser penalties in audits (whether on opt out or otherwise) to look at this document.  (Note that the bookmarks are in the pdf file which can be viewed by downloading the pdf document.)

2. Many of the comments posted on this blog and its related earlier blogs (see above) are worthy of being posted (perhaps with some moderation) to the blog titled Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12), here.  I would like to consolidate appropriate readers comments there if possible, so encourage the commenters to consider doing that.

Tuesday, April 3, 2012

Credit Suisse Moves to Assure U.S. Client Compliance (4/3/12)

Credit Suisse is requiring U.S. clients to complete a form regarding their U.S. tax compliance.  In addition to a certification from the U.S. client, the form requires that a paid U.S. tax preparer sign the certification as well.  The form as linked in the article cited below is here.

The certifications include the following (which I summarize from a very quick review):

1. full compliance with U.S. federal, state and local tax and reporting obligations with respect to income from the account, including checking the appropriate box for the Schedule B foreign account question.  This seems to apply to future and past years.

2. for the 2010 taxable year, identification of the U.S. return preparer with address and either (i) if a paid preparer, the PTIN and EIN of the firm or (ii) a check the box to indicate that the preparer was not a paid preparer.

3.  full timely compliance with FBAR reporting requirements for 2010 and for "taxable years in which the undersigned has had accounts with the Bank," including (a) for the year 2010, whether the form was (i) prepared and filed by the return preparer; (ii) prepared by the return preparer and filed by the client, or (iii) not prepared by the return preparer but filed by the client on his / her own and (b) for the year 2011, whether the form will be  prepared and filed by the preparer or by the client.

Monday, April 2, 2012

Section 6103 and Rule 6(e) Secrecy Rules in Tax Grand Jury Investigations (4/1/12)

In a pair of related rulings in Tucker v. United States,  2012 U.S. Dist. LEXIS 43154 (ND WV 2012), here, and Tucker v. United States, 2012 U.S. Dist. LEXIS 43155 (ND WV 2012), here, the court rejected the plaintiff's claims for damages for alleged Section 6103 violations made by IRS CI special agents interviewing witnesses while assisting in a grand jury investigation.  Section 6103, here, prohibits the IRS from disclosing "return information." (This section has numerous exceptions that go on page after page, but none appear applicable here.)  Section 7431, here, affords a civil remedy for improper disclosures of return information.

The relevant facts, highly summarized, are:  A grand jury was investigating the plaintiff for potential tax crimes.  Two IRS CI agents were assisting the grand jury, as is usually the case in tax grand jury investigations.  (There is no indication of whether these agents had previously conducted an IRS administrative criminal investigation of the plaintiff.)  Incident to the grand jury investigation, the CI Agents interviewed plaintiff and certain third-party witnesses.  The plaintiff alleged that the CI Agents improperly disclosed to the witnesses the following:  (i) that they were investigating plaintiff pursuant to a grand jury investigation of plaintiff; and (ii) that the plaintiff "was going to jail for tax evasion" or some variant thereof.  The witnesses they interviewed appeared as witnesses in the case for the plaintiff and testified somewhat consistently with the plaintiff's allegations.  The CI Agents denied the allegations.

The court first dismissed the first type of allegations -- identifying that the CI agents were investigating pursuant to a grand jury investigation of the plaintiff -- because the court felt the allegations had not been timely made by the plaintiff.  The court dismissed the second type of allegations -- that plaintiff was going to jail -- finding that plaintiff's witnesses not credible and the CI agents credibly denied the allegations.

The case seems straight-forward, but it seems to me the issue is more nuanced than presented.  I have encountered a similar pattern before so I am just going to provide a high level summary to illustrate some nuance.  Section 6103 applies to tax return information gathered by the IRS functioning as the IRS.  Section 6103 does not apply to information gathered by a grand jury, and I think this is true even if IRS CI agents are assisting the grand jury investigation and, as often occurs, actually interview witnesses and gather documents.  Grand jury information is covered by a different "secrecy" provision, Rule 6(e), Federal Rules of Criminal Procedure, here.  Thus, for example, the fact that the CI Agents were assisting in a grand jury investigation is grand jury information and not IRS return information.

Another UBS Client is Sentenced (4/2/12)

USAO D NH press release, here.  The judgment is here.

Key Facts:  From press release:  "According to documents previously filed in the matter, Hoess was aware of and understood his obligation to file FBARs in those years and report his foreign bank accounts, having previously filed FBARs in 1997, 2000 and 2001 for a bank account that he controlled in Italy."

Other Key Details:

Taxpayer:  Lothar Hoess
Sentence Date 3/20/12
Banks: UBS, Bank Ehringer, Armand von Ernst AG
Entities: Yes
Guilt: By Plea Agreement
Count(s) of Conviction: FBAR - 1 count for calendar year 2008 (but admitted failure to file for 2005-2008).
Maximum Possible Sentence:  5 years.
Sentence Imposed: 8 months home confinement
Probation: 3 years (includes time in home confinement)
Age at Sentencing:  64.
Tax Loss: Not stated (see aggregate amount immediately below).
Civil income tax with penalties and interest:  $2,033,209.00
Restitution:  $2,033,209.00
FBAR Penalty: $1,372,774 ("which represents 50 percent of the highest year-end balance in the undisclosed accounts for calendar years 2005 through 2008.").  This amount is apparently not included in restitution because it is a penalty and not a loss (or, alternatively, he may have already paid it).
Court: District of New Hampshire
Judge: McAuliffe, Steven (Wikipedia entry here.)

JAT Comment: In most of the cases, the taxpayer / defendant would not have given the Government the key proof of knowledge of the legal obligation by prior filings.  Prior filings of 1040s is also damaging evidence in a case charging failure to file income tax returns.

Sunday, April 1, 2012

IRS Comparison of Form 8938 and FBAR (4/1/12)

The IRS has posted a web page titled "Comparison of Form 8938 and FBAR Requirements", here.

Addendum 4/4/12:  In the comments below, readers will find discussions of whether Indian Demat accounts are reportable on Form 8938 and/or FBAR and whether they should be included in the penalty base in OVDP and OVDI.  As of this posting on 4/4/12, I am not sure of the answers to these questions but will post in the blog itself if I get reasonably certain answers.  Otherwise, readers should refer to the comments.  For discussions as to the general characteristics of these Demat accounts, see the following:
  • Securities and Exchange Board of India Frequently Asked Questions, here in html and here in pdf.
  • Wikipedia, here.
Update 4/5/12:  On 4/4/12, I polled a practitioner group that I belong to in order to determine if anyone knew how these accounts should be treated.  No one responded.  Since someone in the rather large group responded, I have to assume that most did not really know what I was talking about and that, if there were experience in the group, no one acknowledged it.  I am a bit surprised at that.  Hopefully some reader will be able to offer further insight.

Update on 4/11/12:  See Sebastien Chain and Tamara Woods, Form 8938 – Foreign Reporting Trap for the Unwary (Tax Blawg 4/11/12), here.

The Weak Empire Strikes Bank (4/1/12)

There is a report that Switzerland is seeking to arrest a whistleblower who turned over Credit Suisse data on German citizens to the German tax authorities in return for payments.  The charge is economic espionage.  See Richard Weiss and Leigh Baldwin, Switzerland Wants German Investigators Arrested on Espionage (Bloomberg 3/31/12), here.

I have no idea as to the back story but it strikes me as odd that Switzerland would become aggressive on this front.  Readers' comments will be appreciated, particularly if they have some appreciation for the back story -- what is really going on.

Perhaps, extending the story a bit, Switzerland might proceed against the DOJ attorneys -- I won't mention names -- who consorted with Mr. Birkenfeld to pry open Switzerland and UBS's dirty secrets.  And,  maybe if Mr. Birkenfeld ultimately gets some whistleblower award(s), the list of Swiss targets might be expanded to the Whistleblower Office.  I wonder if the Swiss have something like sealed indictments so that any person who it thinks has committed such economic espionage can be arrested if found within its borders.  For some, traveling to Switzerland may not be the ideal vacation or even business trip.