Friday, May 10, 2013

Cheating is Cheating, Except When Offshore Accounts Are The Means (5/10/13)

I was quoted recently in a Wall Street Journal article.  Laura Saunders, Leniency for Offshore Cheats (WSJ 5/5/13), here, subtitled Courts Hand Down Lighter Sentences Than in Other Types of Tax-Shelter Cases.  Unfortunately, the link I have requires subscription, but I think readers of this blog will get the gist of the article from the title and subtitle.

I have received some comments that I seemed to be advocating for stiffer criminal penalties for offshore cheats.  I thought I would use my blog to give the nuance I actually intended.  I simply was saying that the discrepancy in sentencing in the two classes of cases seems inconsistent.

The particular quote that has drawn attention is:
"The cases involving offshore bank accounts are drawing lighter sentences than other criminal tax cases," said Mr. Townsend, who practices at Townsend & Jones LLP in Houston. He calls the discrepancy "troubling, because cheating is cheating."
The point I was making is that, based on my understanding of the law (particularly the Sentencing Guidelines), the difference should not exist. I will give an example:

Assume a taxpayer cheats on his taxes without any offshore involvement.  Say he skims from his wholly owned corporation and thus evaded tax of $500,000 without any extraordinary means to hide the evasion.  The Government charges him with either evasion or tax perjury.  He pleads guilty, with the Government agreeing to maximum reduction for acceptance of responsibility.  These are the only sentencing factors under the Guidelines.  The Guidelines calculations are as follows:  Base Offense Level - 20; reduction for acceptance of responsibility - 3; offense level for the Chapter 5 Sentencing Table - 17; sentencing range per the Sentencing Table (with no criminal history) - 24-30 months.

Now compare that to the offshore cheater.  This taxpayer socks sufficient money in a foreign account (that may or may not have been taxed before) that then earns in the account sufficient income to generate a U.S. tax of $500,000.  The Government charges him with either evasion or tax perjury.  He pleads guilty.  These are the only sentencing factors under the guidelines -- except that because a foreign account was involved the sophisticated means enhancement likely should apply.  SG 2T1.1, Application Note 4 says (emphasis supplied):
4.      Sophisticated Means Enhancement.— For purposes of subsection (b)(2) [the 2-level sophisticated means enhancement], "sophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.  Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means
With all other things equal, the sophisticated means enhancement makes the offshore cheater's Offense Level for the sentencing table 19 for an indicated sentencing range of 30-37 months.

It is true that the Booker sentencing regime makes the Guidelines calculation of sentencing ranges advisory only.  But, they are advisory.  Advice is still advice and does reflect the considered judgment of the Sentencing Commission over a number of years after detailed study, including in particular how tax crimes should be sentenced.  The "advice" the Sentencing Commission has given is that offshore cheaters should generally get, if anything, a higher sentence that onshore cheaters.  Even if the onshore cheating has sophisticated means, the indicated sentences should generally be the same.  This does not take into account various individual characteristics that sentencing judges may consider under Booker to vary from the guidelines ranges, but in the aggregate those factors should smooth out and there should, in the aggregate, either be little difference between the onshore cheater and the offshore cheater or the differences, if any, should be against the offshore cheater because of the sophisticated means enhancement.

Yet, the observation of the bar, including my own observations, is that offshore cheaters get a better deal.

I could speculate about why that phenomenon occurs.  Maybe in a future blog I will.  But for present purposes, I just wanted to lay out the phenomenon and note that there is no reason apparent to me why there should be lighter sentences for offshore tax cheats.  As I said, cheating is cheating.

Now, back to the point of whether offshore cheaters should be treated the same as onshore cheaters.  As best I see it, assuming the Guidelines calculations are made correctly, there should not be better treatment under the Guidelines.  The difference should be in the Booker variances.  In the aggregate, those variances should not be significantly disparate unless the Government just chooses to prosecute offshore cheaters with better Booker factors than onshore cheaters (a phenomenon which I doubt).  So, the bottom-line sentences should be brought into rough conformance.  That can happen by moving offshore cheaters' sentences up or moving onshore cheaters sentences down.  Either way works.

I reserve the right to argue for onshore cheaters I represent that they should get the lighter sentences that the offshore cheaters get.  Or, if I represent the offshore cheaters, I will argue that they should get the same lighter treatment that the other offshore cheaters have gotten.

I will state finally that I think DOJ Tax has been complicit in the existence of the phenomenon.  As I said, I won't speculate why that occurred, but I question whether it sends the right message to the general public that some forms of tax evasion are better than others.  And, I suspect that in the aggregate, the demographics of the offshore cheaters that the Government prosecutes are different than onshore cheaters who the Government prosecutes.  Is that the right message to the general public?

Addendum 5/13/13:

I thought I would add some data to the key point I make above that sentencings in offshore cases in the IRS's latest initiative post UBS are lighter than general tax sentences.  The following sentencing data are from the U.S.. Sentencing Commission's 2012 Sourcebook of Federal Sentencing Statistics, here.  The statistics here are based on the primary offense category.  The data is for cases where tax offense is the primary offense charged. If some other federal offense is the primary charge, the data appears under that category of offense.

1.  There were 608 tax cases in FYE 2012.  (Some tables say 605.)

2.  Guilty Pleas are achieved in 93.9% of the tax cases; 6.1% went to trial.  See Table 11, here.

3.  Tax cases with imprisonment - 64.3%, broken down as follows:  Prison only - 54.2%; Prison/Community Split Sentence: 10.1%.  Table 12, here.

4.  Tax cases with probation 35.7%, broken down as follows:  Probation and confinement 16.2%; probation only 19.5%.  Table 12, here.

6. The Length of Imprisonment for Offenders in Tax Cases is:  For all tax cases:  Median 23 months and mean 18 months.  For Category One Criminal History Offenders:  The same median and mean.  Table 14, here.

7.  Tax cases sentenced within Guidelines range:  36.9%.  Table 27, here.

8. Tax cases with 5K.1 downward departures.  13.6%.  Table 27, here.

9.  Tax cases with downward departures with Booker.  2%.  Table 27, here.

10.  Tax cases with below range with Booker.  33.6%.  Table 27, here.

So, the question is whether the above data is consistent with the conclusion that offshore cases receive better sentences.  There are perhaps two factors that make comparison of my data in the spreadsheet more complicated.

First, some offshore sentences are included in the Sentencing Commission data, so my data about offshore sentences alone may not be directly compared.  But the number of offshore sentences in the Sentencing Commission data is very small, so I think a fair comparison can be made.

Second, in many cases, my data does not have all of the sentencing factors (both Guidelines factors and Booker factors).  But, I do have the bottom-line sentence.  I realize that at least some of the defendants in offshore cases might qualify for 5K1 departures by assisting in building cases against their enablers, so they might get both 5K1 and Booker.

As noted in paragraph 4 above, tax cases with probation (including probation only and probation with home confinement) are 35.7%.  My comparable statistic for offshore sentences is 48%.  (I have revised my spreadsheet to include some statistics related to these issues.)  More strikingly, the length of imprisonment for category One Criminal History offenders in paragraph 6 above is median 23 months and mean 18 months.  My stats for all offshore cases (including guilty pleas and verdicts and including enablers as well as taxpayers) is mean of 13.8 months and median of 0 months.  And for guilty pleas for taxpayers only, the mean is 5.6 months and the median, not surprisingly is 0.  I think this is too stark a difference to be accounting for by considering the complicating factors above.

Although these are not head-to-head comparisons, I believe the data is consistent with the general practitioner perception that sentencing of offshore bank tax cheats are materially lighter than for onshore tax cheats.

One explanation for the phenomenon that offshore cheaters get better treatment might be that this has been a game which is most egregiously exploited by the very rich.  Sure, there are a lot of minnows and near rich in the game with varying locations on the spectrum from innocent to guilty. But the very rich do it best because of their easy access to the enablers, banks and their minions, who enable them.

Along this line, a guest blogger on the Jonathan Turley Blog has an interesting analysis stating the obvious -- the most egregious offshore offenders are the very wealthy who always get better deals than the rest of us.  Lawrence E. Rafferty, Tax Havens For the Wealthy, But What About the Rest of Us? (Jonathan Turley Blo 5/12/13), here.  The phenomenon of the wealthy getting better treatment, of course, is not unique to offshore tax cheating, but it does seem to be a phenomenon in offshore tax cheating, at least in the stratosphere of the amounts involved.

Which reminds me of a famous misquote about the rich.  The misquote is a reputed exchange between F. Scott Fitzgerald and Ernest Hemingway as follows:

Fitzgerald:  The rich are different from you and me.
Hemingway: Yes, they have more money.

A Fitzgerald short story actually began with the following:
Let me tell you about the very rich.  They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves.  Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.
For more detail, seen this following from Quote/Counterquote, here.


  1. Jack,

    One major problem with all this offshore accounts is that not all are cheats. Many thousands of people truly did not know the FBAR requirements. Furthermore, in many countries taxes on the earned interest were being paid to the local governament so it did not occur to many that they need to pay even more taxes here in the US. Also some might have also been confused if interest is earned income, many think of earned income to be from employment. In many cases, especially India accounts, the deposits are after the taxes have already been paid here in the states. So I think it is unfair to label all offshore account holders as cheats, wheter they are prosecuted or not. The bottom line is the government has deep pockets and long arms. The prosecuters have the liberty to choose their victim and I am sorry to say their victims are not always chosen fairly. How else can you explain the fact that, some can enter the amnesty program and others can not. Especially if the offshore accounts held only after tax income , those account holders should be treated differently from the ones who had not paid taxes on the deposits to begin with and on top evaded further taxes by not reporting their taxes.

    I held an offshore account. The deposits were from after tax income. The unreported interest income was arountd $700. About $200 taxes were paid to the local government. I had absolutely no idea that a FBAR exists and it is something I have to report every year. Not knowing this fact cost be around $10,000(penalty,accounting fees and attorney fees) The government may consider me a cheat but I do not consider myself a cheat. We can not label all offshore account holders as cheats no matter what their bank balance is, especially if that balance is from post tax deposits.

  2. Just a couple of comments:

    1. Not all U.S. taxpayers with noncompliant U.S. accounts are tax cheats. That is to say that they do not fall within the stringent requirement that they intentionally violated a known legal duty. In the blog, I address only persons who were prosecuted and convicted and therefore did meet the requirement. I dare say that for by far most of the U.S. taxpayers with noncompliant accounts did not meet this requirement and, perhaps a different nuance, the Government would never prosecute or obtain a conviction. I do not mean the term "tax cheats" to cover them.

    2. On your facts, you are not a tax cheat (based on the sparse facts and reasonable extrapolations from them). Certainly DOJ Tax would not prosecute or be able to obtain a conviction.

    3. You also express concern as to the exercise of the prosecutors' discretion as to who to prosecute. If I were in charge of tax prosecutions, I don't doubt that I might do it differently, just as you would. However, that uniquely is within the discretion of the prosecutors as they make the judgment calls in the best interest of the tax system as they perceive those interests. Of course, in the blog, I too question the judgment calls as they have appeared to offer more favorable treatment for offshore tax cheats. But I am not in charge.

    Jack Townsend

  3. Unfortunately, the media is only interested in sensationalizing and not getting to the bottom of the truth. I read the article too and found it very disconcerting that innocent minnows are being lumped with people who knowingly evaded the system.

    I find it even more aggravating that non-resident aliens (those on visas in the US) are subject to income tax on foreign income and these draconian penalties for FBARs. As non-resident aliens have no rights in this country, is it fair to expect them to know that their foreign income is taxed?

    "Not a cheat", as for your case, was your account in HSBC India? And you said it cost you about $10,000 in total. Did you enter OVDI and what was your max balance? If you don't mind, can you please share a few details.

    Jack, if IRS can establish a streamlined procedure for US citizens living abroad, why not do the same for foreign citizens and non-green card holders living in the US? Why the bias? I wonder if TA can take up this issue with IRS.


  4. Your question is a good one. Perhaps you could contact the TA with the request that she consider it.


    Jack Townsend

  5. Why exclude green card holders. They have the same reasonable cause as visa holders. Most became aware of the issue when the IRS started their fierce enforcement in 2009-2010 timeframe. Most of them are still largely anaware of the issue, either because their accountant does not even ask them about foreign accounts, or because until a couple years ago, it was hidden under some obscure section in tax software and it was easy to miss it.
    The taxpayer's advocate already proposed to include residents in a streamline procedure similar to the one offered to Americans living abroad, and it's been completely ignored by the IRS. Even the streamline procedure is pretty narrow. If I understand well, it only applies to those who did not file at all. Most of the ones who did file tax returns but not the FBAR, because it was well known are out of luck.

  6. Yes my account was in HSBC India. Yes I entered OVDI and my maximum balance was $38k. The whole OVDI process took 18months and the attorney fees and accounting fees cost more than the 12 percent penalty.
    I applied for OVDi in June 2011 and completed process in February 2013. Until March of 2011 I never even heard of the FBAR.

  7. Not a cheat, it seems that you paid the 12.5% and did not opt out. Is that correct? Did the agent doing the certification give you any input as to whether you should have opted out? Did you contact the Taxpayer Advocate at any point? Even if you have signed the 906 and paid, have you considered letting the TA know about your experience just to add one more example of how benign actors are being handled?

  8. You are right I just paid the penalty and did not opt out. I did not want to take any chance of it becoming a criminal investigation or not being accepted into the OVDI because by that time a few HSBC indictments had already been announced.

  9. Not a cheat, what was your immigrant status, if you don't mind sharing? Even though OVDI guarantees no criminal charges, many wonder if any of the civil penalties assessed in OVDI (in lieu, FBAR etc.) can show up during green card and citizenship applications and cause an issue? It seems that some people have commented that FBAR penalties could be accessible to immigration officers.

  10. Why isn't anyone helping the 7 million oppressed American middle-class diaspora???
    It's the criminal and/or rich home-lander who is evading taxes taxes offshore!!!
    We USED TO BE good will ambassadors around the world.


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