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.