Saturday, July 13, 2013

DOJ Requests Tougher Sentencing for Tax Crimes Involving Offshore Accounts (7/13/13)

DOJ has sent the U.S. Sentencing Commission its annual report "commenting on the operation of the sentencing guidelines, suggesting changes to the guidelines that appear to be warranted, and otherwise assessing the Commission's work."  The report is here.  The following is the excerpt on tax crimes involving offshore banks (footnotes omitted).
F. "Hidden Foreign Bank Accounts" Involved in Tax Crimes 
By law, U.S. taxpayers are required to report worldwide income from all sources, including income from offshore accounts. Similarly, the law requires a U.S. taxpayer to report to the U.S. Treasury Department his or her foreign accounts with balances in excess of $10,000 as to which he or she has certain ownership interests and/or control. The use of bank or investment accounts maintained in a tax haven with strict bank secrecy laws is often done less for customary investment purposes (due to low rates of return and high fees) than because it increases the difficulty of U.S. law enforcement agencies to discover the accounts and enforce U.S. laws. 
Our national tax enforcement program is enhanced when wrongdoers are appropriately sentenced, and those who would contemplate engaging in similar conduct are deterred. Conversely, the program is impaired and tax revenue is correspondingly lost when the offshore cases that are criminally prosecuted result in sentences that do not deter continued evasion. For example, where there is insufficient evidence to prove that the assets in an offshore bank account are themselves untaxed income, the tax loss (which determines the guideline offense level) is limited to the income earned on the offshore account, which can be low even if the account balance is high (as a result of low rates of return and high fees charged in exchange for the secrecy procured). 
We propose that the Commission amend the commentary in §2T1.1 to recognize that an upward departure may be warranted where the tax loss, the customary proxy for harm in tax-related cases, substantially understates the seriousness of the offense. We believe a provision patterned after Application Note 19 in §2B1.1 would best accomplish this and be most consistent with the current guideline structure. We propose a new Application Note 8 to §2T1.1 as follows: 
8. Upward Departure Consideration—There may be cases in which the offense level determined under this guideline substantially understates the seriousness of the offense. In such cases, an upward departure may be warranted. 
For example, a defendant who willfully fails to disclose an offshore bank account may have unreported income from the account that is relatively small in comparison with the value of the assets hidden, as a result of low rates of return and high fees charged in exchange for the secrecy procured. In such a case, the tax loss table in §2T4.1 may produce an offense level that substantially understates the seriousness of the offense. If so, an upward departure may be warranted.
Jeff Neiman, here, one of the prominent players in criminal defense in the offshore tax crimes area, is quoted as saying that the proposal is "overkill" because these offenders are already subject to a sophisticated means adjustment (2 levels upward, which is virtually automatic already for offshore account crimes).  See Rebecca Cohen, Harsher Sentencing Guidelines Necessary in International Tax Evasion Cases, Justice Says (Main Justice 7/12/13), here.

I don't think that the proposed Application Note addition really addresses the problem DOJ identifies.  That is the fact that untaxed money may have come into the accounts and, given the lack of information about how the money got into the account, the "tax loss" on the original corpus may be limited to the income earned in the account which may be very low.  Note in this regard that, under the relevant conduct concept, the tax loss could almost certainly include the tax on the original funds deposited, if that tax loss can be reconstructed.  If that is the concern, the proposed Application Note might offer more guidance to a judge as to when an upward departure (or upward Booker variance for that matter) might be appropriate.

It seems to me that the best way to address that problem is to perhaps treat the opening account balance (or a recent year account balance) as taxable income to the extent the taxpayer does not establish that it is not taxable (e.g., the opening funds had been taxed in the U.S.).  This would at least quantify the tax loss and let the Guidelines operate as it does for economic crimes, including tax crimes.

One other "evil" is identified that I am not sure is an evil.  The Government thinks that there is something sinister in the low returns in these accounts because of the excessive fees charged by the offshore banks and the enablers in their food chain.  I too think there is something sinister in the excessive fees whereby the banks and their enablers shared with the taxpayer in the raid on the U.S. fisc.  That is a good reason to prosecute the banks and the enablers.  It seems to me, however,  that it is not a good reason to increase the sentences of U.S. taxpayer-depositors.  If DOJ is saying, in effect, there is some higher notional tax loss upon which to make the Base Offense Level calculation by "considering" or denying a reduction in the tax loss for the excess fees, then that is inconsistent with the way the Guidelines for financial crimes are conceived and structured.  It is the actual intended tax loss that governs in tax crimes, just as for other economic crimes, it is the intended economic loss (or gain).  I just think that these considerations loosely thrown out in an Application Note of uncertain and fuzzy scope are not necessary to proper sentencing.

And, as the end of the day, judges tend to give more lenient sentencings in offshore tax crimes cases.  Merely giving then a nudge toward upward departures when they are not sentencing at higher levels within the indicated guidelines range is not likely to be persuasive.  So, this may be more about show-biz than something that, if adopted, would affect real-world sentencing except, perhaps, in the truly rare case where the sentencing judge perceives some other skullduggery (such a drug trading) other than the tax crime of conviction.

In this regard, therefore, if there is a real concern that offshore tax crimes cases are not being sentenced sufficiently harshly, that concern should apply to sentences other than upward departures.  In other words, it should also be considered in determining where, within the Guidelines range, a judge might sentence.  Perhaps, the best solution would be to add a 1 level specific offense characteristic in addition to the 2 levels for sophisticated means, but this would unduly punish offshore account crimes, particularly those that are really not that sophisticated, and would, by inference, benefit sophisticated onshore tax crimes that would not be subject to this upward adjustment.  I don't know what the best solution is.  I just feel that the proposal is not it.

Perhaps, we should just leave it to the judges with a real person in front of them to fashion the punishment that fits the crime.  That's so Booker-esque.


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  2. All of this offshore talk is likely good when it concerns people living in America, but I still don't understand why individuals with local accounts need to be threatened by America with human rights violations simply because they do not live within US jurisdiction and due to their national origin.

  3. Another example that the US Govt is not really concerned with the tax losses. They are most concerned that (gasp) citizens might be choosing security of their assets over growth of assets.

    This is a scary proposition for the government and I believe has always been the reason for ratcheting up the "tax evasion" witch hunts. The US Govt does not like when its slaves put their assets where Massa cannot get them or have any knowledge of them. It is the US Govt's opinion that they should have full knowledge and full access to your money - at all times.

    I find it comical that they are going to use the fact that a person has negligible increases in the value of their assets (thus no tax liability) as "further proof" that the person deserves an upward revision. This is on par with the US prosecutors using a defendant's complete silence against them. Salinas v. Texas (

    I always wondered what it would be like to live in a police state....

  4. You suggest "perhaps treat the opening account balance (or a recent year account
    balance) as taxable income to the extent the taxpayer does not establish
    that it is not taxable"
    It seems that such a suggestion would turn the burden of proof onto the taxpayer, particularly regarding something which is difficult to prove either way.

    On the domestic front, there are likely also situations in which it would be very difficult to prove that the original funds have not been taxed. This may occur for example when a contractor uses employees and materials to remodel his personal residence but then deducts the expenses as a business expense, or in cases of those paid in cash who report some or none of the income. On the domestic front there is the intent to further voluntary compliance by allowing qualified amended returns (accepting loss of revenue that occurred more than 3 to 6 years ago in order to obtain future compliance in the long term.) On the international front the effect (regardless of intent) is to hit everyone with the same hammer (even people with legitimate purposes who disclosed voluntarily and who had a minuscule chance of being discovered by the IRS) and by doing so get a lot from 30,000 voluntary disclosures while scaring the other 5 million with unreported accounts to hide them.

    As to the contention that lower yields and higher fees being an indicator of paying for secrecy from the US, someone walking into a Swiss bank to open an account would be subject to the same fee structure regardless of citizenship. Obviously private banking will be more expensive and have a hefty minimum balance, and if you do not speak one of the national languages your banking choices will be limited to banks which specialize in international clientele and have personnel with the appropriate language skills. (Though for English speakers you will often find someone able to handle simple transactions in English at the retail level.)

    Furthermore, if you are sending money to foreign relatives or hold foreign currencies a US bank isn't really appropriate. Wiring money overseas from a US account will typically require a personal visit to the bank, half an hour to an hour with the bank manager who does this maybe a couple of times a year, maybe a couple of follow up phone calls when the transfer doesn't go through, and a fee of around $50 -- even if you're just wiring the equivalent of ten bucks to a foreign government office to get a copy of your birth certificate.

    If you want to hold money in foreign currency at a US bank the effort to do so would be so entertaining as to merit posting on youtube. From personal experience I have found no US bank that will open an account or CD in foreign currency. I'm not talking about something exotic from some small country, I'm talking major currencies like Euro, British Pounds, Canadian Dollars, Yen. Oh, they've told me than they would, and then they said well, no, we really meant that we would take the foreign currency and convert it to dollars and then if you want it in foreign currency you can convert it again. (Fine print: subject to changes in currency value as well as much higher currency conversion fees.)

    Yes, some of us have relatives in other countries, or plan to go live there again, and some actually live in foreign countries.

  5. Guest, you are right on in saying that it would turn the burden of proof. Keep in mind that this is a sentencing proceeding rather than a trial at the criminal phase. The proof standards are more relaxed in the sentencing proceeding. But a similar concept goes on in the trial in determining guilt. For example, if the issue in the guilt determination trial is whether the taxpayer received a constructive dividend, then the law is clear that there is no constructive dividend if there is no E&P. If we took literally the notion that the Government must prove guilt beyond a reasonable doubt, the Government would have to prove the existence of E&P sufficient to support the dividend charged. But, that is not what happens. In effect, what the courts do is say that, if the Government shows the distribution from the corporation, existence of sufficient E&P will be assumed unless the defendant meets some type of production burden to raise a legitimate issue of whether there was sufficient E&P. Now the ultimate burden of persuasion does not shift, but if it is consistent to even shift a production burden to the defendant in a criminal case, then we have observed a dynamic where the burden of proof rules help the Government make its criminal case. I just applied that concept to the sentencing phase, but suggested that the defendant bear the ultimate burden of persuasion on the issue of whether the principal in the offshore account is tax paid or not (if not tax paid, then it would be relevant conduct).

    It is not a perfect solution. Just one that might be considered.

    Jack Townsend


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