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.