Guest Blog: Litigating the FBAR Penalty in District Courts and Court of Federal Claims (3/31/14)

I am pleased to offer this guest blog entry written by Robert Horwitz, a guest blogger and prominent practitioner in civil and criminal matters, including the offshore account area.  Robert is an attorney with the Law Offices of A. Lavar Taylor.  Robert's bio is here.  The balance of this blog is his work, except that I have added links to statutes at the end of the blog.  His work is very good.

In recent years, a number of articles have appeared on litigation of the FBAR penalty.  Most of the articles focus on suits by the Government to collect the FBAR penalty or the Tax Court’s lack of jurisdiction over the FBAR penalty.  Caroline D. Ciraolo, in her 2013 Power Point ABA presentation, Assessment and Collections of the FBAR Penalty, here, noted the intriguing possibility of suing for refund of an FBAR penalty under the Tucker Act.  Expanding upon Ms. Ciraolo’s insight, I researched the issue and recently authored an article, Litigating the FBAR Penalty in District Court and the Court of Federal Claims, here,  which appeared in the Q1 2014 edition of the California Journal of Tax Litigation, the publication of the Tax Procedure and Litigation Committee of the Taxation Section of the California Bar.  The article makes the following points:

1. The Tucker Act, 28 U.S.C. §1491,  and the Little Tucker Act, 28 U.S.C. §1346(a)(2), give the Court of Federal Claims and the United States district courts, respectively, jurisdiction to hear cases for money damages against the Government.

2. Under the Little Tucker Act, district courts have jurisdiction over claims against the Government for money damages in amounts not exceeding $10,000.  The Tucker Court gives the Court of Federal Claims jurisdiction over claims against the Government for money damages in any amount founded upon the Constitution, a federal statute or regulation, or a contract.

3. The Tucker Act and the Little Tucker Act also waive sovereign immunity over claims for money damages against the United States where the claimant can “demonstrate that the source of substantive law he relies upon ‘can fairly be interpreted as mandating compensation by the Federal Government for the damage sustained.’”  United States v. Mitchell, 463 U.S. 206, 216-217 (1983).

4. Under “illegal exaction” cases, the Courts have recognized that there is jurisdiction under the Tucker Act in cases where the plaintiff seeks the return of money that was alleged to have been illegally paid to the Government.  An “illegal exaction,” occurs when money has been “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.”  Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005).  The “prototypical illegal exaction claim is ‘a tax refund suit alleging that taxes have been improperly collected or withheld by the government,’” Kipple v. United States, 102 Fed. Cl. 773, 777 (2012)

5. To maintain an illegal exaction claim, a claimant must allege that she paid money to the federal government and seeks the return of all or a part of that sum because it was improperly paid, extracted or taken from the claimant in contravention of the Constitution, a statute or regulation.

Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (3/30/14)

In United States v. Williamson,  746 F.3d 987 (10th Cir. 2014), here, the Tenth Circuit rejected the taxpayer's argument that the jury should have been instructed on the meaning of "unlawful" meant in a standard form of tax obstruction definition of the "corruptly" element of the crime. See Section 7212(a), here.  The defendant wanted an instruction that was or very close to the standard Cheek instruction -- intentional violation of a known legal duty -- for the willfulness element of most tax crimes, but not an express element of the crime of tax obstruction.  I have argued that the tax obstruction crimes (principally Section 7212(a) and the defraud conspiracy, 18 USC Section 371, here) should be interpreted to have an element functionally equivalent to willfulness and hence that something like intentional violation of a known legal duty should apply.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Let's see what happened in the case.

The defendant undertook more or less standard tax protester actions, making monetary claims against IRS personnel and filing a lien against the agents' real and personal property.  He was indicted for tax obstruction and another crime, 18 USC § 1521, here, for filing a false lien.

At trial, the court gave a standard tax obstruction instructio, first listing the elements of the crime as follows:

First: The defendant in any way corruptly; 

Second: Endeavored to; 

Third: Obstruct or impede the due administration of the Internal Revenue Laws.

After listing the elements, the trial court defined some of the terms in the elements (emphasis supplied):

"Endeavor" means to knowingly and intentionally make any effort which has a reasonable tendency to bring about the desired result. It is not necessary for the Government to prove that the "endeavor" was successful. 

To act "corruptly" is to act with the intent to gain an unlawful advantage or benefit either for oneself or for another. 

To "obstruct or impede" is to hinder or prevent from progress; to slow or stop progress; or to make accomplishment difficult or slow. 

The phrase "due administration of the Internal Revenue laws" means the Internal Revenue Service of the Department of the Treasury carrying out its lawful functions to calculate and collect income taxes.

The trial court did not define "unlawful" which is a term used in the definition of "corruptly."  The defendant wanted it defined.  The sets the stage, so now I include excerpts (in these excerpts except for the footnote number the excerpts are my to draw the readers' attention):

Good Opinion on Error in Not Giving Requested Good Faith Belief Instructions (3/29/14)

Tax practitioners and students cannot be reminded too often on the importance of Cheek's definition of willfulness - voluntary intentional violation of a known legal duty -- and Cheek's holding that a sincerely held even if objectively unreasonable belief that the conduct is lawful requires acquittal because the defendant did not knowingly violate the law.  Cheek v. United States, 498 U.S. 192 (1991), here.  In a case where the defendant claims the defense of good faith belief and it is supported in the record, the defendant is entitled to have the jury instructed that good faith belief even if objectively unreasonable requires acquittal.  I have previously reported the standard appellate dodge in cases where district courts have denied a Cheek good faith instruction but the instruction should have been given -- i.e., by holding that lack of good faith is subsumed in the otherwise adequate willfulness instructions.  See e.g., Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (Federal Tax Crimes Blog 11/20/13), here.  (For a variance on that dodge, see First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (Federal Tax Crimes Blog 1/15/14), here.)

In United States v. Montgomery, 747 F.3d 303 (5th Cir. 2014), here, the Fifth Circuit held that it is error not to give the good faith instruction if properly presented in the record.  The Court, rightly I think, held that otherwise adequate willfulness instructions did not cure the problem.  But, the Court held, that the conviction should nevertheless be affirmed because, although error, the error was harmless in the case because the evidence of willfulness (and, presumably, lack of good faith) was  "so overwhelming that the error could not have contributed to the jury's decision to convict."

The majority and the concurring decisions are useful to practitioners and students, so I excerpt substantial portions below.  In considering the excerpts, a key fact is that both the prosecution and the defendant had each requested a good faith instruction with the concept that a good faith belief even if objectionably unreasonable required acquittal.  The district court judge thought the concept was included in the willfulness instruction.  Here are the excerpts, first from the majority decision (footnote omitted), then from the concurring opinion.

Although ignorance of the law or a mistake of law generally does not provide a defense to criminal prosecution, that is not so with regard to federal tax offenses. Cheek, 498 U.S. at 199-200. "[D]ue to the complexity of the tax laws," certain federal criminal tax offenses require, as an element of the offense, the establishment of a defendant's willfulness. Id. at 200. In United States v. Pomponio, 429 U.S. 10, 12 (1976), the Supreme Court defined willfulness in this context as "a voluntary, intentional violation of a known legal duty." 

Fifteen years later, in Cheek, 498 U.S. at 201, the Court clarified Pomponio's definition of willfulness. There, the district court instructed the jury that an "honest but unreasonable belief is not a defense and does not negate willfulness." Id. at 197. The Supreme Court held that the district court's instruction was incorrect. Id. at 202. It reasoned that the government cannot carry its burden to prove willfulness in a criminal tax prosecution if the jury believes that the defendant, in good faith, did not understand the law. Id. That is true regardless of "however unreasonable a court might deem such a belief." Id.; see also United States v. Simkanin, 420 F.3d 397, 410 (5th Cir. 2005) ("[A] defendant's good-faith belief that he is acting within the law negates the willfulness element."). 

Here, the Montgomerys argue that the district court's jury instruction did not comport with Cheek because it did not advise the jury that a defendant's good-faith misunderstanding of tax law may be objectively unreasonable. In response, the government argues that, despite the fact that its own proposed jury instruction included the unreasonableness language from Cheek, it was unnecessary in light of the Supreme Court's decision in Pomponio, 429 U.S. 10, and our own decision in Simkanin, 420 F.3d 397. They reason that, pursuant to those decisions, where a district court correctly instructs the jury as to willfulness an additional instruction on the good-faith defense is unnecessary. In any event, the government argues that the error was harmless due to the overwhelming evidence of the Montgomerys' guilt. 

We agree with the Montgomerys that the jury instruction was erroneous. The import of Cheek, as applied to this case, is clear: if the Montgomerys truly believed that they were not obligated to report their income, then the jury could acquit, however objectively unreasonable the Montgomerys' belief was. Both parties agreed to instruct the jury along those lines by explaining that the Montgomerys' beliefs regarding tax law could be "unreasonable or irrational." Yet the jury instruction, given sua sponte by the district court, did not explain that point. Rather, it only included a portion of Cheek's good-faith defense:

Silence in NonCustodial Interviews and the Fifth Amendment (3/28/14)

I just read the Seventh Circuit's  opinion in United States v. Phillips, ___ F.3d ___, 2014 U.S. App. 4898 (7th Cir. 2014), here, and a recent Champion article, Neal Davis and Dick DeGuerin, Silence is No Longer Golden: How Lawyers Must Now Advise Suspects in Light of Salinas v. Texas, 38 Champion 16 (2014) [I do not have a link to the article].  I thought it might be worth revisiting an issue I had discussed before in two blogs: Silence in Response to Questions Without Miranda Warning in NonCustodial Setting May Be Evidence of Guilt (Federal Tax Crimes Blog 6/18/13), here, discussing Salinas v. Texas, 570 U.S.    , 133 S. Ct. 2174 (2013), here, and Invocation of Fifth Amendment in Noncustodial Setting May Not Be Used In Prosecution's Case in Chief (Federal Tax Crimes Blog 9/5/13), here, discussing United States v. Okatan, 728 F.3d 111 (2d Cir. 2013), here, which in turn discusses a facet of Salinas.  A brief summary of the law as discussed in those cases and the blogs is that the prosecution may comment at trial upon a noncustodial witness' silence even if the witness was not "Mirandized. " (Readers will recall that Miranda warnings are required only in custodial or equivalent settings, but the IRS in criminal investigations gives modified Miranda warnings in noncustodial settings.)  Of course, such a comment would be improper if the silence were in a context that the witness invoked his or her Fifth Amendment (either expressly or inferentially in context, such as by asking to consult with an attorney).  Salinas held that the prosecutor could.  Okatan held that, if the witness had asked to consult with an attorney, he had effectively invoked his Fifth Amendment privilege and the prosecutor could not comment.

In Phillips, the prosecution elicited at trial from an IRS CI agent that that the testifying CI agent testified that, during the investigation, he had sent two other CI agents to serve a summons and they had served it on defendant.  The cryptic opinion does not state that those serving CI agents attempted to interview her when they served the summons.  Nevertheless, the defendant argued for the first time on appeal that the implication of the testimony as elicited at trial was that they had attempted to interview her and she had not cooperated.  There is no indication that, in fact, the CI agents had attempted to interview her, that they had or had not given Miranda or modified Miranda warnings or that she had refused to be interviewed (stayed silent).  The defendant was apparently arguing that the testimony as elicited inferred at least that they had attempted to interview her and that she had not cooperated.

As an issue raised for the first time on appeal, the Court applied the plain error standard of review.  The Court then rejected the argument cryptically:

Mrs. Phillips claims that the government's questioning of Agent Howard commented on her silence in violation of her Fifth Amendment right against self-incrimination. She argues that Agent Howard spoke of sending agents to "attempt" to interview her, which Mrs. Phillips claims subtly implied that she had refused to speak. She did not object to Howard's testimony or to the prosecutor's statement at closing, so we review only for plain error. United States v. Della Rose, 403 F.3d 891, 906 (7th Cir. 2005). Of course, a defendant has "a constitutional right to say nothing at all about the allegations." United States ex rel. Savory v. Lane, 832 F.2d 1011, 1017 (7th Cir. 1987).  But the government violated her right only if it "manifestly intended to refer to [her] silence, or ... [if] the remark was of such a character that the jury would naturally and necessarily take it to be a comment on [her] silence." United States v. Andreas, 216 F.3d 645, 674 (7th Cir. 2000) (citation and internal quotation mark omitted). 

In light of what happened at Mrs. Phillips' trial, her argument is unconvincing. The government's explanation for Agent Howard's testimony—to establish that the couple started withdrawing cash as soon as they became aware of the IRS investigation—is logical and is reflected in the government's closing argument. The government intended to, and did, point out suspicious conduct and timing, rather than comment on Mrs. Phillips' invocation of her right against self-incrimination. Nor would a jury be likely to view Agent Howard's testimony as commenting on her silence. Indeed, the evidence does not even tell us whether the agents actually spoke to Mrs. Phillips, and if they did, what she did or did not say. Nor did the record clearly suggest that she was silent. We therefore conclude that the government did not violate her right against self-incrimination.

Swiss Legislation to Forego Notice to Foreign Depositors of Treaty Country Request (3/26/14)

Readers of this blog might be interested in a recent blog by Virginia Le Torre Jeker, a practitioner representing expats from the U.S. and foreign persons regarding U.S. tax laws.  The blog is Swiss Account Holders – Losing the Right to be Informed About IRS Disclosure (Angloinfo 3/24/14), here.  The article discusses Swiss legislation that will permit Swiss tax authority to "turn over information to foreign governments on certain account holders with undeclared accounts in Swiss financial institutions without providing the holders any advance notice of the disclosure."  She says:

Under the amended law, information about those suspected of tax evasion can be sent to another country without prior notification to the account holder, provided the country to which the information will be sent can prove that giving such advance notice would hinder the investigation. 

Of course, US depositors should not hit the panic button yet.  I have not studied the legislation and just respond to Ms. Jeker's description of the legislation.  I suspect that the Swiss will give a reticent interpretation of its authority -- meaning that it will require a significant, if not very strong, proof that notice would hinder the investigation.  Seemingly, this type of authority would not fit with group requests of the type that will constitute most of the requests, at least by the U.S.  And, it would require, seemingly, the identify of the individual, the nature of the investigation, and a persuasive statement of why disclosure might hinder the investigation.  So, I doubt that, even when there are individual requests, the requesting country -- thinking particularly of the U.S. -- will automatically claim disclosure would hinder an investigation.  But that remains to be seen.

The article discusses also the procedure, if a foreign depositor is notified, to invoke to block disclosure and the requirement of 18 USC 3506 that U.S. depositors notify the US Attorney General of a proceeding to block disclosure.  Of course, generally, filing a proceeding to block the disclosure is not a meaningful exercise in most cases -- both because of the requirement to notify the Attorney General and the probability that, although some have been successful in the past, I doubt that many, if any, will in the future.  But, notice can permit the U.S. depositor to take other remedial measures, such as most prominently OVDP.

Scope and Limitations of this Blog: It Is a Tax Crimes Blog, not a Tax Crimes Policy Blog (3/26/14)

I responded earlier today to a reader who emailed me.  The underlying theme of the reader's email to me was to complain or at least comment that, in my blog, I do not give a balanced view of the fairness of the tax law and its administration and that I tend to advocate positions that favor the law as it is.  I thought I would offer readers my thinking on that general subject, because it affects what and how I present discussions on this blog.

I conceive my blog as a forum to discuss the law as it is, including how it develops.  It is not a tax policy blog addressing issues of what the law ought to be.  Hence, for example, I have not advocated for or against FATCA or for or against the U.S. taxation of worldwide income or for or against how the U.S. taxes expats.  I have not advocated for or against the IRS Offshore Voluntary Disclosure initiatives (OVDI/P), although I have occasionally said that there are features of those initiatives that, were I in charge (I am not), I would have implemented differently.  I try to offer readers discussion of the law to assist in understanding and navigating the law as it is.  (I have worded this to remind readers that I am not offering them tax advice on this blog; see the page on Lay Reader Limitations to the right, here.)

Readers wanting to post comments on tax policy issues -- even if just complaints as to what the law is now -- are welcome to do so.  I probably will not respond to those comments but other readers certainly can.  For example, those wanting to complain about the IRS OVDI/P may certainly do so.  I will not defend or attack OVDI/P.  I will, where appropriate, discuss features of OVDI/P that may be useful for readers in understanding those programs.

I want readers to understand that I have limited resources to commit to this blog.  I do basically all the work on the blog.  A number of readers and colleagues point me to possible content for the blog, but in terms of understanding issues and presenting them in a way that I hope is meaningful to readers, I do all that work.  I also practice law where I have to spend time serving clients.  I also have a family and other interests that occupy time.  Hence, I am limited in my resources that I can commit to the blog.  The reader who sent the email noted above said:  "How about using your significant resources to investigate (not quote somebody) on the true number of applications, both processed and pending, for certificates of loss of (US) nationality?"  As I read the comment,  he or she is really complaining that the law and  its implementation are driving U.S. citizens to abandon citizenship, as an argument that the law and its implementation are wrong and should be changed.  That's a tax policy issue.  That is not the focus of my blog.  I have limited resources to devote to matters within the intended scope of my blog and certainly do not have the resources imagined to go off on detours from the intended scope of my blog.

Given these limitations, the subjects I address on this blog are necessarily anecdotal -- the subjects that attract my interest.  There are tax crimes subjects involving the law as it is that do not draw my attention.  For example, return preparer tax fraud and stolen identity refund fraud are major tax crimes subjects.  Although I observe tax crimes initiatives in those areas, I just do not address them much in this blog.

With these limitations, I do hope this blog is useful to readers.  As I note in the general introduction to the blog at the top of the blog pages, the blog is really intended for tax professionals and tax students.  I know that, particularly in light of the IRS's offfshore account initiatives, the blog is now read by lay readers and, judging by the comments (all of which I do read), some of the lay readers have developed particular expertise in some facets of the law and tax administration relating to tax crimes.  Indeed, some of the lay readers may understand facets of the IRS's offshore account initiatives better than many tax professionals (including me).  I welcome their comments, whether as a comment on the blog or in an email to me.

Finally, I thank the readers of the blog for spending their limited resources reading my blog.  I would appreciate your comments as to how the blog may be improved.

Civil FBAR Penalty Case in Process -- Government Motion for Summary Judgment (3/25/14)

I have previously reported on a taxpayer named John C. Hom who got caught up in an FBAR investigation.  IRS Not Liable for Opening FBAR Investigation Based on Return Information Subject to Section 6103 (Federal Tax Crimes Blog 10/3/13), here.  There has been a subsequent development - the United States sued for judgement on the FBAR penalty.  See United States v. Hom (No. C 13-03721 WHA - ND CA).  On March 16, 2014, the district court dismissed here Hom's amended answer and counterclaim because the issues raised in those pleadings had already been litigated, thus leaving just the suit to obtain judgement on the FBAR penalty.  The Court's dismissal order is here.

The Government also filed a motion for summary judgement upon which the Court has yet to act.  The motion is here.

The facts alleged in the Government's motion for summary judgement, highly summarized, are:

Hom was an internet gambler.  Internet gambling is illegal for U.S. persons.  He maintained certain accounts related to the gambling with foreign institutions, FirePay.com, PokerStars.com, and Partypoker.com, not traditional financial accounts but functioned like them.  And, of course, they were offshore.

The IRS picked up the issue in an income tax audit.  The IRS issued a summons, the taxpayer did not comply, the IRS sued to enforce the summons, the district court ordered enforcement on 9/27/10, and thereafter the taxpayer complied.

On September 20, 2011, the IRS assessed Defendant with civil penalties under 31 U.S.C. § 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. § 5314, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. Id., Exs. 1-2; Ex. 5, RFA Nos. 24-25. The IRS assessed a $30,000 penalty for 2006, which was comprised of a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based on only Defendant’s PokerStars account. Id. As of July 26, 2013, Defendant owed $45,178.09. Id., Ex. 3. Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. § 3717.

The issues presented on the motion for summary judgment are (number is the number of the issue as presented)

1. Was Defendant a United States citizen or resident during 2006 and 2007? 

2. Are Defendant's accounts at FirePay.com, PokerStars.com, and Partypoker.com "bank, securities, or other financial account[s]" under 31 U.S.C. §§ 5412, 5314 and 31 C.F.R. § 103.24(a)? 

3. Are Defendant's FirePay.com, PokerStars.com, and Partypoker.com accounts "in a foreign country under 31 U.S.C. §§ 5212, 5314 and 31 C.F.R. § 103.24(a)? 

4. Are the asssets from Defendant's FirePay.com, PokerStars.com, and Partypoker.com  accounts held in "foreign commingled funds" under IRS Notice 2009-62 (and modified by IRS Notice 2010-23) such that the filing deadline for FBARs for those accounts for 2006 and 2007 was extended to June 30, 2010? 

5. Was Defendant’s failure to timely file his FBARs due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported as set forth in 31 U.S.C. § 5321(a)(5)(B)(ii)? 

6. Did the IRS assess the FBAR penalties at issue within the six-year statute of limitations found in 31 U.S.C. § 5321(b)(1)?

Blog readers interested in specific issues can download the pdf.  I will note that the penalty seems relatively light, at least compared to some of the Government's swashbuckling assertions of the willful penalty in far less egregious cases.

Prosecutor's "Golden Rule" Argument to Jury Criticized by Court of Appeals (3/25/14)

In United States v. Hunte, 2014 U.S. App. LEXIS 4729 (11th Cir. 2014), an unpublished opinion, here,  the Eleventh Circuit sustained convictions for conspiracy and tax perjury.  The defendants had a scheme to claim refunds related to income tax allegedly withheld (but not actually withheld).  It worked at first, but not later.  Hence, the criminal case.  The opinion is standard fare for this genre of case.  The opinion does have an interesting discussion of prosecutorial misconduct in the closing jury argument.  I offer that discussion:

The Court first discusses the standard of review.  Because there was no objection at trial (which would have permitted the judge to clarify with instructions), the standard of review is for plain error, requiring that the error be plain or obvious and affect the defendant's substantial rights.  Applying this standard, the Court held (bold face supplied by JAT):

Mr. George's prosecutorial misconduct claim on appeal is one of cumulative error. He contends the cumulative effect of the various improper remarks made by the prosecution throughout its opening and closing arguments served to deny him a fair trial. "Even where individual judicial errors or prosecutorial misconduct may not be sufficient to warrant reversal alone, we may consider the cumulative effects of errors to determine if the defendant has been denied a fair trial." United States v. Ladson, 643 F.3d 1335, 1342 (11th Cir. 2011) (quoting United States v. Lopez, 590 F.3d 1238, 1258 (11th Cir. 2009)). "In addressing a claim of cumulative error, we must examine the trial as a whole to determine whether the appellant was afforded a fundamentally fair trial." United States v. Calderon, 127 F.3d 1314, 1333 (11th Cir. 1997). 

Of the various remarks Mr. George challenges, we find that three in particular were improper. During its closing argument and final summation, the prosecution made the following remarks: (1) that the defendants "were stealing from you and they were stealing from me and everyone else that's paying into the system"; (2) that the defendants were "living large off of your tax dollars"; and (3) that without citizens filing accurate tax returns, "we would have no tax revenue, . . . no way to build schools . . . no way to fight wars." There is no doubt that these "golden rule" remarks were improper, as they directly suggested that the jurors had personal stakes in the outcome of the case and they placed the prosecution together with the jury in a joint effort to combat fraud. See United States v. McGarity, 669 F.3d 1218, 1246 (11th Cir. 2012) ("[B]y telling the jury that the victims of the child pornography are 'our daughters and granddaughters, neighbors, friends,' the prosecutor here crossed the line . . . 'demarcating permissible oratorical flourish from impermissible comment.'"). See also United States v. Lopez, 590 F.3d 1238, 1256 (11th Cir. 2009) ("Improper suggestions, insinuations and assertions calculated to mislead or inflame the jury's passions are forbidden in the presentation of closing arguments.").  We expect prosecutors from the Tax Division of the Department of Justice to refrain from this kind of argument in the future. 

Nonetheless, as in McGarity, 669 F.3d at 1246-47, the improper remarks did not so prejudicially affect Mr. George's rights that a different outcome might have been achieved in their absence. First, the district court instructed the jury on at least three separate occasions that the arguments of counsel were not evidence. See United States v. Rodriguez, 765 F.2d 1546, 1560 (11th Cir. 1985) (holding issuance of three curative instructions was sufficient to cure damage arising from prejudicial comments made by prosecutor). Second, there was overwhelming evidence against Mr. George. The improper remarks did not affect Mr. George's substantial rights, even when considered cumulatively. See Ladson, 643 F.3d at 1342 ("There is no cumulative error where the defendant cannot establish that the combined errors affected his substantial rights.") (internal quotation marks omitted). As a result, the prosecution's improper statements do not require reversal.

Article Regarding Representing Swiss Banks (3/24/14)

I received an email today about an article that he and two other prominent tax practitioners published in February.  Alan Granwell, Bob Katzberg and William Sharp, The US DOJ Voluntary Disclosure Program for Swiss banks: What the Umbrella Man can teach bank counsel about criminal intent (International Tax Review 2/13/14), here.

The key contents of the article are probably well known to readers of this blog.  The authors do analogize to the infamous "Umbrella Man" who surfaced in connection with the John F. Kennedy Assassination.  The  Wikipedia entry on the Umbrella Man is here.  I do think  that anecdote is useful in thinking about the situation addressed.

From the legal perspective, however, I do have a couple of quibbles.

• Readers should remember that, in a legal setting, the level of mens rea is the Cheek definition for willfulness -- the voluntary intentional violation of a known legal duty.  Even where willfulness is not a specific statutory requirement, the crimes that could be marshaled against the enablers have similar levels of intent.  See  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.  Of course, those assisting the bank should be keenly aware of that standard and deploy it in assessing the conduct of the bank personnel.
• As for deliberate ignorance (which I usually call conscious avoidance), I have spoken often on that subject on this blog.  The law is not settled, but I think when it is, the concept of willful ignorance will not be a substitute for the express intent to violate a known legal duty, but a device to permit the trier of fact to infer in the context of all the facts and find, beyond a reasonable doubt, that the defendant had the specific intent to violate a known legal duty.  That may not sound important, but I think it is.
• I continue to be concerned about the ease with which the aiding and abetting concept is used.  I have ranted on that subject before and won't do it again.  Follow the links below to read more about it.  See also John A. Townsend, Theories of Criminal Liability for Tax Evasion (5/15/12), here.  As to the charge of tax evasion and the obstruction charges (tax obstruction under Section 7212(a) or defraud / Klein conspiracy under 18 USC 371), the bank employees can be directly guilty of the crime, so aiding and abetting does not add anything other than extra and meaningless jury instructions.  I  suppose that, since tax perjury is a status crime and bank employees do not satisfy the required status (the taxpayer signing the return), the aiding and abetting concept might be marshaled for them, but they probably would be directly guilty under 7206(1), aiding and assisting.  Oh, well.

The key point the authors make is that, as in all of life, there is no substitute for hard work and experience in making the decisions that are so important to the Swiss banks assessing their exposure and participation in the program.

IRS Sting Investigation Nabs Offshore Bank Account Enablers (3/24/14)

According to a DOJ Tax Press Release, here, the IRS nabbed a U.S. Citizen and two Canadian citizens who offered enabler services to U.S. taxpayers.  They were caught in a classic IRS sting operation.  Here are key excerpts (bold-face by JAT):

Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted for conspiracy to launder monetary instruments, the Department of Justice and Internal Revenue Service (IRS) announced today.  The indictment alleges that Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud.  The Caribbean-based defendants allegedly assisted undercover law enforcement agents, posing as U.S. clients, in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners.  Vandyk and St-Cyr invested the laundered funds on the clients’ behalf and represented the funds would not be reported to the U.S. government.  

* * *  In addition to the conspiracy charge, Vandyk, St-Cyr and Poulin were each charged with two counts of money laundering.  

* * * * 

According to the indictment, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based in the Cayman Islands.  St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens.  Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada and in the Turks and Caicos.  His clientele also included numerous U.S. citizens.   

 According to the indictment, Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government.  Vandyk and St-Cyr directed the undercover agents posing as U.S. clients to create offshore foundations with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients.  Vandyk and St-Cyr used the offshore entities to move money into the Cayman Islands and used foreign attorneys as intermediaries for such transactions.  

 According to the indictment, Poulin established an offshore foundation for the undercover agents posing as U.S. clients and served as a nominal board member in lieu of the clients.  Poulin transferred wire payments from the offshore foundations to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside the United States in the name of the offshore foundation.  The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients.  Clients were able to monitor their investments online through the use of anonymous, numeric passcodes.  Upon request from the U.S. client, Vandyk and St-Cyr would liquidate investments and transfer money, through Poulin, back to the United States.  According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion. 

So, it appears that they were both money laundering (not yet alleged against Swiss enablers that I am aware of) and ordinary enablement of U.S. tax evasion (which is what the charge against the Swiss enablers that I am aware of).

Credit Suisse Takes a NonTax Hit from U.S. Authorities (3/21/14)

Elena Logutenkova and Jeffrey Vögeli, Credit Suisse to Pay $885 Million to Settle FHFA Lawsuits (Bloomberg 3/21/14), here.

Credit Suisse Group AG (CSGN), Switzerland’s second-biggest bank, agreed to pay $885 million to settle lawsuits by the Federal Housing Finance Agency over mortgages sold to Fannie Mae and Freddie Mac. 

* * * * 

Credit Suisse was among 18 lenders sued by the FHFA in 2011 to recoup losses on about $200 billion in mortgage-backed securities sold to the two government-sponsored companies before the financial crisis. Nine companies, including JPMorgan Chase & Co., Deutsche Bank AG and UBS AG (UBSN), have agreed to pay more than $9.2 billion to settle similar lawsuits by FHFA. 

“It’s definitely good for Credit Suisse to have this thing out of the way,” said Guido Hoymann, a Frankfurt-based analyst with Bankhaus Metzler. 

Chief Executive Officer Brady Dougan in February called mortgage-related litigation one of the bank’s two most important legal issues alongside the U.S. investigation into whether it helped Americans evade taxes. The company said yesterday the agreement with FHFA resolves the largest mortgage-related investor litigation.

Another UBS Depositor Indicted; the Russian Connection (3/21/14)

DOJ Tax announced here that "Victor Lipukhin, formerly a resident of St. Charles, Ill., was indicted yesterday."  The charges were tax obstruction (Section 7212(a)) and filing false tax returns (Section 7206(1)).  Key excerpts:

According to the indictment, Lipukhin formerly served as president of Severstal Inc. (USA), a subsidiary of AO Severstal, the largest steel producer in Russia.  He lived in St. Charles from at least 2001 through mid-2007. 

Lipukhin, a Russian citizen and former lawful permanent U.S. resident, kept between approximately $4,000,000 and $7,500,000 in assets in two bank accounts with UBS in Switzerland from at least 2002 through 2007.  In 2002, he and another individual opened a UBS bank account in the name of Old Orchard, a sham Bahamian entity.  The account was initially funded with over $47,000,000 transferred into the account from a previously maintained UBS account in the Bahamas.  In 2003, the other individual left the account, leaving Lipukhin as the sole owner and signatory.  Lipukhin also maintained another account at UBS in Switzerland in the name of Lone Star, another sham Bahamian entity.  He directed virtually all transactions in the accounts, typically through a Bahamian national who served as the nominee director of the Old Orchard and Lone Star entities to help conceal Lipukhin’s ownership and control.  However, he failed to report his ownership of these accounts and failed to report any income earned in these accounts on his tax returns.

According to the indictment, in order to further conceal his ownership of the undisclosed UBS accounts, Lipukhin utilized fictitious mortgages through an entity called Dapaul Management, controlled by a Canadian attorney, to conceal his purchase of real estate in the United States with funds from the UBS accounts.  This includes his purchase of a historic building at 18 N. Fourth St, in St. Charles, Ill., for $900,000 in the name of Charlestal LLC, a domestic entity controlled by Lipukhin.  He also transferred funds from his UBS accounts to the Canadian attorney for ultimate transfer to a domestic Charlestal bank account in order to conceal the source of the funds, then used the funds in the Charlestal account to pay for various personal expenses and to withdraw cash for personal use.  Finally, Lipukhin impeded the administration of Internal Revenue laws by attempting to prevent an automobile dealer from filing a Form 8300 – which is required for certain cash transactions over $10,000 – with the IRS in order to report Lipukhin’s cash payment to purchase an automobile.

IRS 2013 Data Book with Many Statistics, Including for Criminal Tax Enforcement (3/21/14)

The IRS has released its 2103 Data Book, here.

The statistics for criminal tax administration and enforcement may be downloaded in Excel format by clicking the link:

Table 18: Criminal Investigation Program, by Status or Disposition, here.

I generated a pdf from  the Excel table.  The pdf may be viewed and downloaded here.

There are 32 tables (31 plus Table A) covering a range of subjects at least tangentially related to criminal tax administration and enforcement.

The web page for IRS Criminal Investigation Statistical Data is here, which provides further links to:

• Current Fiscal Year Statistics
• Three Previous Fiscal Years Statistics
• IRS Data Book, Table 18, Criminal Investigation Program, by Status or Disposition
• CI Enforcement Statistics - Tax and Non-Tax (Ten Years - Fiscal Year 2004 through Fiscal Year 2013)
• Criminal Investigation Statistics by Program and Emphasis Areas of Fraud

I have not had time to review the statistics in Table 18 of the Data Book.  I may post something later, either as an Addendum to this blog entry or a new blog entry.

TRAC Reports on IRS Statistics (3/21/19)

I received the following email from TRAC which links to various statistics related to IRS tax enforcement.  I have not yet reviewed the links.  I will do that later and post anything I want to comment on.  In the meantime, here is the email contents:

Transactional Records Access Clearinghouse ========================================== 

Greetings. Recent and very extensive information from the Internal Revenue Service (IRS) about tax returns, audits and its own criminal enforcement actions are now available on the public web site of the Transactional Records Access Records (TRAC). See TRAC's IRS Data Tools and Applications page at: 

http://trac.syr.edu/tracirs/tools/

 TRAC's tools let you explore newly released data from the IRS about the number of tax returns and the reported incomes in each of more than 3,000 counties in the United States. Tax data from 1991 through 2012 show, for example, that in the most recent year the adjusted gross income (AGI) for New York County (Manhattan) was highest in the nation at $159,410, rising 69 percent from what it was in 2010.

Audit information from 1992 through 2013 is available for corporations of all sizes, from those with assets of $250,000 or less to those with assets of $250 million or more. Information on individual audits for the same time period show audit statistics for taxpayers with a total positive income (TPI) of $200,000 or less to those with a TPI of $1 million or more.  

Criminal enforcement data include the latest figures from the Department of Justice about cases referred by the IRS from FY 1992 through January 2014. Listings, maps and district ranking tables are presented on both a national basis and for each of the 90-plus federal judicial districts. Also included is an updated list of the IRS's most frequently cited statutes in the U.S. Code that eventually led to formal charges or convictions. 

Through the TRACFed subscription service, TRAC offers expanded information and exclusive custom data analysis tools, as well information on over 9,300 Federal Tax lawsuits filed from FY 2007 through January 2014. 

These features can all be reached from TRAC's IRS Data Tools and Applications page at: 

http://trac.syr.edu/tracirs/tools/ 

 TRAC's ongoing reporting on the IRS can be viewed at: 

http://trac.syr.edu/tracirs/ 

 To keep up with TRAC, follow us on Twitter @tracreports or like us on Facebook: 

http://facebook.com/tracreports

TRAC is self-supporting and depends on foundation grants, individual contributions and subscription fees for the funding needed to obtain, analyze and publish the data we collect on the activities of the US Federal government. To help support TRAC's ongoing efforts, go to: 

http://trac.syr.edu/sponsor/ 

 David Burnham and Susan B. Long, co-directors Transactional Records Access Clearinghouse Syracuse University Suite 360, Newhouse II Syracuse, NY  13244-2100

315-443-3563
trac@syr.edu

http://trac.syr.edu 

Around the Net on Offshore Accounts While Otherwise Unproductive (3/20/14)

This will aggregate some of the information I  picked up today in my automated Google searches of the web.

Item #1

A PR Newswire loudly [loudly is my web euphemism for hyperbolically] announced the following:  New Website to Assist Millions of Taxpayers with Undisclosed, Offshore Accounts (3/20/14), here.  I think this is an advertisement to attract those alleged millions and their resources to his coffers.  (I hope he has a good database and staff skills to handle the influx.)  The announcement includes the following:

For those US taxpayers in this precarious position they need expert advice and decisive action to pre-empt imposition of civil tax fraud and criminal tax evasion civil and criminal penalties, which may include: wire fraud, mail fraud, money laundering, failure to file FBAR forms (now known as FinCen Form 1114). Total penalties may be millions of dollars with jail sentences imposed for a maximum of over 80 years for all tax-related felonies.

This is, of course, fear mongering.  The real world is different.  Check out the spreadsheet here which indicates far less -- even minuscule sentences -- in the real world compared to this promo piece.  That does not mean that taxpayer do not face substantial downsides from the behavior, of course.

Item #2

A Wall Street Journal article addresses the expat  issue:  Nearly One-Third of Expats Confused by U.S. Tax Filing Requirements, here.

I don't subscribe to the WSJ because it is a business iteration of Fox News Network (which I like because of the blondes but I won't pay for that anymore because of the WSJ/blonde biases do not match my biases).  So, if you want to read that article, you will have to be a subscriber.  But, if I can speculate about the contents, are they really saying the 2/3's + of expats are not confused and that, therefore, they commit tax fraud when they don't report foreign income (including financial account income) and file FBARs.  WSJ being a Republican rag, I doubt that they intended to infer that because, I suspect, that data set includes a significant number in the "base" to which WSJ pitches its goods.  Really, what they might want to rag on is the IRS and Obama as being responsible for anything inappropriate by anybody anywhere, including expats.

Item #3

U.S. Attorney Enabler Sentenced for Assisting Offshore Evasion (3/19/14)

DOJ Tax announces that attorney Christopher M. Rusch, who enabled two U.S. taxpayers, Messrs. Stephen M. Kerr and Michael Quiel, via offshore bank accounts, has been sentenced to serve 10 months.  See press release here.  (For other blogs on these various players, I suggest readers use the search feature above.)  Key excerpts of the press release (omitting the hype) are:

California attorney Christopher M. Rusch was sentenced to serve 10 months in prison for helping his clients Stephen M. Kerr and Michael Quiel, both businessmen from Phoenix, hide millions of dollars in secret offshore bank accounts at UBS AG and Pictet & Cie in Switzerland 

* * *. 

According to the evidence presented at trial, Kerr and Quiel, with the assistance of Rusch and others, including Swiss nationals, established nominee foreign entities and corresponding bank accounts in Switzerland to conceal Kerr and Quiel’s ownership and control of stock and income they deposited in these accounts.   Rusch testified at trial, admitting that he and others caused the sale of the shares of stock through the undeclared accounts.   Rusch further testified that, at Kerr and Quiel’s direction, he transferred some of the money in the secret accounts back to the United States through Rusch’s Interest on Lawyer’s Trust Account before dispersing the money for Kerr and Quiel’s benefit, including the purchase of a multi-million dollar golf course in Erie, Colo.   According to court documents and evidence presented at trial, with Rusch’s assistance, Kerr and Quiel each failed to report more than $ 4,600,000 and $2,000,000 of income, respectively, during 2007 and 2008 which they hid in the undeclared accounts with Rusch’s assistance.  

Swiss Legislature Further Erodes Swiss Secrecy by Permitting Secret Disclosure to Tax Authorities (3/19/14)

In an excellent short article, Kevin Packman, here, reports that the Swiss have further eroded a component of the fast expiring concept of Swiss bank secrecy.  As Swiss Banking Becomes More Transparent, Americans With Undeclared Swiss Accounts Are Warned (Mondaq 3/18/14), here.

In a move that was likely celebrated by United States governmental officials, Swiss banking secrecy eroded even further on Thursday, March 6, 2014. This is the day that parliament voted to provide foreign tax authorities with identifying information on accountholders with undeclared accounts in Swiss banks without giving the accountholder advance notice.  The one requirement is that the requesting country must demonstrate that by providing notice to the accountholder, the investigation would be hindered.

Kevin's reference is to:  Parliament relaxes terms for tax data exchange (swissinfo 3/6/14), here, which says in part:

Parliament has approved a legal amendment that tax evaders will not always have to be told if Switzerland sends information about them to other countries. The move further loosens Swiss banking secrecy laws in order to avoid a global backlash. 

* * * * 

The Senate on Thursday confirmed an earlier decision by the House of Representatives that people suspected of tax evasion whose information is being sent to another country do not have to be informed of this if the other country can prove that telling them would hinder the investigation. 

 The argument over the reform brought up questions about whether such a move goes against clauses in the Swiss constitution related to guarantees of transparency in legal processes. In the end, the majority in parliament concluded that passing the amendment was in Switzerland’s best interest to meet the OECD’s demands and avoid possible sanctions.

It's All About Packaging the Narrative (3/19/14)

Procedurally Taxing, the premier federal tax procedure blog, has a great guest blog posting by Susan Morse, a UT Professor.  Can the IRS Tell a Good Story? (Procedurally Taxing Blog 3/19/14), here.

The blog is based on Professor Morse's article on Narrative and Tax Compliance, on SSRN here.  The SSRN summary of the article is:

Some noncompliant taxpayers fall outside the reach of third-party withholding and reporting. Revenue agencies may use enforcement and/or prosocial strategies to encourage compliance among such taxpayers. Revenue agencies should stand ready to use narrative as part of these efforts, despite implementation challenges. This is because of the persuasive capacity of narrative. It is also because media will likely create a narrative around any prominent strategy, and the media narrative may not further the goals of the agency.

In arguing for the narrative approach to bolster tax administration and compliance, Professor Morse says in the blog:

A tax administrator might use a punishment narrative to persuade taxpayers that evasion will be discovered (even though the chance of audit is very low).  Stories about other taxpayers, similar to target taxpayers, who have gotten caught can help persuade the audience about the likelihood of audit.  The U.S. government did a nice job with this with respect to its criminal prosecution of holders of secret offshore accounts.  Its strategy was straightforward – it simply wrote press releases that gave some detail about the lives of the individuals who struck plea bargains, for example describing one taxpayer as a retired sales manager for Boeing. 

* * * * 

Stories can be very short.  One famous six-word effort is sometimes attributed to Ernest Hemingway:  “For sale: baby shoes, never worn.”  The IRS offshore account press releases, barebones as they were, gave enough information to permit other taxpayers to fill in the blanks, and make a persuasive story out of the skeleton information.   It helps that the offshore account stories targeted a fairly specific kind of tax avoidance.  Leigh Osofsky, for example, has written about the promise of a strategy that tailors enforcement efforts for micro-groups of taxpayers.

Israeli Banks Advised to Prepare for FATCA Before Negotiations Finalized (3/19/14)

Although the U.S. and Israel are in negotiations, it appears the endgame is in sight.  See Banks told to prepare for new reporting rules on U.S. clients (Haaretz 3/19/14), here.  Key initial except::

The Bank of Israel Sunday advised Israeli banks to begin gearing up to provide information about their U.S. clients to U.S. tax authorities, as provided in the U.S. Foreign Tax Compliance Act. 

The statement was issued by the central bank in an effort to ensure that Israeli banking institutions will be ready to comply with FATCA when it goes into effect, in July. The purpose of the act is to help U.S. authorities collect any taxes owed by U.S. citizens, wherever they may live, with accounts at banking institutions outside the United States. 

Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise. 

The banks had expected Israel’s central bank to push them to comply with the U.S. crackdown, though. Doing otherwise could expose the banks to U.S. sanctions, including limits on their branches within the United States. 

Sunday’s order brought Israel’s banking system in line with many others that have given in to American demands, including Switzerland’s banks, which had been well-known for their privacy. 

As far as is known, the step was taken following advanced negotiations between Israeli government officials and their U.S. counterparts. The bilateral deal would include an Israeli commitment to provide the required information about the American customers of Israeli banks. In return, the United States is expected to commit to provide the Israeli government with comparable data on U.S. banks’ Israeli customers. 

Most Israeli banks have been preparing for two years for the introduction of FATCA in Israel, informing their U.S. customers about the anticipated requirement and its implications. 

It is assumed that any U.S. citizen seeking to evade the reporting requirements has already withdrawn their funds from Israeli banks and turned to other investment channels, such as Israeli real estate, which is not subject to regulation under FATCA. Others have voluntarily disclosed their assets to the U.S. Internal Revenue Service.

Dave Wolf, an Isreali lawyer, advises here that (emphasis supplied by JAT):

This development is quite surprising as usually countries sign the FATCA agreement first before starting the implementation of FATCA rules. 

The negotiations with the USA have been ongoing a very long time and this may be partly the result of the U.S. Department of Justice criminal investigation into the behavior of three Israeli banks in Switzerland: Bank Leumi, Bank Hapoalim and Bank Mizrahi.

U.S. Expects the Swiss Bank Initiative to Produce Information on Account Holders and Bank Professionals (3/19/14)

The following are some key points from a Tax Notes article, Jaime Arora, DOJ Doesn't See Barriers to Receipt of Information Under Swiss Bank Program, 2014 TNT 53-5 (3/19/14).

1. DOJ Tax AAG Keneally expects that information will be forthcoming about account holders and banking professionals under the U.S. Swiss bank initiative.  If that expectation is not met, " the program includes a clause that would allow the DOJ to terminate it."

2.  "In addition to the clause in the program allowing for its termination, the timeline of the program provides another safeguard, Keneally said. She said the DOJ will look at category 2 banks first and make sure the program is working before it moves on to the category 3 banks."

3. The U.S. will assist treaty partners seeking information on their taxpayers.  Keneally noted as an example the John Doe summonses for Norway.

Senators Urge Extradition of Indicted Swiss Bank Enablers (3/18/14)

Senators Levin and McCain, key members of the Senate Permanent Subcommittee on Investigations which held a recent hearing on offshore bank tax evasion, has written DOJ to seek extradition from Switzerland of indicted enablers.  The letter is here.

The body of the letter is short, so I quote it in full:

We are writing to urge a change in the current policy of the Department of Justice (DOJ) which, for more than five years, has not sought extradition from Switzerland of a single Swiss national charged with criminal conduct related to aiding and abetting U.S. tax evasion. 

During the hearing held by the U.S. Senate Permanent Subcommittee on Investigations on February 26, 2014, you testified that DOJ has charged 35 bankers and 25 financial advisors with misconduct related to facilitating U.S. tax evasion.  Of those, 6 have been convicted or pled guilty, and the majority of the rest apparently live openly in Switzerland, having avoided trial on their alleged crimes for years.  Yet you also testified that DOJ has not asked Switzerland to extradite any of those defendants, because DOJ believes “the Swiss will not extradite its citizens.”  

The extradition treaty between the United States and Switzerland, however, does not bar the extradition of Swiss nationals who assisted U.S. nationals in the commission of criminal tax evasion, and it is time to test the Swiss government’s professed willingness to cooperate with international tax enforcement efforts and put an end to its nationals participating in criminal tax offenses.  While Article 3 of the U.S.-Swiss treaty provides some discretion to the Swiss government to deny U.S. extradition requests related to tax offenses, that discretion is limited.  The treaty states that it can “not be used to shield from extradition underlying criminal conduct, such as fraud …or falsification of public documents.”  At least some of the charges in the indictments filed against Swiss bankers and intermediaries appear to meet that standard.  Additionally, Article 8, which provides an exception to extradition requests that name a treaty partner’s nationals, is limited to circumstances where “[t]he Requested State [Switzerland] … has jurisdiction to prosecute that person for the acts for which extradition is sought.” Switzerland does not consider tax evasion a crime, and therefore cannot prosecute such cases, which means the Article 8 exception should not apply to U.S. extradition requests to Switzerland for cases related to tax evasion.  

Given that the current treaty does not foreclose the cooperation of the Swiss government in extradition requests for tax cases, we urge DOJ to at least attempt to use the authorities laid out in that treaty.  Even if a request is unsuccessful, it will inform both Switzerland and its citizens that the United States is ready to make full use of available legal tools to stop facilitation of U.S. tax evasion and hold alleged wrongdoers accountable. 

Thank you for your attention to this matter.

Tax Court Case Where Party In Interest Invokes the Fifth Amendment (3/19/14)

In Humboldt Shelby Holding Corporation v. Commissioner, T.C. Memo. 2014-47, here, decided yesterday, the Tax Court knocked down a digital options bullshit tax shelter relying on the now uniformly discredited interpretation of Helmer v. Commissioner, T.C. Memo. 1975-160, hawked by bogus tax shelter promoters in the mid-to late 1990s through the early 2000s.  The Court starts the opinion as follows:

James Haber is a tax professional who has promoted tax shelters to third parties through a company called the Diversified Group, Inc. (DGI). This case involves a tax scheme Mr. Haber carried out for his personal benefit. Mr. Haber is petitioner's sole shareholder, and his scheme would have allowed petitioner to avoid approximately $25 million of Federal income tax while incurring costs of only $320,000. 

To carry out the tax scheme at issue, petitioner contributed paired options to a partnership to generate an artificially high basis in property the partnership later distributed. Petitioner recognized large capital losses when it sold the stock and reported those losses on its 2003 return to offset capital gains. Respondent disallowed the capital loss deductions and related section 1621 business deductions and determined that petitioner was liable for a section 6662 accuracy-related penalty. The issues for decision are:

1) whether petitioner improperly claimed short-term capital loss deductions of $74,093,688 for its 2003 taxable year. We hold that it did; 

2) whether petitioner improperly claimed section 162 business deductions of $1,249,925 for professional fees it incurred during its 2003 taxable year. We hold that it did; and 

3) whether petitioner is liable for the accuracy-related penalty under section 6662. We hold that it is.

These holdings are straightforward.

An interesting aspect of the case is the following:

Mr. Haber is petitioner's sole owner and the architect of its tax avoidance plan. Mr. Haber is a witness in criminal proceedings in the Southern District of New York involving a former DGI client. The U. S. attorney for that district denied Mr. Haber's request for immunity. Consequently, Mr. Haber has invoked his Fifth Amendment privilege against self-incrimination and declined to testify in these proceedings. Petitioner moved to stay the case until the criminal prosecution's conclusion. We denied the motion after finding that the interests of justice did not support further delaying the trial. 

OPINION 

I. Burden of Proof 

The taxpayer bears the burden of proving by a preponderance of the evidence that the Commissioner's determinations are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any claimed deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The term "burden of proof" includes two distinct concepts: (1) the burden of persuasion, "i.e., which party loses if the evidence is closely balanced", and (2) the burden of production, "i.e., which party bears the obligation to come forward with the evidence at different points in the proceeding". Schaffer v. Weast, 546 U.S. 49, 56 (2005). Before trial we considered shifting the burden of proof to respondent in the light of Mr. Haber's decision to invoke his Fifth Amendment privilege and our decision to move forward with the trial in his absence. We ultimately decided against shifting the burden of persuasion because doing so would have effectively sanctioned the Commissioner for the Federal prosecutor's refusal to grant Mr. Haber immunity. We did shift the burden of production to respondent and requested petitioner to provide an offer of proof regarding the testimony Mr. Haber would have provided if he had been granted immunity. 

Immunity is a statutory creation whose administration Congress bestowed on the executive branch. 18 U.S.C. secs. 6002 and 6003 (2012). Congress has given the Attorney General the authority to exchange the protection of immunity for otherwise incriminating testimony when, in his judgment, a witness' testimony may be in the public's interest. United States v. Quinn, 728 F.3d 243 (3d Cir. 2013). "There is * * * overwhelming judicial and legislative authority for the proposition that review on the merits of a Federal prosecutor's decision to grant immunity is barred by statute." United States v. Herman, 589 F.2d 1191, 1201 (3d Cir. 1978). This bar extends to judicial review on the merits of a prosecutor's decision to withhold immunity. Id. 

Rule 142 permits the Court to shift the burden of proof in its discretion under certain circumstances. Given the prosecutor's broad authority to make immunity decisions without judicial interference, we exercised this discretion cautiously here. After careful consideration of Mr. Haber's circumstances, we determined that he could invoke his Fifth Amendment right to avoid testifying, but we declined to shift the burden of persuasion. After trial it is apparent that the burden of persuasion has no bearing on the resolution of this case. The evidence in the record would support our conclusion even if we had shifted the burden and even if Mr. Haber had testified as petitioner claimed in its offer of proof. Considering the significant objective evidence of his intent here, we would have given little weight to his self-serving testimony. See Faulconer v. Commissioner, 748 F.2d 890, 894 (4th Cir. 1984) ("A taxpayer's mere statement of intent is given less weight than objective facts."), rev'g T.C. Memo. 1983-165.

Article on FATCA as New International Standard (3/18/14)

Tax Notes has published a new article on FATCA.  Joshua D. Blank and Ruth Mason, Exporting FATCA, 142 Tax Notes 1245 (Mar. 17, 2014).  Professors Blank and Mason are at NYU Law and UVA Law.  The earlier draft version at SSRN is here.  The following is the SSRN summary of the article:

The Foreign Account Tax Compliance Act (FATCA) represents a powerful response by the United States to flagrant offshore tax evasion. Although the new reporting regime has been criticized as unilateral and extraterritorial, this short article, prepared for a symposium hosted by Pepperdine Law Review, shows that multilateralism and cooperation so far have been the keys to implementing FATCA. In addition to spurring bilateral Intergovernmental Agreements (IGAs) to implement FATCA, and copycat legislation in other jurisdictions, for many countries, the FATCA reporting requirements represent an aspirational new global standard for automatic exchange of information – one that would supplement, if not replace, information exchange on request.

The following are excerpts (footnotes omitted) from the article as published in Tax Notes (haven't compared to the draft which I link above).  I present them in the outline format of the article, omitting most of the text (omissions shown by * * * *) and sometimes adding information shown by brackets [ ].

A. Introduction

* * * *

B. The Rise of FATCA

* * * *

1. Background. 

* * * *

2. FATCA. 

* * * *

3. Criticisms [of FATCA]

[Those who don't like FATCA will find some reinforcement in this succinct summary of criticisms]

C. From Unilateralism to Multilateralism

While complaints about the unilateralism and extraterritoriality of FATCA are not without merit, FATCA has enhanced multilateral cooperation in combating tax evasion, and it has spawned similar legislation and treaties in other jurisdictions.

Credit Suisse Banker Pleads Guilty to Tax Conspiracy (3/12/14; 3/13/14)

Andreas Bachmann, a Credit Suisse Banker, pled guilty today to one count of conspiracy.  See DOJ Tax press release, here.  The Statement of Facts is here.  I excerpt portions of the Statement of Facts below.

Key excerpts (bold face added by JAT):

In a statement of facts filed with the plea agreement, Bachmann admitted that between 1994 and 2006, while working as a relationship manager in Switzerland for a subsidiary of an international bank, he engaged in a wide-ranging conspiracy to aid and assist U.S. customers in evading their income taxes by concealing assets and income in secret Swiss bank accounts.

As part of that conspiracy, Bachmann traveled to the United States twice each year to provide banking services and investment advice to his U.S. customers.  As a matter of practice, prior to traveling to the United States, Bachmann notified his executive management, including the head of the subsidiary’s private bank in Zurich and the chief executive officer of the subsidiary, of the planned trip and its objectives.

Although Bachmann had been informed of limitations under U.S. law on his ability to provide investment advice to U.S. account holders regarding U.S. securities, the highest ranking executive at the subsidiary was aware that Bachmann was violating U.S. law.  According to the statement of facts, Bachmann was effectively told by the chief executive officer for the subsidiary, “Mr. Bachmann, you know what we expect of you, don’t get caught.”

According to the statement of facts, Bachmann also engaged in cash transactions while traveling in the United States.  In the course of arranging meetings with U.S. customers, some clients would request that Bachmann either provide them with cash as withdrawals from their undeclared accounts or take cash from them as a deposit to their undeclared accounts.  As part of that process, Bachmann agreed to receive cash from U.S. customers and used that cash to pay withdrawals to other U.S. clients.  In one instance, Bachmann received $50,000 in cash from one U.S. customer in New York City and intended to deliver the money to another U.S. client in Southern Florida.  Airport officials in New York discovered the cash but let Bachmann keep the money after questioning him.  The client in Florida refused to take the money after the client learned about the questioning by New York airport officials, and Bachmann returned to Switzerland with the $50,000 in cash in his checked baggage.  Bachmann advised the executive management of the subsidiary about the incident with the cash.

Bachmann also understood that a number of his U.S. customers concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities, or structures, which were frequently created in the form of foreign partnerships, trusts, corporations or foundations.

Bachmann dealt with Josef Dӧrig, a co-defendant, regarding the formation and/or maintenance of structures for U.S. customers, among others.  In approximately 1997, the international bank instructed Dӧrig to form his own company specializing in the formation and management of nominee tax haven entities because it was “too risky” to have Dörig perform that work from inside the international bank.  The international bank then directed the subsidiary and others to use Dӧrig and his Swiss trust company, Dӧrig Partner AG, as the preferred choice for the formation and management of structures.

JAT Comments:

The real target of this plea and the wording of the press release is, of course, Credit Suisse.  Perhaps even the testimony of the CEO at the recent PSI hearing.

Addendum 3/12/14 6:32 PM:

House Oversight Committee Staff Report on Lois Lerner (3/11/14)

The House Committee on Oversight and Government Reform has issued its report on the Lois Lerner episode.  The report is titled Lois Lerner's Involvement in the IRS Targeting of Tax-Exempt Organizations, here.  This is a staff report.

I have not had time to study the report.  My gut reaction from perusing it is that it is a political document, and that she made the right call in invoking the Fifth Amendment privilege, not because the evidence supports her guilt of anything but because the evidence supports that the House majority had found her guilty long ago. So, my only comment is to repeat a quote, variously worded, from the inimitable Daniel Patrick Moynihan: "Everyone is entitled to his own opinion, but not his own facts."

I have done a quick Google search and, not surprisingly, the majority's blogosphere base is wholeheartedly praising the report.

Addendum 3/11/14 6:00 PM:  Let me say that, in my own way, I hope that the report calls it exactly right.  For, if it does not, if it is materially wrong in in reporting of the facts and the fair inferences from the facts, the staff and those who led the staff have done this country a great disservice, not to mention the people they have libeled with no consequence to the staff and those who led the staff.

Addendum 3/12/14 10:06 AM:

Readers of this blog know the standard precaution that is given when serious charges against U.S. citizens are made by way of an indictment:\

The charges and allegations contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

See e.g., a sample USAO SDNY press release announcing an indictment here.

The question raised by this report is whether that precaution applies when charges are made against U.S. citizens by a partisan congressional committee?

Outstanding Presentation on FBAR Assessment and Collection (3/11/14)

Caroline Ciraolo, a major player in tax controversy generally and in OVDI/P specifically, has prepared a great presentation titled Assessment and Collections of the FBAR Penalty.  Caroline's bio is here.  The presentation is here.  Although the presentation is dated April 10, 2013, Caroline advises that the materials presented are still current.  Let me just say that Caroline drills down and asks and answers the questions most readers might have thought about with regard to FBAR assessment and collection.

Some topics she deals with are:

• Administrative Offsets and Suits to Collect FBAR Penalties, Including Statutes of Limitations
• Interest on Unpaid FBAR Penalties
• Taxpayer Lawsuits to Challenge the FBAR Penalty Under the Tucker Act.
• The FBAR Penalty in Bankruptcy

One particular matter that I found of current interest is a quick judicial remedy for a taxpayer suffering an FBAR willful penalty assessment.  The taxpayer may bring immediately a partial payment Tucker Act suit, not hampered by Flora's full payment rule.  For example, say the FBAR willful penalty is $1,000,000.  The taxpayer might pay, say, $100 and bring suit immediately (subject to any administrative claim that might have to be filed, which I have not researched yet).  That does not mean that the Government will stop collection measures, but collection measures may be limited, so the Government would likely then counterclaim for the balance (assuming that the two year statute of limitations for FBAR collection suits is still open, which would be the case if the taxpayer brings an immediate suit).

Even better, the taxpayer suffering an FBAR assessment can bring the suit in district court.  I have not traced out definitively whether the taxpayer is entitled to a jury, but the USAM Civil Resource Manual Title 4, 201, Jury Trials in Civil Cases, here, seems to indicate that a jury trial may be available.

Of course, one forum to litigate the FBAR assessment under the Tucker Act is the Court of Federal Claims where a jury trial is not available.  So, in choosing the forum, the taxpayer and his counsel will have to consider carefully the pros and cons of a jury trial.  In the case I am currently considering this option for a jury trial in the local district court is the way to go.  If we draw that assessment after Appeals Office review, we will be in the district court with a jury demand in less than a week (subject to any required administrative request which, under the tax analog, would be a formality because of Appeals previous consideration).

List of 14 Swiss Banks Under Criminal Investigation (3/9/14)

Here is my current list of the 14 Category 1  banks under criminal investigation with no opportunity to join the U.S. Swiss Bank initiative:

Bank Frey
Bank Hapoalim (Switzerland)
Bank Julius Baer
Bank Leumi (Switzerland)
Basler Kantonalbank
Credit Suisse AG
HSBC Private Bank (Suisse)
Liechtensteinische Landesbank (Switzerland) Ltd.
Mizrahi-Tefahot (Switzerland)
Neue Privat Bank
Neue Zürcher Bank
Pictet & Cie
Rahn & Bodmer
Zürcher Kantonalbank

I would appreciate readers advising if this list is not correct.

Addendum on 5/21/15:  I found another list, Swiss Banks Entering U.S. Client Disclosure Program (Swissinfo 10/15/14), here.  The Swissinfo list overlaps except that (i) Neue Zürcher Bank is on my llist and not on Swissinfo list and (ii) Group SCA is on the Swissinfo and not on my list.

More on Credit Suisse and the Larger SEC Issue for Some Swiss Banks (3/7/14)

I previously blogged on the Credit Suisse SEC fine.  Credit Suisse Take a Hit on U.S. Tax Evasion Business (Federal Tax Crimes Blog 2/21/14), here.  The Wall Street Journal has a good more recent article: Joel Schedman, Broker Dealer Rules Have Teeth Against Swiss Banks (WSJ World 3/6/14), here.  Some f the opening excerpts to get your interest:

Despite stories of unmarked elevators and secret wire transfers, the most damaging charge against Credit Suisse Group AG has been comparatively mundane: as it courted Americans for offshore accounts, the bank failed to register its bankers with the Securities and Exchange Commission. 

Credit Suisse Group AG bankers courted American tax evaders, between 2002 and 2008, schooling them in how to do an end-run around the Internal Revenue Service and hide behind Swiss secrecy rules, according to a 181-page report from the Senate’s Permanent Subcommittee on Investigations. Beyond just offering American clients undeclared Swiss accounts, Credit Suisse bankers helped set up “shell entities” to “mask their U.S. ownership.” The bankers also offered helpful tips in hiding financial activity, like keeping transactions below a certain dollar amount to avoid triggering greater scrutiny, according to the report. 

Credit Suisse acknowledges the “misconduct, centered on a small group of Swiss-based private bankers, previously occurred at our bank,” according to the bank’s statement submitted to the subcommittee. Bank officials “deeply regret these employees’ actions.” Since 2008, after the allegations came to light, Credit Suisse, “took proactive and decisive steps to ensure that only U.S. clients who established compliance with U.S. tax laws could remain at the Bank,” according to the statement. The bank says it shut down the unit responsible for in 2009. 

Despite the color of the alleged tax evasion, the most painful charge against the bank has been less sexy: As bankers recruited American clients, they failed to register with the SEC. Credit Suisse agreed to pay the SEC $196 million over those charges last month, in a case that bore a striking resemblance to the allegations against another Swiss bank, UBS AG. “It’s Deja Vu all over again,” said John C. Coffee, a professor at Columbia Law School.

Fifth Amendment and Immunity in Congressional Hearings (3/6/14; 3/11/14)

Since the Darrell Issa witch hunt is back in the news regarding Lois Lerner's invocation of her Fifth Amendment privilege, I thought I would remind readers of the following blog entry earlier when this nonsense flared up.  Invoking the Fifth - the House Oversight Inquisition (Federal Tax Crimes Blog 5/25/13), here.

I now add two excerpts from law review articles -- the first discussing assertion of the Fifth Amendment in a congressional hearing and the second discussing the congressional committee's ability to avoid the Fifth Amendment by getting immunity for the witness.  (Note that the latter is the way that Committee can get Lerner's testimony that Issa and his crew claims is so essential to the  investigation; so one obvious question is why the Committee does not obtain immunity for her; could one answer be that they know the testimony she will give is not as damaging as they can claim if she does not give the testimony; in other words, is she more useful to the conspiracy theorists by claiming the Fifth when the truth to which she would testify is not helpful to their cause?)

Kalah Auchincloss, Congressional Investigations and the Role of Privilege, 43 Am. Crim. L. Rev. 165, 193-195 (2006) (footnotes omitted).

B. Fifth Amendment in a Congressional Investigation 

1. Watkins v. United States: The 5th Amendment Lives 

As noted several times previously, individual rights did not appear to pose a limit on congressional investigatory power until after the era of abuse by HUAC. Despite the importance of the Fifth Amendment, it is interesting to observe that even this explicitly constitutional privilege was not openly recognized by the Court as available to a witness before Congress until the 1950s.  

In Watkins v. United States [354 U.S. 178 (U.S. 1957), here], the Supreme Court granted certiorari to review the conviction of a witness for contempt for declining to answer questions posed to him by HUAC.  Watkins had cited the Fifth Amendment right to remain silent as justification for his refusal to testify. The Court overturned Watkins' conviction, finding that the Bill of Rights applies to congressional hearings just as it does to courts:

It is unquestionably the duty of all citizens to cooperate with the Congress in its efforts to obtain the facts needed for intelligent legislative action. It is their unremitting obligation to respond to subpoenas, to respect the dignity of the Congress and its committees and to testify fully with respect to matters within the province of proper investigation. This, of course, assumes that the constitutional rights of witnesses will be respected by the Congress as they are in a court of justice. The Bill of Rights is applicable to investigations as to all forms of governmental action. Witnesses cannot be compelled to give evidence against themselves.

U.S. Motion for Summary Judgment in Zwerner (3/5/14)

I have just had the opportunity to peruse the Government's motion for summary judgment in the Zwerner case.  The motion is here (Note to readers, I have bookmarked the outline of the presentation in the pdf but you must download the pdf to take advantage of the bookmarked table).  The motion was filed 2/28/14.  I did not downloaded or read the exhibits, but have listed them here as presented in the motion.  My quick cut is that the exhibits are not relevant for any comments that I will make here.  The docket entries as of this morning are here.

My comments are:

1. The Government asserts that the burden of proof it must meet to establish willfulness is by a preponderance of the evidence.  Two courts have so held, although in one of the holdings was dicta.  I continue to believe that a strong case can be made for the clear and convincing standard.  I have presented my basic position on this point in earlier blogs, although I have recently refined the argument.  So, maybe I'll post on it later.

2.  The Government asserts the willful blindness, saying it is not necessary to prove Zwerner's knowledge that the law required the filing of the FBAR and imposed penalties for failure to do so.  I think that argument is wrong.  Congress' command was that the person have acted willfully.  In this context, it is clear that willfulness is the intentional violation of a known legal duty.  Nobody can seriously question that proposition. See Ratzlaf v. United States, 510 U.S. 135 (1994), here (the defendant knew of the BSA CTR filing requirement and sought to avoid it but did not know the law penalized it)  The question is whether willful blindness is a substitute for intentional violation of a known legal duty (as the Government appears to argue) or, instead, is simply a fact pattern from which the trier of fact is permitted to infer that the person had the requisite intent to violate a known legal duty, which after all is the command of  the statute.  The cases are fuzzy on this distinction, but if it is as the Government argues -- i.e., a substitute for intentional violation of a known legal duty -- then the position adds to the statutory basis for liability enacted by Congress.  That cannot be right.  I too have recently refined my analysis on this position and may post on it later.  (Note that I usually refer to willful blindness as conscious avoidance, as the label below for links to other blogs on the subject suggests.)

3.  Willfulness -- in the sense of intentional violation of a known legal duty -- is an inference from the facts because, as the Government notes, it is hard to prove the workings of a mind.  It thus should be the rare case that a finding of willfulness is compelled as a matter of law, as the Government asserts.  This is a variation of the concern I express in paragraph 2, but I suppose that willful blindness also is an inference from facts and thus also not well-suited for summary judgment.

The outline for the Government's argument on the defendant's liability is:

The Scariest Tax Form? Scary Is in the Eye of the Beholder (3/3/14)

Robert Wood has a timely reminder that certain forms, if not filed or filed properly, can create major statute of limitations problems for U.S. taxpayers.  Robert W. Wood, Scariest Tax Form? Skip It, And IRS Can Audit Forever (Forbes 3/l3/14), here. The particular form he focuses on is the Form 5471.  The Form 5471 is here.  The instructions for the form are here (in pdf format) and here (in html format).  Here is the key excerpt:

The IRS normally gets three years to audit. Sometimes, say if you mess up with offshore account reporting, the IRS gets six. Having a foreign bank account and unreported income is tough to resolve. The safest approach is going into the IRS Offshore Voluntary Disclosure Program, although some clients opt for more aggressive approaches. 

What many people find surprising is that having a company that holds a foreign account is even more sensitive. Yes, we’re talking about controlled foreign corporations, also called CFCs. When a U.S. shareholderdholds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC. A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation’s total voting power. 

That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate. 

What’s more, this penalty can apply even if no tax is due on the return. That seems harsh, but the next rule—about the statute of limitations—is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude. 

This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn’t a return.

This is scary.  But there are many returns and return filing obligations that are scary.  Picky and choosing is a matter of personal preference.  Mr. Woods is concerned about an unlimited civil statute of limitations -- or at least a civil statute suspension until the information is provided.  The criminal statute of limitations is not suspended.