Thursday, July 3, 2014

Attorney Sentence Properly Considered Attorney Status and Deterrence in Tax Cases (7/3/14)

In United States v. McCord, 2014 U.S. Dist. LEXIS 86436 (SD OH 6/25/14) [no link available], the defendant, an attorney, was sentenced by a Magistrate Judge to 60-days incarceration and 1-year of supervised release.  The defendant appealed to the District Judge, alleging various grounds on why the sentence was too harsh.  In one ground, he urged that the Magistrate Judge improperly considered his profession as an attorney in sentencing; in another ground, he urged that the Magistrate Judge improperly considered deterrence of others.  The district judge rejected all of the claims, along with his other arguments.  Here is what the district court said about the two claims specified:
a. Attorney Status 
McCord argues that "[n]either the statute nor the Sentencing Guidelines take[] into account [McCord's] professional status for sentencing purposes . . ." and therefore, by implication, neither should the sentencing court. Id. at 11. However: 
No limitation shall be placed on the information concerning the background, character, and conduct of a person convicted of an offense which a court of the United States may receive and consider for the purpose of imposing an appropriate sentence. 
18 U.S.C. § 3661 (2012); see also U.S.S.G. § 1B1.4 (2013). Thus, the Magistrate Judge was permitted to consider McCord's "background" as an attorney for the purpose of imposing an appropriate sentence." Id.; see also United States v. Saperstein, No.: 94-5275, 1994 U.S. App. LEXIS 36153, *5-6 (6th Cir. Dec. 19, 1994) (approving some upward departure for a lawyer's violation of 26 U.S.C. § 7203 but reversing on grounds that the district court did not consider each incremental step of the departure imposed); United States v. Barbara, 683 F.2d 164, in passim (6th Cir. 1982) (upholding a more-severe-than-otherwise sentence imposed upon a lawyer and citing other cases doing the same). Moreover, McCord's background as an attorney does, in this Court's opinion, make his offense more worthy of punishment than were he not an attorney. 
McCord has consistently claimed, presumably in an attempt at mitigation, that his failure to file income tax returns for five straight years was a "product of his persistent negligence." (Doc. 40, Appellant's Brief at 15). But most people in the United States are at least peripherally aware that the government has bills and occasionally, at least once a year, expects citizens to ante-up in order to help pay them. Attorneys, who must obtain an undergraduate degree, a Juris Doctor degree, and who, therefore, typically spend 7 years at university before even attempting to pass a multi-day bar exam, are expected to (and generally do) know more about the laws and governance of the United States than the general public. Thus, it is a cringe-worthy absurdity when an attorney, who has been practicing for nearly 20 years, claims that his failure to file taxes for five-consecutive years is a matter of negligence. McCord's status as an attorney destroys his attempt to mitigate and was a perfectly reasonable thing for the Magistrate Judge to have considered. 
* * * * 
c. The Need to Deter Others
As the final part of the reasonableness analysis, the Court considers whether the Magistrate Judge erred in giving heavy weight to the need to deter others. McCord argues, "The Magistrate Judge was more focused upon fashioning a sentence designed to create a general deterrence by 'sending a message' because [McCord] is an attorney, rather than a specific deterrence that focuses upon the history and characteristic[sic] of Mr. McCord." (Doc. 40, Appellant's Brief at 14). However, the legitimacy of the need to deter others, not just the defendant, is set forth by statute: 
(a) Factors To Be Considered in Imposing a Sentence.— The court shall impose a sentence sufficient, but not greater than necessary, to comply with the purposes set forth in paragraph (2) of this subsection. The court, in determining the particular sentence to be imposed, shall consider—
. . . .
(2) the need for the sentence imposed—
. . . .
(B) to afford adequate deterrence to criminal conduct;
(C) to protect the public from further crimes of the defendant; . . . . 
18 U.S.C. § 3553(a)(2)(B-C) (2012). In other words, the deterrence set forth in part (B) is not exclusively limited to the defendant because, if it were, part (C) would be robbed of much of its meaning. That is to say, deterring the defendant from criminal conduct and protecting the public from further crimes by the defendant go hand-in-hand. If the sentence successfully deters the defendant, the public is protected. Hence, Part B must mean deterring more than merely one particular defendant. See, e.g., United States v. Coleman, 370 F. Supp. 2d 661, 681 (S.D. Ohio 2005) (Marbley, J.) (noting the general deterrence goals of 3553(a)(2)(B)). Moreover, the fact that part (C) limits its goals to the defendant illustrates that Congress, had they wanted to similarly limit part (B)'s deterrent aims, knew the language with which to accomplish that end. 
In addition, the Magistrate Judge's public deterrence analysis makes a great deal of sense. The Magistrate Judge said: 
[I]t does seem to me that general deterrence is a significant issue in these kinds of cases, and I am very concerned about what message it does send to other folks in a similar situation about their need to file tax returns. If someone who has not done that for a period of five years -- and really from the point of view of being a lawyer -- can't come up with any valid excuse for not having done that, if that's a probation case, I am wondering what the failure to file a misdemeanor case is that's not a probation case? 
. . . . 
If you look at the policy statement for this particular offense, the Sentencing Commission has expressed a concern that the number of people [who] are actually prosecuted for tax offenses of any sort is a very, very, very small fraction of people who actually commit tax offenses. This is just not a crime where there is an awful lot of enforcement through the criminal justice system. . . . . 
But given the fact that there is[sic] an awful lot of people who never get prosecuted, if you add to that the fact that those who do get prosecuted don't get any significant punishment, then you are basically saying to the rest of the public, it is fine, go ahead and don't file your tax returns, for example, because, A, the chances are great that you will never get caught. And if you do get caught, the chances are pretty good that you will never be prosecuted. And finally, if you are prosecuted, the chances are pretty good that other than probation and a requirement that you pay the money that you actually owe, nothing else is going to happen to you. 
(Doc. 38, Sent. 5:11-5:20, 17:3-17:24). In other words, the Magistrate Judge could not, without competing against restitution and McCord's already-delinquent child-support obligations, have imposed a fine. Thus, punishment options were effectively limited to probation/house arrest or imprisonment. The Magistrate Judge concluded, and this Court agrees, that, under the circumstances, probation or home confinement would have sent a bad message to the public. That is, if a potential tax-evader is out there, thinking about whether or not to cheat on her taxes, she might conclude, looking at the result for which the Defense advocates, that she should risk it. At best, she does not get caught or prosecuted and saves a lot of money. At worst, she has to return the money, and spend some time checking in with the folks in the probation department. If prison were a realistic possibility, so the argument goes, the potential criminal might think twice. While deterrence may be a relatively weak argument for crimes like methamphetamine possession (for what punishment could be worse than what meth does to you?) it has real persuasive power in the white-collar crime arena where defendants are genuinely scared of incarceration.


  1. My understanding of OVDP 2014 FAQ 7.2 is that, if you submit the preclearance letter before 8/4/14, there will be no 50% penalty, even for those banks already on the list of publicly disclosed banks.

    If that is a correct reading, this is a powerful incentive for taxpayers to get into OVDP before that date.

    Of course, the same rules do not apply to Streamlined, but,of course, the taxpayer has to certify that he or she is not willful.

    Jack Townsend

  2. As I quickly read the 330 day rule, it seems to apply only during the disclosure years, so 2009 would not be included.

    Jack Townsend

  3. As I read the 8/4/14 date, it is if you are already in OVDP 2012 or have submitted the preclearance by 8/4/14, the 50% penalty will not apply when you get to the Form 906 even after 8/4/14. It is only those entering after 8/4/14 that will get the 50% penalty if one of their banks have been publicly disclosed.

    Keep in mind, for example, that a UBS depositor would not have to take the 50% penalty. He or she could opt out and, provided their facts are right, get a lesser nonwillful penalty. In that event they should not have any penalty by virtue of being on the list. Of course, such a nonwillful actor should strongly consider Streamlining.

    Jack Townsend

  4. I am curious too. If assets having a tax event, i.e. Paying tax on interest on dividend balances from foreign life insurance policies are reported on 1040 and interest generated from a foreign bank account amounts to pennies a year why isn't following the 'yellow brick road' a good approach? Isn't truly being unaware of FBAR filing requirements and mis checking Section III boxes due to misunderstanding the requirements nonwilful?

  5. Nathan Farkas, CPAJuly 4, 2014 at 2:30 PM

    Actually, Jack, I question that conclusion here. The problem is, anyone "waiting for a reasonable program" would not be eligible as they wilfully did not file returns and forms in prior years while waiting for a "more reasonable approach".

    A blanket immunity to all those who are non-compliant with US tax but fully compliant in country of residence is the only approach that will really bring out people worried about the wilful requirement.

  6. I'm not sure. It becomes a bit dicey where the TP already been granted precllearance & has already submitted the FAQ24 letter disclosing info about the prior 8 years' returns with some unreported income... If the TP was midstream when the program hanges were announced, moving into QD mode doesn't seem possible.

  7. I apologize for the delay in acknowledging and thanking you for such a kind comment. It really made my day, week, year... :)

  8. Confused Alot,

    Check this out. Follow numbers 3 & 4. Basically, if you don't fit into SDOP, the IRS still wants you to file. Just attach a letter, for your reasonable causes why you did not file those years.

  9. Tinman, my understanding is that the IRS says foreign life insurance companies earnings are "usually" deferred. There's section of the code dealing with this and exempts certain countries' life insurance as truly deferred vehicles. However, their cash values still need to be reported on FBARs & 8938 forms. Also check on the excise tax on the premiums paid INTO those policies. Certain countries are exempt from that also for paying such excise taxes to the IRS.So just check on that with your advisor. This has been my understanding.

    And yes, a misunderstanding of the law is why t he IRS has the Options available for US taxpayers with undisclosed foreign financial assets option, as well as tne nonwillful certificaiton for SDOP & SFOP participants.

    Anyone else's take?

  10. Anon, Thanks for your feedback. What do you mean by "humanize your case"?

  11. Does Appeals need a tax lawyer or can a competent CPA argue the case?

  12. Milan, I'm not sure you can conclude much from not having had the QDs examined.
    1) Remember the IRS has a 6 yr. SOL on FBAR and the IRS is slow, so it may be 3-4 years before you can more or less breathe easily and 6 yrs. until FBAR SOL has run out.
    2) A QD sent in a couple of years ago may be treated quie differently than one sent today, i.e. QDs may have become easier to detect, or the IRS may have changed its stance to be more aggressive on QDs now than in the past.
    But I agree with you that prior to doing a QD an analysis needs to be done as to what is likely to happen if the taxpayer gets audited.

  13. Does Appeals always need a tax attorney or can a competent CPA make the case?

    Also is Taxpayer Advocate Service of any help when it comes to an audit situation like this thread discusses

  14. Two questions:

    a. #4 sounds very much like a quiet disclosure but with a RC arguments attached to the delinquent FBAR and amended returns. Is that correct?

    b. If that is the case, isn't IRS saying QD with RC is an acceptable way to come into compliance. Of course, one is taking the audit risk with that approach but it nevertheless is a valid approach to compliance. Am I reading this correctly?


  15. SSD, with regards to Milan rosy outlook with regards to QD I have to repeat you cannot conclude much from not having had the QDs examined.
    Remember the IRS has a 6 yr. SOL on FBAR and the IRS is slow, so it may
    be 3-4 years before you can more or less breathe easily and 6 yrs. until
    FBAR SOL has run out.
    2) A QD sent in a couple of years ago may be
    treated quie differently than one sent today, i.e. QDs may have become
    easier to detect, or the IRS may have changed its stance to be more
    aggressive on QDs now than in the past.
    Prior to doing a QD an analysis needs to be done as to what is likely to
    happen if you get audited.

  16. Appeals does NOT need an attorney, but considering how complex a case might be, someone knowledgeable to make your case to help you, is more than enough. TAS can be of help, but as far as i know, they don't help out in routine appeals case situations. You'd have to make the case why you really need their help and how it's affecting your personal financial situation.

  17. I would not characterize a QD, nor the aftermath, where taxpayer gets a bill for FTF & FTP penalties, accuracy related penalties, plus interest as "rosy."

    My practice is devoted almost ENTIRELY to doing QDs, OVDPs, international (both corp & individual) tax matters and filings. I think the odds that the IRS would come back to anyone, REGARDLESS of SOL on FBAR & income tax returns, are extremely LOW. I'll still take my chances, given that the taxpayer, has done the right thing by:

    1) Amending all returns and paying all taxes;

    2) Filing all delinquient FBARs;

    3) Beein comppliant in the ensuing years, after the QD;

    4) Even in the EVENT of an audit, the taxpayer can rely on items 1, 2, & 3, to show reasonable good conduct.

    5) Granted, there are NO willful characteristics of his/her case (i.e., filing an FBAR many years ago, and then not filing them until the QD).

    I recognize that a QD today, might be looked upon more askance by the IRS then prior QDs, but I will STILL take my chances, given:

    6) Reasonable cause arguments can be asserted in an examination setting

    7) Barring a successful "no change" examination, the Appeals process exists to extricate personalities and biases to better explain the facts & defenses of the case (this process may or may not require legal representation);

    8) The court system still exists;

    Given the amount of opportunities for different levels of the IRS to hear one's defenses, in the event of an audit, considering one would be audited in the first place, I usually like the QD route.

    9) Let's take a look at SDOP. Persons who have NOT filed any returns in the last 3 years are not eligible for entry into this program. The IRS thus wants you to file amended returns and delinquent FBARs through the process described here:

    All the IRS is saying is "yes, go ahead and do the QD, but please attach the reasonable cause reasons you are late. This does not mean you will not be audited, but attaching a RC defenses will allow us to better ascertain if you would be a candidate for audit."

  18. Let me reply to your reply.

    1) Agreed. But, my oldest QD is from 2011. It's been 3.5 years since that one, but I might have older QDs, so I havent' kept a list of them, but I out of more than 100 QDs I've done, not one has been audited.

    2) Agreed. But see my response to FallingAsleep. When the IRS comes knocking, you still have ample opportunities to defend yourself. Being in SDOP or SFOP does NOT mean the IRS will NOT audit you later, just because you are in SDOP & SFOP. Having signed a nonwfillful certification in light of a subsequent audit may not help either.

    No one has a crystal ball. So one has to look at all the facts and also the proof backing up those facts. If you can't prove it, it's discarded as a defense or as a fact.

    I have YET to have a client receive an audit for not having filed an FBAR, let alone having filed any delinquent FBAR which is what I have them do as part of any QD.

    I have yet to read many of the criminal cases which Jack has posted on his site, but my understanding is that if there is ENOUGH indirect evidence that a filer is willful, then it might not be a straight case where a QD would be done. Thus an OVDP would be warranted. However, barring enough facts and circumstances which would lead a reasonable jury to believe that the taxpayer KNEW of the IRS's citizenship based tax system and STILL decided to violate it, I am always leaning towards a QD in order to help a filer fuilfill his legal obligations to file and pay taxes.

  19. yes agreed. Sorry, i replied on separate portions of this blog that it's your letter, and not Just Me & Moby's letter.

  20. In my opinion, yes, you are reading 100% correctly.

  21. Wondering about the 4 options listed on IRS website:

    #4 on this page sounds very much like a quiet disclosure but with a RC arguments attached to the delinquent FBAR and amended returns. Is that correct?

    If that is the case, isn't IRS saying QD with RC is an acceptable way to come into compliance. Of course, one is taking the audit risk with that approach but it nevertheless is a valid approach to compliance. Am I reading this correctly?

  22. I'd really appreciate it if a CPA/lawyer can offer their opinion on the following: I filed the 2013 FBAR on time, but have yet to file my 2013 taxes for which I received an extension.

    Under SDOP, IRS says "for each of the most recent 6 years for which the FBAR due
    date has passed (the “covered FBAR period”), file any delinquent FBARs". So is it correct that under SDOP I would electronically file the delinquent FBARS for 2008,09,10,11,12? Also, I'm assuming that I would need to file amended returns for 2010,11, and 12 as part of SDOP, besides filing 2013 separately.

  23. Milan,

    Ref the link to the IRS page that lists the 4 options:
    I don't see IRS recommending "QD with RC" as a legitimate option. Among the four options: Which one do you say is QD with RC? Are you pointing to option #4? (Delinquent international information return submission procedures.)

    The way #4 reads: that option is ONLY for folks who have no unreported foreign income (i.e. no back taxes owed). it says only applicable for those who missed "information return". (I don't know what "information returns" means. I am guessing things like missing out on filing form 8893, or answering No to the sch. B question etc... may be.) What exactly is option #4?

    On a different note, if a minnow does do SDOP - Are you saying that it's very easy for IRS to nail that person as being willful? Don't they have to go though hoops to prove it? (since the burden is on them?) Or is it at the whim of the agent?

  24. If the reasonable cause arguments fit well with one's fact pattern, then I don't see why the specific references to reasonable cause & conduct within the IRM which anon5percent had in her letter cannot be used. If the situation rises to an appeals level or to a court setting, then possibly specific court decisions and Justices' opinions could be drawn upon to infer more concise definitions of willful versus nonwillful.

    To "humanize" is to tie into someone's fact pattern as best as possible to either statutory or judicial definitions of a reasonable defense. I disagree that the reasonable defenses which anon5percent have used have been "used over and over" again. If they were, they would be well known to most taxpayers without having to refer specifically to the IRM or court cases to ascertain them. Even if the reasonable defense claims have been used over and over again, then that's all the more reason to use them, and indeed part of why one would want to again use them -- because the IRS is drawing willful definitions from their own statutory definition of them and not as how the courts seem to be defining "willful" acts within a tax crime context. Thus better to draw upon the SAME statutory guideance which revenue agents have to stack up agains the Services accusations of willful & nonwillful acts of tax noncompliance.

    Just my take.

  25. I think in formulating the reasonable cause / good faith argument, the focus should be on the facts rather than the "law." The IRS knows the law. What the IRS does not know are the facts and the factual nuances. When setting forth the facts and factual nuances, it is helpful for there to be some echoes of the law that the agent will recognize.

    With a good development of the facts and factual nuances, probably only a summary of the law is required.

    I agree that it is helpful to humanize (perhaps to be distinguished from legalize),

    Jack Townsend

  26. thanks. i do owe back taxes for some of the years for which i have not filed- so i will have to pay penalties and interest. because of that, i've been advised that a QD would be very risky specially after the new rules of last month. Opinions please?

  27. No ,you are not reading it correctly ..........since you have to report additional tax #4 does NOT apply to your case !!


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