Monday, January 26, 2015

Why the Lenient Sentencing for Offshore Account Tax Crimes (1/16/15)

I have previously noted the phenomenon that sentencings for tax crimes committed through offshore accounts draw more lenient sentences than tax crimes crimes committed in other contexts.  The term tax crimes here includes tax related crimes, including FBAR crimes where legal source income and assets are involved.  The question is why tax crimes draw more lenient sentences.  The inference one might draw is that tax crimes through offshore accounts are societally more acceptable.  But there is nothing in the statutes or their interpretation that would suggest that any tax crimes should be treated more leniently.  Certainly, the Sentencing Guidelines, here, and the Section 3553(a), here, factors do not hint at any such leniency

I quipped earlier that perhaps judges had more empathy for the type of taxpayer who would commit tax crimes through offshore accounts than the type of taxpayer who commits tax crimes in  other ways.  My notion was that the former was more likely the type of person the judge -- who is generally high middle to upper income person and moves in circles with such people, whether at Church or Synagogue, the country club and other venues. My specific example was that these defendants were often the type of person the judge would see at the country club.

I have just read a very interesting article in the New  York Times that brushes on this very general topic.  The article is titled "Is the Defendant White or Not?" by Nour Kteily, an assistant professor of management and organizations at the Kellogg School of Management at Northwestern University, and Sarah Cotterill, a doctoral student in the department of psychology at Harvard.  The article may be viewed here.

The general thesis of the article,  presented in the context of the Tsarnaev terrorist trial, is that
We also found that such whiteness perceptions had the potential to play an important role in the outcome of Mr. Tsarnaev’s trial. The lower that individuals rated Mr. Tsarnaev as looking white, the more willing they were to punish him severely. In a case like Mr. Tsarnaev’s, where guilt is widely presumed and where the outcome will most likely fall on one side of the line between life imprisonment and death, this finding seems especially relevant.
This is a similar phenomenon in the offshore account tax crimes prosecutions -- by the time the Government brings charges, guilt is presumed and, in fact, admitted by the defendant in his or her guilty plea.  The only issue is punishment.  In that context, the whiteness phenomenon may help explain in part the lenient sentencing.  By whiteness, I don't mean literally whiteness.  I mean the ability of the judge to relate to the defendant better than the typical defendant charged with a tax crime.

As I employ the concept, it is necessarily a loose and fuzzy notion, without the type of research the authors present in the article.  Certainly, I do not have type of research performed by those authors in the specific context they discuss.

But, from my perspective, it seems to me that one can fairly question the notion that commission of tax crimes via offshore accounts is any less blameworthy -- i.e., punishable -- than commission of tax crimes in other contexts.  (Merely saying that will probably exclude me from representing persons charged with offshore tax crimes.)  So what explains the difference?

I would appreciate readers views on this subject.


  1. I don't have too much experience beyond what I have read here but I wonder if you are doing a like for like comparison
    For example, it appears to me that the repercussions in the offshore context are more onerous than those in the purely domestic context, if taken on a like for like basis. Take the reported case of Herr Landegger, who even before sentencing, has already paid a civil penalty of $4.2mm, for a tax evasion of $72k. So essentially, the defendant took money and purchased assets and then hid the profit from the IRS. Is there any conceivable way the defendant. in the domestic context, could have evaded taxes in such a low amount and still owed such an enormous fine. If he had simply bought gold bars, hid them under his bed, sold them for a profit over a period of years where the tax loss was $72k, would the government really have prosecuted to the extent they did and would they have been able to win such a large fee. How much tax would you have to evade in the domestic context before the government fine could rise to $4.2m?
    I would imagine judges might look at the FBAR fines, the relevant bad behaviour as it relates to taxes owed and think, wow, this is, even prior to sentencing, a very harsh punishment.

  2. gottaloveUStax1:

    First, thanks for your comments. I think your point is a good one. I offer a few comments:

    1. The penalty Mr. Landegger incurred was a civil penalty rather than a criminal penalty. Normally, civil penalties are not considered in criminal proceedings. On the other hand, the penalty is so large relative to the tax loss, I understand why DOJ Tax considers it in making their recommendations and judges consider it in imposing sentence.

    2. In most of the offshore account cases the Government chooses to criminally prosecute, the penalties are large relative to the tax loss, but not large relative to the real financial pain it inflicts on the defendants. Beanie Baby / Ty Warner paid a $52 million penalty, but that was peanuts to him. I suspect that the penalty Mr. Landegger paid was only a fraction of his net worth. By contrast, the ordinary tax cheat with a tax loss of $71,000 will pay a 75% civil fraud penalty and that penalty will be significant relative to his net worth in most cases. On a relative scale, at least in most cases, more financial pain is inflicted on the ordinary tax cheat.

    3. The biggest pain -- reflected in the Guidelines -- is incarceration and the Guidelines do not provide any break for the rich who can afford to pay more civil penalties in order to avoid or reduce incarceration.

    4. It is true that Booker gives the judge great discretion, and I applaud Booker. But nothing in Booker suggests that a defendant's ability to pay a big civil fine should buy him a lesser incarceration period.

    So, I am still not convinced that the more lenient sentences for offshore account tax fraud is a wise implementation of Section 3553(a) and the Guidelines. (It probably is not a good thing that I am a judge, but since judges do like to do like to like comparisons, maybe despite this, if I were a judge, I would use other offshore account sentences as the benchmark; but then I would ratchet down the sentencing of ordinary tax cheats as well.)

    I may be wrong and think you have stated well why I may be wrong.


    Jack Townsend

  3. Jack,

    I appreciate your response, and I thought your point 2 was very insightful. It is true that a financial penalty can have a relative impact, whereas imprisonment is more absolute. Everyone suffers from going to prison, but the very rich might not even blink at a multi-million dollar fine. Only caveat (which may be relevant) is for the very young (where rehabilitation might be in order) and the very old (where imprisonment, given life expectancy, could mean someone dies in prison). Given that many of the offshore defendants are quite old, that might also come into play.

    Also, there might be a policy argument (whether or not judges agree or use this is a different question) that whereas tax evasion is an inherent crime (something google defines as a malum in se), the failure to file an FBAR seems more of a regulatory offence (the so-called malum prohibitum). I wonder if prosecutors are focusing on the failure to file without making the moral case for why it deserves imprisonment. If I were a judge, I might think twice at imprisoning someone for a pure regulatory offence.

  4. gottaloveUStax1,

    Your response is well taken and raises issues that need to be considered in sentencing of the particular individual before the judge and horizontal fairness across all defendants somewhat similarly situated.

    I don't have easy answers, but I do appreciate the thoughtfulness of your comments.

    Jack Townsend

  5. I think that part of the reason why some people get heavy punishments is because there are other related crimes. Most offshore tax crimes are strictly a tax crime. In many of the other cases that I have read about the person also stole or embezzled the money or was a drug dealer. As in the case of Al Capone, maybe the government prosecuted on the tax charge and couldn't make a case for any other charge. In considering the penalty for a tax cheat versus a person who is both a tax cheat and an embezzler(or some other kind of criminal) then clearly the latter should receive the more severe sentence. These are the kinds of considerations that should go into determining a prison sentence, if any. A person who is only a tax cheat shouldn't go to jail because he is not really a threat to society. Jail is an unnecessary cost to both society and the convicted person. The punishment should be financial in this case.

    The question of the amount of any penalty can be looked at from several different perspectives. It is related to the long debated philosophical question of what is the purpose of punishment. If the purpose is restitution then most penalties are too high. If the purpose is retribution or deterrence then the question becomes what is the least severe penalty that will provide sufficient retribution and deterrent effect. I think the most reasonable way to based on the dollar amount of the offense. After all, tax crimes are all about dollars so the number of dollars is a useful measure. Basing the amount of the penalty on the net worth of person unfairly penalizes the well to do.

    To look at it another way, consider the amount of the tax loss compared to the amount of taxes paid. Mr. Landegger may not have paid $71,000 in taxes over several years but probably paid many times that amount in taxes on his declared income based upon the assumption that he has a very high net worth. The ordinary tax cheat with a tax loss of $71,000 probably paid very little other taxes assuming that "ordinary" means not wealthy. Mr. Landegger paid most of his taxes and "fudged" a little bit. The ordinary tax payer "fudged" a lot. From this perspective, basing the amount of the fine on the individual's net worth seems disproportionate. The fact that Landegger paid most of his taxes may have been considered by the judge and prosecution when deciding sentencing.

    Also, I'm under the impression that the US does not base fines on someone's net worth with the exception(to some degree) of FBAR penalties. Why is the FBAR the exception?

    Some countries do base fines on the net worth of the offender in some cases.

  6. In most offshore cases there are two different violations that typically come into play: taxes and FBAR. It seems to me that very often one violation is taken as indicative of the other violation (assuming that the FBAR violation was motivated by an attempt to further or conceal the tax violation, which may or may not be the case.)

    I can think of domestic tax violations (intentional or not) such as someone renting out a spare room or even a second home and not reporting the income, either because of ignorance or purposefully (since the rent is not deductible to the payer, how would the IRS find out?) But in such a scenario any tax penalty is based on taxes, and often there is no penalty, certainly not if the violator files a qualified amended return. But in no case is the tax penalty based on 27.5% of the value of the home in question, at the peak of the real estate market.

    There are other instances of breaking laws for not reporting something, such as failing to send in a census form or failing to register for the draft. Typically (and this was during the Vietnam war) someone failing to register was sent a reminder letter or two and given the opportunity to register, and there was no penalty. The only prosecutions I know of occurred in clearly willful cases (the defendant wrote a letter to the draft board saying that he would refuse to register, and even after being told he had to, still refused to do so.) This is somewhat similar to the mayor of London's public statements.

    As to proportionality of FBAR penalty to net worth, I think it depends on individual circumstances. For someone residing abroad, or a recent immigrant, 27.5% (or 50% or 300%) would often be a percentage of both foreign accounts and net worth. For others, it may be a small percentage of net worth.

  7. The Sentencing Guidelines offer some opportunity for head to head comparisons when tax violations are the gravamen of the crime. Obviously, for drug dealers or organized crime figures, the tax crime may exist the the gravamen of the crimes for which they will be prosecuted will be the more serious offenses. Usually, DOJ will not accept a plea only to the tax crime in those cases but will insist on a plea to the more serious provable offense. Where the only crime of which the defendant is convicted is a tax crime (whether convicted by trial or by plea agreement), then the operation of the Sentencing Guidelines do permit a significant degree of relative comparison. In most FBAR cases, the courts have applied the tax guidelines, so focusing on the FBAR as the means to hide the tax offense, it is sentenced as if it were a tax offense. So there are head to head comparisons. Offshore account sentences are more lenient than ordinary run of the mill tax sentences. The question I try to contemplate is why?

  8. How do the sentences compare to truly white collar tax evasion (such as complicated but fraudulent tax structures). That might go some way to strengthening your "people like me" hypothesis in the main post. I know that in many cases (such as Son of Boss" DOJ hasn't chased the users so much as the providers, but in cases where users of those structures have been successfully prosecuted, how have their sentences compared to offshore cases?

  9. The LT chart of USD/CHF says everything one needs to know to understand the "special twisted" relationship Jack Townsend has with the swiss banks in particular and CH as a sovereign nation.

  10. I think one of the mitigating factors for offshore violations is that many of the offenders voluntarily came forward. Many tried to get into an OVDP program but were rejected. Please correct me if I am wrong, but I believe that most "ordinary" tax cheats get caught rather than volunteer. If an ordinary tax payer decides to come clean they just have to file an amended return and pay any amount due(including penalties and interest). I don't think they have to worry about being prosecuted after that. The punishment should be less severe for those who voluntarily come forward or try to voluntarily come forward.
    The penalty is much more for offshore violations. Even if they are allowed to "amend" returns by joining an OVDP program the penalties are much higher. Some are not even allowed to join and end up being prosecuted. The penalties are much more severe than the penalties with filing an amended return. That is why some people are taking the risk of doing quiet disclosure.
    To get a head to head comparisons we would have to compare voluntary offshore cases against voluntary ordinary cases. Or compare non-voluntary cases.
    As to the amount of pain that is inflicted by a monetary penalty, I still say that offshore people get penalized more if you include the FBAR penalties. Take the case of a wealth person who tried to get away with paying 5% less tax versus an ordinary person who tried to get away with paying 100% less tax. In both cases the amount of the tax due is the same. My position is that they should be penalized in proportion to the amount of undeclared tax. Your position(if I understand it correctly) is that they should both be penalized the same percentage of their net worth in order to inflict adequate pain. By that logic, a person who is driving 5 mph over the speed limit should be penalized the same as someone is driving twice the speed limit. All speeders or tax cheats should be punished equally no matter how far they have crossed the line. That doesn't seem proportional or fair to me. There is some proportionality in the 3 year (25% of income omission) civil statute on assessing taxes.
    What do your law students think of this topic?

  11. Most of the ones who were prosecuted either did not attempt to make a voluntary disclosure or did so only after the DOJ/IRS had identified them. As to the latter class, the IRS has always taken the position that voluntary disclosure (whether formal noisy disclosure or quiet disclosure by amended return) simply did not work. So, I don't think that those prosecuted would have met the requirement for a timely disclosure and thus are undifferentiated from ordinary tax cheats who get caught.

    How this would play out in an ordinary tax crime case is that, once the taxpayer realizes that he is in the IRS radar screen, the taxpayer will attempt a voluntary disclosure and be rejected for that reason. He can then be prosecuted, just as those persons with offshore accounts whom the IRS had already identified before attempting a voluntary disclosure can be prosecuted (not all have been but some have been prosecuted).

    In cases where the IRS has already flagged an offshore account taxpayer for a routine audit (not related to offshore accounts) and the taxpayer then, not knowing of the audit, tries to enter OVDP, my experience is that the IRS will deny the taxpayer formal entry into OVDP and undertake a regular civil audit (no criminal investigation and prosecution). In that regular civil audit, the IRS will impose costs (additional tax, penalties and interest plus FBAR penalty) that is the same as the OVDP would require. In other words, the same result is achieved (no criminal prosecution and same civil dollar costs), except that it is done through an audit rather than through OVDP submissions. Now, if the case had been flagged for offshore account issues before the taxpayer attempted to join OVDP (not knowing that his case had already been identified for offshore accounts), that taxpayer is likely to get a worse result (including being subject to criminal investigation and prosecution). (Have not represented any taxpayers in the latter category.)

    Jack Townsend

  12. DOJ attorneys did make some noises about criminal prosecution of some "investors" in the Son of Boss sham, but ultimately decided not to for reasons I could speculate about (probably pretty informed speculation but still speculation, so I won't speculate). Clearly, in terms of stemming the raid on the fisc, getting the promoters of such deals is probably most important and it is not uncommon for the IRS to first and hardest against such persons. But, if the taxpayer knew the law and intended to violate it and that can be proved beyond a reasonable doubt, the DOJ will consider criminal prosecution and, if within its criminal enforcement priorities, will prosecute.

    Many of the most famous criminal cases have involved taxpayers who got caught up in schemes promoted by others and those taxpayers have been prosecuted. For example, perhaps the most famous case in tax crimes is the Cheek case where the Court refined the earlier cases, stating crisply that the willfully element of tax crimes required intent to violate a known legal duty. Mr. Cheek was a member of what many would call a tax protest movement where promoters, usually for a significant fee, gave taxpayers certain "tools" to deploy when cheating on their taxpayers. Those promoters were often prosecuted and some of the taxpayers were also prosecuted. Cheek was prosecuted and ultimately convicted. In those cases, to the extend that you can compare apples to apples, the tax protestor taxpayers got more onerous jail time than the offshore account defendants are receiving, and usually for significantly less tax liability involved.

    Jack Townsend

  13. I think there are several factors perhaps that lead to lower sentences in offshore cases, as follows:

    1. Unlike many defendants, the offshore cases typically involve people who can afford a private attorney who is a specialist in tax crimes. Having the ability to pay for a specialist helps.

    2. Many offshore cases involve individuals who are older and have health issues. Age and health are factors the judge can consider.

    3. I agree with Jack the judges may have more in common with offshore defendants. I think this is a function of middle to upper class - not race because many offshore cases involve immigrants.

    4. Although the undeclared assets in the foreign bank accounts may be significant, the amount of unreported income in these cases is typically much less, leading to lower tax loss and lower sentences.

    5. I think having the ability to pay restitution does make a difference in these cases for two reasons. In most normal tax cases that judges see the taxes are almost never repaid. The offshore cases standout because many defendants pay the restitution. Second, the 50% offshore penalty is generally grossly disproportional to the tax loss in these cases. Judges must realize the defendants are paying a draconian penalty which may influence them to hand down lower sentences.

    6. Most of these people are white collar and have no prior criminal histories.

    I could go on and on but that's enough.

  14. Joe, your comments are excellent. Thank you.

    I do want to clarify that my use of the term "whiteness" in the blog did not relate to race, but the feeling of relatedness to the person under consideration. In a racial context, that would be racial, of course. But I was simply saying that societally, economically and other ways the offshore account defendant is more closely aligned with the judge than most tax crimes defendants are and this may give the judge more empathy with the offshore account defendant that plays out in more lenient sentencing.

    I don't know that to be the case.

    I would note that giving a material sentencing benefit for payment of restitution and penalties is troubling because it introduces a blatant preference for the rich. I am not sure that is the right message to send.

    To be sure, the rich always get better justice. They hire the best lawyers (the Ty Warner case is an example, although the Seventh Circuit is yet to speak). But to give a benefit solely based on ability to pay seems poor policy.

    Having said that, as a criminal defense lawyer, I strongly urge clients to full pay so that they can argue what some lawyers call "super restitution." (This sometimes can mean even paying the full civil tax liability which may exceed the criminal tax number for restitution or, if restitution is not agreed to in the plea agreement, so that restitution can be ordered only for the crime of conviction or for a special benefit, then paying the criminal tax loss for years other than the count(s) of conviction. Payment of such amounts prior to sentencing certainly sets the right tone for sentencing, but giving a material benefit for that institutionalizes the notion that the rich get better justice. That is probably why the Sentencing Guidelines do not give credit for it. It is bad sentencing policy.

    Jack Townsend

  15. ChiTownTaxAttorneyJanuary 29, 2015 at 4:27 PM

    In many cases, I portray restitution payments as a sign of the defendant's sincerity, remorse, and acceptance of responsibility, all of which apply to both guideline and various 3553 factors. Yes, you can indeed have a blind plea case and still get "credit" for acceptance of responsibility.

    The power of this argument is relative to the circumstances, particularly the defendants' personal financial situation. Ty Warner's restitution payment by the signing of a single check that is a relatively small percentage of his net worth is less powerful than a defendant who was worth $10 million, but sold everything at fire sale prices to pay restitution (or better, significant amounts towards civil penalties), even before sentencing.

    The court is to consider the defendant's "characteristics", the need to deter the defendant from future criminal conduct, and the need to provide correctional treatment (i.e., rehabilitation). We give prisoners credit for RDAP, why not for restitution? We don't distinguish between borderline and raging alcoholics in RDAP. Many judges give credit for "good deeds" and charitable works, including to Ty Warner. But are those deeds so good when paid for at least partially with unpaid taxes? Relatively, I'd be far more impressed by a very rich defendant donating his or her time, rather than their money previously co-mingled with unpaid taxes. I cannot remember the case, but recall an appellate court remanding a sentencing and ordering the trial court to consider the defendant's (I believe post-plea or maybe even post-conviction) rehabilitative efforts. I thought it was a good opinion, and it seems analogous to give consideration to a defendant's post-plea restitution efforts the same as any rehabilitation efforts.

    In short, I think paying restitution (or even more on the civil side without consternation) deserves consideration based upon all of the facts and circumstances, and reflects on many guideline and 3553 factors and goals. The biggest "problem" I see with Booker and abandoning the strict guidelines is possible sentencing disparities.But I ask, how many crimes and how many defendants are so alike in their "characteristics" and other factors that we can ever really compare apples to apples?

  16. ChiTownTaxAtty:

    Your comments are excellent as usual and well nuanced, bringing your experience and learning to bear.

    You are correct that, when you peel the onion, you will find many differences between and among different defendants. The problem is that there is then no comparability -- at least in broad strokes -- as to the major recognized sentencing factors and the Guidelines -- and Congress' and the Commission's goals for the Guidelines -- mean nothing. It ultimately is whatever the gut of the sentencing judge indicates is an appropriate sentence based on his assessment of the particular defendant's characteristics and his own personal assessment of how the particular crime is ranked compared to other crimes. Many judges feel that tax crimes really are not as serious as other crimes (e.g., embezzlement or theft) where an equal amount of financial loss to the victim is involved. Other judges feel that tax crimes are serious indeed -- perhaps even rising to the level of treason to the country (OK that is hyperbole, but perhaps not much), because while others are contributing to the welfare of the whole country, tax cheats are shirking their duty).

    An important goal of the Guidelines is to take out or mitigate the variant proclivities of judges that permit defendants appearing before some judges to be treated materially better or worse than other defendants, similar situated in key factors, before other judges. I applaud that goal, while also applauding the goal of Booker and 3553(a) that the sentencing judges should have some ability to sentence outside the Guidelines. The question is how much.

    I really appreciate your comments. They are very thought provoking and invites all readers who take the time to read your comments to think a little (maybe a lot) deeper about the subject.

    Jack Townsend

  17. The U.S. government is no good at dealing with the fact that America has a diaspora. Thus we see all these clumsy “monkey patches” to the laws which affect us. For taxation, they say that non-resident citizens are always resident for tax purposes (even if we’re no longer citizens under the actual nationality laws), and particularly that we’re resident in Washington, D.C.
    if the IRS wants to sue us. For diversity jurisdiction, they’ve just given up entirely. And for voting, instead of giving us proper diaspora representatives the way France does, the federal government dilutes our votes among the fifty states — the same states of which we expressly are not citizens for purposes of diversity jurisdiction — and declines to require that those states extend voting rights to the descendants of their former residents.
    It’s unlikely that the strange issues with U.S. federal courts’ diversity jurisdiction will ever affect any of us Brockers, but nevertheless they clearly demonstrate a basic principle: U.S. laws are not set up to deal with non-resident U.S. citizens in a rational and consistent fashion, and this problem goes all the way down to the foundations of the legal system itself. If you want to enjoy the
    “benefits of American citizenship”, you must actually live in the Homeland.

  18. Arer there are any interesting/noteworth cases in relation to offshore accounts coming down the pipeline, in particular around wilfulness, 8th amendment concerns, etc?

  19. Anon I agree with your post - nobody in Congress represents overseas Americans. And government
    officials think this law is succeeding at catching the tax cheats. That
    may be worth the side effect of losing 10,000 American citizens and LPRs
    every year

  20. It saddens me to see how the US is treating it’s patriotic citizens immensely. Questions that come to mind : Why has there been absolutely NO response from the US Congress or anyone in power in the US government to answer to this injustice? Homelanders would rather have 7.5million renunciations than back track. The lack of understanding in the US of the injustice being done to their diaspora us by this unfair law and by extraterritorial taxation.

  21. The TAS report mentions the difficulty the TAS has in obtaining taxpayer data from OVDI participants. I would suggest that anyone with relatively good facts (even if you've agreed to pay the penalty because you were too scared to opt out, or maybe especially if this is the case) that you send a one or two page letter to the IRS detailing your circumstances. I think the more examples the TAS has of people who do not fit the "bad actor" mold, the better. I have already told the TAS about my circumstances, of course.

    National Taxpayer Advocate

    1111 Constitution Avenue NW

    Room 3031, TA

    Washington DC 20224

    Phone: 202-317-6100

    Fax: 855-810-2126

  22. Hi,

    Great Post! This blog is ever informative. Thanks

    Banking Dispute Lawyer


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.