DOJ Tax Testimony to House Oversight Committee (5/20/15)

Caroline Ciraolo, AAG DOJ Tax, has testified in a the House Subcommittee Hearing on Oversight of DOJ Tax.  Her prepared remarks are here.

I offer key excerpts for tax crimes (setting aside Stolen Identity Refund Fraud), and offer limited comments:

To help achieve uniformity in nationwide standards for criminal tax prosecutions, the Tax Division’s criminal prosecutors are broken into 3 sections and authorize almost all grand jury investigations and prosecutions involving violations of the internal revenue laws. The Division authorizes between 1,300 and 1,800 criminal tax investigations annually.  Alone or in conjunction with Assistant United States Attorneys, Tax Division attorneys prosecute these crimes after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged. And all criminal tax appeals are handled by our Criminal Appeals and Tax Enforcement Policy Section. 

JAT Comment:  I don't know what is meant by this sentence:  "The Division authorizes between 1,300 and 1,800 criminal tax investigations annually." I assume they mean that number of matters that are brought before the grand jury.  I have said before that I am not sure DOJ Tax has authority to conduct tax investigations independent of a grand jury.  More importantly, I would have thought that indictments or prosecutions would be the better metric rather than investigations.

Criminal Investigation and Prosecution 

Criminal Trial. In addition to our extensive civil practice, the Tax Division authorizes nearly all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. In most cases, Tax Division prosecutors either conduct or supervise these prosecutions, often in partnership with prosecutors from the United States Attorneys’ Offices. The Division’s criminal goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Tax Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Tax Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Tax Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,800 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a United States Attorney’s Office, by a Tax Division prosecutor, or by a team of prosecutors from both. Tax Division prosecutors also conduct training for IRS criminal investigators and Assistant United States Attorneys, and provide advice to other federal law enforcement personnel, such as the Drug Enforcement Administration (“DEA”) and the Federal Bureau of Investigation (“FBI”). 

 The crimes investigated and prosecuted by the Tax Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means – as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other - used for tax purposes - showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.  

 It is not uncommon for tax crimes to be committed during the course of other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. Tax Division prosecutors work closely with the United States Attorneys' Offices on these issues. In addition, Tax Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. As tax crimes have become more complex and international in scope, so has the workload of Tax Division prosecutors. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net worth taxpayers and tax professionals who sell and implement dubious tax schemes. During FY14 Division prosecutors obtained 121 indictments and 134 convictions (not including the additional criminal tax prosecutions handled exclusively by United States Attorneys’ Offices). The conviction rate for cases brought by Tax Division prosecutors generally exceeds 95%.

JAT Comment:  I have previously questioned the 95% conviction rate, but I don't know how to confirm or dispute DOJ Tax's claims since I don't have access to the statistics.upon which the claim is made.  The claim, however, does not appear to be consistent with the IRS statistics on conviction rate.  See the IRS web site on its statistics, here and click on the label "Statistics" below for blogs dealing with this issues.

Criminal Appeals. The Tax Division Criminal Appeals and Tax Enforcement Policy Section (CATEPS) handles appeals in criminal tax cases prosecuted by Tax Division prosecutors, as well as some appeals from criminal tax cases handled by United States Attorneys’ Offices. The Division also supervises appeals in matters prosecuted by the United States Attorneys’ Offices. The appellate-level review provided by CATEPS attorneys plays a vital role in promoting the fair, correct, and uniform enforcement of federal tax law. CATEPS is also charged with developing criminal tax enforcement policy, and the section provides technical guidance on issues including the sentencing guidelines and restitution in tax cases. The section’s international team serves as a resource to Division attorneys and IRS agents on international discovery matters arising in civil and criminal cases. CATEPS also plays a role in providing information and technical expertise on matters involving international tax information agreements and treaties. 

* * * * 

Offshore Tax Evasion 

The Tax Division plays a lead role in investigating and prosecuting those who use foreign tax havens to evade taxes and reporting requirements. The increased technical sophistication of financial instruments and the use of the internet have made it all too easy to move money around the world instantly, without regard to national borders. Using tax havens facilitates evasion of U.S. taxes and related financial crimes, and fosters the perception that if people have enough money and access to unscrupulous professionals, they can get away with hiding money offshore.  

Combatting the use of foreign bank accounts to evade U.S. taxes has been a longstanding enforcement priority for the Tax Division. Since 2009, when the Tax Division reached a ground-breaking deferred prosecution agreement with UBS, it has publicly charged more than 100 account holders, of which approximately 90 have pleaded guilty, 12 were convicted following trial, and five are fugitives. The  Department’s enforcement efforts have reached far beyond Switzerland, as evidenced by public actions involving banking activities in India, Israel, Liechtenstein, Luxembourg, and the Caribbean.

These high-profile enforcement actions created pressure on non-compliant taxpayers to correct their tax returns and report previously undisclosed accounts. According to the IRS, since the inception of the investigation against UBS, over 50,000 disclosures have been made of previously secret accounts through the IRS’s offshore voluntary disclosure programs, and taxpayers have paid over $7 billion in back taxes, interest, and penalties.  These enforcement efforts not only remedy past wrongdoing, but also bring into the system tax revenue from taxpayers who become compliant going forward. 

The Tax Division also is committed to holding accountable foreign banks and individuals who facilitate the evasion of U.S. tax and reporting obligations. The Department has prosecuted more than a dozen facilitators, resulting in 12 guilty pleas and two convictions following trial. An additional 23 facilitators have been indicted and remain fugitives. And since announcing the UBS deferred prosecution agreement in February 2009, the Division has taken public action against four other banks, two in Switzerland, one in Liechtenstein, and one in Israel. 

 In December 2014, Bank Leumi, a major Israeli international bank, admitted that it conspired to aid and assist U.S. taxpayers in the preparation and filing of false returns with the IRS by hiding income and assets in offshore accounts at Bank Leumi Group locations in Israel, Switzerland, Luxembourg, and the United States. The deferred prosecution agreement between Bank Leumi and the Department of Justice required the bank to pay $270 million to the United States, provide the names of more than 1,500 of its U.S. account holders, and cooperate with related ongoing investigations. 

 In May 2014, Credit Suisse AG pleaded guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and other documents with the IRS. The guilty plea by the Swiss corporation was the result of a years-long investigation by U.S. law enforcement authorities that also produced indictments of eight Credit Suisse executives since 2011; two of those individuals have pleaded guilty so far. The plea agreement, along with agreements made with other federal and state agencies, required that Credit Suisse pay a total of $2.6 billion. 

 In July 2013, the Department announced that Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein (“LLB-Vaduz”), agreed to pay more than $23 million to the United States and entered into a non-prosecution agreement. As noted in the agreement, before the government began the investigation, LLB-Vaduz voluntarily implemented a series of remedial measures to stop servicing U.S. account holders with undeclared accounts. The bank also assisted in changing the law in Liechtenstein retroactively, which enabled the Division to obtain account files of non-compliant U.S. account holders without having to identify each account holder whose information was requested. 

 In January 2013, Wegelin Bank, the oldest private bank in Switzerland, pleaded guilty to conspiracy to defraud the United States for actions arising from its efforts on behalf of U.S. account holders. Wegelin was ordered to pay approximately $58 million to the United States and to forfeit funds in the amount of $16.2 million previously seized by the government from a correspondent account in the United States, for a total recovery to the United States of approximately $74 million. 

The absence of public disclosure should not be construed as a sign of inactivity in this critical law enforcement area. The Tax Division has on-going criminal investigations in Switzerland and elsewhere concerning the cross-border activities of foreign financial institutions, domestic and foreign individuals who facilitated U.S. tax evasion and reporting violations, and U.S. accountholders who failed to report income on foreign assets and failed to disclose foreign accounts. 

The Department is also successfully using a variety of law enforcement tools to gather information that we believe will lead to admissible evidence in future enforcement efforts. For example, in the last few years the Department obtained orders for John Doe Summonses to be issued for information about U.S. taxpayers held in the United States through correspondent accounts for banks based in Switzerland, India, the Bahamas, Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, and the United Kingdom. The Tax Division continues to work with the IRS and United States Attorneys to gather information about taxpayers who seek to avoid or evade taxes.  

Swiss Bank Program 

The investigation and prosecution of offshore tax evasion requires the IRS and the Tax Division to obtain foreign evidence, most often through a tax information exchange agreement or a mutual legal assistance or other treaty. A fundamental issue with respect to obtaining information about accounts located in Switzerland has been the degree to which Swiss law permits disclosure under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, signed on October 2, 1996. Swiss banks have often contended, in response to our investigations, that Swiss law prohibited meaningful cooperation (most notably, the disclosure of U.S. account holder identities). As part of our efforts to obtain information from these banks, the Department and the IRS engaged in a series of discussions with representatives of the Swiss government. Our central focus in these discussions was on obtaining information from the banks that would serve our law enforcement goals of encouraging voluntary disclosure by U.S. account holders, prosecuting account holders who fail to come forward, and learning where else in Switzerland and the world U.S. taxpayers attempted to use secret accounts to engage in tax evasion. We also sought to maintain the integrity of pending U.S. law enforcement matters and the ability to prosecute those persons who assisted U.S. taxpayers in evading the law. 

On August 29, 2013, the Department announced the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”), which is designed to encourage Swiss banks to cooperate in our ongoing investigations. The Program invited Swiss banks to come forward to provide cooperation and information in return for the possibility of a non-prosecution agreement or deferred prosecution agreement. Two significant points about the Program should be noted at the outset. First, the Program expressly excludes any bank authorized for investigation in connection with their Swiss banking activity related to U.S. account holders before the Program was announced. Second, the Program expressly excludes all individuals. No banker, professional advisor, or accountholder is offered any sort of protection or immunity under the Program. 

Under the Program, banks that were under investigation at the time the Program was announced and therefore, ineligible, are referred to as “Category 1” banks. “Category 2” banks include eligible Swiss banks that self-identified as having committed tax-related offenses, or offenses relating to the filing of Reports of Foreign Bank and Financial Accounts (“FBARs”), in connection with U.S. related accounts. The information required to be provided by the cooperating banks is extensive, and includes full disclosure of their activities, the names of culpable employees and third party advisors, and the number of U.S. accounts. For those accounts that Category 2 banks closed after the Tax Division’s investigation of UBS became public in mid-2008, the Program requires disclosure, on an account-by-account basis, of the number of U.S. persons related to the account, and the nature of that relationship, monthly balances, and monthly transfers into and out of the account. Category 2 banks must also cooperate in  treaty requests for account records, which Switzerland has committed to process on
an expedited basis.  

The Category 2 banks are required to pay a penalty that is based on the maximum aggregate values of the undisclosed accounts, and that is calibrated to reflect both the magnitude of a bank’s involvement in the misconduct as well as the willingness of the bank to continue to service undeclared accounts after our law enforcement activities became known. The penalty can be reduced to the extent that a Category 2 bank encouraged a U.S. accountholder to come forward and participate in an offshore disclosure program established by the IRS. 

Category 2 banks were required to take the initial step of expressing their intent to participate in the Program no later than December 31, 2013. Prior to the execution of a nonprosecution agreement, each Category 2 bank must provide the required information and full cooperation under the terms set out in the Program. Upon execution of the non-prosecution agreement, each Category 2 bank must provide additional information regarding closed accounts, continued cooperation regarding its accountholders and related individuals, and payment of the required penalty. A significant number of banks not previously known to the Tax Division have come forward to accept responsibility for their actions and to offer their cooperation in our law enforcement efforts. Every Swiss bank that comes forward to cooperate under the Program represents an opportunity to obtain valuable law enforcement information from a source that is new to the Division’s investigations. 

On March 30, 2015, the Department announced that BSI SA, one of the 10 largest private banks in Switzerland, was the first bank to reach a resolution and sign a non-prosecution agreement under the Program. BSI admitted to helping its U.S. clients evade their U.S. tax obligations by, among other things, creating sham corporations and trusts that masked the true identity of its U.S. account holders. Pursuant to the terms of the Program, BSI provided all required information, agreed to cooperate in any related criminal or civil proceedings, demonstrated its implementation of controls to stop misconduct involving undeclared U.S. accounts, and paid a $211 million penalty. On May 8, 2015, Vadian Bank became the second bank to enter into a non-prosecution agreement under the terms of the Program. The Department is moving forward as expeditiously as possible, and hopes to reach agreements with the remaining Category 2 banks before the end of 2015. 

The Program also provides for participation by two additional categories of banks. As defined in the Program, “Category 3” banks are Swiss banks that contend that they did not commit any violations of U.S. law but want a determination of their present status regarding their activities. These banks may seek a non-target letter from the Tax Division after providing a report by an independent examiner who conducted an internal investigation and additional information as required by the Program. “Category 3” banks must also verify the percent of U.S. related accounts held in the bank, and the existence of an effective compliance program.  

“Category 4” banks are Swiss banks that meet certain criteria for “a deemed Compliant Financial Institution” based on definitions in the Agreement between the United States of America and Switzerland for Cooperation to Facilitate the Implementation of Foreign Account Tax Compliance Act (“FATCA”) signed on February 14, 2013. These banks may also request a nontarget letter after verification of their information and status. Category 3 and 4 banks were allowed to begin requesting participation beginning on July 1, 2014. 

The Program is furthering our law enforcement goals in several important ways. At the outset, Swiss banks, aware that other Swiss banks might provide information under the Program concerning interbank transactions, came forward to participate. The Program also motivated culpable U.S. account holders, fearful that the Swiss banks would disclose their account information, to make voluntary disclosures to the IRS of their unreported income and undisclosed accounts. In addition, in an attempt to reduce the penalty imposed under the Program, Swiss banks made a concerted effort to encourage U.S. accountholders to participate in an announced IRS Voluntary Disclosure Program or Initiative. Finally, the Program requires cooperating Swiss banks to provide information regarding the movement of funds outside Switzerland. This sends a clear message to U.S. taxpayers that no haven is safe from the Department’s offshore enforcement efforts. 

While the Tax Division uses a variety of criminal and civil law enforcement tools to successfully investigate and prosecute offshore tax evasion, our efforts would be greatly enhanced by the ratification of the protocol signed on September 23, 2009 (the “Protocol”), amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income. The Protocol has been waiting for the advice and consent of the Senate for more than five years. Once the Protocol is ratified, an account that remained in a Swiss bank after September 23, 2009 will be subject to a less restrictive standard of disclosure. The Protocol will enhance our ability to gather full, detailed information about the account from Swiss entities and better enable the Division to pursue the funds and the account holder. We are hopeful that the Senate will act on the Protocol as soon as possible.  

Tax Defier Initiative 

Tax defiers, also known as illegal tax protesters, have long been a focus of the Tax Division’s investigative and prosecution efforts. For decades, tax defiers have advanced frivolous arguments and developed numerous schemes to evade their income taxes, assist others in evading their taxes, and frustrate the IRS, under the guise of constitutional and other meritless objections to the tax laws. Frivolous arguments used by tax defiers include, for example, spurious claims that an individual is a “sovereign citizen” not subject to the laws of the United States, that the federal income tax is unconstitutional, and that wages are not income. Schemes utilized include the use of fictitious financial instruments in purported payment of tax bills and other debts, as well as the filing of false liens and IRS reporting forms, such as Forms 1099, designed to harass and retaliate against government employees and judges. In the most extreme circumstances, tax defiers have resorted to threats and violence to advance their anti-government agenda. 

Tax defiers are identified by the schemes in which they participate and the tactics they utilize. It is important to note that those who merely express dissatisfaction with the tax laws should not be, and are not, prosecuted. The Department cherishes the right to free speech, but recognizes that it does not extend to acts that violate or incite the imminent and likely violation of the tax laws. 

Because a segment of the tax defier community may resort, and has resorted, to violence to advance their cause, it is essential that law enforcement be prepared to respond rapidly to threats against agents, prosecutors, and judges. The Tax Division has implemented a comprehensive strategy using both civil and criminal enforcement tools to address the serious and corrosive effect of tax defier and sovereign citizen activity. Led by a National Director, the Tax Division’s Tax Defier Initiative facilitates coordination among nationwide law enforcement efforts. Increased coordination allows new and recycled tax defier and related schemes and arguments to be identified quickly, and a coordinated strategy to be developed.  

Through the Tax Defier Initiative, the Division leveraged our expertise to develop a government-wide approach to monitoring and combating these crimes. As a result, our National Director for the Tax Defier Initiative, working with representatives of IRS Criminal Investigations, Treasury Inspector General for Tax Administration, the FBI Domestic Terrorism Operations Unit, and the Department’s National Security Division, developed and implemented a national training program for prosecutors and investigators. The close working relationships fostered by our Initiative have enabled us to identify and respond more quickly and efficiently to trends in the tax defier community. 

Recent cases demonstrate the scope and seriousness of tax defier misconduct:  

 A New Jersey pilot and former chiropractor was sentenced to serve 54 months in prison, ordered to pay a fine and $48,199 in restitution after being convicted of filing false returns and attempting to obstruct the internal revenue laws. For example, the man demanded that a third-party financial institution not comply with an IRS levy, and attempted to pay credit card bills and other debts with fake financial instruments that claimed to draw on a U.S. Treasury account that did not exist.  

 A Nebraska man was sentenced to serve 10 years in prison for conspiring to retaliate against several federal officials by filing liens claiming false interests in the officials’ property for millions of dollars. Each of the targeted federal officials was involved in the criminal tax prosecution of a co-defendant or other associates of the defendants. A codefendant was later sentenced to a term of 3 years in prison for his role in the conspiracy. 

 A Utah certified public accountant was sentenced to serve 78 months and ordered to pay restitution to the IRS after being convicted of 18 counts of filing false claims for refund and one count of presenting a fictitious instrument. In addition to filing false personal returns, the man filed false returns for 16 clients, claiming federal tax refunds of $8.4 million. 

 An Illinois man was sentenced to 46 months in prison after pleading guilty to obstructing justice and filing retaliatory liens against federal judges. In one instance the man sent letters to two federal judges in which he threatened to arrest them if they did not release his wife from prison. Additional retaliatory liens were filed against the United States Attorney, the Clerk of the Court, the assigned Assistant United States Attorney and the IRS Special Agent working the case. 

Every prosecution and conviction sends a strong message that any attempt to promote or participate in a fraudulent tax scheme will not be tolerated. Those who engage in tax defier activity risk criminal prosecution resulting in conviction, substantial penalties and time in prison, as well as the collection of taxes, interest and penalties. Prosecution of tax defiers also reassures the vast majority of taxpayers that their voluntary compliance with the tax laws is justified and that everyone will be held accountable under the law.

In an article on the hearing David Van Den Berg, DOJ Official Asks Senate for Ratification of 2009 Swiss Protocol, 2015 TNT 97-7 (5/20/15) (no link available), it was reported that::  "The IRS anticipates that 80 Swiss banks will enter into non-prosecution agreements, with fines reaching billions of dollars, an official said May 9 in Washington. So far, three agreements have been announced,"   (JAT Comment:  That is an odd way of wording it.  It is a DOJ program, not IRS, but I am sure the IRS is heavily involved in the process, particularly because the information obtained via the program must be used for appropriate treaty requests that will be made under the double tax treaty that the IRS administers through the competent authority.)