Saturday, December 5, 2015

The Cash Hoard Defense and ISIS Taxes (12/5/15)

Tax controversy enthusiasts will recall that one of the traditional defenses to the net worth method of proof often used in both civil and criminal cases is the cash hoard defense.  For an explanation of the cash hoard defense, see IRM  (11-05-2004), Net Worth Method of Proof, here.  The net worth method may be stated simply, although the concept may be difficult in application because it takes a lot of work:  The method is a simple comparison of the net worth at the beginning of the period and at the end of the period, with the assumption that increases in net worth from the beginning to the end coupled with expenditures in the period are taxable income unless otherwise explained (such as by gifts, unrealized appreciation in value, etc.).  The cash hoard defense argues that the agent incorrectly used the method because the agent understated beginning net worth by leaving out a "cash hoard" or other assets acquired before the beginning that contributed to the ending net worth or expenditures in the period.  Since cash is the usual claimed "hoard," this is referred to as the cash hoard defense.  E.g.,  (11-05-2004), Cash on Hand Decrease, here. The DOJ Tax Criminal Tax Manual provides guidance on how to rebut the cash hoard defense.  See DOJ CTM 31.07[1], here

I heard an interesting application of the cash hoard defense today.  Planet Money had an episode title Auditing ISIS.  The episode is here.  The episode discusses a month's budget for an ISIS controlled area that listed income and expenditures.  The income was quite substantial, consisting significantly of oil sales, sales of antiquities, confiscations, various fines and penalties, and taxes, as well as other miscellaneous income.  I was particularly interested in the discussion of taxes.  The moderator interviewed a former resident of ISIS controlled territory who talked about the taxes and other compulsory exactions.  Apparently, ISIS has some form of income tax and will, perhaps arbitrarily, determine the amount of income and the tax that should be paid.  If the ISIS tax police find assets in your home (say cash or some valuable asset such as gold items), they would claim that is part of the income that is subject to tax.  The hapless "taxpayer" -- if that is the right word to use -- might, with valuable assets like gold at least, claim that those assets were from long ago, such as wedding gifts and therefore should not be considered for that particular genre of income tax.  I am not sure how often that would work in the ISIS controlled regions (wonder if ISIS keeps database entries on that), but I guess it is worth a try.  I am not sure I would want to be a lawyer presenting that defense to the ISIS tax police.

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