Thursday, December 29, 2016

Categories 3 and 4 Banks in U.S. DOJ Swiss Bank Program Have Been Resolved (12/29/16)

DOJ issued a press release regarding the status of the Swiss Bank Program:  Justice Department Reaches Final Resolutions Under Swiss Bank Program: Information Received Continues to Drive Civil and Criminal Enforcement Efforts (12/29/16), here.

The resolution of Category 2 have been previously announced.  This press release indicates the resolution of Categories 3 and 4.  That leaves only the Category 1 banks some of which have been resolved.  The Category 1 banks were those banks already under criminal investigation when the Swiss Bank Program was first announced.

I am traveling through January 2, so any postings will necessarily be cryptic.

Wednesday, December 28, 2016

On Structuring and Forfeiture and Grand Juries (12/28/16)

In United States v. Fisher, 2016 U.S. Dist. LEXIS 176719 (WD NY 2016), here, the defendant is a woman whose husband had previously been convicted by plea agreement for mail fraud and filing false returns.  He had been sentenced to 36 months imprisonment and ordered to pay $969,647.09 in restitution.  Subsequently, while he was incarcerated, in a series of transactions of less than $3,000, the wife purchased money orders from a financial institution.  The purchases aggregated over $300,000.  The Government obtained an indictment and then a superseding indictment from the grand jury charging multiple "counts of causing a financial institution to fail to file a transaction report—i.e., structuring—in violation of 31 U.S.C. § 5325(a)(2)."  The superseding indictment alleged that she purchased $74,000 in money orders with the intent of evading the identification requirements.  Those identification requirements could have led to the institutions filing reports of the purchases.  The superseding indictment also included a forfeiture allegation.  Pursuant to the forfeiture allegation, the Government filed a notice of lis pendens on the house, thus, she alleged, impairing funds that could have been available for her defense.

Section 5325, here, requires a financial institution to require identification upon the purchase of "a bank check, cashier’s check, traveler’s check, or money order to any individual in connection with a transaction or group of such contemporaneous transactions which involves United States coins or currency (or such other monetary instruments as the Secretary may prescribe) in amounts or denominations of $3,000."

Pursuant to defendant's motion to dismiss the superseding indictment, the magistrate judge recommended dismissal and, in the alternative, dismissing the forfeiture notice.
[Magistrate] Judge Scott makes these recommendations because, during grand jury proceedings in this case, the Assistant United States Attorney (AUSA) made several references to the Defendant's ex-husband's criminal conduct. Judge Scott also recommends dismissal because, in response to grand juror questions, the AUSA and the IRS Special Agent who testified before the grand jury discussed whether and how Fisher's home could be forfeited in the event of a conviction.
The district judge, in this decision and order linked above, rejects that recommendation and sustains the superseding indictment.  I post on the district judge's order because it offers a fascinating look into the grand jury, a look usually denied because of the grand jury secrecy rules.  In summarizing the relevant parts of the grand jury proceeding, the Court said (Slip Op. 3, n3 (carries over to p. 4):

Monday, December 26, 2016

Year End Review of A Top News Story on Panama Papers (12/26/16)

It is the time of year for media outlets to start recycling their choices of top news of the year.  Here is one from BBC on the Panama Papers disclosures.  Panama Papers: What happened next? (BBC 12/26/16), here.  This is a pretty good, if brief, article summarizing the global fall out from an interview with the two top journalists originally accessing the data and pulling together the consortium of journalists to analyze it.  The article focuses not just on hiding for tax purposes but for all sorts of nefarious -- aka illegal -- purposes.

Some excerpts (bold-face supplied by JAT):
Mr Obermaier said the Panama Papers had shown how the offshore world could be used to help aid terrorism. 
"It is striking for me that Europol found 3,469 probable matches between their own files and the Panama Papers - 116 between them on a project on Islamic terrorism alone." 
Mr Obermayer agrees and said the leak had revealed that the offshore world was not only a place for rich people to avoid taxes. He said the Panama Papers showed the secrecy of shell companies could be used to hide criminal activity. 
"I wasn't shocked that rich people use offshore to dodge taxes. I was shocked that there were so many crimes. I think the vast amount of offshore companies are used because someone wants to hide something." 
Mr Obermayer argues there have been concrete changes as a result of the leak's publication. 
"A lot has changed, in Germany. Our finance minister just introduced a new 'Panama Law' (requiring citizens to declare if they are using a shell company) and Panama itself is more open for change now. 
"Some countries have announced registers for beneficial owners and others are also arguing for that for the first time ever. 
"The pressure on tax havens is as high as never before and the Panama Papers have done that. They have directed the spotlight at the problem. 
"But still, what hasn't changed is that the very industry that helps tax dodgers is still alive and kicking. They have huge influence, huge power, huge lobby groups. We don't see the end of offshore - but we do see that offshore is shrinking." 
A potential solution? 
Both journalists argue for a global register of beneficial owners to end tax secrecy. A beneficial owner is the person who has significant control of a company and its profits. 

Sunday, December 25, 2016

Q. How Many IRS Special Agents Brandishing Guns Does It Take to Execute a Tax Crimes Search Warrant? A. 73 (12/25/16; 12/26/16)

Carpenter v. Commissioner, IRS, 2016 U.S. Dist. LEXIS 172675 (D CN 2016) here), is an interesting case involving a Bivens action, Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388, 91 S. Ct. 1999, 29 L. Ed. 2d 619 (1971).  Bivens authorizes an implied federal cause of action based on constitutional violations where there is no statute authorizing the action.  The action is against the individuals causing the violation rather than against the Government.  Bivens actions are not available where, for the alleged violation, Congress has provided a remedy by statute.

The Carpenter decision relates to a motion to dismiss based on inadequacies in the complaint.  Motions to dismiss test the adequacy of the complaint.  Basically, the Court declined to dismiss the main thrust of the claim in order to permit discovery to proceed, with the recognition that, after discovery, some or all of the issues could be resolved by summary judgment.  There will be further trial level proceedings in the matter.  But, some aspects of the decision caught my attention.

The factual background is interesting because, according to the allegations in the complaint not yet tested in discovery, the IRS agents executing the search warrant at Carpenter's place of business were way over the top in the manner in which they executed the search warrant.

The affidavit in support of the search warrant alleged that the agents would search for "for evidence that Carpenter was engaging in criminal tax offenses, including conspiracy to impede the lawful function of the IRS, 18 U.S.C. § 371, and aiding and assisting the preparation of false income tax returns, 26 U.S.C. § 7206(2)."  The affidavit did not mention "any specific dangers anticipated in executing the proposed search nor any exigent circumstances justifying a highly armed raid on the property."

The Facts (Principally as Alleged by Carpenter)

Here is a description from the case of how the IRS agents executed the search warrant:
On April 20, 2010, Schrader and 72 unknown IRS agents (the "John Doe" defendants) executed the search warrant at 100 Grist Mill Road in order to obtain evidence against Daniel Carpenter and GMC. Carpenter alleges that the IRS agents wore "black Kevlar bullet-proof vests and were brandishing automatic weapons" during the execution of the search, which was conducted in the same manner as a SWAT operation. Id. at ¶¶ 8. During the search, Carpenter and the other GMC employees were not informed of which crime they were suspected of committing, nor were they provided with the search warrant affidavit or any other document indicating which crimes were at issue. Id. 
During the search, the government seized 322 banker boxes of documents over the course of eighteen hours, a period in excess of what was authorized by the warrant. Id. at ¶ 9. During the search, the agents held numerous employees against their will for long periods of time and interrogated them. Id. Carpenter was "placed in custody, threatened with handcuffs, and questioned, despite his invocation of his right to have counsel present." Id. at ¶ 10. He was also "threatened with arrest" when he attempted to speak to counsel or leave the room to make a call. Id. Carpenter also alleges that the government "ransacked" his office during the search. Id. at ¶ 28. 
Carpenter alleges that Schrader had a duty to supervise the John Doe defendants in their use of force and the manner in which they carried out the search, and that he failed to do so. Id. at ¶¶ 21, 24. Specifically, he alleges that Schrader failed to supervise or instruct the agents on what was appropriate conduct during the search, and that Schrader was either "directly responsible" for the intimidating tactics or "deliberately indifferent" to the possibility that the search would be carried out in an unconstitutional manner. Id. at ¶ 21. Carpenter alleges that Schrader also "consciously disregarded the substantial risk that he had authorized the custodial interrogation" of Carpenter without reading him his Miranda rights in violation of his Fifth and Sixth Amendment rights to have counsel present. Id. at ¶ 28. 
Carpenter alleges that Schrader's acts were intentional and motivated by animus against Carpenter because of his reputation as an "anti-government" actor and his litigation against the government in the Massachusetts case. Id. at ¶ 26. Accordingly, Carpenter alleges that the manner in which the search was carried out was deliberately intended to "harass, intimidate and humiliate" him. Id. Carpenter further claims that the IRS has a policy and practice of using armed agents to enforce search warrants for [*8]  tax documents, despite the fact that the IRS manual "requires investigations to be carried out with the least intrusive means necessary." Id. at ¶ 22; see also id. at ¶ 25. Carpenter does not allege, however, that Schrader had any responsibility for setting IRS policies. 
To date, Carpenter and his related entities have not been indicted for the tax offenses alleged in the warrant affidavit.

Saturday, December 24, 2016

Protecting the Contingency Fee in IRS Whistleblower Representation (12/24/16)

The issue I discuss today is how an attorney may protect his contingency fee in an IRS Whistleblower case.  The background is the substantial awards available under § 7623(b), here.  Based on my experience and anecdotal information from others, contingency fees with respect to IRS whistleblower claims is the norm.  I have not heard of any hourly rate representations.  The reason, I think, is that there are too many contingencies involved in the representation that encourages the client to avoid the financial cost of hourly representation that may not produce any award.  For more on the contingency fees in legal representation, see Adam Shajnfeld, A Critical Survey of the Law, Ethics, and Economics of Attorney Contingent Fee Arrangements, 54 NYLS Law Rev. 774 (2009/2010), here.

In Begelman & Orlow, P.C. v. Ferara, 2016 U.S. Dist. LEXIS 169788 (D NJ 2016), here, the attorney firm had a 1/3 contingency fee, but apparently the agreement had no protection mechanisms if the client received an award.  The attorney firm could sue the client and, provided there were no debilitating problems in the representation, presumably obtain a judgment in some amount.  But, in Begelman, the client fired the attorney firm and withdrew its power of attorney when, according to the facts, she was on the verge of obtaining a recovery.  Thinking that the client had obtained a recovery, the attorney firm sued the client and the client countersued.  (It is an oft encountered phenomenon that a suit against a client for fees will provoke a counter-action -- either separate suit or, more likely, a counterclaim alleging attorney skullduggery or malpractice.)  The case, filed in 2012, has been pending for some time now.  The docket entries as of 12/9/16 are here.  The decision resolves cross motions for summary judgment.  The decision notes that the defendant denies that she has received an award and limits the attorney firms' recovery to quantum meruit -- value of services received -- which will take into consideration defendant's claims of inappropriate representation.

One of the problems in Begelman is that, because of the withdrawal of the POA, the IRS Whistleblower Office could not tell the attorney firm whether an award had been given and discovery against the IRS was unavailing.  And the client insisted that she received no award.  Her insistence raises a credibility issue (because other proof is stymied unless discovery fleshes it out), so the matter will go to trial and could be resolved because there was no award (if the judge, at trial, finds her a credible witness).

I won't try to summarize the factual intrigues reflected in the decision.  (It is a good read.)  Instead, I want to ask readers the question of how an attorney protects his fees from this type of client gambit?  I have represented whistleblowers and have entered a rather plain vanilla contingency fee arrangement.  I have not protected my fees against this type of client gambit but, fortunately, have not had a client go rogue.  The issue, though, is that the client can fire the attorney midstream or even on the cusp of an award and withdraw the POA.

So, what to do?  One solution I have heard is to make the attorney a joint whistleblower on the Form 211.  A POA would still be required to represent the other filing whistleblower (the client) and the client can withdraw the POA.  But, the attorney's personal interest in the claim would then give him access to the status of the claim and a share of the award.  That will not protect against the client making claims of deficient representation as presented in the Begelman case, but the client would have to institute that suit to recover the fee from the attorney.  Or the client desiring to withdraw midstream could perhaps sue the lawyer seeking inter alia that the client withdraw with respect to the original claim and cede the interest to the client.

I would appreciate hearing from readers how they deal with this possibility.  Please do that by comment or by email to

Defense Counsel Lesson: Always Object to a Willful Blindness Instruction Before Moving to Damage Control (12/24/16)

In United States v. Toth, 2016 U.S. App. LEXIS 22193 (4th Cir. 2016), here, Toth was convicted of conspiracy to commit money laundering and six counts of money laundering concealment.  At the trial, the Court gave the following willful blindness instruction:
In determining whether the defendant acted knowingly, you may consider whether the defendant deliberately closed his eyes to what would otherwise have been obvious to him. If you find beyond a reasonable doubt that the defendant acted with, or that the defendant's ignorance was solely and entirely the result of a conscious purpose to avoid learning the truth, then this element may be satisfied. A person who preserves a lack of actual knowledge of a subjectively obvious fact is just as culpable as a person who has actual knowledge of that fact. This is referred to as willful blindness. 
A showing of negligence is not sufficient to support a finding of willfulness or knowledge. I caution you that the willful blindness instruction does not authorize you to find that the defendant acted knowingly because he should have known what was occurring or that in the exercise of hindsight he should have known what was occurring or because he was negligent in failing to recognize what was occurring, or even because he was reckless or foolish in failing to recognize what was occurring. 
Instead, the government must prove beyond a reasonable doubt that the defendant purposefully and deliberately contrived to avoid learning all the facts. 
If you find that the defendant was aware of a high probability that a conspiracy, agreement, or understanding to launder money existed and that the defendant acted with deliberate disregard to those facts, you may find that the defendant acted knowingly. However, if you find that the defendant actually believed that there was not a conspiracy, agreement, or understanding to launder money, he may not be convicted. 
It is entirely up to you whether you find that the defendant deliberately closed his eyes and any inferences to be drawn from the evidence on this issue.
On appeal, Toth asserted that the trial court should not have instructed the jury on willful blindness.  The Court rejected the argument. The Court's reasoning was that the invited error doctrine applied to preclude complain on appeal because the defendant "invited the error of which he now complains by requesting a willful blindness instruction in the proceedings below."  I found it odd that a defendant would have requested a willful blindness instruction.  I don't recall that I have seen that happen before.  So, I dug deeper.

Friday, December 23, 2016

Statistics on Reversals by Courts of Appeals in Criminal Cases (12/23/16)

These U.S. Court statistics, here, offer an interesting statistic on percentage of reversals by the federal Courts of Appeals in All Cases (Total) and in Criminal cases.

Year Total Criminal
2011 8.7 6.5
2012 6.7 6.9
2013 6.8 5.8
2014 7.3 6.1
2015 8.6 6.9

The basis for the statistics is not clear from the presentation of the data.  For example, if the defendant were convicted on 3 counts of tax evasion, each count of which permits a sentence up to 5 years, and the sentence in the case on appeal, was less than 5 years, the reversal of two of the counts might not affect the sentence (because the tax loss for the Guidelines calculation is determined by including tax loss on even acquitted counts).

Still, even assuming that the reversal resulting in all counts of conviction being eliminated and no retrial, the statistical probability for such a reversal is pretty low.

Clarification: Vontobel Was Not in Swiss Bank Program (12/23/16; 12/29/16)

As rewritten 12/29/16.

On the original blog, I had reported that Vontobel had completed its processing under the DOJ Swiss Bank Program as a Category 3 bank.  I misread the information I had.  Others may have as well.  At any rate, Vontobel has issued a subsequent press, here, release clarifying that its prior release was not intended to indicate that it had proceeded as a Category 3 Swiss Bank.  The clarifying press release is as follows:
It has come to our attention that the Bank's press release of December 22 (Link to media release) may be unclear and may be read as implying that the Bank resolved its case pursuant to the Program for Swiss banks or otherwise received a disposition from the Department of Justice. That is not the case. The first sentence of that release was merely intended to make clear that, in 2013, the Bank and its lawyers determined that the Bank had not committed any offenses under US tax law and proactively engaged in discussions with the Department of Justice prior to the announcement of the U.S. Program. The Bank did not seek a nonprosecution agreement or apply for a non-target letter, and has received neither.

Sunday, December 18, 2016

Conference Report on IRS Offshore and Voluntary Disclosure Efforts (12/18/16)

The ABA recently held a conference titled National Institute on Criminal Tax Fraud and Institute on Tax Controversy.  This is a report on part of the events:  Andrew Velarde, IRS Offers Hints About Future of John Doe Summonses (Tax Notes Today 12/12/16) [no link available].  Key points of my interest from that report are:

1. Expect continued IRS and DOJ activity against offshore service providers with respect to foreign accounts and in the John Doe Summons "JDS" area.

2. Discussion of the bitcoin JDS.  A senior IRS official, John McDougal, is quoted as saying that users of virtual currency "presented the same risk profile as [users of] an offshore account."  He also said that users of bitcoin have ranges of understanding with respect to tax compliance -- "from innocent misunderstanding of what the filing obligations are to tax evasion."

3.  Discussion of influx of information about offshore accounts from FATCA, voluntary disclosure and other sources.

4.  Discussion of certification of nonwillfulness in streamlined procedures. Reports that Scott Michel of Caplin & Drysdale analyzed the certification process where things are rarely black and white under the familiar tax penalty concepts of reasonable basis, substantial authority, and more likely than not.  Michel is quoted as saying:  "The scary thing to me, and I think a lot of others, is it is probably not good enough to have a reasonable basis."  [I infer that the thinking is, at least with respect to any legal issues (including legal issues in fact analysis), this range of levels of comfort in traditional tax penalty analysis may have some effect, at least in terms of practitioner behavior in advising taxpayers and perhaps in arguing cases, although I have not seen that in the application of the FBAR penalty and in the certification of nonwillfulness.]

5.  Discussion of potential problems, particularly criminal from improper certifications of nonwillfulness.  A senior DOJ Tax CES lawyer, Mark Daly, is quoted as saying that he has been looking at a lot of certifications recently.  Some have "patently ludicrous" narratives presented to support the nonwillful certification.  And, they are checking against information from other sources.  He cautioned better due diligence by practitioners.

6.  Discusses the salutary effect of streamlined to channel most taxpayers into streamlined rather than OVDP.  The article cites McDougal of saying that the average $10,000 payment in streamlined suggests that it is working and that, at least in most cases, practitioners are appropriately channeling the clients.  The article quotes statistics that show 18,000 streamlined submissions in the last year compared with 1,800 new OVDP submissions.

Conference Comments on Restitution Based Assessment for Taxes (12/18/16)

I have just read the following article:  Nathan J. Richman, Restitution-Based Assessments Limit Judicial Control of Sentence (Tax Notes Today 11/22/16), no link available.  The article reports events at the New England IRS Representation Conference on 11/18/16.  Those interested in the subject should obtain the article and review it, particularly if they represent convicted defendants subject to restitution awards for tax liabilities of third parties.  I link at the bottom of this blog entry my prior postings on the statute for assessing tax restitution.

Key points from the article are:

1.  It is very important for defense counsel to focus on the tax restitution award because the restitution amount will be assess and cannot be contested.

2.   Restitution based assessment ("RBA") is relatively straightforward as to an individual with respect to his personal tax liability (such as 1040).  However, complexities are encountered where tax restitution is imposed with respect to a third party's tax liability (such as restitution from a convicted return preparer for his clients' liabilities) and upon more than one person is subject to restitution for the same tax.  The complexities and the difficulties encountered make it important for the defense attorney to be prepared to exploit these complexities and difficulties in seeking as low restitution as possible.  Where the defendant is not otherwise personally responsible for the taxes, eliminating them from the restitution calculation has a major benefit for the defendant.  I offer this from the article primarily because most of the comments are by Judge Marvin Garbis, a federal district judge in Baltimore and former DOJ Tax attorney.
According to Garbis, the defense's job is "to make the amount determination as complicated as possible." The goal is to encourage the sentencing judge to leave the specific calculation of the tax loss to the civil tax collection process, he said, adding that the tax loss range for calculating the sentencing guideline range under the U.S. Sentencing Commission Guidelines Manual is distinct from the exact amount of the tax loss for restitution or collection purposes. 
Garbis agreed with Agostino on the difficulty faced by convicted tax return preparers whose former clients are no longer willing to cooperate. He added that the tax return preparer restitution orders become complicated because of the need to account for payments by the underlying taxpayers and the allocation of payments between different parts of the debt. Excessive complexity justifies skipping restitution, he said. 
There is also the question of benefit accruing to the underlying taxpayers when the convicted tax return preparer ends up paying the understatement through the restitution order, said Garbis, who also pointed to the issue of any refunds the underlying taxpayers may have received or had withheld in the interim. "I say it's totally unworkable," he added. 
* * * * 
Restitution orders against a party other than the taxpayer arise in other contexts, Ciraolo said. She pointed to the restitution order that was part of the deferred prosecution agreement reached between the U.S. government and private Swiss bank Julius Baer & Co. Ltd. (Prior coverage  .)

Saturday, December 17, 2016

First Circuit, Reversing the District Court, Rejects Santander's Bullshit Tax Shelter (12/17/16)

I previously have written about Santander Bank's version (through a predecessor, Sovereign) of its version of a bullshit tax shelter (a foreign tax credit generator), a version which was blessed at the trial level.  See Attacks on Indicted Tax Court Judge Kroupa's Decisions (8/26/16), here, (where, on appeal, Santander attacked an adverse precedent in the Tax Court based on the indictment of Tax Court Judge Kroupa).  We now have the decision on the appeal from the First Circuit -- Santander loses. Santander Holdings United States v. United States, ___ F.3d ___, 2016 U.S. App. LEXIS 22400 (1st Cir. 2016), here.

The bullshit tax shelter does not work, just as it failed to work for other taxpayers in the other courts of appeals.  Bank of New York Mellon Corp. v. Commissioner (BNY), 801 F.3d 104 (2d Cir. 2015), here; and Salem Financial, Inc. v. United States, 786 F.3d 932, 951 (Fed. Cir. 2015), here.

The Court offers the following as an introduction to the economic substance doctrine in the tax law, the reason it called the bullshit out:
B. The Economic Substance Doctrine 
The federal income tax is, and always has been, based on statute. The economic substance doctrine, n7 like other common law tax doctrines, can thus perhaps best be thought of as a tool of statutory interpretation, n8 as then-Judge Breyer characterized it in his opinion for this court in Dewees v. Commissioner, 870 F.2d 21, 35-36 (1st Cir. 1989).
   n7 Sovereign argues that the foreign tax credit area is so heavily populated with IRS regulation that there is no need for any further regulation by the courts under the guise of the economic substance doctrine. On these facts, we reject the proposition. In practical terms, it takes time for the government to analyze a new problem, come up with a solution, and promulgate regulations. "The endless ingenuity of taxpayers in attempting to avoid taxes means that there will be a first time for everything," Wells Fargo, 143 F. Supp. 3d at 838, and the economic substance test guards against abuse of loopholes that Congress and the IRS have not anticipated.
   n8 As one commentator says:
A related . . . claim is that the legislature assumes that long-standing common law doctrines such as economic substance will be used to interpret the statutes it enacts. Under this claim, the doctrines have been implicitly adopted as part of the statute -- at least where the statute does not indicate otherwise.
Joseph Bankman, The Economic Substance Doctrine, 74 S. Cal. L. Rev. 5, 11 (2000). 
The common law economic substance doctrine traces back to the Supreme Court's decision in Gregory v. Helvering, 293 U.S. 465 (1935).   n9 The Court there looked beyond the fact that a corporate reorganization technically complied with the statutory requirement and found that it lacked economic substance. Id. at 468-70. It found as such because the reorganization was:
   n9  In 2010, Congress enacted a statutory economic substance test. See 26 U.S.C. § 7701(o). The statutory test was not made retroactive. Our analysis, however, is not in conflict with that test, as Congress specified that the 2010 codification would be applied as courts have previously and consistently applied the economic substance doctrine. Id. § 7701(o)(5)(C). If the codification reveals anything about congressional intent as to pre-2010 STARS transactions, it supports our conclusion. 
an operation having no business or corporate purpose —- a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. 
Id. at 469. The Court reached this conclusion from the fact that "the transaction upon its face lies outside the plain intent of the statute." Id. at 470. 

Thursday, December 15, 2016

Russians Must Have Time on Their Hands (12/15/16)

I previously reported on apparent Russian interest in the Federal Tax Crimes Blog as indicated by Google's source statistics.  See Russian Interest in U.S. Federal Tax Crimes or At Least Federal Tax Crimes Blog (Federal Tax Crimes Blog 6/26/16), here.  While I rarely look at the statistics, I did have a few moments today to poke around them today.  I find that the Russians are back (don't know what if any correlation may exist between their alleged interest in promoting Trump and their indicated interest in my blog).  Here are the statistics I just cut and pasted here (note that Russia was sixth all time, but moved up to second and then, in the past week, have jumped to a clear first place; I wish I were getting paid by the view):

All-Time Sources

United States
United Kingdom

Month Sources

United States
United Kingdom

Week Sources

United States
United Kingdom

Wednesday, December 14, 2016

Packman on State of Offshore Voluntary Disclosure, Particularly Due Diligence for Streamlined NonWillful Certification (12/14/16)

I call readers' attention to a blog entry by Kevin Packman, here, a significant player in offshore account representation.  Kevin Packman, The High Cost of Being Noncompliant with the Internal Revenue Code (Tax Compliance Blog 12/7/16), here.

In the blog entry, Kevin surveys current key issues for the IRS's offshore voluntary compliance programs.

The whole entry is worth a read, but I point out particularly the continuing concerns about the propriety of nonwillful certifications in the Streamlined programs.  Kevin cautions practitioners to test their clients certifications of nonwillfulness to insure that the narrative support for the certification and the real underlying facts support the certification.  Kevin notes (footnotes omitted):
The Government is reviewing the taxpayer streamline certifications, which makes it more crucial for taxpayers to be truthful and not stretch the truth.  Thomas E. Bishop, Director of Field Operations (International) spoke on a panel at the 4th annual International Tax Enforcement and Controversy Conference in Washington DC on October 28, 2016 (DC Conference).  During his comments, Bishop warned practitioners to challenge the taxpayer's assertion of nonwillful behavior.  He stated, "[j]ust keep in mind that we are looking at the actual account documents, the things that we see that show that the particular account holders are acting in a knowledgeable and intended way to conceal their wealth and income from the IRS." 
Caroline D. Ciraolo, Principal Deputy Assistant Attorney General in the Justice Department Tax Division also spoke at the DC Conference.  Ciraolo mentioned that "it's our job to make sure that those people who chose the streamlined program chose appropriately."  She indicated that those who "lied their way through a streamlined narrative," would be prosecuted. Additionally, Ciraolo noted that the Government has a great deal of information that it has received from the banks, which it can compare against the certifications.  More chillingly, they are following the money that left Switzerland "into jurisdictions around the world" and looking at institutions other than banks, such as "asset management companies, corporate service providers financial advisers, and insurance companies." 
A few days after the DC Conference, Ciraolo delivered the keynote address on November 2, 2016 at the American Bar Association's 27th Annual Philadelphia Tax Conference.  During her prepared remarks, she reiterated the warning to taxpayers thinking they can skirt through with a streamline filing.  She indicated that the "Tax Division prosecutors are reviewing certain streamlined filings and will investigate and prosecute taxpayers who willfully submit false statements in an effort to obstruct and impede the IRS and evade the payment of tax due."  She also referenced that DOJ has three dozen FBAR cases currently being litigated.  
On November 14, 2016, Ciraolo was at the American Institute of CPAs National Conference and speaking again about taxpayers inappropriately using streamline when she said "these are potential criminal investigations and we're pursuing them." 
It is not just the possibility of having your certification challenged that should worry taxpayers it is the fact that the false certification can lead to a prosecution.  Tino M. Lisella, Assistant Chief of the Western Criminal Investigation Section of the Tax Division stated at the DC Conference a false streamlined submission could "lead to charges under section 7206(1) for filing a false document signed under perjury, section 7212(a) for tax obstruction, and evasion under section 7201." 
These warnings from Government officials must, however, be weighed against those from John McDougal, special trial attorney and division counsel, IRS Small Business/Self Employed Division.  On October 21, 2016 when speaking at the University of San Diego School of Law-Procopio's International Tax Institute annual conference he said that taxpayers who were grossly negligent could use streamline. McDougal said, "[as long as you were not fraudulent or willful in the FBAR sense...even gross negligence is an appropriate basis for filing streamlined"

Saturday, December 10, 2016

Senyszyn's Claims of Innocence of Tax Evasion Fail Again (12/10/16)

I have written before about the plight of Bodhan Senyszyn.  Senyszyn pled to a count of tax evasion.  Tax evasion, as followers of this blog know, requires a tax evaded element -- often referred to as tax due and owing or tax deficiency.  In subsequent proceedings, involving both direct and collateral and indirect attacks, Senyszyn often and loudly proclaimed his innocence of the charge to which he pled, particularly focusing in part on the absence of the tax evaded element.  One leg of his claims for relief reached the Tax Court where the Court held held that the evidence did not indicate that there was tax evaded on the embezzlement income in the tax evasion charge and that, under principles of res judicata, the Tax Court was not compelled to find some amount of tax evaded where it found as a fact that there was none.  Senyszyn v. Commissioner, 146 T.C. ___, No. 9 (2016), here.  I provide links to my prior discussions of Senyszyn's saga on this aspect of his claims for innocence.

Set back, but not willing to admit defeat on his claims of innocence, Senyszyn is back in court on his claim of innocence.  In Senyszyn v. United States, 2016 U.S. Dist. LEXIS 156155 (D. NJ 2016), here, Senyszyn sought collateral relief from his conviction for tax evasion.  The Court found that his pleading was inartful -- as often the case for parties representing themselves -- and recast the pleading in more lawyerly terms as a petition for writ of coram nobis which the court described as:
A writ of error coram nobis "is used to attack allegedly invalid convictions which have continuing consequences, when the petitioner has served his sentence and is no longer 'in custody' for purposes of 28 U.S.C.A. § 2255." See United States v. Stoneman, 870 F.2d 102, 105-06 (3d Cir. 1989). "A district court has the power, under appropriate circumstances, to grant a writ of error coram nobis and vacate a conviction, but the writ is an extraordinary remedy, and a court's jurisdiction to grant relief is of limited scope." United States v. Dwumaah, 570 F. App'x 193, 195 (3d Cir. 2014) (quotations omitted). A petitioner must meet five requirements in seeking relief from a federal conviction: (1) petitioner is no longer in custody; (2) petitioner continues to suffer consequences of the conviction; (3) the relief sought must correct errors of the most fundamental character; (4) there was no remedy for the defect available at trial; and (5) there are sound reasons for failing to seek the relief earlier. See id. at 196. "Earlier proceedings are presumptively correct and the petitioner bears the burden to show otherwise." Stoneman, 870 F.2d at 106.
Although there were some predicate procedural issues, the court addressed his claim as a claim of actual innocence.  The Court then held against Senyszyn on the following basis:
"Petitioner's claim may still be reviewed in this collateral proceeding if he can establish that the constitutional error in his plea colloquy 'has probably resulted in the conviction of one who is actually innocent.'" Bousley, 523 U.S. at 623 (quoting Murray v. Carrier, 477 U.S. 478, 496 (1986)); see also Lynch, 807 F. Supp. 2d at 230-31 (applying the Bousley holding to a petition for a writ of error coram nobis). "To establish actual innocence, petitioner must demonstrate that, in light of all the evidence, it is more likely than not that no reasonable juror would have convicted him." Bousley, 523 U.S. at 623 (quotations and citations omitted). "It is important to note in this regard that 'actual innocence' means factual innocence, not mere legal insufficiency." Id. 
Petitioner claims that he has demonstrated his actual innocence of tax evasion because of the finding by the Tax Court that he was not liable for a deficiency on his 2003 income tax return. Pet'r's Br. at 15-17. To be clear, the Tax Court did find that Petitioner had repaid misappropriated funds to his business associate during that year and that "the evidence presented does not support the asserted deficiency." See Pet'r's Cert., Ex. B at 20-22. 
The Tax Court's finding certainly contradicts a portion of the second count of the Information, which alleged tax evasion as a product of "embezzled taxable income from the sale of real estate." See S.I. at 6. To that extent, the Court acknowledges that the Tax Court's decision conclusively establishes that Petitioner is not guilty of evading taxes through the embezzlement of taxable income in 2003; however, that is not all that the Information alleges. Notably, the first paragraph under the second count reads: "The allegations contained in paragraphs 1 through 10 of Count One of this Superseding Information are repeated, realleged and incorporated by reference as though fully set forth herein." Id. In other words, Petitioner's conduct under the first count was also sufficient to establish his guilt under the second count. The Tax Court confirmed: "[Petitioner's] preparation of a fraudulent return on behalf of [the corporation] were themselves sufficient grounds to justify his conviction for tax evasion." See Pet'r's Cert., Ex. B at 28 n.7. 
Consequently, Petitioner has not established his actual innocence of tax evasion. To the contrary, the Tax Court's decision confirms the propriety of his guilty plea and conviction. See id. As such, Petitioner has not demonstrated an error of the most fundamental character that warrants correction and his petition for a writ of error coram nobis is, therefore, denied. See Dwumaah, 570 F. App'x at 195; cf. United States v. Osser, 864 F.2d 1056, 1059 (3d Cir. 1988) ("Nevertheless, it appears to us that an assertion that a conviction was based on conduct not covered by a criminal statute class is of a 'fundamental character.'") (citations omitted).

District Court Imposes FBAR Willful Penalty, Holding Reckless Conduct is Willful and Applying Preponderance Standard (12/10/16)

In United States v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (CD CA 2016), here, the Government sued the Bohanecs for judgment for for a single year FBAR penalty.  The Court's Findings of Fact and Conclusions of Law sustain the Government's position.  I include at the bottom of this entry links to other key documents that I downloaded from Pacer.

The facts may be highly summarized as follows:

The Bohanecs were camera dealers in California for many years.  Their camera shop had an exclusive Leica dealership.  Through a relationship with the president of a Leica subsidiary in Canada, Kluck, the Bohanecs earned commissions on sales that were deposited into a UBS account established for them by Kluck.  They amassed substantial amounts in the UBS account.  In 1997, the account had $1,049,900 and, by 12/31/07, the account had $687,600.  The amount in the account on 6/30/08, the filing date for the 2007 FBAR was $643,662.

In addition to the UBS account, the husband had an Austrian account established before he immigrated to the U.S., into which certain deposits were made.  And, they also had an account in Mexico which received transfers from the UBS account to build and maintain a house in Mexico.

After 1998, the Bohanecs stopped filing U.S. income tax returns and did not file until they attempted to join OVDP ini 2010.  The Bohanecs never filed FBARs until they attempted to join OVDP in 2010.

In 2010, the Bohanecs submitted an application to participate in the OVDP.  In the submissions, the Bohanecs only disclosed the UBS account and, further, represented that "original balance and all funds deposited into the [Swiss UBS] account were after-tax earnings from our used camera business."

After preliminary acceptance (acceptance implying that they were not part of UBS's initial disclosures), the Bohanecs submitted six years of delinquent FBARs and delinquent income tax returns (six years were 2003-2008).  The FBARs omitted the Austrian and Mexican accounts.  The delinquent income tax returns omitted income earned by the Bohanecs from camera sale activity on EBay.

The Bohanecs were rejected from OVDP.  The opinion does not state why they were rejected.  Perhaps they were rejected because the IRS became aware of the omissions from the FBAR and the amended income tax returns.  Perhaps by then the IRS had obtained the UBS account documents (either submitted by the Bohanecs or obtained from UBS), showing transfers to the Austrian and/or Mexican accounts.  (If those UBS account documents were submitted by the Bohanecs in the OVDP process, the omission of the other accounts from the FBARs filed in the OVDP process is surprising.)

In 2013, the IRS asserted by notice of deficiency additional tax, failure to file penalties (the regular FTF of 25 percent), and the civil fraud penalty under § 6663.  (It is not clear why the IRS did not assert the fraudulent failure to file penalty in § 6651(f).)  The Bohanecs did not contest the notice and the deficiencies were duly assessed with interest.  Most of the amounts assessed were still outstanding in September 2016 (aggregating $492,163.61).

In this suit, the Government asserts the 50 percent FBAR willful penalty (50 percent of the account balances for reportable accounts on 6/30/08).  The Court in its conclusion states only that the FBAR willful penalty is "the greater of $100,000 or fifty percent of the balance in the foreign accounts on June 30, 2008."  It does not state the amount to which the fifty percent penalty applies.  That may be in the stipulations, though.  The amount of the penalty is not particularly important for present purposes.

The key conclusions for present purposes are relatively short, so I include them all:

Friday, December 9, 2016

German Court Denies U.S. Request for Extradition of Wegelin Banker (12/9/16)

We covered in several blog entries the saga of Raoul Weil, a top UBS banker, who was arrested in Italy on an Interpol Red Notice and extradited to the U.S.    See entries on Weil, here.  Now, we have news that a German court has refused to extradite a Wegelin banker, Roger Keller.  Nate Raymond, Ex-Swiss banker goes home after U.S. loses extradition from Germany (Reuters 12/9/16), here.  All posts on Keller can be viewed here.  Key excerpts from the article on Keller are:
A former Swiss banker who was arrested last year in Germany on U.S. charges that he helped wealthy Americans evade taxes is back in Switzerland after the denial of a request to extradite him to the United States from Germany, his lawyer said on Friday. 
Roger Keller, a onetime client adviser in Zurich at Wegelin & Co, was one of three bankers at the now-defunct Swiss private bank charged in a 2012 indictment in New York federal court for helping U.S. taxpayers hide more than $1.2 billion in assets. 
He was arrested in Germany in February 2015 at the request of the U.S. government, which sought his extradition, and served seven months in jail before being granted bail, said Thomas Green, Keller's U.S. lawyer at the law firm Sidley Austin. 
By German court order, he was officially released on Friday after the U.S. request to extradite him was denied, Green said, though Keller had already been allowed to return to Switzerland a "few days ago."
Denial of extradition just wins that battle.  It does not resolve the U.S. criminal charge against Keller.

And, the statute of limitations is determined by the filing of the charges.  And, as to any other charges, the statute would be suspended by § 6531, here, which provides:  "The time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code, shall not be taken as any part of the time limited by law for the commencement of such proceedings."

The Beard Test and Differences Between Civil Penalties Fraudulent Failure to File and Civil Fraud (12/9/16)

I again want to plug the Procedurally Taxing Blog which has this new entry:  Stephen Olsen, Procedure Grab Bag: CCAs - Suspended/Extended SOLs and Fraud Penalty (Procedurally Taxing Blog 12/9/16), here.  The issue addressed in the CCA is whether the manner in which fraudulent OID was claimed on the filed "returns" met or did not meet the Beard test (summarized in the CCA and below) of what is a return for tax purposes (at least some tax purposes addressed in the CCA).  If the "returns" are returns, then the penalty for fraud on the documents is the civil fraud penalty, § 6663; if the "returns" are not returns, then the penalty for fraud would be the fraudulent failure to file penalty, § 6651(f).

As paraphrased in the CCA, the Beard test requires (citing Beard v. Commissioner, 82 T.C. 766, 777 (1984)):
(1) it must contain sufficient data to calculate tax liability; (2) it must purport to be a return; (3) it must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) it must be executed by the taxpayer under penalties of perjury.
The CCA recommends taking protective positions -- assertion of the civil fraud penalty and the fraudulent failure to file penalty.

Based on the CCA, I just added to my draft for the next Federal Tax Procedure edition (usually published in August of each year) the following paragraph to the discussion of the fraudulent failure to file penalty (footnotes omitted):
Finally, by definition, the fraudulent failure to file penalty applies only if no return is filed.  It is not uncommon for a taxpayer to file a document on the reporting form (in the case of income tax, the Form 1040) that appears at least superficially to be a return.  As noted earlier in discussing the requirements for a return, a standard test – referred to as the Beard test (Beard v. Commissioner, 82 T.C. 766, 777 (1984) – is often applied in determining whether the document is a return.  If it is a return that is fraudulent, the civil fraud penalty, § 6663, can apply and the fraudulent failure to file penalty cannot apply; if it is not a return, the fraudulent failure to file penalty, § 6651(f), can apply but the civil fraud penalty cannot.  It is not always clear whether a document having some resemblance to a return is a return under the Beard test.  Where that is the case, the IRS may assert protectively both the civil fraud penalty applicable if it is a return and a fraudulent failure to file penalty if it is not a return.  And, in those cases where the IRS does not assert alternative positions protectively, an unlimited statute of limitations would probably apply to fraudulent positions (e.g., if the document is a return, the unlimited statute of limitations for fraud would apply and, if the document is not a return, the unlimited statute of limitations would apply).
And, I previously had (and am carrying forward), the following paragraphs on the relationship of the two penalties (footnotes omitted):

Louisiana Attorney Pleads Guilty to Tax Evasion (11/9/16)

DOJ Tax and USAO ED LA issued press releases here and here announcing the guilty plea of a Louisiana attorney, Michael Thiel, to one count of tax evasion.  The key excerpts from the parallel press releases are:
Michael Thiel, 66, a resident of Baton Rouge, Louisiana, pleaded guilty to one count of evading the payment of federal income and employment taxes for 2003 through 2013.  According to documents filed with the court, Thiel operated a criminal defense law practice in Hammond, Louisiana.  Despite earning substantial income through his law practice, Thiel did not timely file income tax or employment tax returns, and did not timely pay tax due and owing to the United States.  Thiel agreed that as of April 30, he owed federal income tax, penalties and interest totaling $736,527, and employment tax, penalties and interest totaling $261,725. 
In January 2007, in an effort to conceal the ownership of his property and evade the payment of his tax liabilities, Thiel used nominees and the trusts he beneficially owned to purchase his principal residence for $435,000.  The nominees obtained a mortgage on the principal residence, and used a nominee bank account beneficially funded by Thiel to make the payments. Thiel entered into a lease agreement with the nominees to falsely characterize the monthly mortgage payments as rent.  In addition, between January 2007 and January 2014, Thiel deposited $416,283.56 into the nominee bank account with funds from the trusts and other accounts not held in his name. 
* * * * 
Pursuant to the plea agreement, Thiel faces a maximum sentence of 37 months in prison * * * *.
The key documents are:

  • The Information, here.
  • The Plea Agreement, here.
  • The Fact Statement, here.
  • The Minute Entry for the Plea Hearing, here.

JAT Comments:

1.  The plea is to one count of tax evasion under § 7201, here, which has a maximum sentence of five years.  However, the plea is a special plea pursuant to Rule 11(c)(1)(C), FRCrP, here, which permits the parties to "agree that a specific sentence or sentencing range is the appropriate disposition of the case, or that a particular provision of the Sentencing Guidelines, or policy statement, or sentencing factor does or does not apply (such a recommendation or request binds the court once the court accepts the plea agreement)."  In this case, the plea agreement specifies a maximum sentence at the top of the indicated guidelines range at the agreed offense level of 19 (reflecting a stipulated tax loss in the range $550,000 to $1,500,000 for purposes of Sentencing Guidelines 2T1.1 and 2T4.1 and a 3-level reduction for acceptance of responsibility reduction).  The tax evasion count to which Thiel pled is a five-year felony under § 7201, here.  At the plea hearing, the judge deferred approving the Rule 11(c)(1)(C) agreement until it has reviewed the sentencing report.

Thursday, December 8, 2016

Offshore Evasion: IRS Summons Setback Does Not Mean Game Lost (12/8/16)

I recently blogged about the decision in United States v. Greenfield, 831 F.3d 106 (2d Cir. 8/1/16), here, about failed summons enforcement for offshore account records.  Important CA2 Opinion on Foregone Conclusion Required To Overcome Fifth Amendment Act of Production Assertion to Summons Production of Foreign Documents, Including Bank Records (Federal Tax Crimes Blog 8/1/16), here.  Procedurally Taxing offers a great blog showing more audit and need context.  Dave Breen, Grinches, Liechtenstein Royal Princes, Bankers, Toymakers (and Offshore Evasion): A Holiday Summons Tale (Procedurally Taxing 12/8/16), here.  

Among other things Dave notes the difficulty the IRS has in going back to older years.  Indeed, the failed IRS attempt in Greenfield resulted from a too tenuous extrapolation from 2001 to 2013.  But, while Greenfield may have achieved at least a temporary victory, the rest of the universe of offshore evaders should not rest too easy.  The IRS will continue its efforts to discover the offshore noncompliance.  Some taxpayers will win the lottery; some will not.  Dave concludes:
But before you settle your brains for a long winter’s nap, think about this.  Even though Steven may have sunk IRS’s Battleship, today IRS is not in any immediate Trouble.  In fact, it is already working on a new Mousetrap.  On November 30, 2016 IRS received permission to issue a John Doe summons to Coinbase, Inc., a virtual currency exchanger headquartered in San Francisco, California, that Les discussed last month in his post IRS Seeks Information via John Doe Summons Request on Bitcoin Users.   
The moral of the story?  Uno’s?  I suspect many clients with assets hidden offshore will still take a big Risk by not coming in under IRS’s voluntary disclosure program, but you don’t have to be a Mastermind to see that many of them will ultimately be Sorry.  But, I guess that’s The Game of Life.  Happy Holidays!

Tuesday, December 6, 2016

Gelfand Article on Defending a Criminal Tax Case (12/6/16)

I want to point readers, particularly students, to a very good recent article by Justin Gelfand, Defending a Criminal Tax Case, Champion 40 (April 2016), here.  Justin is a seasoned practitioner with DOJ Tax CES and private practice experience.  Justin's bio page is here.

Justin opens with DOJ Tax's high 90+% conviction rate (virtually all by plea agreements) and two prominent instances of acquittals.  He then states:
This is not to say that every tax case should be tried and will be won. The Justice Department wins the lion’s share of tax cases that proceed to trial — many of which are investigated by stellar federal agents and prosecuted by talented financial fraud prosecutors. A savvy defense attorney will realize that certain tax cases should never see a courtroom and that the focus should be on negotiating the best deal. 
Notwithstanding the government’s 90 percent conviction rate, when a tax case hits defense counsel’s desk, counsel should think outside the box and litigate creatively because many a criminal tax case can be won, negotiated down to a favorable plea, and/or resolved with a lenient sentence.
Then Justin offers key "Tricks of the Trade" with a short introduction to the tricks.

  • Request an IRS SAC Conference and DOJ Tax Conference.
  • Obtain the tax preparer’s work papers.
  • File a FOIA request.
  • Identify and interview key witnesses early  [Good stuff here about the IRS-CI interview of the tax preparer]
  • Read the indictment carefully.
  • Consider moving for a bill of particulars.
  • Request IRS records in discovery.
  • Send the IRS a preservation letter.
  • Retain a Kovel accountant.
  • Cross-examine the government’s revenue agent.
  • Consider statutes when negotiating a plea.
  • Cross-examine the IRS-CI special agent.
  • Analyze sentencing issues thoroughly.
A very good read.  Thanks, Justin.