Friday, November 30, 2018

New DOJ Policies for Prosecution of Entities and the Individuals Within Them Most Responsible (11/30/18)

Deputy Attorney General Rod Rosenstein announced yesterday important changes to Government policy on prosecuting corporations and individuals yesterday at a conference on the FCPA.  See DOJ announcement here.  I include below the key excerpts (lengthy) explaining the policy:
Under our revised policy, pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation. 
It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing. Corporate-level resolutions also allow us to reward effective compliance programs and penalize companies that condone or ignore wrongdoing. 
But the deterrent impact on the individual people responsible for wrongdoing is sometimes attenuated in corporate prosecutions. Corporate cases often penalize innocent employees and shareholders without effectively punishing the human beings responsible for making corrupt decisions.  
The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes.  So we revised our policy to make clear that absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability. 
Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.  
In response to concerns raised about the inefficiency of requiring companies to identify every employee involved regardless of relative culpability, however, we now make clear that investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted. 
We want to focus on the individuals who play significant roles in setting a company on a course of criminal conduct.  We want to know who authorized the misconduct, and what they knew about it. 
The notion that companies should be required to locate and report to the government every person involved in alleged misconduct in any way, regardless of their role, may sound reasonable. In fact, my own initial reaction was that it seemed like a great idea. But consider cases in which the government alleges that routine activities of many employees of a large corporation were part of an illegal scheme. 
When the government alleges violations that involved activities throughout the company over a long period of time, it is not practical to require the company to identify every employee who played any role in the conduct. That is particularly challenging when the company and the government want to resolve the matter even though they disagree about the scope of the misconduct. In fact, we learned that the policy was not strictly enforced in some cases because it would have impeded resolutions and wasted resources. Our policies need to work in the real world of limited investigative resources. 
Companies that want to cooperate in exchange for credit are encouraged to have full and frank discussions with prosecutors about how to gather the relevant facts.  If we find that a company is not operating in good faith to identify individuals who were substantially involved in or responsible for wrongdoing, we will not award any cooperation credit.  

Thursday, November 29, 2018

New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (11/29/18; 11/30/18)

I link the IRS's new guidance on voluntary disclosure.  Memorandum from Kristen B. Wielobob, Deputy Commissioner for Services and Enforcement, re Voluntary Disclosure Practice (LB&I-09-1118-014 dated 11/20/18), here.  The memorandum is short (5 pages) and straight-forward.  I encourage all practitioners and affected taxpayers to read it carefully.

I will try to summarize what I think are the key points on my initial reading.

1.  The guidance applies to all voluntary disclosures, whether offshore or otherwise, received after 9/28/18.  Readers will recall that that date was the conclusion of the IRS's OVDP 2014, the program (with predecessors) that applied to offshore voluntary disclosures.  But, remember that this guidance applies to all voluntary disclosures.

2.  Voluntary disclosures are for the bad actors -- those with potential criminal exposure.  Here is the relevant paragraph:
The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.
For those without criminal exposure, as with OVDP, the IRS has other procedures, including filing amended returns (that may be qualified amended returns avoiding the accuracy related penalties) and the special procedures for correcting offshore filings outside OVDP.

3.  The practice covers tax and tax-related criminal acts, so tax-related FBAR violations are included.

4.  Voluntary disclosure starts with the taxpayer submitting to CI a preclearance request under "a forthcoming revision of Form 14457." The current version of Form 14457, titled Offshore Voluntary Disclosure Letter, is here. "IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility."  IRM 9.5.11.9 is here.

5.  Upon acceptance, the taxpayer is notified and the case then processed for civil examination (going through LB&I Austin).  The case will be transferred to the appropriate civil division for examination. All voluntary disclosures will follow "standard examination procedures," requiring that examiners develop the case with its usual information gathering tools.

6.  The civil resolution framework (apparently inspired by OVDP and its various iterations) is (this is just cut and paste because the actual wording is so important):
a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
i. In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
ii. In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.
iii. With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods). 
b) Taxpayers must submit all required returns and reports for the disclosure period. 
c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
i. Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
ii. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
iv. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
v. A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
vi. Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
vii. Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals. 
d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases. 
JAT Comments (added 11/30/18 at 12:30pm):

Wednesday, November 28, 2018

Use or Abuse of Joint Defense Agreements: Which Is It for Manafort and Trump? (11/28/18)

I have previously written on joint defense agreements, both generally and in relationship to the special counsel investigation.  I collect the more pertinent prior blog entries related to Trump at the end of this blog entry.  I post this blog today because of the startling developments where Manafort's lawyers shared the information from Manafort's supposed / feigned cooperation with Trump's lawyers, a truly startling development.

I offer an excellent opinion piece: Ken White, Why Did Manafort Cooperate With Trump Over Mueller? (NYT 11/28/18), here.  Mr. White is (per the bio on the bottom):  "a former federal prosecutor, is a criminal defense lawyer and First Amendment litigator at Brown White & Osborn in Los Angeles, and a host of 'All the President’s Lawyers,' on radio station KCRW."  I have worked extensively and written on joint defense agreements and believe that Mr. White's discussion is spot on.  Highly recommended.

Here are the pertinent prior blogs (in reverse chronological order):
  • All the President's Joint Defense Agreements (Federal Tax Crimes Blog 10/8/18), here.
  • On Trump, Manafort and Joint Defense Agreements (Federal Tax Crimes Blog 9/14/18; 9/15/18), here.
  • More On Joint Defense Agreements (Federal Tax Crimes Blog 5/15/18), here.
  • On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.
As an aside, the biggest case in which I was involved with was a case that spawned many great opinions, but the principal opinion in the case was United States v. Stein, 541 F.3d 130 (2d Cir. 2008), here (notice how many lawyers were for the defendants in the case).  I was quite familiar with JDAs before the Stein case, but dealt with JDAs in great nuance in that case.  The fun fact of particular interest in the case was that the prosecution team included Kevin Downing of DOJ Tax Division (where I used to work) at the trial level.  Kevin Downing is Manafort's lawyer (his picture is prominently displayed in the linked article.)  Let's just say that he was not an easy guy for me to deal with then.  Still, he is smart and very aggressive.  Of course, for those taking the trouble to read the opinion, the prosecution's aggressiveness resulted in 13 defendants in the sprawling tax evasion case having their prosecutions dismissed for prosecutorial abuse.

Another Offshore Account Plea to One Count of Tax Perjury (11/15/18)

DOJ Tax announced here the plea agreement for tax perjury by Israel Birman, a Bank Leumi account holder.  Key excerpts:
According to court documents, between 2006 and 2014, Israel Birman held offshore bank accounts in Israel at Bank Leumi and Israel Discount Bank.  The accounts had balances over $10,000 each year, which required the filing of Reports of Foreign Bank and Financial Accounts (FBARs) with the Department of the Treasury. In 2013, Israel Birman’s bank accounts at Israel Discount Bank had a total value of over $3.4 million. Israel Birman did not file FBARs for 2006-2014. Israel Birman instructed Bank Leumi to hold bank mail from delivery to the United States, and obtained access to his offshore funds through the use of “back-to-back” loans from Bank Leumi USA collateralized by his undeclared Bank Leumi offshore funds. In 2009 and 2010, Israel Birman earned taxable interest income on his Bank Leumi bank accounts totaling over $187,000. He failed to report that interest income on his 2009 and 2010 federal tax returns. 
* * * * 
In December 2014, Bank Leumi entered into a deferred prosecution agreementafter the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers to prepare and present false tax returns by hiding income and assets in offshore bank accounts in Israel and other locations around the world. Under the terms of the deferred prosecution agreement, Bank Leumi paid the United States a total of $270 million and continues to cooperate with respect to civil and criminal tax investigations. 
* * * * 
As part of the plea agreement, Israel Birman has agreed to pay a civil penalty of not less than $1,709,883, representing fifty percent of the balance in his Israel Discount Bank account in 2013.

Defense to Evasion of Payment by Fictitious Instruments--the IRS "Monetized" and Holds the Proceeds in a Secret Fund (11/28/18)

In United States v. Nix, Case No. 2:17-CR-105-RSL (W.D. Wash. Nov. 21, 2018), here, a jury found Nix guilty of nine counts of attempted evasion of payment of taxes for the tax years 1998 and 2000-2007, four counts of attempted evasion of assessment of taxes for the tax years 2010-2013, eleven counts of presentation of fictitious financial obligations, and one count of corrupt interference with the administration of the Internal Revenue Code."  The defendant moved to vacate the judgment and grant a new trial.

Here is the part I found interesting (cleaned up):
At trial, the government introduced as evidence eleven money orders, purporting to be payments for defendant's tax debt, that were mailed to the Internal Revenue Service ("IRS") on defendant's behalf ("the Money Orders"). William C. Kerr, an "expert on financial fraud and fictitious instruments," was called as one of the government's witnesses. Mr. Kerr testified that the Money Orders were fictitious. Defendant also admitted that  they were fictitious.  
Defendant filed a motion for a new trial on September 12, 2018. This is based on allegedly newly discovered evidence that shows that the Money Orders were not fictitious, as they have been monetized by the government and deposited in various financial funds. Defendant claims that, after the trial, he was "able to find a confidential source [who] [had] appropriate access to the necessary banking screens and ... was willing to research the instruments and provide such research data... under a private trust agreement that include[d] strict confidentiality and non-disclosure of the confidential source." This source allegedly used "the instrument numbers and personal identifying information of [defendant] to search the banking system..." and locate the Money Orders. Defendant also submitted a "Notice of and Assignment of Claim in Subrogation and Demand for Deposition of Charges," purporting to assign to the government all of his alleged property interests in these financial funds.

JAT Comments:  None.

Thursday, November 22, 2018

The Difference Between § 7206(2) Aiding and Assisting and 18 USC § 2(a) Aiding and Abetting (11/22/18)

I speak in this blog entry on one of my pet peeves in federal tax crimes practice.  One of the principal tax crimes is § 7206(2), here, provides that a person is guilty of a three-year felony if the person --
(2) Aid or assistance  Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.
This is often referred to as the substantive tax crime of "aiding and assisting."  One person acting alone can be guilty of this crime and does not require another actor guilty of some crime.

This aiding and assisting tax crime is not the same as aiding and abetting under 18 USC § 2(a), here, which provides
§ 2. Principals
(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.
I focus on the second part dealing with aiding and abetting.  The first part merely states the common law that the person committing the substantive offense is punishable as a principal.  Of course, that person is a principal.

Aiding and abetting is not itself a substantive crime but simply makes someone who is not otherwise a principal of a substantive crime a deemed principal of the crime by virtue of aiding and abetting.  One person alone cannot be guilty of Title 18's aiding and abetting crime without some criminal conduct of another.   (I address the concepts that can make person guilty of a crime that he or she did not otherwise commit in my article John A. Townsend, Theories of Criminal Liability for Tax Evasion (5/15/12), SSRN https://ssrn.com/abstract=2060496.)

So, what brings this topic up now?  Back in July, DOJ Tax announced here a conviction with the following opening paragraph:
A jury in the Northern District of California convicted a San Francisco area Certified Public Accountant late yesterday of three counts of aiding and abetting the filing of a false tax return, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and Acting U.S. Attorney Alex G. Tse for the Northern District of California.

Monday, November 19, 2018

Yet Another Offshore Account Plea (11/19/18)

DOJ Tax announced, here, another plea deal today.  The defendant is Teymour Khoubian.  Key excerpts:
According to the plea agreement and related court documents, Teymour Khoubian pleaded guilty to filing false tax returns for tax years 2009 and 2010 that failed to report foreign financial accounts in Germany and Israel, and failed to report income earned on those accounts. Between 2005 and 2012, Khoubian jointly owned multiple accounts at Bank Leumi in Israel with his mother that held between $15 million and $20 million. Additionally, since at least 2005, Khoubian also owned a foreign account at Commerzbank AG in Germany. Despite his ownership interest in these accounts and a legal requirement to declare all offshore accounts containing $10,000 or more, Khoubian prepared false tax returns for tax years 2005 through 2011 that did not fully disclose his foreign accounts, nor report all the interest income earned on those accounts. For instance, Khoubian’s Bank Leumi accounts generated interest income in excess of $4 million between 2005 and 2010, none of which was reported to the Internal Revenue Service (IRS).  The total tax loss associated with the Bank Leumi accounts is approximately $ 1.2 million.  
At least since 2009, Khoubian was aware of the IRS’s Offshore Voluntary Disclosure Program (the OVDP).  The OVDP allowed U.S. taxpayers to voluntarily disclose their previously unreported foreign accounts and pay a reduced penalty to resolve their civil liability for not declaring foreign accounts to U.S. authorities. During 2011 and 2012, Bank Leumi requested that Khoubian sign a Form W-9 for U.S. tax reporting purposes. In an August 13, 2012, recorded telephone conversation with a banker at Bank Leumi, Khoubian stated that the reason he did not want to sign a Form W-9, was "because you have to pay half of it." 
In 2012 and 2014, Khoubian knowingly made multiple false statements to IRS special agents investigating his foreign accounts, including falsely stating that the Bank Leumi accounts were not in his name, that he did not own a bank account in Germany from 2005 to 2010, that he closed his German bank account and moved all of that money to the United States, and that none of the money in his German bank account was moved to Israel.     
As part of the plea agreement, Khoubian agreed to the entry of a civil judgment against him for an FBAR penalty in the amount of $7,686,004.  Khoubian further agreed to pay an additional $612,310 in restitution to the IRS.   
Documents related to the plea are:

1.  The plea agreement, here.
2.  The docket entries as of today, here.

JAT Comments:

Thursday, November 15, 2018

Multi-Country Joint Chiefs of Global Tax Enforcement Targeting Enablers (11/15/18)

This article has more information on an a multi-country initiative with other countries to target enablers of tax evasion.  Tom Wilson, U.S. and four allies target tax-dodge specialists (Reuters 11/15/18), here.  The initiative is called the Joint Chiefs of Global Tax Enforcement (J5).  See IRS web site here:

According to the IRS web site:
The Joint Chiefs of Global Tax Enforcement (known as the J5) are committed to combatting transnational tax crime through increased enforcement collaboration. We will work together to gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials. 
The J5 comprises the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Fiscale Inlichtingen-en Opsporingsdienst (FIOD), HM Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI). 
We are convinced that offshore structures and financial instruments, where used to commit tax crime and money laundering, are detrimental to the economic, fiscal, and social interests of our countries. We will work together to investigate those who enable transnational  tax crime and money laundering and those who benefit from it. We will also collaborate internationally to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime and to make the most of data and technology.
Now back to the Reuters article, quoting Dan Fort:
“You investigate and you see where the money goes - inevitably it leads you to many levels, many different individuals and many different facilitators,” he said, with the IRS looking at the role of at community banks and smaller financial firms some money launderers may use. 
The J5 has said previously said that Britain’s tax enforcement agency, Her Majesty’s Revenue and Customs, has launched criminal investigations on more than 200 individuals and firms that make money by facilitating tax evasion. 
Cryptocurrencies are a key part of the J5’s work, Fort said, citing the risk that such coins are used in the United States to avoid capital gains taxes. Digital money can be used to transfer funds to people without the need for foreign bank accounts, he added.
The IRS is looking at the involvement of cryptocurrency exchanges and financial firms in withdrawals of digital money, and their conversion to government backed “fiat” currencies.\ 
“One of the ways to track cryptocurrencies, focused on when the actual cryptocurrency enters the system - folks want their money, and when it comes out is what we are focused on,” Fort said.
Picky nuance:  The IRS page linked above says that the Joint Chiefs are "combatting" transnational tax crimes.  That made me wonder if the word should be "combatting" or "combating."  My Google search quickly produced this discussion on word reference titled "combatting or combating," here, which linked to this offering in Dictionary.com, here:
combat
verb (used with object), com·bat·ed, com·bat·ing or (especially British) com·bat·ted, com·bat·ting.
Sure enough, my word processor spell-check flagged the double t version.

So there you have it.

Monday, November 12, 2018

New LB&I Compliance Campaigns Related to Offshore Matters (11/11/18)

The IRS has announced that new "compliance campaigns" related to offshore matters.  See IRS web page titled "IRS Announces the Identification and Selection of Five Large Business and International Compliance Campaigns," here.  The IRS describes its compliance campaigns as:
LB&I is moving toward issue-based examinations and a compliance campaign process in which the organization decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach makes use of IRS knowledge and deploys the right resources to address those issues. 
The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback. LB&I is investing the time and resources necessary to build well-run and well-planned compliance campaigns.
The new offshore related campaigns are:
  • Offshore Service Providers
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The focus of this campaign is to address U.S. taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets, generally, for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.
  • FATCA filing accuracy.  
FATCA Filing Accuracy
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.
  • 1120-F Delinquent Returns Campaign
Practice Area: Cross Border Activities
Lead Executive: Orrin Byrd, director of Field Operations (East)
The objective of the Delinquent Returns Campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
Form 1120-F must be filed on a timely basis and in a true and accurate manner for a foreign corporation to claim deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. The filing deadline may be waived, in situations based on the facts and circumstances, where the foreign corporation establishes to the satisfaction of the commissioner that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F per Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 dated 2/1/2018 established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.
The full list of compliance campaigns is here.  The ones that might be of particular interest to readers of this blog are:

Sunday, November 11, 2018

Offshore Account Enabler Post Conviction Motions for Acquittal and New Trial Denied; Issue on Reliance of Counsel (11/11/18; 11/15/18)

I have previously blogged on the indictment and conviction of Michael Little, a lawyer and an offshore account enabler.  I list the prior blogs at the end of this blog entry.  In an Opinion and Order dated November 1, 2018, the district court denied Little's motion for acquittal and alternative motion for new trial.  United States v. Little, 2018 U.S. Dist. LEXIS 187643 (S.D. N.Y. 2018), here.

The opinion is straight-forward. The only thing that caught my attention was this (Slip Op. p. 10):
Essentially, he [little] argues that the evidence was insufficient with respect to the third element—willfullness—because the government failed to disprove his advice of counsel defense. This claim is meritless. An advice of counsel defense is an affirmative defense. As such, the burden is on the defendant to prove the elements of the defense, not on the government to disprove the defense. A successful advice of counsel defense requires the defendant to prove that he (1) honestly and in good faith sought the advice of counsel, (2) fully and honestly laid all the facts before his counsel, and (3) honestly and in good faith followed his counsel's advice, believing it to be correct and intending that his acts be lawful. United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir. 2012).
I think the court errs in saying that the advice of counsel defense is an affirmative defense requiring that the defendant bear the burden of proof.  The defendant does bear a threshold burden on the issue, like a burden of production, to put the reliance on counsel defense in play.  But the Government's burden of proof beyond a reasonable doubt is to prove willfulness and that requires the Government to disprove good faith (including reliance on counsel) when that "defense" has properly been put in play in the case.

Here is the relevant excerpt from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015) (disclosure, I am the principal draftsman of Chapter 12):
¶ 12.05[2][b][ii] Blame others —tax professionals. 
A defendant will frequently assert that he or she lacked willfulness because he or she relied upon a tax professional. This is a Cheek argument in that the government failed to meet its burden to prove willfulness rather than a defense per se. The government thus has to show that the defendant did not rely upon the tax professional in order to show willfulness. n524 But, as in Cheek, the defendant has to put the “defense” in play by introducing some evidence of reliance on the tax professional. n525 Once the defendant does that, n526 it is then the government's burden to show that the defendant acted willfully, which means negating the taxpayer's claimed reliance. 
If the defendant does put the reliance defense in play, the following is a typical instruction that the government will request to advise the jury of what it must consider with respect to the defense: 
A good faith reliance upon the advice of a qualified tax accountant is also a complete defense to the charges because such a reliance is inconsistent with the intent required to commit these crimes. In order for the defendant to rely on the advice of a qualified tax accountant in good faith, the defendant must (1) make full and complete disclosure of all tax-related information, (2) to a qualified tax accountant, (3) actually rely upon and follow the advice that was provided, (4) without reason to believe that the advice was not correct. n527

Saturday, November 10, 2018

Court Holds that the Trust Fund Recovery Penalty is a Tax For Purposes of Tax Evasion, § 7201 (11/10/18)

In United States v. Prelogar, 2018 U.S. Dist. LEXIS 188305 (D. Mo. 2018), here), the Court rejected the defendant's argument to dismiss the following count of tax evasion, § 7201 that defendant:  "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America."  The first thing to note is that two types of evasion are alleged -- one for the TFRP and the other for income tax.  I focus here on the allegation of tax evasion for the TFRP.

Defendant's argument was simple.  Tax evasion requires a tax to be evaded (or, in the language of the statute attempted to be evaded).  The TFRP, as stated in § 6672, is a "penalty" rather than a tax.  Therefore a person evading the TFRP is not evading tax and thus outside the scope of tax evasion.

The Court rejects the defendant's argument as follows:
Count I charges that Defendant "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America" in violation of 26 U.S.C. § 7201. Defendant argues that § 7201 does not apply to him because the TFRP owed is a penalty and not a tax. In support of this argument, Defendant quotes Section 7201, which prohibits the willful evasion of "any tax imposed by this title or the payment thereof." Id. (emphasis added). Initially, the Court notes that Defendant's argument does not justify dismissal of Count I because Count I alleges that Defendant attempted to evade the payment of both taxes and penalties. At best, Defendant's argument would justify only limiting the scope of Count I. Regardless, the Court does not agree with Defendant that § 7201 applies only to evasion of the tax itself. Section 7201 makes it unlawful to attempt "to evade or defeat any tax", and § 6671(a) states that "any reference in this title to 'tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter." 26 U.S.C. § 6671(a). As explained in the Report, a "plain reading of Section 6671(a) leads to the inescapable conclusion that a reference to 'tax imposed' in a statute under the Internal Revenue Code [Title 26] must be deemed to include a 'penalty' provided in the subchapter [Subchapter B: Accessible Penalties]." Therefore, Defendant's arguments with respect to Count I are rejected. 
In Defendant's objections to the Report, he argues that the Fifth Circuit supports his claim that a penalty is not a tax for the purposes of § 7201. (Doc. 68, p. 3.)1 In United States v. Wright, 211 F.3d 233 (5th Cir. 2000), the Fifth Circuit addressed whether petitioners could be prosecuted for tax evasion if they owed only interest and penalties. Wright, 211 F.3d at 236-37. The Court based its analysis by relying on Sansone v. United States, 380 U.S. 343 (1965), where the Supreme Court observed that a conviction under § 7201 requires proof of a "tax deficiency." The Fifth Circuit then relied on the tax code's definition of "tax deficiency" - which does not include a tax penalty — to conclude that a conviction under § 7201 cannot be predicated on the willful evasion of a tax penalty. Id. at 236 & n. 3-4 (citing 26 U.S.C. §§ 6211, 6601(e)). The Court declines to follow Wright for several reasons. First, Wright does not discuss § 6671. Second, the phrase "tax deficiency" does not appear in § 7201, so the more limiting definition of "tax deficiency" (as opposed to the definition of "tax" found in § 6671) is inapplicable. Third, the issue in Sansone involved the circumstances under which a person charged with felony tax evasion is entitled to a lesser-included offense instruction for the misdemeanor of willful failure to pay a tax. Thus, it does not appear that when Sansone said the elements of § 7201 included a "tax deficiency," it meant to use the technical definition of the phrase as found elsewhere in the tax code. For these reasons, the Court denies Defendant's arguments with respect to Count I.

Tuesday, November 6, 2018

Second Circuit Offers Excellent Discussion of Accomplice and Conspirator Pinkerton Liability and Exception (11/16/18)

I have previously written on a tax iteration of the use of what I call derivative criminal liability -- i.e., not liability as a principal of the substantive offense but liability as an accomplice (aider or abettor) or a conspirator (Pinkerton liability).  John A. Townsend, Theories of Criminal Liability for Tax Evasion (May 15, 2012), available at SSRN: http://ssrn.com/abstract=2060496.  Basically, my concern was that by charging in the pleading that a defendant was a principal of the crime, an aider and abettor or causer of the crime, and a co-conspirator liable under Pinkerton, the Government was getting an advantage in the jury charge that overstated its case.  At least in the context of tax evasion, liability for the substantive offense for nontaxpayers (return preparers or abusive shelter promoters) incorporated the other potential liabilities and, if the defendant was not liable for the substantive offense, he was not liable for the other nominal offenses.  By charging the jury on all three, the impression could be given to the jury that if he was not guilty of one or two, he still could be convicted of the third.

I write today on a recent Second Circuit decision that, although not a tax case, addresses some of these derivative liability theories so ubiquitous in white collar crimes generally.  In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), here, the Court address a related issue in the context of the FCPA.  The Court framed the issue as follows:
In this case, we are asked to decide whether the government may employ theories of conspiracy or complicity to charge a defendant with violating the Foreign Corrupt Practices Act ("FCPA"), even if he is not in the category of persons directly covered by the statute. 
* * * *  
The central question of the appeal is whether Hoskins, a foreign national who never set foot in the United States or worked for an American company during the alleged scheme, may be held liable, under a conspiracy or complicity theory, for violating FCPA provisions targeting American persons and companies and their agents, officers, directors, employees, and shareholders, and persons physically present within the United States. In other words, can a person be guilty as an accomplice or a co-conspirator for an FCPA crime that he or she is incapable of committing as a principal?
I will now offer substantial "cleaned up" quotes (see my discussion of the cleaned up technique here), with most footnotes omitted:

Monday, November 5, 2018

U.S. .Sentencing Commission Quick Facts for Tax Fraud Offenses for fye 2017 (11/05/18)

I offer the U.S. Sentencing Commision's "Quick Facts" on key characteristics for sentencing for "Tax Fraud Offenses for fiscal year 2017.  The pdf is available from the Sentencing Commission's web site here.  I could not find a way to make legible copies of the pages on this blog page.

The facts (mostly statistics) are for offenders sentenced under Sections 2T1.1 land 2T1.4 of the Guidelines Manual which are the tax guidelines.  The 2018 Guidelines Manual is here.  Readers should remember that, previously the Government would assert sentencing for FBAR violations under the tax guidelines. but the Government had a change of mind on the appropriate sentencing for FBAR violations.  See Offshore Account Defendant Sentence with Court Accepting Government's New Position on Guidelines Calculations (1/25/18), here; Questions About New DOJ Tax Policy on FBAR Sentencing Guidelines (12/11/17), here; More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17), hereAnother FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (10/27/17), here.

Certain key items for fiscal year 2017 are:

  • There were 584 tax fraud offenders sentenced, who accounted for 0.9% of all offenders sentenced under the guidelines.  These seem low compared to the IRS statistics for sentencing.  My spreadsheet with the statistics is here.  The spreadsheet has links to the IRS statistics.  I have not tried to reconcile the differences.
  • The majority of tax fraud offenders had little or no prior criminal history (80.5%of these offenders were assigned to Criminal History Category I).
  • The median tax loss for these offenses was $277,576.
  • 87.2% of tax offenses involved tax losses of $1.5 million or less.
  • 19.8% of tax offenses involved tax losses of $100,000 or less.
  • Sentences were increased: (i) 12.5% for sophisticated means; (ii) 8.4% for leadership or supervisory role; (iii) 3.8% for abusing position of public trust; and 8.7% for obstructing or impeding the administration of justice.
  • More than half of tax fraud offenders were sentenced to imprisonment only(59.1%).
  • The average sentence length for tax fraud offenders was 17 months
  • During the past five years, the rate of within range sentences for tax fraud offenders has decreased (from 36.1% in fiscal year 2013 to 26.5% in fiscal year 2017).
  • In each of the past five years, approximately one-quarter of tax fraud offenders received a sentence below the guideline range because the government sponsored the below range sentence.
  • Substantial assistance departures were granted in approximately 15 to 17 percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 67.3% in their sentence during the five-year time period (which corresponds to an average reduction of 17 months).
  • Other government sponsored departures were granted in approximately seven to thirteen percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 68.1% in their sentence during the five-year time period (which corresponds to an average reduction of 13 months).
  • The rate of non-government sponsored below range sentences increased during the past five years (from 40.8% of tax fraud cases in fiscal year 2013 to 45.9% in fiscal year 2017). Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months).
  • Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months). The average guideline minimum ranged between 24 months and 26 months during that time period.  The average sentence ranged between 15 months and 18 months during that time period.

Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18)

I post a Powerpoint Presentation (in pdf format), here, that was offered at the 14th Annual University Of San Diego School Of Law Procopio International Tax Institute last week.  The panel was titled "Summer of Norman, Wahdan, Colliot:Defending Title 31 FBAR penalties: Pre and Post-Assessment, IRS & DOJ Policies and Strategy," and the panelists were
  • Caroline D. Ciraolo, of Kostelanetz & Fink, here.
  • Robert S. Horwitz of Hochman Salkin Toscher & Perez PC, here.
  • Patrick W. Martin of Procopio, et al., here
This is really a great current discussion on all facets of FBARS, including
  • FBAR penalties, 
  • FBAR penalty assessments, 
  • the Offshore Voluntary Disclosure programs, 
  • FBAR Audits and Litigation (including Government collection suits and FBAR penalty refund suits), 
  • FBAR willfulness and reasonable cause, 
  • FBAR administrative collection
  • And more.
When getting permission to post this, I did engage in discussing with the authors one issue related to pp. 32&33 of the PowerPoint.  The FBAR penalty refund suit as stand alone litigation is not a trial to the judge; no jury trial is available.  The FBAR penalty collection suit can be tried to a jury.  Now, as tax lawyers are familiar, subject to the Flora full payment rule in much tax litigation, when the taxpayer files a proper tax refund suit after not paying the full amount (perhaps for other events or years), the Government will counterclaim for the unpaid balance.  For example, in TFRP cases, the putative responsible person can make partial payment and the Government will counterclaim.  The counterclaim is a collection suit in response to the refund suit.  Applying those concepts to the FBAR context (although outside Title 26), in theory the FBAR penalty refund case should be decided by the judge, and the counterclaim / collection case could be tried to a jury if either side demanded a jury.  That is an odd situation and at least offers the theoretical possibility, if not mitigated somehow, that the judge could reach a decision on the refund case that is inconsistent with the jury verdict on the counterclaim / collection case.  I say it is theoretical, because I think it would be unlikely for practical reasons.  Still:

Article on Benefits and Risks of Kovel Accountant, and Case on Topic (11/5/18)

I call readers attention to a very good succinct article on benefits and risk of using a Kovel accountant.:  Maintaining Privileges When Kovel Accountants Prepare Tax Returns by Evan Davis (Hochman, Salkin, Toscher & Perez Blog 10/29/18), here, which links to the article of that name in Tax Notes, here.  The author's bio is here.

On Kovel, I also offer readers the opinion in United States v. Adams, 2018 U.S. Dist. LEXIS 41165 (D. Minn. 2018), here.  (If the link is not working, please let me know at jack@tjtaxlaw.com or by posting a comment.,.  I cut and paste the relevant discussion (cleaned up, beginning on p. 2 of the opinion):
II. Murry LLC Communications 
Mr. Adams has invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called Kovel arrangement. See United States v. Kovel, 296 F.2d 918, 921–22 (2nd Cir. 1961) (holding that attorney-client privilege may apply to an individual’s communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer”). The government raises three challenges to this assertion of privilege. First, the government argues that the protections provided under Kovel are not applicable to the individual communications before the Court for in camera review. Even if the protections of Kovel did apply, the government asserts that any protection was waived by Mr. Adams’s subsequent filing of amended tax returns. Finally, the government argues that the crime-fraud exception vitiates any claim of privilege. 
The Court has conducted an in camera review of the following Murry communications: In Camera Exhibits M, N, O, P, R, S, and T. For the reasons set forth below, the Court rejects the government’s challenge to the assertion of privilege regarding these documents. However, this Court’s decisions regarding the privileged nature of the specific documents at issue is expressly limited to these documents. The Court’s rulings should not be read to strengthen or weaken claims of privilege or discoverability as to other documents, evidence, or testimony as those issues are not now before the Court. 
A. Attorney-Client Privilege 
Federal common law governs questions of privilege in a criminal case such as this. The attorney-client privilege protects confidential communications between a client and an attorney that are made for the purpose of obtaining legal advice. The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies.  
B. Application of Kovel 
With respect to the government’s argument that the protections of Kovel do not apply to the Murry communications, the Court finds that Thomas Brever’s Declaration and Supplemental Declaration sufficiently demonstrate that the attorneyclient privilege extends to the documents at issue. In these declarations, Mr. Brever thoroughly explains how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in Mr. Brever’s provision of legal advice to his client regarding tax-related matters. This is sufficient to invoke the attorney-client privilege. See Kovel, 296 F.2d 921–22 (explaining that where an attorney retains an accountant to assist the lawyer in providing legal advice to a client concerning tax issues, the attorney-client privilege may extend to communications between the client and the accountant); see also United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972) (concluding that attorney-client privilege may apply where “the accountant’s aid to the lawyer preceded the advice and was an integral part of it”). The Court’s in camera review of the communications does not contradict Mr. Brever’s explanation. 
C. Waiver By Filing Amended Returns 
The Court also concludes that Mr. Adams’s subsequent filing of amended tax returns for 2008, 2009, and 2010 do not result in a waiver of the privilege as to the Murry communications submitted for in camera review. In Cote, after concluding that the privilege could apply to communications between a client and an accountant who is retained to assist an attorney in providing legal advice on tax matters, the Eighth Circuit reasoned as follows: 
Notwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant’s workpapers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data.  
456 F.2d at 144. Too broad an application of the rule of waiver requiring unlimited disclosure by reason of filing an income tax return might tend to destroy the salutary purposes of the privilege which invite confidentiality between the attorney and his client. The Cote court distinguished between “workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns,” and other workpapers to which the rule of waiver would apply. Id. (emphasis in original). Here, Mr. Brever explains in his Supplemental Declaration that in responding to a subpoena from the government, he provided copies of files that contain data and
information that that was included on the amended returns for 2008–2010. However, he did not disclose information communicated by Mr. Adams in connection with requests for legal advice. Mr. Brever’s explanation distinguishes this case from Cote, where the accountant “testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government,” thereby waiving the privilege. The Court cannot conclude on this record, which includes the Court’s in camera review, that Mr. Adams is claiming privilege over the underlying details for the data that was ultimately transmitted to the IRS when he filed amended returns. Instead, the record suggests that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.

Fourth Circuit Fuzzes the Issue as to Whether Legal Uncertainty Is an Issue for the Court (11/5/18)

In United States v. Burks, 2018 U.S. App. LEXIS 23804 (4th Cir. 2018) (unpublished), here, Burks was convicted of "conspiracy to commit mail and wire fraud, substantive mail and wire fraud, and conspiracy to defraud the United States by impairing the lawful functions of the Internal Revenue Service."  He was sentenced to "176 months incarceration concurrent on the counts involving mail and wire fraud, and 60 months concurrent on the conspiracy to defraud count, as well as being ordered to forfeit $244 million." This should tell you that the defraud / Klein conspiracy was not the principal driver in this case which involved the more serious mail and wire fraud charges for a Ponzi scheme.

I will get to the defraud / Klein conspiracy, but want first to mention that one of the banks involved filed "multiple suspicious activity reports with the United States Treasury."  I won't get further into that, but this is a good warning to the practitioner community that these reports are filed and the depositor is not notified.

The issue that I found particularly interesting was what I called the James issue.  James v. United States, 366 U.S. 213 (1961).  James held that legal uncertainty in the law's commands meant that a defendant could not be convicted of a crime as a matter of law.  I offer here the discussion on James from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[2][b][iii] Complexity and uncertainty in the tax law (footnotes omitted; online edition viewed on 11/5/18) (Disclosure:  I am the principal draftsman of that Chapter):
¶ 12.05[2][b][iii] Complexity and uncertainty in the tax law. 
One defense to a tax crime is that the legal duty upon which the criminal charge is based is not sufficiently certain to put the defendant on notice that failure to honor the uncertain duty can be an intentional violation of a known legal duty.
The seminal decision is James v. United States. The issue was whether James could be prosecuted for evasion under Section 7201 for failing to report and pay tax on embezzled income. James had been convicted of failure to report and pay, meaning that the jury determined guilt, which further meant that the jury determined that he intentionally violated a legal duty he knew to report the income. The question was whether, because of legal uncertainty as to the duty, he could be convicted even if he had a subjective intent to violate a duty that he “knew” (at least thought he knew). The Supreme Court majority found that the substantive issue of taxability of embezzled funds was in doubt — a doubt of the Supreme Court's own making. In an earlier case, Wilcox, the Supreme Court held that embezzled funds were not income for federal tax purposes. The underlying premise was that embezzled funds gave rise to an offsetting obligation to pay back, so the defendant had no increase in wealth and thus no taxable income. After that holding and before James, the Supreme Court decided in Rutkin that extorted funds were income despite an obligation to repay, thus rejecting the theoretical underpinning of Wilcox. In Rutkin, the Court expressly declined to overrule Wilcox. That was the state of the law when James was convicted. So Wilcox's express holding that embezzled funds was not income stood un-reversed; James presented the issue of whether James could be criminally prosecuted for failure to report embezzled funds that the un-reversed Supreme Court authority squarely on point held was not income. 
The Supreme Court started its analysis in James by taking the step it had previously declined to take in the intervening case, holding that for civil tax purposes, embezzled funds are income, thus overruling the original holding. Under the Court's reasoning, the law prior to this reversal did not clearly impose a legal duty with respect to embezzled funds (although that might be an even strong inference, it was not a compulsory inference from Rutkin because in Rutkin the Court expressly declined to reverse Wilcox). So even though James subjectively “knew” embezzled funds were taxable and violated that duty known to him (remember the jury so determined), objectively, there was legal doubt as to his duty to report and pay tax on embezzled funds. The duty itself was unknowable in any objective legal sense because of the state of the Supreme Court authority. Emphasizing that it was dealing with a criminal penalty, the Court said the following: 
We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner's conviction may not stand and that the indictment against him must be dismissed.
The bottom line holding is that, given the confusion as to the objective legal duty, James could not be prosecuted. It did not matter that the jury had determined that James had willfully failed to report the income, a holding that logically meant that James had not placed any reliance on the confusing Supreme Court authority. It did not matter, as the jury found, that James had the darkest of motives vis-a-vis the federal tax system. All that mattered was that, as a matter of law regardless of the facts, the legal duty was uncertain and thus could not support a criminal prosecution. 
Let's address some conceptual issues inherent in James that may be easily and erroneously conflated. James itself held that uncertainty in the law can preclude prosecution regardless of a defendant's intention to violate what he or she may have thought was a known legal duty. In this inquiry, the defendant's actual intent is irrelevant, and conceptually therefore it is not a jury issue but a judge issue that the judge pre-empts without the existence of actual intent being relevant. This issue turns upon the legal conclusion as to whether the law is “knowable” — meaning that it sets a discernible legal duty. Knowability is a legal issue for the court, as the Supreme Court held in James. The issue for the jury is whether the defendant knew the knowable legal duty and intended to violate it. This is a factual issue for the jury that is only addressed after the court first determines that the legal duty is knowable. (Actually, as in James, the determination that the law is unknowable can be made after the defendant has been found guilty by reversing the conviction.)
James is still viable on this issue. James spawned other cases in which convictions were reversed, but reversals are not common.

Eleventh Circuit Affirms Klein Conspiracy and Tax Perjury Convictions Mostly on Harmless Error But Raising Interesting Tax Crimes Issues (11/5/18)

In United States v. Garcia, ___ F.3d ___, 2018 U.S. App. LEXIS 29554 (11th Cir. 2018), here, the indictment charged the defendant and her late husband (who died before trial) of (i) one count of conspiracy (both offense conspiracy and defraud / Klein conspiracy) and (ii) three counts of tax perjury (§ 7206(1).  Garcia was convicted on all counts.

The principal issue in the appeal was whether Garcia's and her counsel's absence from the trial for three to ten minutes in a trial lasting 49 hours violated her constitutional rights.  That is an interesting discussion but not relevant or only tangentially so to federal tax crimes.  The essence of the court's holding was that, although violating her rights, the error was not prejudicial to her.  One of the factors that the court discussed that made the error not prejudicial is, however, worth noting (cleaned up):
Finally, the jury got to consider the testimony of the defendant who vigorously denied knowingly defrauding the United States. A defendant's testimony is substantive evidence that a jury may -- and indeed in this case did consider and reject. A statement by a defendant, if disbelieved by the jury, may be considered as substantive evidence of the defendant's guilt. As the Supreme Court has explained, a defendant who chooses to take the stand runs "the risk that in so doing he will bolster the Government case enough for it to support a verdict of guilty." McGautha v. California, 402 U.S. 183, 215 (1971) [subsequent case history omitted]  An explanation or denial offered by a defendant at trial that the jury finds implausible or false may form a sufficient basis to allow the jury to find that the defendant had the requisite guilty knowledge. Garcia's decision to testify at trial thus, ironically, added further weight to the prosecution's case.
Focusing on the defraud / Klein conspiracy, often formulated in jury instructions as a conspiracy to impair, obstruct and defeat the lawful function of the IRS, the court instructed that the conspiracy was "attempting to impair, obstruct and defeat the lawful function of the IRS." (emphasis supplied.)  Garcia complained, and the court agreed, that the addition was error and the parties agreed that the addition was a constructive amendment of the indictment.  The court affirmed the conviction because she could not show plain error in the constructive amendment.  None of the trial focused on any attempt, with this being injected for the first time in the instructions.  Further, the conspiracy charge was for both offense conspiracy and defraud / Klein conspiracy.  She was convicted of the offenses that were the object of the offense conspiracy, and hence the error was harmless:  "It is, therefore, remote that the verdict rendered on Count One was somehow based on an attempt to defraud rather than on the actual commission of the substantive crimes. "  [JAT Note; that is a bit fuzzy, but the overall point is clear enough.]

Garcia made another claim about the defraud / Klein conspiracy -- she urged that the trial court did not instruct on it.  I am not sure from the opinion what this claim was, since, as noted in the preceding paragraph, a variation of the defraud / Klein conspiracy, albeit erroneous, was given.  But the Court held that her substantial rights were not affected, saying:
It is abundantly clear that the primary issue contested at trial was whether the defendant knowingly and willfully participated in the tax conspiracy. We repeat that the jury ultimately convicted Garcia on three substantive tax charges, which were included as objects of Count One.