DOJ Tax Principal DAAG Recent Review of Activities Related to Federal Tax Crimes (11/13/16)

DOJ Tax issued this press release:  Principal Deputy Assistant Attorney General Caroline D. Ciraolo Delivers Keynote Address at the American Bar Association’s 27th Annual Philadelphia Tax Conference (11/2/16), here.  The following are excerpts related to the topics discussed on this blog (with JAT bold-face to draw readers' attention):

Tax Division prosecutors authorized, investigated and prosecuted traditional tax crimes, such as tax evasion, false returns, obstructing and impeding the due administration of the internal revenue laws, employment tax violations and the concealment of assets and income offshore, as well as aggravated identity theft and fraudulent return preparation.  Since 2014, our division prosecutors obtained more than 200 indictments, negotiated more than 100 guilty pleas and achieved a conviction rate in more than 30 trials of over 95 percent.  This does not include the additional criminal tax prosecutions authorized by the Tax Division and assigned to the U.S. Attorneys’ Offices.  

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We are also prioritizing criminal investigations and prosecutions of willful employment tax violations.  For example, in September, the former owner of a trucking company in Kansas was sentenced to three years in prison for evading the payment of more than $900,000 in employment taxes and for filing a false statement with the IRS concealing his ownership interest in assets when the IRS began collection efforts. 

On the offshore front, we completed 78 non-prosecution agreements with 80 Swiss banks that admitted assisting in the concealment of U.S. related accounts and facilitating the evasion of U.S. tax, and that completed the requirements of Category 2 of the Swiss Bank Program.  We collected more than $1.3 billion in penalties and received substantial, detailed information regarding U.S. related accounts, U.S. accountholders and foreign and domestic individuals and entities that assisted the U.S. accountholders to evade U.S. tax and reporting requirements. 

In addition, since 2008, the department, working with our colleagues in IRS Criminal Investigation (IRS-CI), charged more than 160 U.S. accountholders with tax evasion and willful failure to report foreign accounts and more than 50 individuals who assisted in this criminal conduct. We also reached resolutions with nine foreign financial institutions outside of the Swiss Bank Program and continue to pursue investigations of entities located within and outside Switzerland. 

Our criminal offshore enforcement efforts have encouraged participation in the IRS offshore voluntary disclosure programs, through which more than 55,000 taxpayers have come into compliance and paid nearly $10 billion in tax, interest and penalties since 2009.  In addition, filing of Reports of Foreign Bank and Financial Accounts (FBARs) has increased from 332,000 reports for calendar year 2007, to over a million reports for 2015. 

Our civil trial attorneys also furthered our offshore tax enforcement efforts, seeking the issuance of John Doe summonses to identify U.S. taxpayers whose identities are unknown and who are engaged in violations of the internal revenue laws and initiating summons enforcement proceedings to assist the IRS in conducting its examinations and determining the accurate tax due. The information we seek is often located in the United States; however, as we recently demonstrated in a district court in Miami, we will pursue enforcement of a Bank of Nova Scotia summons when a domestic entity has dominion or control over records located outside the United States, even where the domestic entity asserts that production may be a violation of foreign law, if our interest in combatting tax evasion substantially outweighs the interest in foreign jurisdictions in allowing banks to preserve the privacy of their customers. 

Our civil trial attorneys also are actively engaged in suits involving penalties assessed for failing to file FBARs. These suits include affirmative litigation to collect unpaid penalties, and defensive litigation raising a variety of issues.  We have approximately three dozen cases involving FBAR issues pending, the vast majority of which include a willfulness penalty for at least one of the years at issue.  These suits have raised issues related to the computation of the penalty, burden of proof, service of process abroad, definition of a foreign account, corresponding assessments on spouses, venue, jurisdiction, and challenges under the Administrative Procedures Act. 

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* * * * Let me take a moment to share my forecast of what I think you will see in 2017. 

First, the Tax Division is now well into the legacy phase of the Swiss Bank Program, reviewing the substantial data provided by the banks and obtained from other sources.  We are working closely with our colleagues in the IRS and using information gathered in pending investigations and to identify new individuals, entities and areas of interest for both civil tax enforcement and criminal tax investigations and prosecutions.  We are following the money outside Switzerland and into jurisdictions around the world and investigating activities by asset management companies, corporate service providers, financial advisers, insurance companies and other financial entities.  As a result of our enforcement efforts, entities are contacting us to acknowledge their role in facilitating U.S. tax evasion, disclose the individuals engaged in this conduct, and cooperate with the department in an effort to address and resolve criminal exposure. 

In addition, the IRS recently announced that 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and paid approximately $450 million in taxes, interest and penalties.  While we certainly encourage taxpayers to come into compliance, 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. 

When requested by the IRS, the Tax Division will ask courts to authorize John Doe summonses, pursue summons enforcement proceedings, and when appropriate, will seek to enforce Bank of Nova Scotia summonses and issue and enforce Bank of Nova Scotia subpoenas to obtain information located outside the United States. 

In conducting civil and criminal investigations, the Tax Division will also continue to seek and review information pursuant to our bilateral and multilateral international treaties and agreements, respond to requests from treaty partners, and work closely with foreign counterparts to promote financial transparency and combat global tax evasion. 

In addition, the Tax Division is working closely with IRS-CI to prioritize traditional legal source tax prosecutions.  Our voluntary tax system only works when the honest taxpayer has faith in the process and believes that those who break the law will be held accountable.  When a local business owner, the neighborhood doctor or dentist, the mechanic down the street, or an investment banker is prosecuted for skimming from their business, using nominee accounts and shell companies to conceal assets and evade tax, filing false returns, conspiring to defraud the IRS, or obstructing the due administration of the internal revenue laws, there is an immediate and substantial impact among the defendant’s family, friends and neighbors, in the local and regional community and throughout the applicable industry.  These high-impact cases send a clear message that no one is above the law and that those who engage in this criminal conduct will pay a heavy price, including incarceration, fines, restitution and collateral consequences.

District Court Rejects Complaint Denying Full Streamlined Relief for OVDP Participants (7/26/16)

The District Court for the District of Columbia has rejected taxpayers' attempt to force the IRS to admit them into the full Streamlined Procedures rather than the Streamlined Transition Treatment in OVDP 2012.  Maze v. IRS, 2016 U.S. Dist. LEXIS 96471 (D. D.C. 2016), here.  The fight, as it usually is, is about money, but seasoned by the risk of criminal prosecution theoretically looming in the background (relief from which is the common inducement to join any IRS voluntary disclosure program).  In order to follow the money, I first have to review key features of the programs in question:

The common features of the various iterations of the IRS offshore voluntary disclosure programs (referred to here collectively as OVDP) have been:  (i) filing delinquent or amended income tax returns for 8 years, (ii) payment of income tax penalties (20% accuracy related penalty for amended returns or the delinquency penalties (up to 45+%) for delinquent returns), (iii) filing 8 years of delinquent or amended FBARs, and (iv) a Title 26 Miscellaneous Offshore Penalty ("MOP") based upon a percentage -- currently 27 1/2% (increasing to 50% if a bad bank is involved) -- of the highest balance in the offshore accounts for the 8 year period.  The inducement was that, with completion of the OVDP process via a closing agreement, the IRS will not refer the taxpayer to DOJ Tax for criminal prosecution.  A taxpayer joining OVDP who thought the OVDP civil penalty structure was too high under the circumstances could opt out and be subject to a regular IRS audit that covered both income tax and FBAR noncompliance.  Usually, taxpayers who were relatively innocent -- i.e., nonwillful -- with respect to income tax and FBAR noncompliance might want to either forego joining OVDP altogether or joining OVDP and opting out.  If they were relatively innocent -- nonwillful -- the results of the audit would often be much better than the OVDP civil penalty regime, except possibly if certain other returns or forms (such as for foreign corporations or trusts) were not filed.  But the "typical" U.S. taxpayer would only have foreign accounts with no foreign entities to muddy the water with other penalties that might apply and could, in any event, probably avoid those penalties with true nonwillfulness.  The risk of opting out was that the taxpayer has miscalibrated as to his nonwillfulness.

In 2014, the IRS substantially amended its Streamlined Filing Compliance Procedures.  As I understand it, the design of the revision was to catch relatively innocent taxpayers -- those who could certify nonwillfulness and provide a supporting narrative -- who would otherwise choose not to join OVDP or, if they joined OVDP, would opt out.  The Streamlined tax and penalty regime was calibrated to impose, roughly, the result they might obtain upon audit (either audit if they did not join OVDP or audit after opt out if they did join OVDP).  The key to this procedure with substantially less financial cost than OVDP was that the taxpayer must certify that his income tax and FBAR noncompliance was nonwillful and provide a narrative supporting the certification.  Based upon that certification and narrative, the procedure requires 3 years of amended returns or, in the case of foreign resident taxpayers, delinquent returns during the period (a domestic taxpayer does not qualify if he filed no return in the key 3 year period) and 6 years for delinquent or amended FBARs (although the narrative make take some explaining about bank accounts omitted from original FBARs).  The income tax and interest is due for the three years; there is no accuracy related or other income tax penalties.  The MOP will be 0% for the foreign resident taxpayer and 5% for the domestic resident, based upon the high year-end balance in the 6 year period.  The Streamlined Procedure does not result in a closing agreement, the taxpayer can be audited (although as an initial step such an audit might focus on the validity of the certification and narrative), and the taxpayer is given no assurance that he will not be criminally prosecuted.  (I have recently noted that DOJ Tax has noised about potential criminal prosecutions for improper certifications and narratives, as well as the underlying conduct.)

Revised Streamlined Certification Forms 14653 SFOP and 14654 (SDOP) (3/11/6)

In February, the IRS revised the Foreign and Domestic certifications (Forms 14653, here, and 14654, here, respectively) in February 2016.  I set forth the principal revisions below:  (In my browser, the links doe not permit actually viewing the form, but it can be downloaded or saved and should work fine with a pdf program.)

The Non-Resident Certification form 14653 (Feb 2016) now includes:

1. A chart asking the filer to declare for each year whether they were out of the country for at least 330 days
2. If the  person is not a citizen or lawful permanent resident, the calculations for the application of the substantial presence test under section 7701(b)(3) for 5 years (the 3 years in return covered period and the two previous years).
3. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story.  
4. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

The Resident Certification Form 14654 (Feb 2016) now includes:

1. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story. 
2. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

If I missed any key differences, please let me know either by comment or email.

AICPA Recommends Changes to OVDP and SFCP (3/10/16 & 3/11/16)

On March 9, 2016, the AICPA (American Institute of Certified Public Accountants) sent the IRS recommendations on the OVDP and SFCP.  The letter with the recommendations is here.  The recommendations as summarized in the letter are:

For the 2014 Offshore Voluntary Disclosure Program, we recommend that the IRS: 

1) Restore the previous practice of not requiring an upfront payment of the miscellaneous offshore penalty by taxpayers.
2) Apply the 50% miscellaneous “Super” penalty only to accounts held at institutions listed on the Foreign Financial Facilitators List.
3) Allow the waiver of the passive foreign investment company (PFIC) computations for small account cases. 

For the Streamlined Filing Compliance Procedures, we recommend that the IRS: 

1) Modify the penalty base to include only those assets associated with tax non-compliance.
2) Expand the Streamlined Filing Compliance Procedures to include certain classes of nonwillful individuals who are currently ineligible for either the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP).
3) Provide additional guidance in the SFOP and SDOP filing instructions to taxpayers on the specific factors the IRS will consider in judging whether their non-compliance was willful.

See the letter for more detail.  I think the recommendations generally are good ones I am concerned but some of them come a little late in the implementation of these programs to be adopted after many cases have already been processed.

Addendum 3/11/16:  I am advised that the AICPA comments overlap somewhat prior recommendations by the American Bar Association in October 2015, here.

Updated FAQs for SFOP and SDOP Streamlined Processes (1/13/16)

The IRS has updated the FAQs for the Streamlined Domestic and Streamlined Foreign Offshore Procedures.  The are here:  SFOP FAQs, here, and SDOP FAQs, here.  Both were last reviewed and updated on 1/7/16.

My review indicates that the important items are:

1.  More detail on what the IRS expects from the narrative supporting the certification of nonwillfulness.  (SFOP FAQ 6; SDOP FAQ 13.)  In some cases, the IRS was getting narratives that did not contain enough detail to support the taxpayers' certifcations of nonwillfulness.  Most practitioners regularly working in this area already knew that the narrative had to have sufficient details -- not just conclusory allegations -- to support the certification.  So, for those practitioners, I am not sure that the new FAQs add to what they already knew and implemented in making submissions.  But other practitioners may find the new FAQs helpful, and certainly taxpayers going through the process without representation will get a sense of what the IRS will need to process the certifications.  In sum, the narrative must include "the whole story including favorable and unfavorable facts."  (Bold face supplied by JAT.)  The process is one of persuasion from the facts -- favorable and unfavorable -- and that's where a practitioner regularly engaged in the art of persuasion may be able to add value in the submission.  Also, a tip given to me by an IRS person working in the area -- larger or multiple foreign accounts usually require more explanation than smaller or fewer accounts.  Thus, for example, a single $200,000 account owned directly rather than through an entity would likely not require as much detail supporting the certification as would accounts aggregating $10,000,000 owned by foreign entities.

2.  Process for handling joint returns requiring amendment where the other spouse may not participate by signing the amended returns or joint certification.  (SFOP FAQ 7; SDOP FAQ 14.)  The spouse participating in SFOP and SDOP may submit amended returns with only his or her signature (and not the nonparticipating spouse's signature) if the amended return reports additional tax due.  The submission should explain the inability to obtain the other spouse's signature with a prominent reference to the FAQ in issue.  The IRS will routinely request that the other spouse's signature be obtained, but if the other spouse still will not sign, the participating taxpayer notifies the IRS of this.  However, if the amended return indicates a refund for the year, this procedure is not available.