Indictment of Taxpayers for Evasion of Payment and Structuring Cash Withdrawals (8/14/17)

DOJ Tax announced here the indictment of two Virginia taxpayers -- husband and wife -- for evasion of payment, § 7201, and conspiracy to structure bank deposits to avoid the reporting requirements.

This is a pretty straight-forward, unexceptional indictment for Count One, evasion of payment.  They owed the tax, they reported the tax liabilities on their returns, the IRS assessed the tax as reported, and they took various actions affirmative acts to evade payment (transfer or assets to kin, signing and filing false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and withdrawing cash from bank accounts (the actions asserted in the structuring conspiracy charge as the overt acts of the conspiracy)).

The structuring conspiracy charge is also unexceptional except for how sparse it is.  The overt acts of the conspiracy are the many cash withdrawals of less than $10,000.  These overt acts are presented in a spreadsheet table.  Often the overt acts of a conspiracy go on ad nauseum to conjure up the defendants as evil actors.  Here, by contrast, these overt acts are simply the list of cash withdrawals during a six month period in 2015.  That is all that is required to have the indictment pass muster as presenting fair notice to the defendants.  If the case goes to trial, however, I would expect the Government to enter into evidence additional acts that could reasonably be described as overt acts of the conspiracy and am surprised that the Government did not lard up the indictment to paint a more sinister picture than presented by the list of withdrawals.

One technical quibble. The indictment refers to the tax liability as "self-assessed."  There is no such concept as a self-assessed tax.  The taxpayer reports -- self-reports, if you will -- tax liability on a return; the IRS assesses the tax liability accordingly.  Section 6201(a)(1) ("The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title").  The act of assessment is  the recording by the IRS of the liability (whether self-reported or not) on the books of the IRS as an assessment.  As I note in my tax procedure book:

Our tax system is described as a “self-assessment” system.  This means that the taxpayer reports the amount of the tax obligation via a tax return.  The IRS must assess the tax reported on the return.  § 6201(a)(1). The taxes thus reported are often referred to colloquially as “self-assessed” which is probably a fair characterization since the statutory requirement that the IRS assess the amount reported is mandatory, making the IRS’s formal assessment a ministerial act.  

And then, elsewhere in the book later, I use the short-hand self-assessed or some variation.

Upward Variance Not Asserted by Government Sustained on Appeal (4/16/17)

In United States v. Nguyen, ___ F.3d ___, 2017 U.S. App. LEXIS 6390 (5th Cir. 2017), here, Nguyen was charged by information, here, with a single count of aiding and assisting a false corporate return and pled guilty to that single count.  The plea agreement is here.  The final Guidelines calculation indicated a range of 21-27 months.  The maximum sentence based on the sole count of conviction was 36 months.  The Probation Officer informed in the Court in PSR of apparent structuring conduct and recommended an upward departure based on Sentencing Guidelines § 4A1.3, here, for an underrepresented criminal history or under Sentencing Guidelines § 5K2.21, here, for uncharged conduct.  The district court did not accept the recommendation, but did consider the conduct in question in exercising its Booker discretion under 18 USC § 3553(a), here, to make an upward variance to the maximum allowable sentence of 36 months.

I cut and paste much of the opinion because, I think, I could not improve on it.  After that I offer some comments.

Nguyen, the owner of a wholesale salon equipment business, was charged with aiding and assisting in the preparation of a false and fraudulent corporate tax return. He pleaded guilty pursuant to a written plea agreement and entered into a settlement agreement with the Government, wherein he agreed to forfeit $1,100,000 in seized funds. In preparing the presentence report ("PSR"), the probation officer determined that Nguyen had a total offense level of 13 and a criminal history category of I, resulting in an advisory Guidelines range of 12-18 months. However, the probation officer also noted that Nguyen appeared to be involved in unlawful structuring activities n1: IRS agents found over $4,900,000 in structured deposits made by third parties to bank accounts registered to Nguyen or his family members. Moreover, during a raid of Nguyen's business, IRS investigators found $3,215,703 in currency- most of it separated into $10,000 bundles-whose source could not be determined. In paragraph 87 of the PSR, the probation officer suggested the structuring activities could warrant an upward departure under U.S.S.G. § 4A1.3 for an underrepresented criminal history or under U.S.S.G. § 5K2.21 for uncharged conduct.
   n1 A person "structures" a transaction if he, acting alone or in conjunction with others, "conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading . . . reporting requirements." 31 C.F.R. § 1010.100(xx) . Section 5324 makes it a crime to "structure or assist in structuring, or attempt to structure or assist in structuring," a transaction to avoid § 5313's requirement that financial institutions file a currency transaction report ("CTR") with the government for all cash transactions exceeding $10,000. 31 U.S.C. §§ 5313(a); 5324(a)(3); United States v. Rodriguez, 132 F.3d 208, 212 (5th Cir. 1997). 

Nguyen objected to the suggestion that an upward departure may be appropriate, and the Government agreed that there was insufficient evidence to prove that he had structured or directed the structuring of deposits into his bank accounts. The district court, however, entered an order tentatively concluding that Nguyen's objections to the upward departure were without merit. The district court suggested that it would reject the plea agreement, including the forfeiture settlement, and that Nguyen should receive a sentence above the advisory Guidelines range, given the probability that he knew of the structured deposits being made into his accounts and the Government's failure to prosecute him for that crime. 

At the first sentencing hearing, the district court conducted an evidentiary hearing to determine whether Nguyen had participated in illegal structuring activities. The district court questioned three witnesses. Oanh Nguyen, Defendant-Appellant's wife, testified that the new business bank accounts Nguyen had opened at Chase Bank ("Chase") and Wells Fargo were not an attempt to evade the law but rather a result of his decision to restructure the company after their son decided to leave the business. IRS Special Agent Alan Hampton and IRS Task Force Officer Alison Turner then testified about the investigation into Nguyen's financial activities. Afterwards, the district court accepted the plea agreement but expressed its belief that there was sufficient evidence to conclude that structuring activities occurred, that Nguyen was aware of the illegal transactions, and that he aided and abetted the deposits. The Government, while agreeing there was enough evidence to show that the funds were structured, expressed doubt that there was sufficient proof by a preponderance of the evidence to show that Nguyen himself assisted in the structuring. 

At the second sentencing hearing, the district court sustained Nguyen's objection to an upward departure as detailed in paragraph 87 of the PSR. The district court also concluded that Nguyen was not entitled to a reduction for acceptance of responsibility, which resulted in a newly applicable Guidelines range of 21-27 months. Taking into account the 18 U.S.C. § 3553(a) factors, the district court then sentenced Nguyen to 36 months in prison, to be followed by a one-year term of supervised release and payment of a $250,000 fine. The district court acknowledged the Government's doubt as to whether Nguyen participated in structuring activities, but explained that it had reached a different conclusion based on its examination of the evidence and provided a lengthy explanation as to why "it [was] more likely than not that [Nguyen] committed the offense of structuring." In support of its decision, the district court cited, inter alia, Nguyen's dishonesty in underreporting his taxable income for multiple years; the connection between the investigation into his structuring activities and the discovery of tax fraud; and that Nguyen was able to retain "millions of dollars" that could have been subject to forfeiture had the Government pursued forfeiture proceedings. The district court rejected Ms. Nguyen's explanation for why the new bank accounts were opened and noted that Defendant-Appellant gave conflicting explanations to IRS investigators as to whether funds seized from his business were bank withdrawals. In its thirteen-page Statement of Reasons ("SOR"), the district court reiterated these conclusions and detailed the factors that influenced it to impose an above-Guidelines sentence. Nguyen timely appealed.

TIGTA Report on Civil Seizures for Structuring (4/5/17)

TIGTA has issued a report on civil forfeitures and seizures:  Criminal Investigation Enforced Structuring Laws Primarily Against Legal Source Funds and Compromised the Rights of Some Individuals and Businesses (Ref. 2017-30-025 3/20/17), here.

The highlights from the report are:

IMPACT ON TAXPAYERS 

The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. Title 31 of U.S. Code Section 5324(a) states that no person shall, for the purpose of evading the reporting requirements, cause or attempt to cause a U.S. financial institution to fail to file a report required or structure. Whoever violates the structuring law can be fined, imprisoned, or both. Any property involved in violation of this law may be seized and forfeited. 

WHY TIGTA DID THE AUDIT 

In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements. 

WHAT TIGTA FOUND 

Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases. CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations. 

In most instances, interviews with the property owners were conducted after the seizure to determine the reason for the pattern of banking transactions and if the property owner had knowledge of the banking law and had intent to structure. CI procedures required agents to give subjects advice of rights in Title 26 cases (i.e., Internal Revenue Code) but not in Title 31 cases. In only five of the 229 interviews conducted, noncustodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI. In 202 interviews, the property owners were not adequately informed of important information, such as the purpose of the interview, by CI during the interview. The outcomes for legal source cases lacked consistency. In 37 investigations, the Government appeared to have bargained nonprosecution to resolve the civil case.  

CI also needs to improve its process for identifying grand jury information. 

WHAT TIGTA RECOMMENDED 

TIGTA recommended that the Chief, CI, establish controls to ensure that CI is selecting cases that meet the IRS’s goals and policies, return funds forfeited from legal source cases with no illegal activity, ensure that reasonable explanations are considered when interviews are conducted, ensure appropriate referrals to IRS’s Examination function, and improve the process for designating grand jury information. 

In response to the report, CI agreed with and implemented changes for five of the nine recommendations and partially agreed with another. CI disagreed with establishing guidance on bargaining nonprosecution and procedures that strive for fair and consistent outcomes, and did not agree to improve its grand jury information designation process.

Also helpful for readers are these excerpts from the background section of the report (footnotes omitted):

Article on Structuring to Avoid Bank Currency Reporting Requirements (6/5/15)

The New York Time's Upshot has an interesting article on CTRs and withdrawing cash from a bank.  Josh Barrol, When It's a Crime to Withdraw Money From Your Bank (6/5/15), here.  The article is inspired by the Denny Hastert episode.  See Former House Speaker Indicted for Structuring and Lying to Federal Agents (Federal Tax Crimes Blog 5/29/15; 6/3/15), here.  The article is targeted to the lay reader.  A key excerpt:

To be clear: It’s not illegal simply to take $8,000 out of the bank repeatedly. 

“The criminal provisions there do have strong mens rea (criminal intent) requirements: The government has the burden to prove that the defendant knew about the reporting requirement and intended to evade it,” said Jim Copland, who directs the Center for Legal Policy at the Manhattan Institute, a right-of-center think tank. “So this is quite unlike many of the regulatory crimes that can ensnare the unsophisticated.”

A good read.

Former House Speaker Indicted for Structuring and Lying to Federal Agents (5/29/15; 6/3/15)

Former Speaker of the U.S. House of Representatives J. Dennis Hastert has been indictment for structuring bank withdrawals to evade bank reporting for currency transactions (CTRs) and lying to the FBI.  The DOJ announcement is here; the indictment is here.  Although this is not a tax case, it does involve structuring and lying, two crimes that play out in many tax crimes cases.  There is some considerable irony that the structuring provisions of the Patriot Act, enacted under Hastert's leadership, as the basis for a key count in the indictment.  Daniel Marans, Patriot Act That Dennis Hastert Passed Led To His Indictment (Huffington Post 5/28/15), here.

The underlying problem for Hastert seems to have arisen from misconduct that occurred before he became a U.S. representative.  Later, in 2010, he agreed to pay a person aggrieved by the misconduct "$3.5 million as compensation for the misconduct."  (Indictment, par. 1d.)   He withdrew $1.7 million in cash from various bank accounts, but did so, at least for some withdrawals, in a manner to avoid the bank's reporting of those transactions on Currency Transaction Reports, required for deposits and withdrawals of cash in excess of $10,000.. (Indictment, par. 1f - 1m.).  He was indicted for structuring in violation of   Count Two based on 31 USC § 5324(a)(3), here.  In addition, he is indicted for false statements to agents when questioned about the structuring.  Count One based on 18 USC 1001(a)(2), here.

Addendum 6/3/15 12:50pm:

Legal pundit, Jeffrey Toobin, has this article in the New Yorker on line:  The Legal Logic of the Case Against Hastert (New Yorker 6/2/15), here.  Although he is no longer a prosecutor, relying on punditry for a living instead, Toobin presents the law enforcement case for the charges against former House Speaker Hastert.  He also makes the general argument for when the CTR provisions (both criminal and, in other cases, forfeiture) should be deployed.  As I read it, if it had just been a CTR case, Hastert probably would not have been prosecuted.  He was prosecuted because he lied to the agents when they inquired about the cash withdrawals.  (In this regard, I doubt that he would have been prosecuted if his only lie was that he did not have sex with the guy long ago (shades of Bill Clinton); but, he told a lie going to the very purpose of the CTR provisions and thus having a nexus to legitimate law enforcement priorities.

Structuring Forfeitures Again in the News (2/12/15)

Forfeiture is again in the news with the recent hearing on IRS forfeiture practice.  William Hoffman, No Forfeitures Absent Illegal Source of Income, Koskinen Says, 2015 TNT 29-4 (2/12/15), no link available.  The problem is, of course, that the statute imposes forfeiture for making deposits into financial institutions in amounts intended to avoid the CTR filing requirement for $10,000 or more currency deposits.  The statute does not require that, for forfeiture, the currency be related in any way to or the fruits of illegal income.  So, mom and pops who simply don't want the reports going to the Government because of their own legitimate privacy concerns and other innocents can structure to avoid the reporting requirement.  (Of course, by defining the criminal violation as simply the act of structuring, one might say that these people are not quite so  innocent, since the law does require that they know the CTR filing requirement and act with intent to violate that law.)

After taking considerable heat on which we reported before, the IRS has hunkered back to a policy that generally (that's a fuzz word) will allow seizure only where the IRS has proof of illegal income.  So, under the new law, generally the innocents (meaning those without illegal income) can intentionally violate the structuring law without being subject forfeiture and presumably without being subject to structuring prosecution.  It seems to me that Congress should change the law rather than have the IRS not enforce the law as Congress wrote it or to signal to citizens that they can violate the law with impunity so long as they do use illegal funds.  Some changes to the  law are now in consideration, hence the House Hearings, but I am not sure the proposals fix the fundamental problem.

Here are a few quotes from the introduction to Mr. Hoffman's article:

IRS Commissioner John Koskinen said February 11 that the agency changed its civil asset forfeiture policy last October because an internal review found that it was applied inconsistently, and it decided it won't pursue cases in which serial bank deposits are just under the $10,000 threshold for reporting under the Bank Secrecy Act of 1970 unless there are indications that the funds were illegally obtained. 

That deposit practice, called structuring, may be linked to organized crime, drug dealers, and terrorism, Koskinen told the House Ways and Means Oversight Subcommittee. In each forfeiture case, the IRS prepares a search warrant for review by the appropriate U.S. attorney's office, he said. The warrant must then be approved by a federal judge before a seizure can take place, he noted. 

* * * *

The IRS conducted 146 civil asset forfeitures in fiscal 2014, accounting for about 5 percent of the workload of the IRS Criminal Investigation division, Koskinen said. The median value of assets seized was less than $34,000, Rep. Patrick Meehan, R-Pa., said, though the commissioner said the average is well over $100,000. In 60 percent of forfeitures, Koskinen added, no taxpayer challenged the IRS seizure, suggesting the depositor was probably involved in some illegal activity. 

"We came up with the decision that the right balance between law enforcement and trying to protect taxpayers was, when there was no evidence that the funds were from illegal sources, there would be no seizure," Koskinen said. The new policy has been communicated to IRS agents, and appropriate changes will be made to the Internal Revenue Manual by the end of the first quarter of 2015, he added. 

Following Koskinen's remarks, the subcommittee heard from angry small business owners who said their companies were hobbled or threatened with closure after the IRS seized their bank accounts claiming they had repeatedly made bank deposits of less than $10,000 to avoid reporting requirements under the Bank Secrecy Act.

IRS CI Modifies Its Policy Regarding Forfeitures for Structuring on Bank Deposits for Legal Source Deposits (10/28/14)

An important facet of the criminal tax practice is the money laundering laws, including the reporting requirements for currency transactions.  Among those requirements are the the currency transaction report by financial institutions for deposits of $10,000 or more.  Piece mealing deposits -- often called structuring -- to make each individual deposit less than $10,000 to avoid the reporting requirements can be a crime and can result in forfeitures.  This law and its punitive penalties (meant to be redundant) is designed to support the criminal laws by identifying criminal conduct.  But, persons not involved in criminal conduct can be caught in and violate this provision.  In a recent article, the New York Times raised questions about the IRS's expansive use of the forfeiture power against persons not otherwise involved in criminal activity -- against small business owners and others who, perhaps from ignorance, engage in a pattern that can be viewed as structuring.  See Shaila Dewan, Law Lets I.R.S. Seize Accounts on Suspicion, No Crime Required (NYT 10/25/14), here.

In response to the article (or just in advance of it), the IRS announced in a statement, here, to the New York Times as follows:

After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. attorney offices) regarding our policies, I.R.S.-C.I. will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level. While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring. This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.'s mission and key priorities. The policy involving seizure and forfeiture in “illegal source” structuring cases will remain the same.

Kudos to the investigative reporter for the New York Times for shining light on this aggressive use of the law by the IRS.  And Kudos to the Institute for Justice, here, mentioned prominently in the article for representing citizens caught in this trap.  Robert Johnson of the Institute for Justice has contributed a blog entry, here, to the Procedurally Taxing Blog,

One question readers my have is how the IRS would learn about structuring -- the pattern of depositing less than $10,000 from which an inference might be made that the activity was to avoid the CTR reporting requirements?  I suspect -- you know where this is going -- that the banks may report most of such activity on Suspicious Activity Reports ("SARs").  See Wikipedia discussion of SARs, here.  In my Federal Tax Crimes book, I describe SARs as follows (footnotes omitted):

Although there is no general duty under American law to report crimes, certain financial institutions (including money services businesses and high cash businesses such as casinos) are required to file with FinCen a report, called a Suspicious Activity Report (“SAR,” but not to be confused with the Special Agent’s Report with the same acronym which we encountered earlier).  This SAR combines features of earlier reports and is in addition to the CTR if required.  The SAR is required if the financial institution “knows, suspects, or has reason to suspect the money was derived from illegal activities” or the transaction was “part of a plan to violate federal laws and financial reporting requirements (structuring).”  The financial institution is not required to investigate or confirm that a crime has been committed. The financial institution is prohibited from telling its customer of the filing of the report, even in response to a subpoena.  The financial institution is protected from liability to the customer.  The IRS may share this SAR with the IRS examination function having civil tax responsibility, but components of the IRS receiving the information are required to keep the information secure to the same extent as if received from a confidential informant.