Statistics and Extrapolations on Tax Cheating in the US (3/27/18)

This is an interesting article with some data and some extrapolations from the data. A high level overview of who cheats (at least certain segments of the tax cheat category) and why.  Evan Horowitz, Everyone Tries To Dodge The Tax Man, And It Keeps Getting Easier (FiveThirtyEight 3/19/18), here.

The author discusses the data in three subject categories:

Foe No. 1: A weakened IRS
Foe No. 2: Small businesses cheat, and tax reform fosters them
Foe No. 3: Partisanship

I add that, in the mix for accounting for the problem of tax cheating, should be corporations and wealthy taxpayers  and their enablers who have scammed the system with Bullshit Tax Shelters and variants for years.  Many of those Bullshit Tax Shelters and variants work because the IRS does not have the resources to ferret them out and give those taxpayers their due.  And, even when caught, the IRS is reticent to hold the wealthy taxpayers (corporate and individual) liable with civil and criminal penalties, often slapping them at most with the accuracy related penalty when they knew that they were gaming the system.  They may sometimes prosecute the tax professionals who enabled these taxpayers but rarely do they proceed against corporate and wealthy individual taxpayers how played the game and hid behind their professionals.

I have recently discussed in another context my opening session with many clients who may have criminal tax problems.  For clients who I did not have reason to know were straight-shooters, I made and emphasized two key conditions/statements.  First, if the client lies to me, I will fire them.  (Now, I knew when I told them that, that there would be some lies in many cases; I would cross-examine most of what they told me and if I caught them lying repeatedly, I would and did fire them.)  Second, I would tell the clients that, if anyone in the room is going to jail, it would be them and not me.  I am not the fall guy (although, as noted above, in the Bullshit Tax Shelter area, some taxpayer enablers have served as the fall guy for taxpayers who should have and, in many cases, did know better).

I raise this principally because a former student recently reminded me of my telling my Federal Tax Crimes law students of these opening sessions with clients.  He reminded me of this in the context of John Dowd resigning as principal lawyer for the President in the Mueller led investigation.

DOJ Tax Encourages Taxpayer to Avoid Willful Violation of the Tax Law (4/13/17)

We have seen the usual flurry of announcements of indictments for tax crimes, particularly with respect to return preparers.  Today's -- just 5 days from the filing deadline on April 18 (with the weekend/holiday extensions) -- DOJ Tax has a generic "encouragement" to avoid willful violations of Tax Laws: With the Individual Income Tax Filing Deadline Approaching, Justice Department Warns Willful Violations of Tax Laws Are Criminal, here.  The announcement does offer some examples of misbehavior.

For those who have previously filed returns that may be questionable, a superseding return can be filed by the filing deadline that will be treated as the return against which liability for civil and criminal penalties is tested.  So, the prudent thing to do with respect to a questionable tax return filed early is to file a new return by the filing deadline correcting the problems.

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.

Render Unto Caesar and the Offshore Initiative (10/27/12)

Tax Notes Today has an article summarizing comments made by a government attorney and by practitioners at a recent annual conference sponsored by University of San Diego School of Law and the Procopio International Tax Institute.  See Stephanie Soong Johnston, IRS Advancing in Battle Against Offshore Tax Noncompliance, McDougal Says, 2012 TNT 209-8 (10/29/12)  Readers of this blog will already know the substantive content of the article, but I write just to note the concluding paragraph:

Overall, McDougal [an IRS attorney prominently involved in the offshore initiatives] was confident that good progress has been made in battling offshore tax compliance issues, both in the United States and abroad. "Consciousness is being raised about this problem," he said. "And let's face it, when you've got the Pope coming out and writing a letter talking about how harmful it is for wealthy people to be evading their taxes when the needs of the poor are going unmet, that really adds fuel to the fire. So there is a change in consciousness and the situation is gradually improving."

This, of course, is a variation in this context of Jesus' famous "Render Into Caesar" comment.  See Wikipedia entry here.  The full quote is:  "Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's."  Matthew 22:21 (the King James Version of the quote is here; please note on the link that you can use the features on the page to see the entire context of the quote).)

Tea Party and Tax Compliance (5/31/12)

Richard Lavoie, a professor at the University of Akron, here, has posted an interesting article, here.  Here is the introduction (cut and paste):

PATRIOTISM AND TAXATION:
THE TAX COMPLIANCE IMPLICATIONS
OF THE TEA PARTY MOVEMENT 

Richard Lavoie* 

Given the rise of the tea party movement, which draws strength from the historical linkage between patriotism and tax protests in the United States, the role of patriotism as a general tax compliance factor is  examined in light of the extant empirical evidence. The existing research suggests that patriotism may be a weaker tax compliance factor in the United States than  it is  elsewhere. In light of this possibility, the tea party movement has the potential to weaken this compliance factor even more. Further, when considered in light of the broader tax morale factors that contribute to tax compliance, the tea party movement also poses a risk of destabilizing the social contract framework that underlies our established taxpaying ethos. In order to strengthen the impact of patriotism on tax compliance and lessen any adverse impact of the tea party movement on the country’s taxpaying ethos, the government should take steps to disentangle American patriotism from its anti-tax roots. Important first steps in this regard are outlined in this Article, including the creation of a voluntary “Patriotic Remittance Tax.” Making such changes will strengthen the bond between taxpayers and the government and help promote a vision of American patriotism that is positively associated with taxation rather than antithetical to it

Thanks to the Tax Prof Blog posting on the article here, I do recommend to my readers, particularly professionals, with an interest in tax that they read the Tax Prof Blog daily here.  Paul Caron is author of the Tax Prof Blog and does not limit his blogs to just tax.

Why We Cheat and Lie -- Taxes Included (5/29/12)

In an excellent article adapted from an upcoming book, Dan Ariely,  James B. Duke Professor of Behavior Economics at Duke University, offers insight from his research about why people lie.  Dan Ariely, Why We Lie (WSJ 5/26/12), here.  The name of the book is The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves (Harper June 5, 2012), here.  Dan Ariely's Duke bio is here.

Here are some quotes easily applied to taxes that might entice readers to read the article and then, when published, the book.

What we have found, in a nutshell: Everybody has the capacity to be dishonest, and almost everybody cheats—just by a little. Except for a few outliers at the top and bottom [the top and bottom are those small percentages who will not cheat at all and those at the other extreme who will cheat big], the behavior of almost everyone is driven by two opposing motivations. On the one hand, we want to benefit from cheating and get as much money and glory as possible; on the other hand, we want to view ourselves as honest, honorable people. Sadly, it is this kind of small-scale mass cheating, not the high-profile cases, that is most corrosive to society. 

* * * * 

"[T]he level of cheating was unaffected by the probability of getting caught." 

* * * * 

The results of these experiments should leave you wondering about the ways that we currently try to keep people honest. Does the prospect of heavy fines or increased enforcement really make someone less likely to cheat on their taxes, to fill out a fraudulent insurance claim, to recommend a bum investment or to steal from his or her company? It may have a small effect on our behavior, but it is probably going to be of little consequence when it comes up against the brute psychological force of "I'm only fudging a little" or "Everyone does it" or "It's for a greater good." 

* * * * 

Another set of our experiments, conducted with mock tax forms, convinced us that it would be better to have people put their signature at the top of the forms (before they filled in false information) rather than at the bottom (after the lying was done)