Role of Tax Evasion and Its Prosecution in a Civilized Society (4/7/14)

Professor James Maule has a good editorial piece on this blog.  The entry is titled
How Shocking is Tax Evasion? (Mauledagain Blog 4/7/14), here.

The issue is whether tax evasion has lost its place as a seriously considered offense in the United States.  Professor Maule has a good succinct insight.  I recommend it to readers.

I am reminded of the famous Oliver Wendell Holmes quote in Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904) (dissenting), here: "Taxes are what we pay for civilized society."

Credit Suisse DOJ Investigation Status and New NY Investigation (4/7/14)

The NYT Dealbook reports that Credit Suisse is nearing the end of the investigation by DOJ for its offshore banking for U.S. taxpayers, but is facing a new investigation.  Ben Protess and Alexandra Stevenson, Credit Suisse Is Said to Be Facing Double-Barreled Inquiries (NYT Dealbook 4/6/14), here.

Regarding the DOJ investigation, the article reports:

The biggest danger to Credit Suisse, suspected of sheltering billions of dollars for American clients who evaded taxes, comes from federal prosecutors. While the Justice Department has considered a so-called deferred-prosecution agreement that would suspend any indictment in exchange for a large cash penalty and other concessions, it is also pushing for a guilty plea from a Credit Suisse subsidiary, people briefed on the case said, a punishment that banks generally avoid in all but the gravest cases. The cash penalty, the people said, is expected to exceed the $780 million that Switzerland’s largest bank, UBS, paid to resolve a similar case in 2009. 

The Credit Suisse case, the outcome of which depends on settlement talks in the coming weeks, will most likely strike a blow at overseas tax shelters, a hallmark of Switzerland’s banking system. And while the case will resolve a major liability for Credit Suisse, it won’t put the shelter problem to rest. 

The article reports a separate investigation by New York's financial regulator, Benjamin Lawsky as follows:

Just as the [DOJ] criminal inquiry is reaching its conclusion in Washington, a civil investigation has started from scratch in New York. Benjamin M. Lawsky, New York State’s top financial regulator, has requested documents from Credit Suisse and is expected to demand additional records this week, two people briefed on that case said. 

Mr. Lawsky, who will examine whether Credit Suisse lied to New York authorities about engineering tax shelters, has also petitioned a Senate subcommittee for a trove of internal Credit Suisse documents. 

The subcommittee [the U.S. Senate Permanent Subcommittee on Investigations] questioned bank executives, including Brady W. Dougan, the bank’s American chief executive, at a hearing in February, and produced a scathing report exposing “a classic case of bank secrecy.” In late March, the Senate agreed to release the internal Credit Suisse documents to “a state regulatory agency.” The people briefed on the case, who were not authorized to speak publicly, identified that agency as Mr. Lawsky’s Department of Financial Services.

* * * * 

And Mr. Lawsky’s case could bring a fine of its own. In its investigation, the New York State Department of Financial Services is expected to examine what role, if any, the bank’s New York employees played in creating the tax shelters. The agency, the two people briefed on the case said, is also seeking to recover any lost tax revenue for New York.

More On IRS Sting Operation in the Recent Indictments (4/5/14)

I recently reported on indictments arising from an IRS sting operation on offshore accounts in tax haven jurisdiction other than Switzerland.  See IRS Sting Investigation Nabs Offshore Bank Account Enablers (3/24/14), here.  Rounding out that story for now is the following article:  Laura Saunders, Offshore accounts: the next target (WSJ Marketwatch 4/4/14), here.  Here some excerpts (with bold face added by JAT to draw your attention to things I think particularly important):

This past week, an official at the Justice Department said the sting should serve as a warning about offshore accounts. 

“The Cayman case illustrates that we have ways of getting information that people don’t know about,” Assistant Attorney General Kathryn Keneally of the department’s Tax Division said at a news conference in New York. “The days of waiting for a warning sign, such as a letter from a bank, are over.” 

Keneally said that the government receives account information from many sources, including whistleblowers hoping for monetary rewards. She declined to comment on whether U.S. officials have the names of Americans who hold accounts in the Caymans or elsewhere in the Caribbean as a result of this probe. 

Taxpayers are ineligible to participate in the IRS’s limited-amnesty program for undeclared offshore accounts if U.S. authorities already have their names. The program imposes steep penalties but offers protection against criminal prosecution.
Experts believe U.S. authorities do have names of account holders in the Caymans.
“Announcements by the government about this case suggest it already has customer lists, although officials can’t confirm it,” says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York, which has handled more than a thousand confessions by U.S. taxpayers with offshore accounts. 

* * * * 

In March of last year, the indictment says, three undercover IRS agents met with St-Cyr and VanDyk in Miami. One of the agents represented himself as a U.S. citizen who wanted to launder $2 million. 

To show how the scheme worked, Poulin, VanDyk and St-Cyr arranged several transfers of $200,000, the indictment alleges. 

In December, the funds were wired from a Virginia account to an account at Poulin’s law firm in the Turks and Caicos, according to the indictment. The $200,000 was then moved to an account in the Cayman Islands, and most of it was returned to the U.S. in February. 

Poulin allegedly told the IRS agents that most of his clients were Canadian or American. The entire $2 million was intended to be concealed, in part by using a foundation named Zero Exposure in the Turks and Caicos. 

St-Cyr and VanDyk allegedly said that they charged clients more to launder criminal proceeds than to assist in tax evasion, according to the indictment. They also said a foundation was preferred for laundering criminal proceeds, while a trust was sufficient to conceal tax evasion.

This sting operation appears similar to one involved in the Aegis criminal investigation.  I have previously blogged on some of the criminal prosecutions arising out of that investigation.  See here.  That operation involved shunting untaxed money to offshore entities as the means to evade U.S. tax.  IRS agents participating in either an IRS investigation or a grand jury investigation attended promotional meetings outside the U.S. and then did sting operations on U.S. persons (such as return preparers who enabled the evasion, either willingly or unintentionally).  This is the first time I am aware that the IRS had done a sting operation in the current round of offshore initiatives commencing with UBS in 2009, but I suspect that there are others that have been commenced earlier and will be ongoing.  We will undoubtedly hear more later.

Credit Suisse Ups Its Reserve for U.S. Tax and Securities Laws Penalties (4/4/14)

Caroline Copley and Oliver Hirt, Credit Suisse increases provision for U.S. tax deal (Reuters 4/3/14), here.

Excerpts

Credit Suisse has increased the funds it has set aside to settle a U.S. tax dispute and avoid prosecution for helping wealthy Americans hide cash from the taxman, raising the prospect it may be close to a settlement in the lengthy dispute. 

* * * * 

The bank set aside an extra 425 million Swiss francs ($480 million) to take its total provisions for tax and securities law matters in the United States to 895 million francs, it said in its annual report published on Thursday. 

Credit Suisse was told by the U.S. Department of Justice it was under investigation in 2011. The bank made a 295 million franc provision that year, but many analysts believed that sum would not suffice.

The indicated 895 million francs total reserve would, on the same conversion rate (480$/425 Swiss francs), be over $1 billion USD.  I previously reported on a penalty for the securities violation.  See Credit Suisse Take a Hit on U.S. Tax Evasion Business (Federal Tax Crimes Blog 2/21/14), here. That hit was $197 million.  It is not clear that the 895 million francs includes this amount, but for purposes of analysis,, we'll say it does.  That means that Credit Suisse expects the nonsecurities tax related hit to exceed $800 million, which would mean that the apples to apples cost to Credit Suisse exceeds UBS's $780 million costs in 2009.

Guest Blog: Litigating the FBAR Penalty in District Courts and Court of Federal Claims (3/31/14)

I am pleased to offer this guest blog entry written by Robert Horwitz, a guest blogger and prominent practitioner in civil and criminal matters, including the offshore account area.  Robert is an attorney with the Law Offices of A. Lavar Taylor.  Robert's bio is here.  The balance of this blog is his work, except that I have added links to statutes at the end of the blog.  His work is very good.

In recent years, a number of articles have appeared on litigation of the FBAR penalty.  Most of the articles focus on suits by the Government to collect the FBAR penalty or the Tax Court’s lack of jurisdiction over the FBAR penalty.  Caroline D. Ciraolo, in her 2013 Power Point ABA presentation, Assessment and Collections of the FBAR Penalty, here, noted the intriguing possibility of suing for refund of an FBAR penalty under the Tucker Act.  Expanding upon Ms. Ciraolo’s insight, I researched the issue and recently authored an article, Litigating the FBAR Penalty in District Court and the Court of Federal Claims, here,  which appeared in the Q1 2014 edition of the California Journal of Tax Litigation, the publication of the Tax Procedure and Litigation Committee of the Taxation Section of the California Bar.  The article makes the following points:

1. The Tucker Act, 28 U.S.C. §1491,  and the Little Tucker Act, 28 U.S.C. §1346(a)(2), give the Court of Federal Claims and the United States district courts, respectively, jurisdiction to hear cases for money damages against the Government.

2. Under the Little Tucker Act, district courts have jurisdiction over claims against the Government for money damages in amounts not exceeding $10,000.  The Tucker Court gives the Court of Federal Claims jurisdiction over claims against the Government for money damages in any amount founded upon the Constitution, a federal statute or regulation, or a contract.

3. The Tucker Act and the Little Tucker Act also waive sovereign immunity over claims for money damages against the United States where the claimant can “demonstrate that the source of substantive law he relies upon ‘can fairly be interpreted as mandating compensation by the Federal Government for the damage sustained.’”  United States v. Mitchell, 463 U.S. 206, 216-217 (1983).

4. Under “illegal exaction” cases, the Courts have recognized that there is jurisdiction under the Tucker Act in cases where the plaintiff seeks the return of money that was alleged to have been illegally paid to the Government.  An “illegal exaction,” occurs when money has been “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.”  Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005).  The “prototypical illegal exaction claim is ‘a tax refund suit alleging that taxes have been improperly collected or withheld by the government,’” Kipple v. United States, 102 Fed. Cl. 773, 777 (2012)

5. To maintain an illegal exaction claim, a claimant must allege that she paid money to the federal government and seeks the return of all or a part of that sum because it was improperly paid, extracted or taken from the claimant in contravention of the Constitution, a statute or regulation.

Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (3/30/14)

In United States v. Williamson,  746 F.3d 987 (10th Cir. 2014), here, the Tenth Circuit rejected the taxpayer's argument that the jury should have been instructed on the meaning of "unlawful" meant in a standard form of tax obstruction definition of the "corruptly" element of the crime. See Section 7212(a), here.  The defendant wanted an instruction that was or very close to the standard Cheek instruction -- intentional violation of a known legal duty -- for the willfulness element of most tax crimes, but not an express element of the crime of tax obstruction.  I have argued that the tax obstruction crimes (principally Section 7212(a) and the defraud conspiracy, 18 USC Section 371, here) should be interpreted to have an element functionally equivalent to willfulness and hence that something like intentional violation of a known legal duty should apply.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Let's see what happened in the case.

The defendant undertook more or less standard tax protester actions, making monetary claims against IRS personnel and filing a lien against the agents' real and personal property.  He was indicted for tax obstruction and another crime, 18 USC § 1521, here, for filing a false lien.

At trial, the court gave a standard tax obstruction instructio, first listing the elements of the crime as follows:

First: The defendant in any way corruptly; 

Second: Endeavored to; 

Third: Obstruct or impede the due administration of the Internal Revenue Laws.

After listing the elements, the trial court defined some of the terms in the elements (emphasis supplied):

"Endeavor" means to knowingly and intentionally make any effort which has a reasonable tendency to bring about the desired result. It is not necessary for the Government to prove that the "endeavor" was successful. 

To act "corruptly" is to act with the intent to gain an unlawful advantage or benefit either for oneself or for another. 

To "obstruct or impede" is to hinder or prevent from progress; to slow or stop progress; or to make accomplishment difficult or slow. 

The phrase "due administration of the Internal Revenue laws" means the Internal Revenue Service of the Department of the Treasury carrying out its lawful functions to calculate and collect income taxes.

The trial court did not define "unlawful" which is a term used in the definition of "corruptly."  The defendant wanted it defined.  The sets the stage, so now I include excerpts (in these excerpts except for the footnote number the excerpts are my to draw the readers' attention):

Good Opinion on Error in Not Giving Requested Good Faith Belief Instructions (3/29/14)

Tax practitioners and students cannot be reminded too often on the importance of Cheek's definition of willfulness - voluntary intentional violation of a known legal duty -- and Cheek's holding that a sincerely held even if objectively unreasonable belief that the conduct is lawful requires acquittal because the defendant did not knowingly violate the law.  Cheek v. United States, 498 U.S. 192 (1991), here.  In a case where the defendant claims the defense of good faith belief and it is supported in the record, the defendant is entitled to have the jury instructed that good faith belief even if objectively unreasonable requires acquittal.  I have previously reported the standard appellate dodge in cases where district courts have denied a Cheek good faith instruction but the instruction should have been given -- i.e., by holding that lack of good faith is subsumed in the otherwise adequate willfulness instructions.  See e.g., Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (Federal Tax Crimes Blog 11/20/13), here.  (For a variance on that dodge, see First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (Federal Tax Crimes Blog 1/15/14), here.)

In United States v. Montgomery, 747 F.3d 303 (5th Cir. 2014), here, the Fifth Circuit held that it is error not to give the good faith instruction if properly presented in the record.  The Court, rightly I think, held that otherwise adequate willfulness instructions did not cure the problem.  But, the Court held, that the conviction should nevertheless be affirmed because, although error, the error was harmless in the case because the evidence of willfulness (and, presumably, lack of good faith) was  "so overwhelming that the error could not have contributed to the jury's decision to convict."

The majority and the concurring decisions are useful to practitioners and students, so I excerpt substantial portions below.  In considering the excerpts, a key fact is that both the prosecution and the defendant had each requested a good faith instruction with the concept that a good faith belief even if objectionably unreasonable required acquittal.  The district court judge thought the concept was included in the willfulness instruction.  Here are the excerpts, first from the majority decision (footnote omitted), then from the concurring opinion.

Although ignorance of the law or a mistake of law generally does not provide a defense to criminal prosecution, that is not so with regard to federal tax offenses. Cheek, 498 U.S. at 199-200. "[D]ue to the complexity of the tax laws," certain federal criminal tax offenses require, as an element of the offense, the establishment of a defendant's willfulness. Id. at 200. In United States v. Pomponio, 429 U.S. 10, 12 (1976), the Supreme Court defined willfulness in this context as "a voluntary, intentional violation of a known legal duty." 

Fifteen years later, in Cheek, 498 U.S. at 201, the Court clarified Pomponio's definition of willfulness. There, the district court instructed the jury that an "honest but unreasonable belief is not a defense and does not negate willfulness." Id. at 197. The Supreme Court held that the district court's instruction was incorrect. Id. at 202. It reasoned that the government cannot carry its burden to prove willfulness in a criminal tax prosecution if the jury believes that the defendant, in good faith, did not understand the law. Id. That is true regardless of "however unreasonable a court might deem such a belief." Id.; see also United States v. Simkanin, 420 F.3d 397, 410 (5th Cir. 2005) ("[A] defendant's good-faith belief that he is acting within the law negates the willfulness element."). 

Here, the Montgomerys argue that the district court's jury instruction did not comport with Cheek because it did not advise the jury that a defendant's good-faith misunderstanding of tax law may be objectively unreasonable. In response, the government argues that, despite the fact that its own proposed jury instruction included the unreasonableness language from Cheek, it was unnecessary in light of the Supreme Court's decision in Pomponio, 429 U.S. 10, and our own decision in Simkanin, 420 F.3d 397. They reason that, pursuant to those decisions, where a district court correctly instructs the jury as to willfulness an additional instruction on the good-faith defense is unnecessary. In any event, the government argues that the error was harmless due to the overwhelming evidence of the Montgomerys' guilt. 

We agree with the Montgomerys that the jury instruction was erroneous. The import of Cheek, as applied to this case, is clear: if the Montgomerys truly believed that they were not obligated to report their income, then the jury could acquit, however objectively unreasonable the Montgomerys' belief was. Both parties agreed to instruct the jury along those lines by explaining that the Montgomerys' beliefs regarding tax law could be "unreasonable or irrational." Yet the jury instruction, given sua sponte by the district court, did not explain that point. Rather, it only included a portion of Cheek's good-faith defense:

Silence in NonCustodial Interviews and the Fifth Amendment (3/28/14)

I just read the Seventh Circuit's  opinion in United States v. Phillips, ___ F.3d ___, 2014 U.S. App. 4898 (7th Cir. 2014), here, and a recent Champion article, Neal Davis and Dick DeGuerin, Silence is No Longer Golden: How Lawyers Must Now Advise Suspects in Light of Salinas v. Texas, 38 Champion 16 (2014) [I do not have a link to the article].  I thought it might be worth revisiting an issue I had discussed before in two blogs: Silence in Response to Questions Without Miranda Warning in NonCustodial Setting May Be Evidence of Guilt (Federal Tax Crimes Blog 6/18/13), here, discussing Salinas v. Texas, 570 U.S.    , 133 S. Ct. 2174 (2013), here, and Invocation of Fifth Amendment in Noncustodial Setting May Not Be Used In Prosecution's Case in Chief (Federal Tax Crimes Blog 9/5/13), here, discussing United States v. Okatan, 728 F.3d 111 (2d Cir. 2013), here, which in turn discusses a facet of Salinas.  A brief summary of the law as discussed in those cases and the blogs is that the prosecution may comment at trial upon a noncustodial witness' silence even if the witness was not "Mirandized. " (Readers will recall that Miranda warnings are required only in custodial or equivalent settings, but the IRS in criminal investigations gives modified Miranda warnings in noncustodial settings.)  Of course, such a comment would be improper if the silence were in a context that the witness invoked his or her Fifth Amendment (either expressly or inferentially in context, such as by asking to consult with an attorney).  Salinas held that the prosecutor could.  Okatan held that, if the witness had asked to consult with an attorney, he had effectively invoked his Fifth Amendment privilege and the prosecutor could not comment.

In Phillips, the prosecution elicited at trial from an IRS CI agent that that the testifying CI agent testified that, during the investigation, he had sent two other CI agents to serve a summons and they had served it on defendant.  The cryptic opinion does not state that those serving CI agents attempted to interview her when they served the summons.  Nevertheless, the defendant argued for the first time on appeal that the implication of the testimony as elicited at trial was that they had attempted to interview her and she had not cooperated.  There is no indication that, in fact, the CI agents had attempted to interview her, that they had or had not given Miranda or modified Miranda warnings or that she had refused to be interviewed (stayed silent).  The defendant was apparently arguing that the testimony as elicited inferred at least that they had attempted to interview her and that she had not cooperated.

As an issue raised for the first time on appeal, the Court applied the plain error standard of review.  The Court then rejected the argument cryptically:

Mrs. Phillips claims that the government's questioning of Agent Howard commented on her silence in violation of her Fifth Amendment right against self-incrimination. She argues that Agent Howard spoke of sending agents to "attempt" to interview her, which Mrs. Phillips claims subtly implied that she had refused to speak. She did not object to Howard's testimony or to the prosecutor's statement at closing, so we review only for plain error. United States v. Della Rose, 403 F.3d 891, 906 (7th Cir. 2005). Of course, a defendant has "a constitutional right to say nothing at all about the allegations." United States ex rel. Savory v. Lane, 832 F.2d 1011, 1017 (7th Cir. 1987).  But the government violated her right only if it "manifestly intended to refer to [her] silence, or ... [if] the remark was of such a character that the jury would naturally and necessarily take it to be a comment on [her] silence." United States v. Andreas, 216 F.3d 645, 674 (7th Cir. 2000) (citation and internal quotation mark omitted). 

In light of what happened at Mrs. Phillips' trial, her argument is unconvincing. The government's explanation for Agent Howard's testimony—to establish that the couple started withdrawing cash as soon as they became aware of the IRS investigation—is logical and is reflected in the government's closing argument. The government intended to, and did, point out suspicious conduct and timing, rather than comment on Mrs. Phillips' invocation of her right against self-incrimination. Nor would a jury be likely to view Agent Howard's testimony as commenting on her silence. Indeed, the evidence does not even tell us whether the agents actually spoke to Mrs. Phillips, and if they did, what she did or did not say. Nor did the record clearly suggest that she was silent. We therefore conclude that the government did not violate her right against self-incrimination.

Swiss Legislation to Forego Notice to Foreign Depositors of Treaty Country Request (3/26/14)

Readers of this blog might be interested in a recent blog by Virginia Le Torre Jeker, a practitioner representing expats from the U.S. and foreign persons regarding U.S. tax laws.  The blog is Swiss Account Holders – Losing the Right to be Informed About IRS Disclosure (Angloinfo 3/24/14), here.  The article discusses Swiss legislation that will permit Swiss tax authority to "turn over information to foreign governments on certain account holders with undeclared accounts in Swiss financial institutions without providing the holders any advance notice of the disclosure."  She says:

Under the amended law, information about those suspected of tax evasion can be sent to another country without prior notification to the account holder, provided the country to which the information will be sent can prove that giving such advance notice would hinder the investigation. 

Of course, US depositors should not hit the panic button yet.  I have not studied the legislation and just respond to Ms. Jeker's description of the legislation.  I suspect that the Swiss will give a reticent interpretation of its authority -- meaning that it will require a significant, if not very strong, proof that notice would hinder the investigation.  Seemingly, this type of authority would not fit with group requests of the type that will constitute most of the requests, at least by the U.S.  And, it would require, seemingly, the identify of the individual, the nature of the investigation, and a persuasive statement of why disclosure might hinder the investigation.  So, I doubt that, even when there are individual requests, the requesting country -- thinking particularly of the U.S. -- will automatically claim disclosure would hinder an investigation.  But that remains to be seen.

The article discusses also the procedure, if a foreign depositor is notified, to invoke to block disclosure and the requirement of 18 USC 3506 that U.S. depositors notify the US Attorney General of a proceeding to block disclosure.  Of course, generally, filing a proceeding to block the disclosure is not a meaningful exercise in most cases -- both because of the requirement to notify the Attorney General and the probability that, although some have been successful in the past, I doubt that many, if any, will in the future.  But, notice can permit the U.S. depositor to take other remedial measures, such as most prominently OVDP.

Scope and Limitations of this Blog: It Is a Tax Crimes Blog, not a Tax Crimes Policy Blog (3/26/14)

I responded earlier today to a reader who emailed me.  The underlying theme of the reader's email to me was to complain or at least comment that, in my blog, I do not give a balanced view of the fairness of the tax law and its administration and that I tend to advocate positions that favor the law as it is.  I thought I would offer readers my thinking on that general subject, because it affects what and how I present discussions on this blog.

I conceive my blog as a forum to discuss the law as it is, including how it develops.  It is not a tax policy blog addressing issues of what the law ought to be.  Hence, for example, I have not advocated for or against FATCA or for or against the U.S. taxation of worldwide income or for or against how the U.S. taxes expats.  I have not advocated for or against the IRS Offshore Voluntary Disclosure initiatives (OVDI/P), although I have occasionally said that there are features of those initiatives that, were I in charge (I am not), I would have implemented differently.  I try to offer readers discussion of the law to assist in understanding and navigating the law as it is.  (I have worded this to remind readers that I am not offering them tax advice on this blog; see the page on Lay Reader Limitations to the right, here.)

Readers wanting to post comments on tax policy issues -- even if just complaints as to what the law is now -- are welcome to do so.  I probably will not respond to those comments but other readers certainly can.  For example, those wanting to complain about the IRS OVDI/P may certainly do so.  I will not defend or attack OVDI/P.  I will, where appropriate, discuss features of OVDI/P that may be useful for readers in understanding those programs.

I want readers to understand that I have limited resources to commit to this blog.  I do basically all the work on the blog.  A number of readers and colleagues point me to possible content for the blog, but in terms of understanding issues and presenting them in a way that I hope is meaningful to readers, I do all that work.  I also practice law where I have to spend time serving clients.  I also have a family and other interests that occupy time.  Hence, I am limited in my resources that I can commit to the blog.  The reader who sent the email noted above said:  "How about using your significant resources to investigate (not quote somebody) on the true number of applications, both processed and pending, for certificates of loss of (US) nationality?"  As I read the comment,  he or she is really complaining that the law and  its implementation are driving U.S. citizens to abandon citizenship, as an argument that the law and its implementation are wrong and should be changed.  That's a tax policy issue.  That is not the focus of my blog.  I have limited resources to devote to matters within the intended scope of my blog and certainly do not have the resources imagined to go off on detours from the intended scope of my blog.

Given these limitations, the subjects I address on this blog are necessarily anecdotal -- the subjects that attract my interest.  There are tax crimes subjects involving the law as it is that do not draw my attention.  For example, return preparer tax fraud and stolen identity refund fraud are major tax crimes subjects.  Although I observe tax crimes initiatives in those areas, I just do not address them much in this blog.

With these limitations, I do hope this blog is useful to readers.  As I note in the general introduction to the blog at the top of the blog pages, the blog is really intended for tax professionals and tax students.  I know that, particularly in light of the IRS's offfshore account initiatives, the blog is now read by lay readers and, judging by the comments (all of which I do read), some of the lay readers have developed particular expertise in some facets of the law and tax administration relating to tax crimes.  Indeed, some of the lay readers may understand facets of the IRS's offshore account initiatives better than many tax professionals (including me).  I welcome their comments, whether as a comment on the blog or in an email to me.

Finally, I thank the readers of the blog for spending their limited resources reading my blog.  I would appreciate your comments as to how the blog may be improved.

Civil FBAR Penalty Case in Process -- Government Motion for Summary Judgment (3/25/14)

I have previously reported on a taxpayer named John C. Hom who got caught up in an FBAR investigation.  IRS Not Liable for Opening FBAR Investigation Based on Return Information Subject to Section 6103 (Federal Tax Crimes Blog 10/3/13), here.  There has been a subsequent development - the United States sued for judgement on the FBAR penalty.  See United States v. Hom (No. C 13-03721 WHA - ND CA).  On March 16, 2014, the district court dismissed here Hom's amended answer and counterclaim because the issues raised in those pleadings had already been litigated, thus leaving just the suit to obtain judgement on the FBAR penalty.  The Court's dismissal order is here.

The Government also filed a motion for summary judgement upon which the Court has yet to act.  The motion is here.

The facts alleged in the Government's motion for summary judgement, highly summarized, are:

Hom was an internet gambler.  Internet gambling is illegal for U.S. persons.  He maintained certain accounts related to the gambling with foreign institutions, FirePay.com, PokerStars.com, and Partypoker.com, not traditional financial accounts but functioned like them.  And, of course, they were offshore.

The IRS picked up the issue in an income tax audit.  The IRS issued a summons, the taxpayer did not comply, the IRS sued to enforce the summons, the district court ordered enforcement on 9/27/10, and thereafter the taxpayer complied.

On September 20, 2011, the IRS assessed Defendant with civil penalties under 31 U.S.C. § 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. § 5314, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. Id., Exs. 1-2; Ex. 5, RFA Nos. 24-25. The IRS assessed a $30,000 penalty for 2006, which was comprised of a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based on only Defendant’s PokerStars account. Id. As of July 26, 2013, Defendant owed $45,178.09. Id., Ex. 3. Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. § 3717.

The issues presented on the motion for summary judgment are (number is the number of the issue as presented)

1. Was Defendant a United States citizen or resident during 2006 and 2007? 

2. Are Defendant's accounts at FirePay.com, PokerStars.com, and Partypoker.com "bank, securities, or other financial account[s]" under 31 U.S.C. §§ 5412, 5314 and 31 C.F.R. § 103.24(a)? 

3. Are Defendant's FirePay.com, PokerStars.com, and Partypoker.com accounts "in a foreign country under 31 U.S.C. §§ 5212, 5314 and 31 C.F.R. § 103.24(a)? 

4. Are the asssets from Defendant's FirePay.com, PokerStars.com, and Partypoker.com  accounts held in "foreign commingled funds" under IRS Notice 2009-62 (and modified by IRS Notice 2010-23) such that the filing deadline for FBARs for those accounts for 2006 and 2007 was extended to June 30, 2010? 

5. Was Defendant’s failure to timely file his FBARs due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported as set forth in 31 U.S.C. § 5321(a)(5)(B)(ii)? 

6. Did the IRS assess the FBAR penalties at issue within the six-year statute of limitations found in 31 U.S.C. § 5321(b)(1)?

Blog readers interested in specific issues can download the pdf.  I will note that the penalty seems relatively light, at least compared to some of the Government's swashbuckling assertions of the willful penalty in far less egregious cases.

Prosecutor's "Golden Rule" Argument to Jury Criticized by Court of Appeals (3/25/14)

In United States v. Hunte, 2014 U.S. App. LEXIS 4729 (11th Cir. 2014), an unpublished opinion, here,  the Eleventh Circuit sustained convictions for conspiracy and tax perjury.  The defendants had a scheme to claim refunds related to income tax allegedly withheld (but not actually withheld).  It worked at first, but not later.  Hence, the criminal case.  The opinion is standard fare for this genre of case.  The opinion does have an interesting discussion of prosecutorial misconduct in the closing jury argument.  I offer that discussion:

The Court first discusses the standard of review.  Because there was no objection at trial (which would have permitted the judge to clarify with instructions), the standard of review is for plain error, requiring that the error be plain or obvious and affect the defendant's substantial rights.  Applying this standard, the Court held (bold face supplied by JAT):

Mr. George's prosecutorial misconduct claim on appeal is one of cumulative error. He contends the cumulative effect of the various improper remarks made by the prosecution throughout its opening and closing arguments served to deny him a fair trial. "Even where individual judicial errors or prosecutorial misconduct may not be sufficient to warrant reversal alone, we may consider the cumulative effects of errors to determine if the defendant has been denied a fair trial." United States v. Ladson, 643 F.3d 1335, 1342 (11th Cir. 2011) (quoting United States v. Lopez, 590 F.3d 1238, 1258 (11th Cir. 2009)). "In addressing a claim of cumulative error, we must examine the trial as a whole to determine whether the appellant was afforded a fundamentally fair trial." United States v. Calderon, 127 F.3d 1314, 1333 (11th Cir. 1997). 

Of the various remarks Mr. George challenges, we find that three in particular were improper. During its closing argument and final summation, the prosecution made the following remarks: (1) that the defendants "were stealing from you and they were stealing from me and everyone else that's paying into the system"; (2) that the defendants were "living large off of your tax dollars"; and (3) that without citizens filing accurate tax returns, "we would have no tax revenue, . . . no way to build schools . . . no way to fight wars." There is no doubt that these "golden rule" remarks were improper, as they directly suggested that the jurors had personal stakes in the outcome of the case and they placed the prosecution together with the jury in a joint effort to combat fraud. See United States v. McGarity, 669 F.3d 1218, 1246 (11th Cir. 2012) ("[B]y telling the jury that the victims of the child pornography are 'our daughters and granddaughters, neighbors, friends,' the prosecutor here crossed the line . . . 'demarcating permissible oratorical flourish from impermissible comment.'"). See also United States v. Lopez, 590 F.3d 1238, 1256 (11th Cir. 2009) ("Improper suggestions, insinuations and assertions calculated to mislead or inflame the jury's passions are forbidden in the presentation of closing arguments.").  We expect prosecutors from the Tax Division of the Department of Justice to refrain from this kind of argument in the future. 

Nonetheless, as in McGarity, 669 F.3d at 1246-47, the improper remarks did not so prejudicially affect Mr. George's rights that a different outcome might have been achieved in their absence. First, the district court instructed the jury on at least three separate occasions that the arguments of counsel were not evidence. See United States v. Rodriguez, 765 F.2d 1546, 1560 (11th Cir. 1985) (holding issuance of three curative instructions was sufficient to cure damage arising from prejudicial comments made by prosecutor). Second, there was overwhelming evidence against Mr. George. The improper remarks did not affect Mr. George's substantial rights, even when considered cumulatively. See Ladson, 643 F.3d at 1342 ("There is no cumulative error where the defendant cannot establish that the combined errors affected his substantial rights.") (internal quotation marks omitted). As a result, the prosecution's improper statements do not require reversal.

Article Regarding Representing Swiss Banks (3/24/14)

I received an email today about an article that he and two other prominent tax practitioners published in February.  Alan Granwell, Bob Katzberg and William Sharp, The US DOJ Voluntary Disclosure Program for Swiss banks: What the Umbrella Man can teach bank counsel about criminal intent (International Tax Review 2/13/14), here.

The key contents of the article are probably well known to readers of this blog.  The authors do analogize to the infamous "Umbrella Man" who surfaced in connection with the John F. Kennedy Assassination.  The  Wikipedia entry on the Umbrella Man is here.  I do think  that anecdote is useful in thinking about the situation addressed.

From the legal perspective, however, I do have a couple of quibbles.

• Readers should remember that, in a legal setting, the level of mens rea is the Cheek definition for willfulness -- the voluntary intentional violation of a known legal duty.  Even where willfulness is not a specific statutory requirement, the crimes that could be marshaled against the enablers have similar levels of intent.  See  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.  Of course, those assisting the bank should be keenly aware of that standard and deploy it in assessing the conduct of the bank personnel.
• As for deliberate ignorance (which I usually call conscious avoidance), I have spoken often on that subject on this blog.  The law is not settled, but I think when it is, the concept of willful ignorance will not be a substitute for the express intent to violate a known legal duty, but a device to permit the trier of fact to infer in the context of all the facts and find, beyond a reasonable doubt, that the defendant had the specific intent to violate a known legal duty.  That may not sound important, but I think it is.
• I continue to be concerned about the ease with which the aiding and abetting concept is used.  I have ranted on that subject before and won't do it again.  Follow the links below to read more about it.  See also John A. Townsend, Theories of Criminal Liability for Tax Evasion (5/15/12), here.  As to the charge of tax evasion and the obstruction charges (tax obstruction under Section 7212(a) or defraud / Klein conspiracy under 18 USC 371), the bank employees can be directly guilty of the crime, so aiding and abetting does not add anything other than extra and meaningless jury instructions.  I  suppose that, since tax perjury is a status crime and bank employees do not satisfy the required status (the taxpayer signing the return), the aiding and abetting concept might be marshaled for them, but they probably would be directly guilty under 7206(1), aiding and assisting.  Oh, well.

The key point the authors make is that, as in all of life, there is no substitute for hard work and experience in making the decisions that are so important to the Swiss banks assessing their exposure and participation in the program.

IRS Sting Investigation Nabs Offshore Bank Account Enablers (3/24/14)

According to a DOJ Tax Press Release, here, the IRS nabbed a U.S. Citizen and two Canadian citizens who offered enabler services to U.S. taxpayers.  They were caught in a classic IRS sting operation.  Here are key excerpts (bold-face by JAT):

Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted for conspiracy to launder monetary instruments, the Department of Justice and Internal Revenue Service (IRS) announced today.  The indictment alleges that Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud.  The Caribbean-based defendants allegedly assisted undercover law enforcement agents, posing as U.S. clients, in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners.  Vandyk and St-Cyr invested the laundered funds on the clients’ behalf and represented the funds would not be reported to the U.S. government.  

* * *  In addition to the conspiracy charge, Vandyk, St-Cyr and Poulin were each charged with two counts of money laundering.  

* * * * 

According to the indictment, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based in the Cayman Islands.  St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens.  Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada and in the Turks and Caicos.  His clientele also included numerous U.S. citizens.   

 According to the indictment, Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government.  Vandyk and St-Cyr directed the undercover agents posing as U.S. clients to create offshore foundations with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients.  Vandyk and St-Cyr used the offshore entities to move money into the Cayman Islands and used foreign attorneys as intermediaries for such transactions.  

 According to the indictment, Poulin established an offshore foundation for the undercover agents posing as U.S. clients and served as a nominal board member in lieu of the clients.  Poulin transferred wire payments from the offshore foundations to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside the United States in the name of the offshore foundation.  The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients.  Clients were able to monitor their investments online through the use of anonymous, numeric passcodes.  Upon request from the U.S. client, Vandyk and St-Cyr would liquidate investments and transfer money, through Poulin, back to the United States.  According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion. 

So, it appears that they were both money laundering (not yet alleged against Swiss enablers that I am aware of) and ordinary enablement of U.S. tax evasion (which is what the charge against the Swiss enablers that I am aware of).

Credit Suisse Takes a NonTax Hit from U.S. Authorities (3/21/14)

Elena Logutenkova and Jeffrey Vögeli, Credit Suisse to Pay $885 Million to Settle FHFA Lawsuits (Bloomberg 3/21/14), here.

Credit Suisse Group AG (CSGN), Switzerland’s second-biggest bank, agreed to pay $885 million to settle lawsuits by the Federal Housing Finance Agency over mortgages sold to Fannie Mae and Freddie Mac. 

* * * * 

Credit Suisse was among 18 lenders sued by the FHFA in 2011 to recoup losses on about $200 billion in mortgage-backed securities sold to the two government-sponsored companies before the financial crisis. Nine companies, including JPMorgan Chase & Co., Deutsche Bank AG and UBS AG (UBSN), have agreed to pay more than $9.2 billion to settle similar lawsuits by FHFA. 

“It’s definitely good for Credit Suisse to have this thing out of the way,” said Guido Hoymann, a Frankfurt-based analyst with Bankhaus Metzler. 

Chief Executive Officer Brady Dougan in February called mortgage-related litigation one of the bank’s two most important legal issues alongside the U.S. investigation into whether it helped Americans evade taxes. The company said yesterday the agreement with FHFA resolves the largest mortgage-related investor litigation.

Another UBS Depositor Indicted; the Russian Connection (3/21/14)

DOJ Tax announced here that "Victor Lipukhin, formerly a resident of St. Charles, Ill., was indicted yesterday."  The charges were tax obstruction (Section 7212(a)) and filing false tax returns (Section 7206(1)).  Key excerpts:

According to the indictment, Lipukhin formerly served as president of Severstal Inc. (USA), a subsidiary of AO Severstal, the largest steel producer in Russia.  He lived in St. Charles from at least 2001 through mid-2007. 

Lipukhin, a Russian citizen and former lawful permanent U.S. resident, kept between approximately $4,000,000 and $7,500,000 in assets in two bank accounts with UBS in Switzerland from at least 2002 through 2007.  In 2002, he and another individual opened a UBS bank account in the name of Old Orchard, a sham Bahamian entity.  The account was initially funded with over $47,000,000 transferred into the account from a previously maintained UBS account in the Bahamas.  In 2003, the other individual left the account, leaving Lipukhin as the sole owner and signatory.  Lipukhin also maintained another account at UBS in Switzerland in the name of Lone Star, another sham Bahamian entity.  He directed virtually all transactions in the accounts, typically through a Bahamian national who served as the nominee director of the Old Orchard and Lone Star entities to help conceal Lipukhin’s ownership and control.  However, he failed to report his ownership of these accounts and failed to report any income earned in these accounts on his tax returns.

According to the indictment, in order to further conceal his ownership of the undisclosed UBS accounts, Lipukhin utilized fictitious mortgages through an entity called Dapaul Management, controlled by a Canadian attorney, to conceal his purchase of real estate in the United States with funds from the UBS accounts.  This includes his purchase of a historic building at 18 N. Fourth St, in St. Charles, Ill., for $900,000 in the name of Charlestal LLC, a domestic entity controlled by Lipukhin.  He also transferred funds from his UBS accounts to the Canadian attorney for ultimate transfer to a domestic Charlestal bank account in order to conceal the source of the funds, then used the funds in the Charlestal account to pay for various personal expenses and to withdraw cash for personal use.  Finally, Lipukhin impeded the administration of Internal Revenue laws by attempting to prevent an automobile dealer from filing a Form 8300 – which is required for certain cash transactions over $10,000 – with the IRS in order to report Lipukhin’s cash payment to purchase an automobile.

IRS 2013 Data Book with Many Statistics, Including for Criminal Tax Enforcement (3/21/14)

The IRS has released its 2103 Data Book, here.

The statistics for criminal tax administration and enforcement may be downloaded in Excel format by clicking the link:

Table 18: Criminal Investigation Program, by Status or Disposition, here.

I generated a pdf from  the Excel table.  The pdf may be viewed and downloaded here.

There are 32 tables (31 plus Table A) covering a range of subjects at least tangentially related to criminal tax administration and enforcement.

The web page for IRS Criminal Investigation Statistical Data is here, which provides further links to:

• Current Fiscal Year Statistics
• Three Previous Fiscal Years Statistics
• IRS Data Book, Table 18, Criminal Investigation Program, by Status or Disposition
• CI Enforcement Statistics - Tax and Non-Tax (Ten Years - Fiscal Year 2004 through Fiscal Year 2013)
• Criminal Investigation Statistics by Program and Emphasis Areas of Fraud

I have not had time to review the statistics in Table 18 of the Data Book.  I may post something later, either as an Addendum to this blog entry or a new blog entry.

TRAC Reports on IRS Statistics (3/21/19)

I received the following email from TRAC which links to various statistics related to IRS tax enforcement.  I have not yet reviewed the links.  I will do that later and post anything I want to comment on.  In the meantime, here is the email contents:

Transactional Records Access Clearinghouse ========================================== 

Greetings. Recent and very extensive information from the Internal Revenue Service (IRS) about tax returns, audits and its own criminal enforcement actions are now available on the public web site of the Transactional Records Access Records (TRAC). See TRAC's IRS Data Tools and Applications page at: 

http://trac.syr.edu/tracirs/tools/

 TRAC's tools let you explore newly released data from the IRS about the number of tax returns and the reported incomes in each of more than 3,000 counties in the United States. Tax data from 1991 through 2012 show, for example, that in the most recent year the adjusted gross income (AGI) for New York County (Manhattan) was highest in the nation at $159,410, rising 69 percent from what it was in 2010.

Audit information from 1992 through 2013 is available for corporations of all sizes, from those with assets of $250,000 or less to those with assets of $250 million or more. Information on individual audits for the same time period show audit statistics for taxpayers with a total positive income (TPI) of $200,000 or less to those with a TPI of $1 million or more.  

Criminal enforcement data include the latest figures from the Department of Justice about cases referred by the IRS from FY 1992 through January 2014. Listings, maps and district ranking tables are presented on both a national basis and for each of the 90-plus federal judicial districts. Also included is an updated list of the IRS's most frequently cited statutes in the U.S. Code that eventually led to formal charges or convictions. 

Through the TRACFed subscription service, TRAC offers expanded information and exclusive custom data analysis tools, as well information on over 9,300 Federal Tax lawsuits filed from FY 2007 through January 2014. 

These features can all be reached from TRAC's IRS Data Tools and Applications page at: 

http://trac.syr.edu/tracirs/tools/ 

 TRAC's ongoing reporting on the IRS can be viewed at: 

http://trac.syr.edu/tracirs/ 

 To keep up with TRAC, follow us on Twitter @tracreports or like us on Facebook: 

http://facebook.com/tracreports

TRAC is self-supporting and depends on foundation grants, individual contributions and subscription fees for the funding needed to obtain, analyze and publish the data we collect on the activities of the US Federal government. To help support TRAC's ongoing efforts, go to: 

http://trac.syr.edu/sponsor/ 

 David Burnham and Susan B. Long, co-directors Transactional Records Access Clearinghouse Syracuse University Suite 360, Newhouse II Syracuse, NY  13244-2100

315-443-3563
trac@syr.edu

http://trac.syr.edu