Plea to Tax Obstruction in Evasion of Payment Case (1/31/13)

I cut and paste this IRS news release principally for the benefit of students just being introduced to federal tax crimes.  First, the press release illustrates that the criminal enforcement system seeks to undergird the federal tax system by publicizing compliance initiatives that will encourage other taxpayers to voluntarily comply.  The IRS thus issues press releases for criminal actions.  DOJ Tax and U.S. Attorneys Offices issue press releases as well.  I often refer to the DOJ Tax and USAO press releases and have links to the right of the blogs to DOJ Tax's press release sites.  Second, this particular plea illustrates a matter we covered last week in the Federal Tax Crimes class at UH Law School.  We were covering tax evasion.  Tax evasion under Section 7201, here, is usually evasion of assessment (principally by false return underreporting tax liability), but sometimes by evasion of payment.  The case described in the press release below seems to fit the pattern of an an evasion of payment case, although the charge was not tax evasion.  The pattern for evasion of payment that we discussed in class was for a taxpayer to have unpaid assessed tax liabilities (often reported by him or set up on audit) that he avoids paying and takes affirmative steps to avoid paying.  That appears to be what this defendant did.

We have also noted in class that a pattern of conduct can often fit within the elements of two or more crimes.  Here, the pattern of conduct could have been charged as evasion of payment but was charged as tax obstruction, Section 7212(a), here.  This was a plea deal and perhaps the "lesser" crime of tax obstruction is what the defendant required in order to plea.  Facially, it is a lesser crime than tax evasion.  Tax evasion is a five year maximum sentence, whereas tax obstruction is a three year maximum sentence.  Given the amount of the tax loss ($1.7 million), it is possible that the three year count of conviction could be less than at least the top of the sentencing guideline range.  I did a fairly clean calculation of the guidelines range (only factors were the tax loss and the 3-level reduction for acceptance) and determined an indicated guidelines range of 30-37 months, so the maximum period allowed by a Section 7212(a) plea will cap the sentence at 36 months.  And this is true not only as to the guidelines range, but also as to any possibility of an upward Booker variance.  Some of the foregoing will be unintelligible to students in the early part of the course, but will be easily understood once we complete the Guidelines chapter.

Warnings on Continued Government Patience for Offshore Account Ostriches (1/31/13)

A Tax Notes Today article reports that the Assistant Attorney General for the Tax Division, Kathy Keneally, has warned that amnesty for offshore account evasion will not last forever.  Jeremiah Coder, Keneally Says Government's Patience with OVDP Holdouts Has Limits, 2013 TNT 21-3 (1/31/13).  The opening quotes are:

The Justice Department Tax Division and the IRS will not forever offer criminal amnesty to taxpayers who continue to avoid reporting their undeclared offshore bank accounts, Kathryn Keneally, assistant attorney general for the Tax Division, said on January 29. 

Account holders should disclose their accounts through the IRS offshore voluntary disclosure program (OVDP) as quickly as possible, "because sitting it out at this point is extremely dangerous," Keneally said at a roundtable discussion held at the University of Southern California's annual tax institute. If a taxpayer knows a criminal investigation is underway, "it's too late" to enter the OVDP and avoid investigation by the DOJ, she said.  

Several offshore cases that started out as civil IRS exams have now gone criminal, Keneally said. "This idea of sitting it out, and if the government goes after me I'll only have civil penalties to deal with -- people need to get over that," she warned.

JAT Note:  She is right, of course.  But there is nuance in what she says.  When advising a U.S. taxpayer with this problem whether to enter the applicable version of the IRS OVDI/P  program, the key initial inquiry is whether that taxpayer has material criminal fraud risk and, correspondingly, material civil fraud risk that might result in the civil consequences of fraud (specifically, (i) for income tax, the unlimited statute of limitations and the civil fraud penalty) and (ii) the civil fraud FBAR counterpart, the willfulness penalty.  If those risks are material, the taxpayer certainly should get into the program.  If those risks are not material, then getting into the program may offer very little benefit.  The reason is that can happen when the risks have been accurately assessed to be minimal is that the taxpayer will be subjected to civil audit if the IRS chooses to audit.  Inside the program, the taxpayer with that profile will usually be a candidate for opting out and, upon opt out, will get an audit.  The taxpayer is no worse off and, indeed, the taxpayer may  be better off if he or she is not audited.  Of course, accurately assessing the criminal prosecution risk and the civil fraud consequences requires experienced judgment because of the consequences of missing a material risk assessment.

Another UBS Depositor Pleads (1/31/13)

DOJ Tax has announced the guilty plea of "Christopher B. Berg * * * to an information charging him with willful failure to file the required report of foreign bank account (FBAR) for an account he controlled at UBS in Switzerland in the year 2005."  The announcement is here.

Key elements:

Plea: FBAR (1 count)
Maximum Possible Sentence:  5 years.
Conviction (Plea) Date: 1/30/13
Bank: UBS
Entities: ?
Omitted Income:  $642,070
Tax Loss (called Tax Harm):  $270,757
High Balance: ?
FBAR Penalty: ?
Sentencing Date: 7/8/13
Court: California Northern District
Judge: ?
Other factors:  Used account funds to pay Eurocard while traveling in Europe

I will update the spreadsheet and post it later.  I will also update this blog entry as new information comes in.

Article on Importance of Jury Instructions in White Collar, including Tax, Crime Cases (1/29/13)

I write today to direct readers to a recent very good article by Susan E. Brune and Laurie Edelstein titled Jury Instructions: Key Topics in Federal White Collar Cases, 36 Champion 26 (2012), here.  The authors' web site is here and their bios are here (Brune) and here (Edelstein).

The introduction:  "The right jury charge can make the difference between conviction and acquittal. "  The article then explores some contexts in which instructions can be particularly helpful in white collar crime cases.  As most readers will know (and as I remind my Tax Fraud class), tax crimes are a subject of white collar crimes, hence it is not surprising that the authors deal with instructions in tax crimes cases.

The six areas discussed are (1) Reasonable Doubt, (2) Willful Blindness, (3) Venue, (4) Securities Fraud, (5) Tax Evasion: Economic Substance, and (6) Antitrust.  I will focus on the comments on (1) Reasonable Doubt, (2) Willful Blindness and (3) Tax Evasion: Economic Substance.

Reasonable Doubt

The authors clearly summarize the courts' continuing inability to formulate instructions to explain reasonable doubt to a jury in a way that we can have confidence that the jurors understand the concept.  None of the various circuit courts' formulations is perfect, but the suggest that (footnotes omitted):

Defense counsel might consider proposing the Federal Judicial Center's (FJC) pattern instruction on reasonable doubt, which Justice Ginsburg highlighted in Victor. This instruction does away with the "hesitate to act" analogy and instead focuses on whether the government has met its burden of proof: "Proof beyond a reasonable doubt is proof that leaves you firmly convinced of the defendant's guilt." The "firmly convinced" standard, which certain circuits have approved, more accurately reflects the state of certainty required to find a defendant guilty.  

* * * * 

Because the Supreme Court's decision in Victor effectively held that problematic words or definitions in a reasonable doubt charge can be neutralized by words or phrases that preclude the jury from requiring more than a reasonable doubt to acquit, it is unlikely that a reasonable doubt charge will provide grounds for reversal of a guilty verdict on appeal. Advocating for a charge that focuses on the government's burden and instructs the jury that it cannot convict unless it is firmly convinced of the defendant's guilt thus can be critical. It may help secure an acquittal in the first instance.

IRS Issues John Doe Summons to UBS (All Over Again) (1/28/13; updated 2/2/13)

A federal district judge in SDNY has authorized the issuance of a John Doe Summons to UBS for its correspondence accounts related to Wegelin and, through Wegelin, some other Swiss banks.  The USAO SDNY press release is here. The Government's Memorandum of Law in Support of the United States' Ex Parte Petition for Leave to Serve John Doe Summons is here.  Wegelin has previously pled guilty to conspiracy to defraud the IRS through promoting and exploiting secret accounts permitting U.S. taxpayers, co-conspirators, to avoid their income tax reporting and payment and their FBAR reporting requirements.

According to the press release:

U.S. District Judge William H. Pauley III entered an order authorizing the Internal Revenue Service to issue a summons requiring UBS AG (“UBS”) to produce information about U.S. taxpayers who may hold accounts at the Swiss bank Wegelin & Co. (“Wegelin”) and other banks based in Switzerland to evade federal income taxes. Specifically, the IRS summons seeks records of Wegelin’s United States correspondent account at UBS, which will allow the United States to determine the identity of the U.S. taxpayers who hold or held interests in financial accounts at Wegelin and other Swiss financial institutions that used Wegelin’s UBS account. 

Conscious Avoidance All Over Again (1/23/13)

I am again back on the conscious avoidance issue in its use generally and specifically in tax crimes.  The background is that tax crimes are the -- certainly an -- exception in Anglo-American jurisprudence where ignorance of the law is a defense.  Tax crimes require knowledge that the known facts are a crime.  Generally, crimes requiring knowledge merely require knowledge of the facts and not that the law defines knowledge that those facts constitute a crime.  Hence, for crimes requiring knowledge of facts, ignorance of the law is not a defense so long as the facts are known; for tax crimes requiring as an element intentional violation of a known legal duty, ignorance is a defense or, to put be more technically correct, the Government has not proved beyond a reasonable doubt that the defendant intended to violate a known legal duty where the defendant does not know the law.  I have obsessed on that fundamental point in early email, so I will not cover that ground again but will extend the obsession by addressing related points.

We all learned in law school (at least the older lawyers among us) that irrebuttable or conclusive presumptions of fact are suspect.  For example, if the element of the crime (or, in a civil context, an element of the cause of action, requires that fact A exist, then can the statute -- key here, statute -- require that A be conclusively -- or irrebuttably -- presumed if Fact B exists?  At one time in our jurisprudence, that type of conclusive or irrebuttable presumption was deemed to be constitutionally suspect, even in civil contexts.  But, wait, the effect of such a statutorily compelled conclusive or irrebuttable presumption is that the crime (or civil action) exists, whether or not A exists (or at least in the absence of proof that A exists), so long as B exists.  In other words, the substantive elements of the crime (or cause of action) have changed.  And, certainly, so long as the Congress (or the relevant legislature) has legislated that change, there would seem to be no due process problem so long as there is some reasonable -- not perfect, but reasonable -- relationship between Fact A and Fact B.  But this assumes that Congress (or a relevant legislature) has statutorily legislated presumption.

The application of conscious avoidance in the federal criminal law, however, is not based on legislation.  Rather, it is based on judicial interpretation.  Therein lies the problem.  Certainly, in the context of tax crimes, Congress has not said that conscious avoidance is a substitute for specific intent to violate a known legal duty.  Only the courts, or at least some of them, have made that bold suggestion (and send defendants to jail based on the bold suggestion).

The conscious avoidance concept is that, depending upon how it is interpreted and applied, it either: (1) PERMITS an inference of Fact A (knowing conduct) from proof of Fact B (conscious avoidance of knowledge of Fact B) or (2) it COMPELS an inference of Fact A (knowing conduct) from proof Fact B (conscious avoidance of Fact B).  The second alternative is where the problem lies.  And, as applied to tax crimes, it is not simply knowledge of the fact that the law mandates to be a crime but knowledge of the law itself.  The conscious avoidance concept is not really designed to deal with that construct, unless knowledge of the law is a fact that can be plugged into these formulae.

Fifth Circuit Sustains Jury Verdict Despite Admittedly Erroneous Conscious Avoidance Instruction (1/23/12)

I write today again about conscious avoidance (which readers will recall goes by several names, such as willful ignorance, deliberate ignorance, etc.).  This blog entry is occasioned by United States v. Roussel, 705 F.3d 184 1385 (5th Cir. 2013), here.  The defendant was convicted of two wire fraud counts and conspiracy involving a scheme to defraud a New Orleans-based utilities provider.  The trial court gave the jury a conscious avoidance instructions, apparently based on the Fifth Circuit pattern jury instructions 1.37, quoted in the opinion as follows:

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Like other courts, the Fifth Circuit believes that the conscious avoidance instruction carries great risks to a fair trial.  Quoting an earlier precedent, the Court said:

We have often cautioned against the use of the deliberate ignorance instruction. Because the instruction permits a jury to convict a defendant without a finding that the defendant was actually aware of the existence of illegal conduct, the deliberate ignorance instruction poses the risk that a jury might convict the defendant on a lesser negligence standard—the defendant should have been aware of the illegal conduct.

Further, quoting a subsequent precedent, Court said:

Last year, we further elaborated that "[d]eliberate indifference instructions are inappropriate in the usual case, where the evidence presents a simple choice between a version of the facts in which the defendant had actual knowledge, and one in which the defendant was no more than negligent or stupid."

Steps in OVDI/P Processing and Opting Out

An anonymous commenter going under the name "Anonymous" posted the comment below.  It is a very good comment and solicits other comments, so I am posting it as a blog entry so that readers do not miss the excellent analysis and make comments as appropriate.

Anonymous 01/22/13 11:04 AM

I am listing below the steps leading to opting out of OVDI as I understand them from what I've read on this blog. I am not a professional, just a layman involved in OVDP. I am not sure everything is correct and would appreciate input. I've numbered the steps so intermediate steps can be added or the steps can be referred to by number.

1. Taxpayer decides to enter OVDP, possibly because of the risk of quiet disclosure or forward compliance.

2. Submit preclearance.

3. Submit intake letter.

4. Submit "package" of amended returns with payment of additional tax, 20% penalty on taxes, and interest on both, as well as penalty calculation worksheet.

4A. At this point, or once Federal returns are finalized, residents of many states will also need to file amended state income tax returns. The procedure, number of years, penalties, etc. vary by state and I'm just mentioning this so as not to leave it out.

5. After months, examiner assigned.

6. Examiner audit. Might be straighforward if returns prepared by professional.

More on Conscious Avoidance (1/21/13)

Caveat to readers -- the initial version of this blog cited the Ramsey case as a new opinion.  It was not a new opinion but from 1986.  I picked the case up from Judge Holmes decision in Fiore which I discussed in  Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13), here.  I was just moving too incautiously to pick up the case as an earlier decision rather than a recent one.  My apologies to readers; however, I have gone back through my discussion and I think the points remain good despite the age of the case. 

I return to the conscious avoidance issue today because of an exceptional opinion by Judge Easterbrook of the Seventh Circuit in a nontax case, United States v.Ramsey, 785 F.2d 184 (7th Cir. 1986), which Judge Holmes cited in his opinion in Fiore.  Conscious avoidance is also called willful blindness, willful ignorance, deliberate ignorance and various similar formulations.  I generally prefer conscious avoidance.  (For all blog entries on the subject, click  on the label "Conscious Avoidance" at the end of this blog.)  Before getting to Judge Easterbrook's opinion, however, I want to draw the parallel between conscious avoidance, at least as sometimes articulated, and the defraud conspiracy.

Readers will recall that, in an exceptional recent opinion, the Second Circuit questioned the validity of the expansive interpretation of the defraud conspiracy (in a tax iteration, referred to as a Klein conspiracy) to criminalize conduct that did not involve a defraud element as the word defraud has been traditionally applied and consistently applied in other criminal statutes.  In essence, the Court suggested that the expansion,  which was done solely by the judiciary -- and in particular, the Supreme Court -- and not  by Congress in the language it used might be an impermissible common law, nonstatutory crime through interpretation.  For my blogs on this, see Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12), here, and Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (12/18/12), here.

Focusing on the conscious avoidance issue in the context of federal tax crimes where the general mens rea requirement is willfulness -- a term that can have various meanings depending upon context but which in the tax crime area is interpreted to mean intentional violation of a known legal duty.  It is a specific intent crime.  Ignorance of the law is a defense.  Further, even if one knew the law, ignorance of the facts that would invoke the known legal consequences would not be willfulness as defined.  Here is a flavor for what the Supreme Court has said somewhat expansively (Bryan v. United States, 524 U.S. 184, 194 (1998))

In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating.  See, e.g., Cheek v. United States, 498 U.S. 192 (1991).

The Supreme Court just got carried away in Bryan in saying that willfulness in tax crimes required knowledge of the specific tax section violated.  E.g., United States v. Mousavi, 604 F.3d 1084, 1092 (9th Cir. 2010); United States v. Patridge, 507 F.3d 1092, 1094 (7th Cir. 2007), cert. den. 552 U.S. 1228 (2008) ("Knowledge of the law's demands does not depend on knowing the citation any more than ability to watch a program on TV depends on knowing the frequency on which the signal is broadcast.").  But the general concept that a tax crime requires knowledge of the law's command  and an intent to violate the known law is irrefutable and a bedrock of the criminal tax provisions.

Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13)

In Fiore v. Commissioner, T.C. Memo. 2013-21, here, the Tax Court (Judge Holmes) held the taxpayer liable for the civil fraud penalty.  Apparently critical to its holding was an application of the willful blindness concept that has rarely if ever been applied in a civil fraud context.  I have written often on willful blindness -- which goes by several different names, the one I usually use is conscious avoidance -- in a criminal context.  My blogs discussing the concept are here.  My criticism of the concept in a criminal context is that, when as in tax crimes the statute requires willfulness, which is definitively interpreted to mean intentional violation of known legal duty, ignorance is not intent to violate a known legal duty.  According to that intentional violation of a known legal duty interpretation (on its face), anything less than intentional conduct will not do.  And, in the context of tax crimes, it is intent to violate the tax law that is required.  Willful blindness or conscious avoidance or similar phrasings do not connote specific intent.

Now to the use of this concept in a civil context.  There are usually two consequence of "fraud" in a civil context -- (1) an unlimited statute of limitations under Section 6501(c)(1), here, and a civil fraud penalty under Section 6663, here.  Essentially, the type of conduct that invokes these consequences is the type that would be evasion in a criminal context under Section 7201, here.  The key differences relate to the nature of the proceeding.  In a criminal case, the Government must prove the elements -- including intentional violation of a known legal duty -- beyond a reasonable doubt.  In a civil cause, where fraud is at issue, the Government must prove the fraud by clear convincing evidence.

Some of the key facts are:

1.  The defendant was a tax lawyer.

2.  The defendant was indicted for four counts of tax evasion, Section 7201, for the years 1996 through 1999.  As is typical in such cases, the defendant pled to a single count of tax evasion for 1999.  However, he agreed that the tax losses for the other years were "relevant conduct," but agreed that the IRS could determine additional taxes for the year of conviction and the relevant conduct years.  He did attempt to mitigate the force of the relevant conduct agreement at the sentencing hearing where he claimed:  "I recognize that I brought this on myself relating to one year, 1999. I deny strongly as I can in this situation that the prior years, other than being relevant conduct for purposes of determining apparently the so-called tax loss, which I've fully paid, that the prior years have anything to do with or anywhere near the same conduct that I pled guilty to."  [There is a long discussion about this, but I don't develop it in this blog entry in order to focus on willful blindness.]

Is it Pled or Pleaded? (1/18/13)

I have not dealt previously with some of the finer points of the English language.  However, I do today after reading an ABA Journal Law News Now blog on the topic "Is it 'pleaded' or 'pled'?, here  (Actually, I am not sure that this is one of the finer points; notice also that I reversed the order in the topic of this blog, signaling my preferred usage.)  This brief ABA article links to a longer one at Daily Report:  John Chandler and Brian Boone, War of the Words: pleaded vs. pled (Daily Report 1/15/13), here.

Readers who are interested in the question have probably noticed that I usually use "pled" in this blog.  It sounds right to me.

The article by Messrs. Chandler and Boone is helpful:

Mr. Chandler's view (said to be minority) (footnotes omitted):

Use "pled." Boone needs to get out more—"pleaded" may seem fine on paper, but lawyers chuck the word when they head to court. A lawyer arguing a motion to dismiss doesn't say, "They haven't pleaded scienter." He says, "They haven't pled scienter." 

* * * * 

Twice, legal tabloid/blog Above the Law has asked its readers which they prefer—"pleaded" or "pled." Twice, strong majorities chose "pled." Check Westlaw or Lexis, and you'll find that judges use "pled" more often than "pleaded." 

* * * * 

Boone can wield a pen, but on this one, he's stuck in the past. Use "pled."

Mr. Boone's view (said to be majority)

Petition for Cert filed in FBAR Required Records Case (1/18/13)

As readers know, taxpayer have won some of the temporary battles in required records cases, but have always lost the war at the court of appeals level.  (For blogs on this subject, click on the label below.)

One of the losers in the court of appeals has now filed a petition for certiorari in the Supreme Court.  The petition is here.  The lead attorney for the petitioner is Paul D. Clement, a formidable Supreme Court advocate and former Solicitor General.  His bio is here and his Wikiepdia entry is here.  Mark Matthews, a prominent player in the offshore account area, is also on the brief.  Mark's bio is here.

Here is the introduction to the petition:

This case presents an exceptionally important question about the relationship between two aspects of this Court’s Fifth Amendment jurisprudence: the “act-of-production privilege” and the “required records doctrine.” The government served Petitioner with a subpoena demanding a record of any foreign banking interests he may have held during a specified period. The Bank Secrecy Act presumptively requires all taxpayers, on pain of criminal penalty, to create, retain, and file records of their foreign banking interests. Because Petitioner has not disclosed any such interests during the relevant period, the government concedes, as it must, that the act of producing the records it requests would incriminate Petitioner. For that reason, there is no dispute that Petitioner has asserted a valid Fifth Amendment privilege under the Court’s “act-of-production” cases, which hold that the compelled act of producing papers may be protected by the privilege, even if the contents of the papers are not, when the act of production itself could reveal incriminatory information. 

Nonetheless, the Court of Appeals accepted the government’s contention that the “required records doctrine,” a 65-year-old doctrine necessitated by a conception of the Fifth Amendment that the Court has long since abandoned, “overrides” otherwise valid invocations of the privilege against self-incrimination, under the fiction that an individual waives his constitutional privilege whenever he engages in any conduct for which records must be kept. That decision is part of a pattern of recent Court of Appeals decisions treating the judicially created and arguably  [*2]   obsolete required records doctrine as an “exception” to the Constitution’s Fifth Amendment privilege in materially analogous contexts.

Doing Your Time (1/17/12)

This TIGTA Report suggests that, if you are sentenced to prison,  perhaps there is still some opportunities for gainful employment.   TIGTA, Further Efforts Are Needed to Ensure the Internal Revenue Service Prisoner File Is Accurate and Complete (December 18, 2012 Ref#:  2013-40-011), here.

Report on Webinar on Opting Out and Litigating FBAR Penalties (1/17/13; with Caveat Update on 2/1/13)

Yesterday, I attended via computer the ABA Webinar titled Through the Looking Glass (Parts 1 and II) Opting Out of the OVDI Penalty Structure and Litigating FBAR Penalties (1/16/13).  The information about the meeting and  the participants is here.  The participants were:

Megan L. Brackney, Kostelanetz & Fink LLP, New York, NY
David A. Breen, Senior Counsel, Office of Chief Counsel, SB/SE, IRS, Philadelphia, PA
Caroline D. Ciraolo, Rosenberg Martin Greenberg LLP, Baltimore, MD
David H. Dickieson, Schertler & Onorato LLP, Washington, DC
Mark E. Matthews, Caplin & Drysdale Chartered, Washington, DC
John C. McDougal, Special Trial Attorney, Small Business/Self-Employed Division, Office of Chief Counsel, IRS, Washington, DC
Richard J. Sapinski, Sills Cummis & Gross PC, Newark, NJ
Thomas J. Sawyer, Senior Litigation Counsel, Counsel for International Tax Matters, Tax Division, Department of Justice, Washington, DC
Zhanna A. Ziering, Caplin & Drysdale Chartered, New York, NY

For those having access to TNT, a good summary is Jeremiah Coder, Taxpayers Face Hurdles and Risks When Opting Out of OVDP, 2013 TNT 12-4 (1/17/13).

The following is my summary (parallel to in many respects but not the same as Mr. Coder's):

1. Megan Brackney, a practitioner, opened with a summary of the Taxpayer Advocates recent report. I have previously reported on the report in a blog entitled TA Report Identifies IRS' OVDP / OVDI As Problem (1/9/13), here.   She presented the chart in the Report regarding processing times, opt  outs, etc.  She said that the low number of OVDI 2011 opt outs probably reflects the slow processing time to the point of opt out, with most cases not at that point yet.  She noted that the average FBAR penalty on opt out, about $15,000, was encouraging that the IRS was not being punitive on opt outs.

2. Mark Matthews, a practitioner, suggested that, for the more benign players (referred to on this blog as minnows), the threshold decision of whether to even join OVDI (currently 2012 OVDP) is important.  Certainly, for those joining with the expectation of opting out may have good alternatives to joining.  I think his comments were consistent with the point I have made several times -- that the profile of someone who would opt out (i.e., no risk of willfulness (or its income tax counterpart, civil fraud)) does not obtain the principal benefit of the program in the first place -- eliminating the criminal exposure -- and thus have only an audit risk if they don't join which is the risk -- indeed the certainty -- they have if they do join.

3. One of the alternatives to joining the program he discussed was filing perhaps 3 years of amended returns and some number of years of delinquent FBARs (I presume perhaps 4-6 years).  Mr. McDougal, an IRS lawyer heavily involved in the program and penalty assertion, countered with the oft-repeated claim that the IRS is screening amended returns reporting offshore account income (and presumably screening delinquent FBARs as well), but did acknowledge that it was a screening process and there is not 100% audit coverage.

4. Of course, historically, for taxpayers with criminal exposure, quiet disclosures by filing amended returns, was a practically effective -- if not guaranteed -- way to eliminate or mitigate the criminal exposure, but at the risk (but not often the actuality) of full bore civil fraud penalty exposure.

Defendant Screws Up His Acceptance of Responsibility (1/15/12)

In United States v. Bigica, 2013 U.S. Dist. LEXIS 3772 (D NJ 1/10/13), an unpublished decision, the Court denied the defendant, who had pled to a tax obstruction count and an elections count, the 3 level Sentencing Guidelines downward adjustment.  The reason:  Although the defendant claimed remorse, his actions after the time of the guilty plea continued the obstructive conduct.  Hence, this defendant got no benefit from pleading guilty, and saving the Government and the court the time and expense of trial.  Not only that, his obstructive conduct convinced the judge to sentence him at the top of the unreduced Guideline range.

The opinion is quite a read, but I can summarize it here as to the tax charge -- Section 7212(a), here, criminalizing corrupt attempts to interfere with the administration of the internal revenue laws.  The defendant, although making large income over many years, failed to file tax returns and, when the IRS started inquiring into his failure to file, took a series of steps to put his assets beyond the IRS's ability to collect what he knew would be a large tax liability, all the while living a lavish lifestyle.  The problem was that, even after the plea to one tax obstruction count and one election law count, he continued to live a lavish lifestyle, secreting money, not truthfully accounting for his assets, and failing to pay the IRS.

The court first resolved a grouping issue against the defendant, requiring a 2 level increase because, the court determined, the two counts of conviction did not arise from the same harm.

The Court then turned to acceptance of responsibility which the defendant hoped to achieve by virtue of his guilty plea.  The probation officer gave a marginal recommendation for the 3-level downward adjustment.  But, the Court rejected the adjustment because the defendant had continued his obstructive conduct even after the plea and while dealing with the Probation Office.  The Court details the defendants obstructive behavior.  Key quotes (one footnote omitted):

This Court has not had another defendant in over a dozen years on the bench who has shown this level of continued financial evasion in his representations to the United States Probation Department. Defendant was untruthful, cavalier and evasive to the United States Probation Office regarding his financial status and his ability to pay restitution. In addition, while Defendant stated in his plea agreement his intention to make "full restitution," he failed to pay anything toward restitution during the long interval between the plea and sentencing, despite earning nearly $1,000,000.00 in 2011 and more than $40,000.00 per month for each of the first six months of 2012. And, while earning such huge sums, Defendant continued to pay for lavish luxury expenses of others, including, but not limited to, a monthly mortgage payment of $19,563.00 ($234,756.00 annually) for a mortgage on a home he insists is not his own asset.  * * * *

The Big Boys Get Better Treatment in Our Tax System Than Do Minnows (1/12/13)

I speak again on the basic relative unfairness of the treatment of many, if not most, in the IRS's offshore voluntary disclosure initiatives.  The title to this blog entry is that Big Boys get better treatment than do Minnows.  That has always been the case.  So why is it noteworthy here?  Maybe its not, and those readers who think that is acceptable and fair in our country may not be interested in this blog entry.

I refer readers to Carl Levin's October 5, 2012 letter to the leaders of the tax writing committees, here. Senator Levin provides a list of what he calls "loopholes" related to U.S. offshore taxation that should be closed.  Most of these loopholes he identifies are exploited by powerful U.S. corporations who have a major interest -- translated into major lobbying -- in keeping the loopholes as they are -- exploitable and very lucrative in a zero-sum game with the U.S. fisc and U.S. taxpayers.  The term loophole, in a broader sense, can refer to (i) provisions of law helping certain narrow interests, sometimes unintentionally or unknown to most legislators enacting them, or having real or perceived ambiguities which can be exploited by powerful interests, or (ii) to deficiencies in enforcement of the legislative scheme where little or no ambiguity exists.  In the latter sense, until recently, offshore accounts used for tax evasion might be considered loopholes -- not legal ones, but practical ones because of enforcement deficiencies.  For more on the concept of loopholes, see Wikipedia entry, here.  So too, Son-of-Boss and other abusive tax shelters might have been considered loopholes until the IRS discovered their mass marketing and took steps to close down most of them, with collection of tax penalties and interest.  The line between what is a loophole in the law and enforcement loopholes may sometimes be difficult to draw.  This difficulty is what taxpayers and tax professionals such as those implementing the corporate bullshit shelters I have discussed here, attempt to exploit by imagining different locations for the line than any rational person would believe it to be and hoping that the IRS's enforcement deficiencies will give them a win in audit lottery or, if caught, will reward their imaginations will little or no penalties.

Senator Levin provides a list of loopholes that are variations of both varieties.  Here is Senator Levin's list of loopholes that:

(1) allow U.S. multinational corporations to shift profits offshore through abusive transfer pricing arrangements;
(2) allow U.S. multinationals to pretend to keep profits offshore, while actually returning offshore cash tax-free to the United States through serial loans;
(3) allow U.S. multinationals to pretend to keep profits offshore while using offshore subsidiaries to place the offshore cash in U.S. banks and investments;
(4) allow U.S. entities operated and managed out of the United States to incorporate offshore, claim foreign status, and dodge substantial U.S. taxes;
(5) allow U.S. financial firms to treat swap payments received from the United States as nontaxable foreign source income;
(6) allow U.S. multinationals to make an offshore subsidiary invisible for tax purposes and avoid taxation of passive offshore income under the so-called "check-the-box" and "CFC look-through" rules;
(7) allow U.S. multinationals to deduct the costs of moving jobs and operations offshore;
(8) allow mutual funds to dodge limits and taxes on commodity speculation by routing their commodity activities through offshore shell corporations;
(9) hamstring U.S. tax enforcement with inadequate tools to combat taxpayers hiding assets in secret tax haven bank accounts; and
(10) allow U.S. taxpayers to hide assets in U.S. bank accounts opened in the name of offshore entities.

DOJ Tax CES Attorney Comments on Offshore Criminal Enforcement Initiatives (1/12/13)

In a new article in Tax Notes, Lee Sheppard reports on comments of participants on a panel at the Florida Bar Annual International Tax Conference in Miami Lee A. Sheppard, IRS Officials Discuss Streamlined Voluntary Compliance, 2013 TNT 9-6 (1/14/13).  I am not much interested in the Streamlined Program because if its limited benefit, but here are some snippets on broader issues attributed to Mark Daly, a DOJ Tax CES attorney who is a major participant in the criminal enforcement efforst related to offshore accounts:

Mark Daly of the Justice Department Tax Division Criminal Enforcement Section talked about DOJ's approach to using data so gathered. DOJ is especially interested in bankers who helped fleeing UBS customers move to other banks. "They're the most culpable," Daly said. 

Swiss bankers are so nervous and so inconvenienced by their inability to travel that they have been offering bank account information to DOJ in an effort to obtain immunity. And there are a lot of CDs floating around Europe. 

"We're finding a lot more people knocking at our door," said Daly. "Your banker knows who you are." Moreover, DOJ can reconstruct bank account data to find transactions like monthly wires structured to evade suspicious transaction reports. 

But DOJ does not interpret the money laundering (18 U.S.C. section 1956) rules to grab income tax violations. According to the U.S. Attorneys' Manual, mailing a false tax return is not considered mail fraud, a predicate offense to money laundering. There has been no change in policy, according to Daly.

Daugerdas Defendant Loses Ineffective Counsel Claim (1/11/13)

In United States v. Daugerdas, 2013 U.S. Dist. LEXIS 2516 (SD NY 1/3/13), David Parse, the "Daugerdas" defendant, who did not get a new trial for juror misconduct, was denied his last-ditch bid to obtain a new trial for ineffective assistance of counsel.  Ineffective assistance of counsel is tested under Strickland v. Washington, 466 U.S. 668, 685 (1984) and is very difficult to establish.  See my prior blogs:  Daugerdas Defendant Whose Conviction Was Not Dismissed Claims Ineffective Assistance of Counsel (Federal Tax Crimes Blog 8/7/12), here; Daugerdas and Others, But Not All, Get New Trial (Federal Tax Crimes Blog 6/4/12; revised 6/22/12), here.

Defense counsel make many strategic calls, both inside and outside the courtroom, many of which are not pre-cleared with a fully informed client.  Those strategic calls are not always right -- from the benefit of hindsight -- but they are made by effective counsel in the course of even simple trials.  Parse was involved in complex tax shelter criminal litigation.  Perfect calls cannot be expected. But calls by effective counsel can be expected and rarely fall short of the standard of ineffective assistance counsel.

The Court's opinion is short, so I quote it substantially (parallel citations omitted):

DISCUSSION 

"[The assistance of counsel] is one of the safeguards of the Sixth Amendment deemed necessary to insure fundamental human rights of life and liberty..... The Sixth Amendment stands  as a constant admonition that if the constitutional safeguards it provides be lost, justice will not still be done." Johnson v. Zerbst, 304 U.S. 458, 462 (1938) (internal quotation omitted). Access to counsel's skill and knowledge is necessary to afford defendants "ample opportunity" to meet the prosecution's case. Adams v. United States ex rel. McCann, 317 U.S. 269, 275  (1942). But mere access to an attorney is not sufficient. "An accused is entitled to be assisted by an attorney ... who plays the role necessary to ensure that the trial is fair." Strickland v. Washington, 466 U.S. 668, 685 (1984). Thus, the Sixth Amendment right to counsel is "the right to the effective assistance of counsel." McMann v. Richardson, 397 U.S. 759, 771 n.14 (1970). 

The Due Process Clause guarantees a fair trial and "[t]he benchmark for judging any claim of ineffectiveness must be whether counsel's conduct so undermined the proper functioning of the adversarial process that the trial cannot be relied on as having produced a just result." Strickland, 466 U.S. at 686. To prevail on an ineffective assistance claim, a defendant must show that his counsel's performance fell below an objective standard of reasonableness and that, but for the deficiency, the outcome would have likely been different. See Strickland, 466 U.S. at 688, 694.