Altria # 4 - Second Circuit Declines Altria's Invitiation to Sustain a BS Tax Shelter (9/30/11)

The Second Circuit recently rejected another hokey tax shelter in Altria Group, Incorporated v. United States, 658 F.3d 276 (2d Cir. 2011), here. I have previously blogged on the trial level results in the following blogs: (i) Altria # 1 - Frank Lyon and tax shelters (3/20/10), here, (2) Altria #2 - Economic Substance and Juries (3/22/10), here, and (iii) Altria #3 - What Were Those Guys Smoking? (3/23/10), here.

The only question I have about the appeal is whether Altria really harbored the fantasy that, having failed to smoke these these shelters past the jury and then the district judge, the Second Circuit just would not be paying attention? Altria's goofy adventures -- first in getting into these shelters and then thinking that it could con the jury and the judges -- should be the best refutation that if we just let business people be business people they will make good decisions.

Superseding Indictment for Dr. Ahuja Adding Conspiracy Count (9/28/11)

Jeff Neiman posted a blog this morning in the superseding indictment for Dr. Ahuja. See Jeff Neiman, Superseding Indictment: HSBC India Customer Charged (9/28/11), here. Jeff's Blog entry has a good discussion and link to the superseding indictment, so I recommend it and will not repeat it here, other than to note that the allegations which flesh out any conspiracy charge are quite interesting. I have previously blogged the original indictment which did not include the conspiracy charge, here.
I do note the nature of conspiracy charges in this context by this cut and paste from my book (footnotes omitted):

Not surprisingly, therefore, the Government trots out the conspiracy charge whenever it can imagine more than one bad guy behind the tree – it is so easy to do. The conspiracy count allegations are framed as a cascade of allegations telling a damning story (if true and, although literally true, not misleading), but sometimes producing more heat than light. This contrasts with counts for the tax offenses which are dry, sparse, boring, and usually not even flowered up for dramatic effect. The benefits for the Government are great, and the downsides are few; after all, the prosecutors’ life and liberty are not at stake. This means, of course, that the Government’s power to tack on conspiracy charges can be abused, particularly with a weapon as potent and elastic as conspiracy. The Supreme Court has noted that:

We agree that indictments under the broad language of the general conspiracy statute must be scrutinized carefully as to each of the charged defendants because of the possibility, inherent in a criminal conspiracy charge, that its wide net may ensnare the innocent as well as the culpable.

Addendum on 9/29/11:

Another UBS Client Pleads -- With the Baggage of Illegal Income (9/27/11)

Michael A. Hase, a former comptroller for the U.S. Agency for International Development, has pled guilty to Theft of Government Property and Tax Perjury. The bullet points are below, but I caution the reader that this is an illegal source income case where the Government's main angst is about the conduct underlying the Theft Count. This limits the ability to make inferences to legal source income as is the bulk of the cases involving the current offshore financial account initiative. Notwithstanding that, since the tax Guidelines produced the highest offense level, the tax Guidelines governed with one level added for the theft crime. I link the Information here, the Plea Agreement here, the Statement of Facts here, and the USAO Press Release here.

Taxpayer: Michael A.Hase
Bank : UBS AG and its predecessor Swiss Bank Corporation Jersey Islands;
Entities: No
Guilt: By Plea Agreement - 2 counts - theft of government property 18 USC 641 (one count); tax perjury (Section 7206(1)) (1 count covering 10 years).
Maximum Incarceration Period: 13 years (10 years on theft count; 3 years on tax count)
Admits: Failure to File FBARs but not charged or pled
Unreported Income: $909,156.66
Tax Loss: $254,564.14
FBAR Penalty: $1.937,934.53 + (Based on 50% of the indicated highest balance of $3,875,934 in 2006).
Offense Level (Before AOR): 21 (20 for tax count plus 1 for multiple offense)
Offense Level After AOR: 18 (Criminal History I).
Guidelines Range: 27 - 33 months
Restitution: $36,325.52 (for theft count)
Court: D DC.
Judge: ?

The Willfulness Element of Tax Crimes (9/27/11)

A commenter to one of my other blog entries mentioned the excellent article in today's Wall Street Journal - Gary Fields and John R. Emshwiller, As Federal Crime List Grows, Threshold of Guilt Declines (WSJ 9/27/11), here. The article is a good introduction for afficioinados to the range of general criminal intent requirements:

For centuries, a bedrock principle of criminal law has held that people must know they are doing something wrong before they can be found guilty. The concept is known as mens rea, Latin for a "guilty mind."

This legal protection is now being eroded as the U.S. federal criminal code dramatically swells. In recent decades, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Today not only are there thousands more criminal laws than before, but it is easier to fall afoul of them.

As a result, what once might have been considered simply a mistake is now sometimes punishable by jail time.

* * * *

Over time, lawmakers have devised a sliding scale for different crimes. For instance, a "willful" violation is among the toughest to prove.

Requiring the government to prove a willful violation is "a big protection for all of us," says Andrew Weissmann, a New York attorney who for a time ran the Justice Department's criminal investigation of Enron Corp. Generally speaking in criminal law, he says, willful means "you have the specific intent to violate the law."

Update on RRSPs in OVDI (9/26/11)

This blog entry reviews a Tax Notes Today article -- Marie Sapirie, Clarification of Retirement Plans Need in OVDI, 2011 TNT 186-4 (9/26/11):

1. RRSPs are similar to U.S. IRAs permitting Canadian tax deductions and reporting of income upon subsequent withdrawal. For persons also subject to U.S. taxation, deferral requires the filing of a Form 8891, "U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."  U.S. persons residing in Canada were often unaware of the implications of the RRSP and thus did not file the Form 8891. Late filing of the Form 8891 requires filing a private letter ruling request for relief under under Reg. Section 301.9100-3.

2. The issues raised by RRSPs are (i) whether, absent the Form 8891, the RRSP will be included in the in lieu of penalty base in OVDI; (ii) whether the income earned inside the RRSP is subject to current U.S. taxation in the year earned or whether the taxpayer may get some retroactive Form 8891 relief; and (iii) whether the U.S. sourced income inside the RRSP will be considered in determining the $10,000 relief.

Sentencing - Plea Bargaining and the Right to Trial (9/25/11)

As tax crimes practitioners know, the vast majority of tax crimes indictments end in a plea agreement. This is true of federal crimes generally. The plea agreement the prosecutor offers usually materially raises the risks of going to trial as opposed copping a plea. We also know that the inducements can include the obvious -- acceptance of responsibility 2 or 3 level downward adjustment to the Guidelines offense level calculation and, where appropriate, a 5K1 departure for substantial cooperation. But the plea equation can also be manipulated in other ways probably not intended by the Guidelines. This means that the prosecutors can make the plea deal so sweet that, in many cases, a defendant cannot take the risks of exercising his or her Sixth Amendment right to go to trial.  At one level, that is the nature of the plea agreement; at another level, it can be corrosive to the system as we imagine it.

In a very thoughtful opinion in United States v. Ring, ___ S. Supp. 2d ___, 2011 U.S. Dist. LEXIS 106217 (D DC 2011), here (and with appendix here), Judge Segal Huvelle of the DC District Court addresses these manipulations of the Guidelines sentences to discourage the exercise of the Sixth Amendment right to trial. Ring was one of the lobbyists caught up in the Abramoff affair. Several, including Ring, were affiliated with the Greenberg Traurig law firm. There were others, including a congressman.  Ring was the only one of the targets to go to trial -- the others found the plea deal the prosecutors offered to be just to good to go to trial. As a result of going to trial (and perhaps in some form of perverse punishment for going to trial), the prosecutors sought to managing the sentencing to make the punishment harsh indeed compared to those who pled. I won't go into all the detail of how the prosecutors sought to mete out extra punishment through the Guidelines calculations for Ring. I cite below several articles that flesh this out. Suffice it to say, Judge Huvelle navigated the Guidelines to take away the sting the prosecutors sought to impose.  As a predicate to doing so, Judge Huvelle has a very thoughtful discussion of just how corrosive the process can be.  For that reason, I strongly recommend that the reader interested in this subject, read the opinion.

Tax Crimes and Money Laundering (Particularly Defense Attorney Fees) (9/24/11)

In United States v. Blair, 661 F.3d 755 (4th Cir. 2011), here, cert. denied 2012 U.S. LEXIS 4469 (U.S. 2012), the Fourth Circuit opens with a high level summary of the case:

Walter L. Blair, a Maryland attorney, concocted and executed a scheme to launder drug proceeds that he obtained from a client. Blair was tried and convicted on eight counts of concealment money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i); one count of laundering in violation of 18 U.S.C. § 1957(a); one count of tampering with a witness in violation of 18 U.S.C. § 1512; one count of obstructing justice in violation of 18 U.S.C. § 1503(a); one count of making a false statement in violation of 18 U.S.C. § 1001(a)(2); and two counts of failing to file an income tax return in violation of 26 U.S.C. § 7203.1 He received a 97-month sentence. Blair appeals several counts of conviction for money laundering as well as his obstruction of justice conviction. Blair also challenges the ruling of the district court denying his motion to sever the failure-to-file counts. We affirm the convictions for money laundering under §§ 1956 and 1957, and we affirm the district court's denial of Blair's motion to sever. We reverse, however, Blair's conviction on the obstruction-of-justice charge (Count 11 of the superseding indictment) for insufficient evidence. We remand for resentencing in light of this opinion.

The facts were, in their essence (at the expense of detail and nuance): (1) a drug dealer left the proceeds of the drug dealing with a third party otherwise uninvolved in the drug dealing; (2) after much violence related to the drug dealer's associates and the drug dealer's disappearance, the third party contacted Blair, a lawyer and, at his request, delivered the proceeds to his office; (3) Blair then orchestrated the deployment of the proceeds, in part in ways to (a) launder a portion of the proceeds and in part to pay for the legal representation of two of the drug dealer's associates. Blair was charged with a panoply of money launder, tax and obstruction offenses. Blair was convicted on these charges and appealed.

Voluntary Disclosures of Foreign Financial Account and Related Matters After OVDI 2011 (9/20/11)

The IRS has posted contact information for persons desiring to make noisy voluntary disclosures. See Voluntary Disclosure Contacts in IRS Criminal Investigation, here. The notice states:

Tax professionals or individuals who want to make a voluntary disclosure not covered by the 2011 Offshore Voluntary Disclosure Initiative, may contact an IRS criminal investigator at the numbers below.

I speculate that

1. As in the two programs (OVDP 2009 and OVDI 2011) the IRS will discourage quiet disclosures of foreign financial institution accounts.  Will the IRS and DOJ Tax will pick off one or two or more where the quiet is not quite up to snuff and prosecute?  (I can't define the up to snuff standard; it is like pornography -- you will know it when you see it and good practitioners will prevent their clients from submitting not up to snuff quiet disclosures.)

DOJ Tax Web Site Touts DOJ Tax and IRS Juggernaut on Foreign Financial Accounts (9/20/11)

DOJ Tax has a new web page titled "Offshore Compliance Initiative," here.  The page touts DOJ Tax's efforts and the strategic timing of efforts with IRS's offshore compliance initiatives (OVDP 2009 and OVDI 2011).    However, the claim of the eclipse of the tax efficient secret Swiss bank account may be exaggerated.

DOJ Tax touts the statistics as follows:

The prosecution results so far have been encouraging: To date, approximately 150 grand jury investigations of offshore-banking clients have been initiated, of which 30 cases have been charged, with 24 guilty pleas having been entered, 2 convicted after trial, and 4 awaiting trial. A number of facilitators who helped clients hide assets offshore at UBS and other banks have been indicted, resulting in ten bankers and two attorneys being charged and awaiting trial, and one advisor being charged and convicted. In addition, grand jury investigations have been opened into eight additional offshore banks across the world.

Statistics are always dicey things. The 150 grand jury investigations is new public information, but it is unclear what exactly the number means. Does the 150 refer to the number of "targets" or to the number of investigations with some of them having more than one target? And, the statistics I show for the prosecutions (see my spreadsheet available from the page in the right column) do not match DOJ Tax's number of prosecutions (30 cases, but that may be because a case can have more than one defendant and some involving offshore account and/or FBAR prosecutions that I count may did not arise out of the initiative). In any event, the numbers are impressive.

Diverting Corporate Earnings - Constructive Dividends or Wages / Salary (9/17/11)

One of the common ways of cheating on taxes is to divert corporate earnings from a C corporation to an entity that is off the IRS's radar screen. The diversions may be of the income which never hits the corporation's books and thus is not reported as income on its tax returns; they may also occur after the income is recorded with the diversion achieved by making payments from the corporation for goods or services which are deducted.  When the transactions thereafter get on the IRS's radar screen, the issue is whether the diversion was an underpayment of tax at the corporate level. 

In a wholly owned corporation, particularly a personal service corporation providing professional services, the corporate income arises from the personal services of the sole shareholder. In such a case, the corporation could easily pay the shareholder wages or salary of the entire net income before payment of compensation. (I refer to this as wages, as did the Court in the case I discuss below.) There would certainly be no unreasonable compensation issue. But, by paying the amount as wages, although fixing the tax issue at the corporate level, the income still is taxed at the shareholder level and the corporation has to withhold, payover and provide a W-2 for an easy IRS match at the shareholder level. By diverting that amount via  either diverting the income or through falsely deductible payments to a shareholder designated entity which does not pay tax, the tax cost at both the corporate and the shareholder levels are avoided (at least until caught). When caught, of course, in order to minimum the tax avoided, the corporation and the shareholder may try to claim that the diversion payments were really wages to the sole shareholder rather than dividends thereby eliminating the corporate level tax. Sometimes, when caught, the shareholder will cause the corporation to amend its returns making that claim.

The Object of a Klein Conspiracy and Specificity (9/17/11)

In United States v. Mubayyid, 658 F.3d 35 (1st Cir. 2011), here, the First Circuit addressed the issue of the nature of the Klein conspiracy when the object alleged indictment went beyond the usual general allegation of impairing and impeding the lawful functions by specifically alleged how the object was achieved.
The Court introduces the case as follows:

This complex appeal arises out of the joint criminal prosecution of Emadeddin Muntasser, Muhamed Mubayyid, and Samir Al-Monla for conspiring to defraud the United States by obstructing the functions of the Internal Revenue Service ("IRS"), for corruptly endeavoring to obstruct the due administration of the Internal Revenue laws,  for filing false tax returns, for making false statements to agents of the Federal Bureau of Investigation ("FBI"), and for scheming to conceal material facts from a federal agency. The charges stem from each defendant's involvement with Care International, Inc. ("Care"), a charitable organization incorporated by Muntasser in 1993 with a stated purpose of providing worldwide humanitarian aid.

The defendants' twenty-four day jury trial focused on the circumstances motivating Muntasser's formation of Care in 1993; the defendants' failure to disclose some of Care's activities, such as the publication of certain newsletters from 1993 to 1997; and Care's support for, and promotion of, Islamic jihad and fighters known as "mujahideen." n1 The government's central theory at trial was that Muntasser had established Care in order to fraudulently obtain a tax exemption, so that contributions being used to finance mujahideen overseas could be deducted from individual tax returns as charitable donations.
n1 At trial, witnesses for the government testified that "jihad" means "holy struggle," and specifically refers to the duty to fight against the enemies of Islam, while "mujahideen" refers to Islamic [*3] "holy warriors." In its own materials, Care defined "mujahideen" as "[t]hose who are going out for Jihad, fighting in the path of Allah."

IRS Promotes the Success of OVDI and Related Items (9/16/11)

As suspected, the IRS is promoting the success of the most recent offshore initiative -- OVDI 2011.  I will use this blog to post items in that general category, but encourage readers to post as comments any additional items -- pro and con -- that they think will be useful to readers.

The IRS promo piece is IRS Shows Continued Progress on International Tax Evasion, IR-2011-94 (9/15/11), here.  In the piece, the Commissioner claims major progress in global tax enforcement and getting back into the system.

My Editorial:  On the point of getting people back into the system, the truth is that the one size fits all approach kept many people out of the system and made many taxpayers cynical that good guys were being treated the same as bad guys.  Hopefully those taxpayers will get right in the system on a go-forward basis without serious repercussions from the past.  The truth is that most of those taxpayers who let by-gones be by-gones probably will never be bothered by the IRS and that could make those conscientious / fearful taxpayers who got into the program look and feel like dupes.  I think the system would have been better off with a more nuanced program.  A more nuanced program would have required more systemic resources but the additional cost would, I think, have been justified by treating bad actors worse than good actors.  (That's a relative scale, a continuum if you will, but I think the system would be better off with more nuance than the programs allowed.)  Just my thought, and really not trying to open up comments about the horrors of the system.  There are plenty of other posts where those comments are developed.

Experiences Inside OVDP / OVDI #1 (9/14/11)

This blog is created for users to share, by their comments, their experiences inside the OVDP / OVDI programs.  I know the IRS touts that there is little flexibility inside these iterations of the voluntary disclosure program, and that has concerned the practitioner and taxpayer communities.  However, I suspect that, in extreme cases, accommodations may be made inside the program without the necessity of opting out to obtain the just and fair result.

So, I encourage readers to post their experiences here to help persons in the program, particularly those who are not represented, to take affirmative steps, to avoid pitfalls or just to obtain some comfort from others' experiences.  Or even some amusing anecdotes "inside the program," if any, could be helpful.

Thanks,

Jack Townsend

Note to Readers:  Please post new comments to the #2 version of this blog, titled Experiences Inside OVDP / OVDI #2 (4/4/12), here.  For context, if you are referring to comments below (i.e., on the #1 version of the blog), please copy and paste the content you reference into the new comment on the #2 version so that readers will understand your comment.

The Noose Tightens: Swiss Banks Deliver Up Data (9/11/11)

Ten of the more significant Swiss bank players in assisting U.S. taxpayers hide their income from U.S. tax authorities have delivered statistical data to the U.S. The data is sufficiently broad that it does not identify individual taxpayers but almost certainly could give the U.S. ways to sharpen its focus on the information and documents that it might ultimately demand from the banks.

An article in Tax Notes (Randall Jackson, Swiss Banks Turn Over Statistical Data in Tax Evasion Investigation, 2011 TNT 177-3 (9/13/11)) reports:
The banks include the following:

HSBC
Wegelin
Julius Baer
Basler Kantonalbank
Zürcher Kantonalbank

Eveline Widmer-Schlumpf, chief of the Swiss Federal Department of Finance, on September 10 also stated that statistical data had been turned over to U.S. officials. However, she added that no personal data had been disclosed. "That would be a violation of banking secrecy," she said, as quoted in a September 11 Agence France-Presse report.
Widmer-Schlumpf stressed that reaching a mutually acceptable outcome between the United States and Switzerland over the latest tax argument is of vital importance, but that it would not require an emergency law or separate treaty.
"The fact is that we are working with a lot of commitment for a solution that Switzerland can deliver within the existing legal framework of administrative assistance in the case of tax fraud and tax evasion. This is happening in accordance with the government and in conjunction with the involved banks. There is no need for an emergency law or separate treaty," she said, as quoted in a September 11 interview with NZZ am Sonntag.

Katie Reid, U.S. Obtains Data From 10 Swiss Banks In Tax-Dodging Probe (Huffington Post/Reuters 9/10/11), here.

Breaking News 9/13/11:

As the commenter notes below, the reports are that the Swiss are caving for all banks by now allowing what I call John Doe Treaty requests as follows (US client data to be provided based on activity (swissinfo.ch), here):

In cases where US authorities are able to supply enough details to justify a suspicious pattern of behaviour, Swiss banks will hand over the names and account details of US clients suspected of tax fraud – which happened to 4,500 UBS clients in 2009.

Of course, the U.S. will only be able to supply very general characteristics, such as use of foreign entities between the swiss account and the U.S. taxpayer, failure to supply the required forms, perhaps some minimum dollar amount (say $50,000).  Many of the characteristics might be discernible from the aggregate data discussed above, and were a key component of the UBS requests.

I will post more on this as more details are known.

Materiality and Corruptly in Tax Obstruction under Section 7212(a) (9/10/11)

In United States v. Bonds, 2011 U.S. Dist. LEXIS 96051 (ND CA 2011), the jury had found Barry Bonds guilty of obstruction of justice in violation of the so-called Omnibus Clause of 18 U.S.C. section 1503. The court rejected Bonds' Rule 29 for acquittal and Rule 33 for new trial. The Court's discussion is interesting for tax crime afficionados because the tax obstruction statute, section 7212(a), has its roots in the general obstruction statutes in 18 U.S.C., including specifically section 1503(a)'s Omnibus Clause. 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.

The key elements of 1503's Omnibus Clause for present purposes are: (i) the defendant must endeavor (ii) corruptly to (iii) obstruct or impede the due administration of justice. The Court has the obligatory discussion of the leading case, United States v. Aguilar, 515 U.S. 593, 598 (1995), which is fascinating but need not detain us here.

Opting Out Considerations - A Jeff Neiman Guest Blog (9/10/11)

The OVDP and OVDI programs have come to an end and many taxpayers who participated in the programs are about to get their tax bill from Uncle Sam. In the programs, the formula to calculate tax and penalties was rigid and inflexible. The programs dictated that penalties are the same for the taxpayer who knew of his reporting obligations and the taxpayer who innocently was not in compliance. As I described in more detail in a Tax Notes opinion piece entitled, “Jeffrey A. Neiman, Opting Out: The Solution for The Non-Willful OVDI Taxpayer," Tax Notes 11135 (9/23/11), here, the failure to differentiate between the two distinct taxpayers has prevented thousands of taxpayers from coming forward as they view the programs as too expensive.

As we turn the corner, taxpayers who entered the program and who were not aware of their obligation to file an FBAR or to report their worldwide need to consider opting out of the voluntary disclosure program. Under the program, the IRS and DOJ assumed every taxpayer acted intentionally or willfully. However, in fact, I think in many cases, it will be very difficult for the government to prove that a taxpayer willfully violated the law.

Willfulness is defined as the intentional violation of a known legal duty. It is the cornerstone to any criminal prosecution, to the civil fraud penalty, and to the draconian 50% per year FBAR penalty. The government proves willfulness by looking at a taxpayers conduct. When I was a federal prosecutor, examples of conduct I looked to in order to infer willful behavior included using nominees, misleading the IRS, providing incomplete information to an accountant, dealing in cash, and maintaining a double set of books. Without some of these factors, it is very difficult to prove willfulness and without willfulness, there is no criminal case, no civil fraud penalty, and no 50% FBAR penalty.

Rumors of Additional Grand Jury Subpoenas and John Doe Summonses Against Foreign Banks (9/10/11)

Jeff Neiman has a new blog entry, Reuters: Enforcement Action Against Ten Swiss Banks in the Works (9/10/11), here, reporting on a Lynnley Browning Reuters report of subpoena / John Doe summons action that are being prepared to blast information out perhaps 10 foreign banks. (Ms. Browning's report is here; as I get additional links for information I deem useful on this subject, I will post them below.) The reported rumor is that the request will be for accounts of "as low as $50,000." Jeff's discussion is excellent, so I encourage readers to go to that discussion. My comments are:

1. While assisting clients having a significant, sometimes, large number of foreign financial accounts scattered in relatively low amounts among a number of foreign financial institutions, the sheer number of accounts created logistical difficulties in making a proper assessment of the risks of not getting into the voluntary disclosure programs and, if the client entered the programs, then the processing of the information and documents for the final package. But when that significant or large number of accounts involved relatively small amounts and relatively small aggregate amounts, even beyond the logistics issues, the upfront decision was tilted in favor of joining the programs and will affect the decision whether to opt out. Specifically, the nonwillful penalty (up to $10,000) is per account per year. For example, in the worst cases (the criminal cases to date), the Government has demanded only a single FBAR willful penalty of 50% of the highest amount in the foreign financial account(s) in the highest year(which does not include foreign assets, such as real estate). This 50% willful penalty asserted in the criminal cases could be significant, but still represents a Government decision not to press for larger penalties by including more years otherwise permitted by the FBAR statute. (There could be some constitutional issues of Excessive Fines and perhaps due process in asserting higher FBAR penalties; see the tag below.) But, with a large number of accounts, the IRS could go for the nonwillful penalty, designed to punish less culpability, and easily extract the same or a larger penalty than the willful penalty depending upon a combination of the aggregate numbers and the number of accounts. The problem with trying to assess what the risks are with respect to the nonwillful penalty (assuming that the lawyer and client properly reach a conclusion of unlikelihood of criminal risk, civil fraud risk, and willfulness risks, which are all variations of the same them) is that we don't have enough of a populated data base to anticipate what the IRS will do in nonwillful cases. The nonwillful penalties are up to $10,000 per account per year and the IRS agent has a lot of discretion, even in cases where there is no reasonable cause, as to what to do -- including merely issuing a slap on the hand letter saying, in effect, go forth and sin no more. We just don't know based on real information data points (including the discussion in the IRM), so many clients in this profile were not willing to take the risk of going forth and sinning no more, but taking the audit risk for past years. They were pushed into the program, thus capping the civil penalties with the notion of perhaps opting out for audit after better information is available as to what might happen on audit.

IRS Continues Mining the Gold from Voluntary Disclosures, and Picks Off a Liechtenstein Bank (9/10/11)

Lynnley Browning for Reuters reports today that USAO SDNY "are building a criminal-fraud case against Liechtenstein's oldest bank, Liechtensteinische Landesbank,"  Lynnley Browning, U.S. Probing Liechtenstein Bank Over Allegedly Helping Wealthy Tax Dodgers, (Huffington Post Reuters Report 9/9/11), here.

According to the article:

American officials learned of Liechtensteinische Landesbank's identity and alleged role through scores of voluntary disclosures made by `wealthy Americans in recent years to the U.S. Internal Revenue Service. The disclosures, which offer reduced fines and penalties in exchange for coming forward with secret offshore accounts, require U.S. taxpayers to provide detailed information about the network of banks, trusts, shell corporations and intermediaries they have used.

It has been clear for some time that the Government was picking up egregious enablers through the disclosures made in the special offshore voluntary disclosure programs.  The same database of information will produce the names and skullduggery of the egregrious financial institutions in this game as well.

In a similar vein, the Wall Street Journal reports today the the "golden age of offshore tax havens may be fading out." Robert Frank, 'Gold Mine' of Data Helps Officials Clamp Down on Offshore Tax Havens (WSJ 9/10/11), here. The Gold Mine is, of course, the data mentioned in the Browning article. Here are some excerpts:

The Swiss Hogs Get Slaughtered, Perhaps (9/6/11)

The Swiss defense now is to have the pot (the Swiss) call the kettle black (more on the metaphor, here). The Swiss Bankers Association "chairman, Patrick Odier, urged the Swiss people and the government to 'put up a united front' and work out a solution that applies to all countries." See Swiss Banks Urge ‘United Front’ Against U.S. Pressure on Tax Evasion (NYT via AP 9/5/11), here.  The problem, of course, is that no other country is like Switzerland. In the past, Switzerland distinguished itself by out-cheating all other countries.  If there is any truth, in the adage that "Pigs Get Fat. Hogs get Slaughtered," the Swiss should just suck up and take their medicine.

Burden of Proof for Willfulness in FBAR Violations (9/6/11)

A key issue in considering the FBAR willfulness penalty is the standard standard of proof if the Government pursues the FBAR penalty. The Government is required to pursue the FBAR penalty by filing a suit and, if successful, obtaining judgment, rather than through the panoply of collection devices for tax assessments.

In United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), previously discussed here, the court said that it was applying a preponderance of the evidence standard but it is clear that it held the Government to a fairly strict standard of proof. For burden of proof afficionados, I should state that historically in Anglo-American jurisprudence, a party alleging fraud must prove the fraud at a higher level than preponderance of the evidence. See generally Grogan v. Garner, 498 U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy discharge because of the nature and context of that exception). For example, if the IRS asserts the civil fraud penalty under § 6663, the Code only says that the burden of proof is on the IRS (§ 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or clear and convincing. But the law is clear that the IRS must prove fraud by clear and convincing evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (“Tax Court Rule 142(b) echoes the statutory language but specifies the clear and convincing standard by which the government must carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of the broadly prevailing rule.”). The clear and convincing burden is conceptualized as heavier than preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal burden).

Defense Witness Immunity: Prosecutor Discretion and Compelling Testimony of a Reluctant Witness in Criminal Cases (9/6/11)

In criminal cases, the prosecutors often bring charges where third party witnesses could give testimony that might be crucial to the prosecution or the defense. For example, the prosecutors' imagination for the ubiquitous conspiracy charge will often include unindicted co-conspirators, named in the indictment or not. It is not uncommon for those witnesses to be reluctant for a number of reasons, including fear of prosecution if they were to testify or fear of some other type of retribution if they testified. The former, of course, has constitutional dimensions.

At least in the example of unindicted co-conspirators, the prosecutors may be able to use and abuse hearsay statements under FRE 801(d)(2)(E). But, prosecutors may want actually live testimony of the unindicted co-conspirator(s). The prosecutors have a powerful tool to force such testimony by conferring statutory immunity. 18 USC Section 6003 (court "shall" issue the order of statutory immunity upon request of prosecutors). If the witness is important to the prosecutors' case against the named defendants, the prosecution will have the incentive to force the witness to testify upon penalty of contempt and incarceration if he or she does not testify. The prosecutors will often not want to confer immunity if the testimony is less important to the prosecution and the prosecutors want to hold open the possibility of prosecuting the witness in the future. (Technically, the grant of statutory immunity grants only derivative use immunity, but the difficulties of the Kastigar hearing may make prosecution unlikely after the witness testifies under compulsion of statutory immunity (use and derivative use immunity). )

U.S. Ups the Pressure on the Swiss to Rat Out Their U.S. Clients (9/4/11)

In the continuing game of chicken between the Swiss government (perhaps better described for this purpose as the Swiss financial system) and the rest of the civilized world (at least the part that is serious about their income tax systems), the U.S. appears to ratcheting up the ante. As reported in the press (I give a Reuter's link below, but there are a number of other reports with similar hard facts (few) and speculations (many)).

The hard key fact is that U.S. Deputy Attorney General James Cole wrote a letter in which he demands that the Swiss turn over a lot of information related to U.S account owners.  The precise details of the letter are unclear, but there are speculations.  For a sample of the combination of facts and speculations, here is a sample the Reuters' article linked below:

The SonntagsZeitung quoted Swiss sources close to the talks as saying Washington is seeking details of all U.S. clients with accounts worth at least $50,000 between 2002 and 2010 at banks including Credit Suisse, private banks Julius Baer and Wegelin as well as the Zurich and Basel cantonal banks.

What is the Amount for the 50% FBAR Penalty, What is the Violation and When Does it Occur (9/1/11)

The FBAR penalty, in part relevant to most individuals, imposes two penalty regimes - one for the willful actor and the other for the non-willful actor. Only the willful actor penalty is alternatively based upon an "amount" -- i.e., the greater of $100,000 (a set amount) or "50 percent of the amount determined under subparagraph (D)." 31 USC 5321(a)(5)(C). The referenced subparagraph (D) provides in relevant part:

(D) Amount.— The amount determined under this subparagraph is—

* * * *

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

The FBAR violation is the failure to file the report or the filing of a false report. The time of the violation thus would be July 1 ((The metaphysical moment in time when 6/30 ends and 7/1 begins is the time that the violation occurs.)) or, in the case of a false FBAR, on the date of filing the FBAR. See e.g., Exhibit 4.26.16-3 (07-01-2008) , in the LCCI initiative, stating: "the balance in the account at the time of the violation (the opening balance of the account on 7/1 of the subsequent year)."  The amount penalized under the 50% willful penalty thus is not the highest amount in the account during the year. This obviously can cut both ways.