TIGTA Report on IRS Offshore Accounts Initiative Administration (10/27/11)

TIGTA has a new report on the IRS's administration of the offshore account initiatives.  The full report, titled The 2009 Offshore Voluntary Disclosure Initiative Increased Taxpayer Compliance, But Some Improvements are Needed (TIGTA Report 2011-30-118  9/21/11), is here.  Here are  the "Highlights:"

HIGHLIGHTS
THE 2009 OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE INCREASED TAXPAYER COMPLIANCE, BUT SOME IMPROVEMENTS ARE NEEDED
Highlights
Final Report issued on September 21, 2011
Highlights of Reference Number: 2011-30-118 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.
IMPACT ON TAXPAYERS
Taxpayers with undisclosed foreign accounts or assets who do not submit a voluntary disclosure run the risk of detection by the Internal Revenue Service (IRS). If caught, these taxpayers face the imposition of substantial penalties, including the fraud and foreign information return penalties, as well as an increased risk of criminal prosecution. By making an offshore voluntary disclosure, taxpayers can become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution.
WHY TIGTA DID THE AUDIT
This audit was initiated to determine whether the IRS’s voluntary disclosure practices were effective, especially with the high volume of cases received, and to determine whether all cases have been appropriately assigned and worked. The audit is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Globalization.
WHAT TIGTA FOUND
The IRS’s voluntary disclosure practices were effective, and cases were being appropriately assigned and verified even with the unusually high volume of disclosure requests received and accepted. However, some improvements are needed.
Our review of 60 closed voluntary disclosure cases showed that 18 cases had no evidence of the taxpayers reconciling the unreported income in their offshore accounts to their amended or newly filed delinquent tax returns. In 28 cases, information from the taxpayers’ financial accounts and promoters either was not captured or was incorrectly transcribed on the data collection system used for current and subsequent data mining efforts. In 31 cases, voluntary disclosure agreements were not printed on IRS watermarked paper or initialed by revenue agents on each page to ensure no alterations to the original document were made by taxpayers.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Commissioner, Large Business and International Division, implement a requirement for taxpayers to provide a detailed reconciliation of unreported income. The Commissioner, Large Business and International Division, and the Commissioner, Small Business/Self-Employed Division, should develop a quality review process to ensure all data relating to voluntary disclosures are properly transcribed for future data mining and require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature.
In their response to the report, IRS management agreed with two of the three recommendations. Management stated that a reconciliation of all unreported taxpayer income from offshore accounts is already a requirement of the 2011 Offshore Voluntary Disclosure Initiative. In addition, management plans to implement procedures to conduct a 100 percent review of inputs to the E-Trak Offshore Voluntary Disclosure Program system. However, management disagreed with our recommendation to require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature.

Article on OVDI and Beyond - Highly Recommended (10/24/11)

Scott Michel and Mark Matthews have written a thought-provoking article on the status of the IRS offshore financial account.  See Scott D. Michel and Mark Matthews, OVDI is Over -- What's Next for Voluntary Disclosures?, 133 Tax Notes 369 (Oct. 17, 2011), here.  (The article is offered here with the permission of Tax Analysts, the publisher of Tax Notes.)  Scott and Mark are seasoned practitioners who are major players in this niche area.  The article is excellent and should be read by those interested in this area.  Each reader will take away his own key points from the article, but here are mine:

1. Voluntary disclosure for offshore accounts is still alive and well even after the close of OVDI 2011.  In theory, the voluntary disclosure will be under the noisy disclosure procedures for general voluntary disclosure and there is uncertainty as to the amount of the "in lieu of" penalty. 

2. The authors state:

Admirably, CI used a pre-clearance process in the OVDI programs, and one would think that would remain available. Will "optional intake letters" continue to be required? And how does the process differ for non-foreign-account cases?

 JAT Comment:  I suspect that the IRS will use the administrative process it has refined (original letter by the preclearance letter, a submission like the offshore voluntary disclosure letter and a package like the one required in the program.  This will insure some level of uniformity and consistency for fair treatment relative to those who came forward to join the programs.

3. The authors state:

What civil penalties will be imposed? One would think that the IRS will seek to exact an amount somewhere north of 25 percent for offshore cases, and probably less than the 50 percent paid by most of those who pleaded guilty to criminal tax offenses.

Presumably, whatever that amount is it will function like the program "in lieu of" penalty to resolve the other penalties that could apply (5471, 3520, etc.).

The Final Nail for Ambassador Egan's Estate (10/22/11)

The First Circuit just put the finishing touch on the Richard Egan estate's hopes to mitigate the damage of Egan's folly in entering a BS tax shelter. Fidelity International Currency Advisor A Fund, LLC v. United States, 661 F.3d 667  (1st Cir. 2011), here. Actually, the district court below did a pretty good job quashing those hopes. I have previously blogged on the district court opinion (see listing of my blogs below).

So what was left for damage control?  Why the appeal? By appealing, the estate hoped to avoid the 40 percent penalty that applies to the portion of a tax underpayment that is "attributable to" a "gross valuation misstatement." § 6662(h). The fulcrum for many bull shit tax shelter transactions when the veneer is stripped away is a gross valuation misstatement.  Ambassador Egan's shelter was no exception. But, as is also often the case, there are other bases for denying the claimed tax shelter benefit besides the gross valuation overstatement.  Ambassador Egan's also was no exception.

This phenomenon of failing on grounds other than the gross valuation misstatement permitted Ambassador Egan's estate to argue that, well, since more than one ground for disallowance of the claimed tax shelter benefit applied, then it could not be said that the disallowance of the benefit was "attributable to" the "gross valuation misstatement." The circuit courts are split on that issue, although critical mass seems to be in favor of rejecting the argument. The cases are cited in the opinion. The First Circuit rejected the argument as well. [My prediction is that ultimately all courts will resolve to rejecting the argument as well, although it may take the Supreme Court to get there.] So much for the estate's hopes to mitigate the damage from Ambassador Egan's participation in this plainly BS shelter.

TIGTA Report on the State of IRS CI (10/17/11)

In August, TIGTA released its report titled Trends in Criminal Investigation’s Enforcement Activities Showed Improvements for Fiscal Year 2010, With Gains in Most Performance Indicators (Ref: 2011-30-068 7/25/11), here. I have finally found time to look at the report, which is an annual report on key areas of priority and statistics for IRS' Criminal Investigation ("CI"), the IRS division charged with investigating tax crimes. CI has other criminal investigation responsibilities, but after the Webster Report in the late 1990s, has been tasked with using more of its resources on criminal tax investigation and, within that category, legal source criminal tax investigations. The notion for focusing more on legal source criminal tax investigation is that that is where the IRS can get the most benefit from its limited resources in terms of supporting the overall tax system. Obtaining and publicizing legal source tax convictions will likely have much more ripple effect on compliance than with obtaining and publicizing illegal source tax convictions.

Most of the report is about statistics, usually presented in graph form (called figures). I caution readers to heed Benjamin Disreali's caution that: "There are three kinds of lies: lies, damned lies and statistics."

Reminder re Extended Filing Date for pre-2010 FBAR Signatory Powers (10/12/11)

This is a reminder to readers that November 1, 2011 is the deadline for persons whose relationship to foreign accounts is as signatory only (i.e., those persons who have no ownership or title interest in any foreign accounts but serve as signatory only) to file FBARs for pre-2010 years. See Notice 2011-54, 2011-29 IRB 53, here. Those who qualify for this extended deadline should act timely.

The problem for such signatories, of course, is that U.S. owners (title or beneficial) may have their own FBAR filing requirements and, unless the owners filed (or will file) pursuant to a voluntary disclosure (OVDI or regular (quiet or noisy)), the signatory FBARs will not match to owner FBARs.  For those U.S. taxpayer owners who decided to go forward without correcting the past, their signatories (usually family members or friends) are in a precarious position if they choose not to file the signatory FBARs within this extended deadline.  If they file, their FBARs could be the last link in the chain in identifying the U.S. taxpayer owners who have not gotten right with the IRS and, if they don't file, they are at risk of significant penalties themselves without any mitigation of the owners penalties.  This choice is not a good one for family or friends.  Owners of the accounts should consider now getting right with the IRS (however they do so, whether by guiet or noisy disclosure) so as to mitigate the damage that could be done to the signatories.

GAO Report On Exchange of Information Between U.S. and Its Treaty Partners (10/12/11)

GAO recently issued a report, titled IRS's Information Exchanges with Other Countries Could Be Improved through Better Performance Information (GAO-11-730 September 2011), here, describing the U.S. treaty system for sharing information between treaty partners (the treaties involved are bilateral negotiated treaties involving only two countries (or states in treaty speak). Readers of this blog will recall that, pursuant to pressure on UBS and indirectly the Swiss system of banking secrecy, the United States obtained information about UBS' U.S. clients by treaty request pursuant to the Exchange of Information provision in the U.S. / Swiss Double Tax Treaty.  I call the type of request where the name of the taxpayer is not known a John Doe Treaty Request. Readers will also remember that the U.S. continues to put pressure to obtain this type of information from other Swiss banks. Negotiations regarding that access are ongoing.

The GAO report is a worthwhile read for those interested in the use of treaties to obtain information regarding U.S. persons' offshore accounts. The report is broader than that, of course, but is useful for those interested in offshore accounts. I excerpt below some parts that I think are particularly useful for readers of this blog. I focus only on the concepts involved and not on the specific procedures and implementations (which are summarized in the Report). I also omit footnotes.

Swiss Bankers / Enablers Indictment; Reputedly Julius Baer Related (10/11/11)

Today brings another indictment of offshore bank enablers. The enablers are two Swiss bankers -- Daniela Casadei and Fabio Frazzetto -- reputedly associated with Julius Baer, a bank that by rumor has been on the DOJ's hit list for a while. The indictment is here. These indictments are standard fare now -- a conspiracy count with multiple allegations of skulduggery with multiple U.S. taxpayer clients, including accounts with secret codes -- sometimes called "fantasy" names -- and sham entities, all to ward off the evil spirit of the U.S. tax collector.

I presume that these defendants were targeted from the volume of information that the IRS is receiving incident to its special offshore voluntary disclosure programs. I am sure that there will be more to come.

Now, back to the allegations in the indictment, here are some of the fun - well, at least interesting to me -- allegations (Swiss Bank No. 1 being, reputedly, Julius Baer):

 6. From at least in or about the 1990s up through and including in or about 2010, more than 180 U.S. taxpayer-clients of Swiss Bank No. 1  conspired with, at various times, DANIELA CASADEI and FABIO FRAZZETTO, the defendants, and others known and unknown, including other client advisors at Swiss Bank No. 1, to defraud the United States, to conceal from the IRS on false tax returns and otherwise the existence of bank accounts maintained at Swiss Bank No. 1, and. the income earned in these accounts'  (hereafter "the undeclared accounts"), and to evade U.S. taxes on income generated in those accounts. CASADEI, FRAZZETTO and other client advisors at Swiss .Bank No. 1 conspired with U.S.  Taxpayer clients to hide at least $600,000,000 in assets from the IRS at Swiss Bank No. 1, and CASADEI and FRAZZETTO managed undeclared U.S. taxpayer assets worth at least $13,200,000 and $20,500,000 respectively. In furtherance of the conspiracy, CASADEI and FRAZZETTO, among other things, advised and helped U.S. taxpayer-clients open and maintain undeclared accounts in code names or in  [*4] the names of non-U.S. relatives or.sham corporate entities; ensured that mail relating to those accounts was not sent to U.S. taxpayer-clients in the United States; caused U.S. taxpayer-clients to travel to Switzerland to conduct business relating to the undeclared accounts; traveled to the United States to meet with U.S. taxpayers; and, in or about 2008 and 2009, assured U.S. taxpayer-clients not to worry about the undeclared accounts being discovered by the IRS or U.S. law enforcement authorities because, CASADEI and FRAZZETTO advised, unlike UBS AG - another Swiss bank that was being investigated by U.S. authorities for engaging in similar practices - Swiss Bank No. 1 did not have an office in the United States and the accounts would therefore remain secret.

 * * * *

Confusion in the Court of Appeals About the Indirect Method of Proof (10/10/11)

In both criminal and civil cases, the Government sometimes uses what is called an indirect method of proof to show that a taxpayer owes additional tax. A direct method, for example, uses the return as filed and proves omitted income or improperly claimed deductions or credits. The indirect methods essentially reconstruct the taxpayer's tax picture (income, deductions, credits, taxable income) without using the return as the starting point. I explain the general theory of the use of the method in my book as follows:

In many cases, the Government may not be able to assemble proof of a tax due and owing from direct methods of proof. In those cases, the Government has developed indirect methodologies that circumstantially prove tax due and owing. The key cases blessing these indirect methodologies have arisen in the guilt determination phase in tax evasion cases where tax due and owing is an element of the offense or in parallel civil cases. These methodologies are also used also in the sentencing phase, although I am aware of no important case opinions arising from sentencing phase determinations.

All indirect methodologies are based on logic – from the facts proven can the further inference be made that there is a tax due and owing. It is the force of that logic – and that force alone – that permits the use of these methods. And, for conviction, the force of the logic must persuade beyond a reasonable doubt.

For use of an indirect method, the Government should establish that a direct method is either not available or not reliable under the circumstances. For example, the Government should show why the taxpayer’s books and records are not available (taxpayer lost or destroyed them) or, if available, are not reliable (substantial provable irregularities). The indirect methodology itself may be sufficient to show that -- for example, large cash flows not reflected on the books and records establishes that they are unreliable. The Government must also establish either a “likely source” for the unreported income or that it has reasonably negated nontaxable sources of income.

Finally, I provide here only a summary of the principal indirect methods. These methods which are heavily fact dependent can be complex in their application. A good and substantially more detailed discussion of these indirect methods is contained in the CTM.

There are various ways in which the indirect methodologies attempt the reconstruction. The more commonly encountered indirect methodologies go by such labels as the "Net Worth Method" and the "Bank Deposits / Cash Expenditures Method"

In United States v. Khanu,  662 F.3d 1226 (D.C. Cir. 2011), here, the Government used an indirect methodology described as the "cash method of proof." A principal element of the proof as presented by the Government at trial was cash of $1.9 million the Government seized pursuant to executing a search warrant at Khanu's home. At trial, the Government identified another $300,000 which, if it were considered alone, would have still produced tax due and owing, a key element of the tax evasion crime with which Khanu was charged. But, the Government insisted at trial, over Khanu's objection, that the $1,9 million seized be included in computing the tax due and owing amount presented to the jury.

The Role of the Taxpayer's Independent Lawyer in Tax Shelter Promotions with Promoter Opinions (10/8/11)

In Candyce Martin 1999 Irrevocable Trust v. United States, 822 F. Supp. 2d 968 (ND CA 2011) ("Candyce Martin Trust"), opinion here, the Court trashed another Son-of-Boss tax shelter and imposed accuracy-related penalties upon the taxpayers for entering the transaction. In imposing the accuracy-related penalties, the Court noted inter alia that even if the taxpayers did not know the intricacies of the tax law, they were smart enough to know that the transaction was too good to be true. The Court said:

First, Mr. Folger and the Martin family should have known that the transaction resulting in a $315.7 million tax basis for a $0.9 million offsetting options transaction was "too good to be true." Stobie Creek, 608 F.3d at 1383. Furthermore, they knew that the purpose of the transaction was to boost the basis to generate a large capital loss to offset the capital gains from the CPC sale. Finally, they proceeded with the transaction even after the issuance of Notice 2000-44, entitled "Tax Avoidance Using Artificially High Basis," which alerted them that the basis created by the options transaction would likely be disallowed. Although they were advised by Mr. Sideman that the transaction had a legitimate business purpose, Mr. Folger and the Martin family entered into this transaction with the knowledge that it would generate an artificially high capital loss. Given the level of education and business experience shared by Mr. Folger and the Martin family, they should have known that the absence of a tax liability on a sizeable capital gain did not reflect the economic reality of the transaction. The underpayment of tax was not, therefore, the result of "an honest misunderstanding of fact or law." Treas. Reg. § 1.6664-4(b)(1). Because Mr. Folger, with the consent of the Martin family, did not act in good faith, the court finds that the accuracy-related penalty was appropriately applied here.

This is standard fare now. I write to develop a different angle that is demonstrated in this case -- the role of the taxpayer's own independent tax lawyer.

Another UBS Client Sentenced (10/6/11)

Another UBS client, Peter A. Schober, was sentenced on 10/5/11.  I blogged the original charges, Other UBS Account Holders are Charged (10/28/10), here.  The following are the key bullet points as of now:

Taxpayer: Peter A. Schober
Bank: UBS
Entity(ies): Yes (Small Guard Foundation)
Guilt: By Plea Agreement - 1 Count FBAR violation.
Sentence: 1 month incarceration; 2 months home; 6 months supervised release
Unreported Income: ?
Tax Loss: $77,870.67
FBAR Penalty: $773,652
Court: D MA
Judge: Nathaniel M. Gorton

I will supplement these bullet points when more information is available.  I will also update the spreadsheet at that time.

Lawyers and Obstruction: the Stevens Case (NonTax) Lessons for Tax Lawyers (9/5/11)

This is a guest blog by Scott Schumacher.  Scott is an Associate Professor of Law and Director of the Graduate Program in Taxation at the University of Washington School of Law in Seattle, Washington. Prior to entering academia, he was an attorney with the Department of Justice Tax Division and in private practice with the law firm of Chicoine & Hallett in Seattle. He writes frequently on criminal tax matters and is one of the authors, along with our blog host Jack Townsend, of the book Tax Crimes, here.

In May of this year, the U.S. District Court for the District of Maryland granted a motion for judgment of acquittal in the case of United States v. Stevens (No.: RWT 10 CR 0694 (D. Md. 2011), here. Lauren Stevens, former vice president and associate general counsel of pharmaceutical giant GlaxoSmithKline (GSK), had been charged with obstruction of justice and making false statements during a civil investigation by the FDA.

In a stinging rebuke of the government’s case, the court held that “only with a jaundiced eye and with an inference of guilt that's inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant, and that “it would be a miscarriage of justice to permit this case to go to the jury.” The court concluded that “the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

Even though the court acquitted Stevens, as I discuss in the Tax Notes article, “Stevens: Is Zealous Advocacy Obstruction of Justice?”, 132 Tax Notes 1169 (9/12/11) here, this prosecution has implications for any lawyer, including tax lawyers, who regularly deal with the government.

Courts Reject More BS Tax Shelters (10/5/11)

DOJ Tax is touting the stunning phenomenon of three major victories in BS tax shelters all in a single day. See Press Release, Justice Department Prevails in Three Tax Shelter Cases on Same Day (10/4/11), here (with links to the pdf files for the opinions). All of these cases were tried to judges in U.S. district courts. (Note the Altria case I discussed in the prior blogs here was tried to a jury with the same outcome.)

The common thread of these tax shelter is captured in Michael Graetz's famous characterization of a tax shelter as: "a deal done by very smart people that, absent tax considerations, would be very stupid." That is not a complete definition -- it is more like Potter Stewart's famous quotation (presented here in full):

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Well, these courts knew abusive tax shelters when they saw them, as did the jury and judges in Altria.