Friday, June 1, 2012

DOJ Tax Promo Piece to House Oversight Subcommittee (6/1/12)

Kathryn Keneally, the recently anointed AAG Tax, has promoted the Tax Division's efforts and accomplishments before a House subcommittee on oversight.  See Statement of Kathryn Keneally, Assistant Attorney General, Tax Division, before the Subcommittee on Courts, Commercial and administrative Law Committee on Judiciary, U.S. House of Representatives, Regarding Oversight of the Tax Division (May 31, 2012), here.

Here are excerpts related to criminal tax matters that are the focus of this blog:
Tax Division prosecutors authorize and prosecute cases after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged.  
 * * * * 
Criminal Investigation and Prosecution 
Criminal Trial In addition to our extensive civil practice, the Tax Division authorizes all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. In most cases, Division attorneys either conduct or supervise these prosecutions, often in partnership with prosecutors from the United States Attorneys' Offices. The Division's twin criminal goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Tax Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Tax Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Tax Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,800 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a United States Attorney's Office, by a Tax Division prosecutor, or by a team of prosecutors from both. Tax Division prosecutors also conduct training for IRS criminal investigators and Assistant United States Attorneys, and provide advice to other federal law enforcement personnel, such as the DEA and the FBI.
The crimes investigated and prosecuted by the Tax Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means -- as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other -- used for tax purposes -- showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.
Tax Division prosecutors also investigate and prosecute tax violations that have been committed along with other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. In addition, Tax Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. As tax crimes have become more complex and international in scope, so has the workload of Tax Division prosecutors. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net worth taxpayers and tax professionals who sell and implement dubious tax schemes. During FY 2011, Division prosecutors obtained indictments in 145 cases and convictions in 137 cases. The conviction rate for cases brought by Tax Division prosecutors usually exceeds 95%. 
Criminal Appeals The Tax Division Criminal Appeals and Tax Enforcement Policy Section (CATEPS), handles appeals in criminal tax cases prosecuted by Tax Division prosecutors, as well as some appeals from trials handled by United States Attorneys' Offices. The Division also supervises appeals in matters prosecuted by the United States Attorneys' Offices. The appellate-level review provided by CATEPS attorneys plays a vital role in promoting the fair, correct, and uniform enforcement of federal tax law. CATEPS is also charged with developing criminal tax enforcement policy, and the section provides technical guidance on issues including the sentencing guidelines and restitution in tax cases. The section's international team serves as a resource to Division attorneys and IRS agents on international discovery matters arising in civil and criminal cases. CATEPS also plays a role in providing information and technical expertise on matters involving international tax information agreements and treaties. 
It is apparent from this brief overview that Tax Division attorneys and prosecutors are involved in every facet of federal tax enforcement. While we continue to maintain a sizeable caseload of what may be considered "traditional" tax enforcement matters, we are also mindful of the need to identify and respond to ongoing, growing, and new trends in civil and criminal noncompliance. I would like to take a moment to highlight four areas of noncompliance that are among our highest enforcement priorities -- stolen identity refund fraud, abusive tax shelters, offshore tax schemes, and tax defiers. 
Stolen Identity Refund Fraud  
[Omitted, even though it relates to criminal enforcement; it is not a  primary focus of this blog although it is a hot topic now]
Abusive Tax Shelters 
[Omitted because it is primarily a civil initiative now; although some outlier shelters are prosecuted, gone are the juicy criminal initiatives against the major accounting firms] 
Offshore Tax Schemes 
The Tax Division plays a lead role in investigating and prosecuting those who use foreign tax havens to evade taxes and reporting requirements. The increased technical sophistication of financial instruments and the use of the internet have made it all too easy to move money around the world instantly, without regard to national borders. According to a 2008 report issued by the Permanent Subcommittee on Investigations, Committee on Homeland Security and Government Affairs, United States Senate, the use of undeclared offshore accounts to evade U.S. taxes costs the Treasury at least $100 billion annually. Using tax havens facilitates evasion of U.S. taxes and related financial crimes, and fosters the perception that if people have enough money and access to unscrupulous professionals, they can get away with hiding money offshore. Thanks to the considerable and highly publicized efforts of the Tax Division and the IRS, reality has caught up with those who chose to engage in this illegal behavior. 
Offshore tax schemes re often difficult to detect and prosecute. Over the last several years, the Tax Division and the IRS have worked closely and devoted considerable civil and criminal resources to target taxpayers and professionals who engage in and facilitate offshore tax evasion. The Division's initial efforts focused on UBS AG, the biggest bank in Switzerland and the seventh largest in the world. In 2009, UBS entered into a deferred prosecution agreement, paid $780 million in disgorged profits, taxes and penalties, exited the cross-border business and provided account information for a large number of U.S. taxpayers. Separately, UBS agreed to provide the IRS information on thousands more U.S. taxpayer accounts. The Tax Division and the IRS engaged in extended negotiations with the Swiss government to obtain the necessary records under Swiss bank secrecy laws. Both the Department and the IRS continue to investigate offshore tax schemes worldwide. Charges have already been brought against a bank and numerous bankers, independent financial advisers and attorneys. The deterrent effect of these efforts has been substantial. Since 2009, nearly 30,000 taxpayers have voluntarily disclosed their hidden foreign accounts, compared to fewer than 100 voluntary disclosures of all types annually in prior years, and the IRS recently reported it has collected $4.4 billion from those taxpayers. And the individuals who disclosed their foreign activities are now expected to go forward as compliant taxpayers, bringing much more into the Treasury. 
There are constraints imposed by prosecutorial needs as well as statutory protections for grand jury secrecy and the confidentiality of tax information that prevent me from commenting on any ongoing investigations in this or any other area. However, I can say this: We have insisted, and will continue to insist, that individuals and companies doing business in this country comply with U.S. laws. And we have investigated and prosecuted, and will continue to investigate and prosecute, U.S. taxpayers who try to evade taxes by hiding money in offshore accounts and those who help them. 
National Tax Defier Initiative 
[Omitted; it does involve criminal prosecutions but they are not a focus of this blog]
JAT Comment: Some of the statistics are not self-explanatory.  For example, AAG Keneally touts that "nearly 30,000 taxpayers have voluntarily disclosed their hidden foreign accounts, compared to fewer than 100 voluntary disclosures of all types annually in prior years."  I think for the low number in prior years, she is referring to noisy disclosures.  I am confident that there were a hell many, many more quiet disclosures that brought in substantial revenue to the Government.  Those quiet disclosures were often intended to mitigate the criminal tax exposure and, in most case, in fact no criminal  prosecution ensued.

I do agree that the "deterrent effect has been substantial.  Certainly, on a go-forward basis, compliance has been enhanced many times with respect to FBARs and related income tax reporting.  By go-forward in this context, I mean no just the go-forward only strategy (although that is substantial), but all  persons who are now aware of and concerned about these obligations.  Many, perhaps most, of them will do right in the future and that will be a big revenue gain.

Also, note the statistics.  Only a limited number are prosecuted.  That is not a reason to play fast and loose in reporting and paying tax liabilities.  But it should tell you that the IRS / DOJ are not going to be the next persons who knock on your door.  Hence, you have to to deal  with this very serious matter in a productive and appropriate way without panicking.  You need to deal with it and start now.  But do not panic or assume the worst which can debilitate you from dealing with the issue.


  1. Well, well...  PR Promo indeed!  Rolling out the same old tired stats that will be repeated endlessly by our scribe journalist without a question asked. While I agree, "deterrent effect has been substantial", could the IRS  have accomplished similar compliance or even better without the all the harm they have done with the application of their OVDP / OVDI programs?  At what cost has this program been a "success"?  There is always a balance sheet. If I was the IRS I would not want to mention the other side of the Ledger.  The TAS report to Congress and Nina Olson's TAD is an embarrassing counter balance to their assertions. Of course there is no mention of the anger in the Expat community, and the "bait and switch" nature of FAQ 35 in the OVDP program. Not a word about the inefficiency and cost of a 2 year bureaucratic process just to end up in an Opt Out where discretion is finally applied. They haven't mentioned the increasing number of expatriations, directly tied to these IRS actions, but never mind.  We are not searching for truth here. Let's not question the narrative. Mission accomplished! That is all you need to know, Congress. Allow us our victory lap. Let us brag about the new notches in our gun before we march onward to FATCA fallout which is coming!   Also, notice the lack of any mention of the Whale to Minnow ratio or number of 
    expats or new immigrants  in those 30,000 tax payer who they tout as prime examples of their program success in ferreting out those "hidden foreign accounts."  Do you think anyone in Congress will ask or question whether the IRS really needs a global FATCA (GATCA) that they are now orchestrating as a follow on to their "success"?  Is there really $100 Billion in revenues out there that merits all the systemic risk such a program creates?  What is the documentation for that $100B assertion?  America has been asleep while the rest of the worlds FFI's seethe at this hubristic action by our Congressman who probably never read or knew what they were voting for when they passed the Hire Act in 2010. It  is just now starting to get homeland attention when the IRS unilaterally applied it domestically, in the DATCA version of FATCA.  See Senator Rubios editorial in the Miami Herald, or Congressman Boustany demand of Geither to stop stonewalling and produce the cost benefit analysis for these actions. I read an interesting piece in the Asian Investor tonight, with quotes from a DC lobbyist, that merit attention.  (I know he is drumming up business, but just the same, I do take note. )“Outside a handful of legislators who slipped it into the 2010 ‘Hire Act’ with no debate and a few Treasury officials tasked with enforcing it, hardly anyone here has even heard of Fatca,” Jatras says. The looming costs to domestic financial institutions are just beginning to be understood. “The window for impacted industries to delay Fatca’s enforcement and to set the stage for its repeal not only has not closed – it really is just beginning to open,” Jatras says. “If Hong Kong interests want to ‘fire back’ at Fatca, they have to aim at the right target: Congress.” You can read more here:

  2. Thanks Jack for breaking that up into more readable chunks.  Don't know why it all ran together, but will be careful in the future to assure the paragraphs breaks stay in place. 

  3. Does the use of foreign accounts really cost the Treasury 100 billion annually?  There are about 100 million households.  This works to $1,000 per household.  The report was written in 2008, so let's say it refers to 2007 when interest rates were higher (around 5%.)  So the average household would have $100K earning $5K on which $1k of tax was unpaid.  Not bloody likely.

    But the biggest inaccuracy is the use of the word "hiding" in conjunction with foreign accounts.  I believe only a small fraction of foreign accounts reflect intentional hiding to save taxes and most were opened and maintained for legitimate non-tax reasons, and the owners just weren't aware of reporting requirements. 

    Analyzing the $100 billion figure again, if the figure is correct, and the IRS has collected $4.4 billion, which would cover tax revenue for the eight-year OVDI disclosure period, OVDI has now resulted in 4.4 divided by 8 years, or 0.55 billion per year in additional revenue, or 1/200th of the purported 100 billion tax loss.  Hardly a success.

    If the IRS had given its approval to the quiet disclosure/forward compliance choices, for all except those with clear criminal exposure (for whom OVDI would be appropriate) and come up with a streamlined process, I believe they would have been far more successful.  A 1 in 200 success rate is hardly something to brag about.

  4. "Promo piece" is an apt title.  About 5,000 of these disclosures were the result of government action.  The other 25,000 -- plus many quiet/forward disclosures (maybe 350,000 of those, judging from the jump in FBAR filings) were truly voluntary, people who had little chance of getting caught, apparently had not taken active steps to hide the money (relatively easy for dual citizens and expats to do, if that had been their goal) and who tried to do the right thing in spite of the risk of draconian penalties.

  5. Thank you.

    Jack Townsend

  6. Yes, if the Fourth Circuit decides Williams in a Government-friendly way, the Government could pick a court in the circuit and prevail as to nonresidents.

    However, DOJ Tax as I know it (somewhat dated for in-depth knowledge) does take a broader view than that. DOJ Tax would, I imagine, want to hear from other circuits on the issue as well. The beauty of our system is that it tolerates different court views up until the time that the Supreme Court imposes uniformity instead of cacophony. In truth, with enough vetting of the issues among the lower courts, effective uniformity may be achieved by lower courts resolving the differences among themselves. At least that is a possibility.

    So, I am not sure that, with a favorable Williams precedent, the Government would choose to pursue all cases possibly within the scope of the favorable precedent in the Fourth Circuit.

    But, your point is that the Government could, and in terms of trying to read tea leaves into the future, that is a risk factor for taxpayers.

    Jack Townsend

  7. Ms. Keneally has  written or co-written some articles before about foreign account  reporting penalties (and occasionally written with some concern about IRS positions in the VD programs).

    Is her past position to make a difference in the overall 'mindset' of the IRS at all ? Or is that more a matter for the IRS than DoJ tax ? Besides, her professional duty is now to her new client, the government, so she may change her positions a little ?

  8. As you note, Ms. Keneallly has a new client now and with that a new perspective. I would not expect her positions to be the same. And, of course, her input right now would principally be on the criminal end of the pipeline. DOJ Tax will only see the civil ramifications after the IRS asserts the FBAR penalty and then must get DOJ Tax to pursue the case in district court. That might not be for some time now. However, I would suspect that the IRS has solilcited DOJ Tax's views in formulating strategies for the FBAR penalty because it makes no sense to take a position that DOJ Tax will not be enthusiastic about pursuing in the district court. So in that sense, she might have some influence but, as noted, her perspective has changed.

    Jack Townsend


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