More thoughts on Lawyer's Behavior -- Ethics and Criminality (3/28/13)

I have recently posted two blogs on Ethics -- (1) Random thoughts on Ethics, Tax Opinions and A Tax Lawyer’s Life at a Big Law Firm (3/27/13), here, written by a guest blogger and (2) Ethicist Question About Tax Professionals Exploiting Loopholes (3/24/13), here, referring to an NYT Ethicist question.

I thought I would point readers to another blog, by Christopher Bergin of Tax Notes, The Legend of Rusty Pipes (3/7/13), here.  His blog was written in response to the recent announcements of E&Y's deferred prosecution agreement and a tax shelter lawyer's sentencing. See E&Y Admits Wrongdoing on Bullshit Tax Shelters; Will Pay $123 Million (3/1/13), here, and USA SDNY Announces Sentencing of Daugerdas Related Defendant (3/23/13), here.

Some excerpts from Mr. Bergin's article to whet your appetite to read his full blog:

Referring to the tax shelter abuses in the 1990s:

For me, the most disturbing fact of those days was the involvement of lawyers in the tax shelter scandal. Please don’t misunderstand me. It’s a good tax lawyer’s job to legally minimize what a client pays in taxes. I also believe lawyers are the stewards of the tax code and should protect it. Lawyers need to know where the line is and not to cross it. In the 90s, there were good lawyers at good law firms who forgot that. The rallying cry was “we are just taking care of our clients.” The truth was that some lawyers were simply taking care of themselves. One was actually famously quoted as saying, “It’s a question of sleeping or eating, and I’d rather eat.” 

Today, there is a whole new generation of tax lawyers. They should learn the lesson of the 90s. And not learn it the hard way.

Quoting some of his comments in an article from the early 1990s:

You may have heard this one, but I’m trying to illustrate a point. A guy walks into a crowded bar, stumbles over to the bartender, orders a drink, and turns to the crowd and shouts, “All lawyers are jerks!” (When retelling the story, “jerks” can be substituted with something stronger.) Way in the back of the room another guy stands up and says, “I resent that!” The first guy looks at him and says, “What are you, a lawyer?” The second guy says, “No, I’m a jerk.”

Fourth Circuit Finds Prosecutor Abuse for Comment on Credibility and Questioning Character Witness but Affirms Anyway (3/27/13)

In United States v. Woods, 710 F.3d 195 (4th Cir. 2013), here, Woods "was convicted of numerous charges arising from a tax fraud scheme operated through his business of preparing income tax returns for private individuals."  He "was charged in a thirty-four count superseding indictment with willfully assisting the preparation and presentation of false and fraudulent tax returns to the Internal Revenue Service (IRS), in violation of 26 U.S.C. § 7206(2) (Counts 1-12); wire fraud, in violation of 18 U.S.C. § 1343 (Counts 13-22); identity theft, in violation of 18 U.S.C. § 1028(a)(7) (Counts 23-32); and aggravated identity theft, in violation of 18 U.S.C. § 1028A (Counts 33-34). "  The gravamen of the Government's claims was that Woods:

added fraudulent information to clients' tax returns in order to qualify the clients for substantial tax refunds. For example, the evidence showed that Woods listed on the returns various educational, business, and travel expenses never incurred by his clients. Also, Woods falsely listed as dependents on several clients' tax returns the names of individuals who were patients of the VA, including their birth dates and social security numbers. The government's witnesses testified that Woods charged clients a $500 premium for each false dependent included on a tax return. The government maintained that Woods stole the names of the false dependents from the VA computer system, to which he had access through his employment as data warehouse manager.

This is a variation of a theme for abusive tax return preparers.

I address here two of the issues on appeal.  First, is the issue of whether the prosecutor improperly injected his belief as to witness -- the defendant's -- lack of credibility.  Second, is the issue of whether the Government improperly questioned a defense character witness by assuming Woods' guilt.  One problem in the case is that Woods represented himself, hence he was not meticulous at preserving objections and otherwise comporting himself with his best defense.

Random thoughts on Ethics, Tax Opinions and A Tax Lawyer’s Life at a Big Law Firm (3/27/13)

An anonymous reader of this blog offered comments on a recent blog entry, Ethicist Question About Tax Professionals Exploiting Loopholes (3/24/13), here.  The anonymous reader's comments were good, so I requested that he expand or revise them to be presented as a blog entry rather than a comment to another blog.  The reader prefers to remain anonymous, and I honor that preference.  Please note that all of the balance of this blog entry are the reader's comments (as revised).  I do not indent because it is not necessary to show the reader's authorship:

I worked on the Street for many years as a tax lawyer for a “top-10” major law firm. During that time, I worked on a number of highly tax-driven deals, which were technically not tax shelters in the sense that they were not mass-marketed and liberally replicated for different "taxpayers." No, they were much more subtle than that (tax shelters nonetheless) involving tailor-made solutions for particular “tax problems” (almost always how to evade tax payments on excess cash build-up) experienced by large corporate enterprises (see Google, Dell, Apple, Facebook, for current examples), for which legal opinions were designed to fend off an IRS investigation (I will come back to that aspect of things). Technically, our “client” for many of the transactions was a large investment bank no longer with us since 2008 (yep, that one) who had a huge "tax" servicing business, comprised of fixing its clients’ tax issues using its massive balance sheet to do.

I, and, more importantly, my direct supervising tax partner, knew that most (if not all, my memory is hazy) did not work in the sense that if any particular scheme were thoroughly and competently reviewed, it would fail that scrutiny. Typically, we dressed the structure up to resemble a complicated machine (a Rube Goldberg type contraption) that would be difficult, perhaps well-nigh impossible, to decipher. (Since then, I suspiciously view over-complicated legal structures as a badge of fraud; I have yet to be proven incorrect, though I live in vain hope).

First Circuit Decides NonTax Criminal Case With Issues Related to Issues in Tax Crimes Cases (3/27/13)

A reader, Eliot Silverman, here, brought to my attention a recent First Circuit opinion in a nontax criminal prosecution.  See United States v. Wu, 711 F.3d 1 (1st Cir. 2013), here.  In the case, the two defendants, formerly husband wife, were prosecuted for violating restrictions on the overseas shipment of weapons-grade technologies.  The criminal statute involved, like tax crimes, has a willfulness element.  I write this blog entry to address three issues in the case that may resonate with tax crimes.

Void for Vagueness

The defendants asserted that the prosecution which relied upon the defendants' violation of the law because of the inclusion of certain products on the Munitions List was void for vagueness.  Designated defense articles may not be exported without license from the State Department. The designations are made by regulations which are not subject to judicial review.  The designation is made by the Munitions List.  The Court explained the Munitions List as follows (p.12):

Pursuant to the President's authority under the AECA, the State Department has promulgated the International Traffic in Arms Regulations ("ITAR"), 22 C.F.R. pts. 120-130, which include the U.S. Munitions List, id. pt. 121. The Munitions List is not a compendium of specific controlled items; instead, it is a series of categories describing the kinds of items that qualify as "defense articles" requiring export licenses. The Munitions List contains "attributes rather than names" * * * *.

As noted, the crime involved required willfulness, which seems to be interpreted the same as the tax crimes element of willfulness -- intentional violation of a known legal duty.  The Court discussed the relationship of void for vagueness and the willfulness element as follows (pp. 13, 15):

Vagueness. At the outset, we address the defendants' argument that this carefully crafted regulatory scheme--which has remained in place for more than a quarter century--is unconstitutionally vague. The Fifth Amendment's Due Process Clause requires that "a criminal statute provide adequate notice to a person of ordinary intelligence that his contemplated conduct is illegal." Buckley v. Valeo, 424 U.S. 1, 77, 96 S. Ct. 612, 46 L. Ed. 2d 659 (1976) (per curiam); see also United States v. Anzalone, 766 F.2d 676, 678 (1st Cir. 1985). The "void for vagueness doctrine" addresses at least two discrete due process concerns: "first, . . . regulated parties should know what is required of them so they may act accordingly; second, precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or discriminatory way." FCC v. Fox Television Stations, Inc., 132 S. Ct. 2307, 2317, 183 L. Ed. 2d 234 (2012).

IRS Identifies Its Dirty Dozen Tax Scams for 2013 (3/26/13)

The IRS has released its annual Dirty Dozen of Tax Scams.  See IR-2013-33, here. [I will link here when I get the link.]  Some involve scams that I have discussed before on this blog or variations of those scams.  So, I have cut and pasted from the email to identify all of the identified scams, but will include the discussion only for the ones most relevant to this blog.  The balance of this blog is from the cut and paste.

* * * *

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

A Tax Defier Is Convicted (3/26/13)

While I have not represented so-called tax protestors or tax defiers -- persons wrapping their tax cheating in a cloak of feigned patriotic duty or constitutional right -- they are an important part of the tax landscape.  Some of the seminal cases in the criminal tax arena have involved such misguided taxpayers (or, more descriptively, nontaxpayers).  DOJ Tax announced yesterday the conviction of yet another tax defier, on James Timothy Turner, aka Tim Turner.  The press release is here.

Key Excerpts are:

Self-Proclaimed “President” of Sovereign Citizen Nation Convicted in Alabama of Federal Tax Crimes 

A federal jury in Montgomery, Ala., found James Timothy Turner, also known as Tim Turner, guilty late Friday of conspiracy to defraud the United States, attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service (IRS), failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding, the Justice Department, the IRS and the FBI announced today. 

Based on the evidence introduced at trial and court filings, Turner, the self-proclaimed “president” of the so-called sovereign citizen group “Republic for the United States of America” (RuSA), traveled the country in 2008 and 2009 conducting seminars teaching attendees how to defraud the IRS by preparing and submitting fictitious “bonds” to the United States government in payment of federal taxes. Although the evidence at trial revealed the bonds are fictitious and worthless, witnesses testified that Turner used special paper, financial terminology and elaborate borders in an effort to make them look “real” and more likely to succeed in defrauding the recipient. Turner was convicted of sending a $300 million “bond” in his own name and of aiding and abetting others in sending fifteen other “bonds” to the Treasury Department to pay taxes and other debts.

Supreme Court Will Decide Whether Bullshit Tax Shelters with Basis Overstatements Draw the 40% Penalty (3/25/13)

The Supreme Court has decided to accept cert on the split in the circuits on the issue of whether the 40% valuation / basis overstatement applies to bullshit tax shelters that fail in a number of ways other than just valuation / basis overstatement.  The Supreme Court docket page in the case, United States v. Woods, No. 12-562. is here.  The entry granting cert adds the following TEFRA partnership procedure issue:

In addition to the question presented by the petition, the parties are directed to brief and argue the following question: Whether the district court had jurisdiction in this case under 26 U. S. C. 6226 to consider the substantial valuation misstatement penalty.

I can't get excited about the TEFRA issue.  It is important, to be sure.  But, the principal issue is foisted on the Supreme Court by the Fifth and Ninth Circuits' stubborn insistence to grant relief to bullshit tax shelters with basis overstatements despite their own expressed doubts and the critical mass of circuit court opinions denying that relief. I guess, though, that the TEFRA jurisdictional issue could perhaps give the Court an opportunity to duck the merits issue, thus not resolving the conflict.  (I would think, however, that, if the Supreme Court ducked the issue, the Fifth and Ninth Circuits could still resolve the issue by moving to the majority view in the next cases presenting the issue; alternatively, the Supreme Court might resolve the split in some case that does not present a jurisdictional impediment (such as the case for which petition for certiorari was filed from a majority view case in Alpha I L.P. v. United States, No. 12-550, here.)

For good discussions of the split, see Gustashaw v. Commissioner, 696 F.3d 1124, 1136 (11th Cir. 2012), here; Crispin v. Commissioner, ___ F.3d ___, ___ n. 18 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), here; ; AHG Investments LLC et al. v. Commissioner, 140 T.C. ___, No. 7 (2013), here (adopting this majority rule for the Tax Court in cases where the Circuit Court to which an appeal would be taken has not spoken); and  Jeremiah Coder, Self-Serving Concessions and Penalty Avoidance, 134 Tax Notes 1583 (Mar. 26, 2012).

U.S. Focuses on Liechtenstein (3/25/13)

Bloomberg reports that Liechtenstein, sometimes acting independently and sometimes as a  partner with Swiss enablers, is now receiving special attention previously reserved for the Swiss.  Dylan Griffiths, U.S. Seeks Answers in Liechtenstein on Tax Cheats (Bloomberg 3/24/13), here.  Key excerpts:

The U.S. has asked Liechtenstein to hand over data on foundations that may have been used to hide untaxed American money from the Internal Revenue Service, a step that may threaten Swiss banks. 

The U.S. wants to know the number of foundations set up by fiduciaries -- lawyers, accountants, financial advisers and asset managers -- for American taxpayers, according to a letter sent by the Department of Justice to authorities in the Alpine principality. A “formal request” to fiduciaries will follow, the DOJ said. 

“Seeking documents from the Liechtenstein fiduciaries is an important investigative step,” which will shed light on “the roles of banks, of bankers outside of Liechtenstein,” the Justice Department wrote in the letter, adding that it looked forward to receiving the data by March 29. 

* * * * 

“It’s a further evolution of the Department of Justice using third-party fiduciaries to gather more information on these structures and the banks involved,” said Milan Patel, a former IRS trial attorney who is now a partner at Zurich-based law firm Anaford AG. “This could be bad news for Switzerland, as the information could be used against more Swiss banks.” 

* * * * 

Unwinding Secrecy

Ethicist Question About Tax Professionals Exploiting Loopholes (3/24/13)

In this blog, I usually discuss tax crimes and matters related to tax crimes.  At least for tax professionals, there are parallel ethical issues.  The ethical issues certainly are recognized or should be recognized by tax professionals whose conduct approaches the criminal tax line -- that line where they cross over into intentionally violating a known legal duty, the mens rea standard for tax crimes.

The Ethicist, a column in the New York Times, addressed a facet of the ethical issue, in a context that does not necessarily implicate a tax crime.  Chuck Klosterman, A Tax Lawyer's Quandary (NYT Ethicists 3/22/13), here.  The question the anonymous tax lawyer asks is:

I am a tax lawyer. Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible? The structures take advantage of legal loopholes in the tax legislation. 

The Ethicist answer, very short, is:

The ethics of specific professions create unique realms of responsibility. In the same way that a defense attorney is ethically obligated to give his client the best possible defense — even if he’s convinced of the individual’s guilt — your principal responsibilities lie with the company hiring you. You need to do your job to the best of your abilities, within the existing rules. You should, however, voice your moral apprehension about the use of such loopholes to the company you represent.

For a good, short general discussion, I suppose this works.

IRS has New Forms for Offshore Voluntary Disclosure Letter and Attachment (3/23/13)

These new forms apparently will replace the dog-ugly word versions.  As of this posting, the old ones -- in MS Wod format -- are still the forms linked on the master page, here.  I have not compared the content to see what might have changed.

Form 14457 (March 2013)  Offshore Voluntary Disclosure Letter, here.

Form 14454 (March 2013) Program Letter Attachment, here.

I will be back if I learn anything material.

Addendum 4/8/13: A reader has advised me -- and I have confirmed -- that the IRS has apparently taken the forms off the links, but the notice is that they will be posted soon.  In the meantime, here the forms are as they were originally posted:

• Form 14452 Foreign Account of Asset Statement, here.
• Form 14453 Penalty Computation Worksheet, here.
• Form 14454  Offshore Voluntary Disclosure Program Letter Attachment, here.
• Form 14457 Offshore Voluntary Disclosure Letter, here.

USA SDNY Announces Sentencing of Daugerdas Related Defendant (3/23/13)

USA SDNY announced, here, the sentencing of David Parse, a former broker at Deutsche Bank, caught up in the Daugerdas juggernaut.  Key excerpts are:

 DAVID PARSE, a former broker at Deutsche Bank (“DB”), was sentenced in Manhattan federal court today to 42 months in prison on tax obstruction and mail fraud charges stemming from his work in assisting lawyers from the Jenkens & Gilchrist (“J&G”) law firm and BDO Seidman (“BDO”) accounting firm in the design, marketing, and implementation of fraudulent tax shelters that allowed his clients to claim billions of dollars in fraudulent tax losses. Parse was sentenced by U.S. District Judge William H. Pauley III. 

Manhattan U.S. Attorney Preet Bharara said: “David Parse used his professional acumen to help his wealthy clients make an end-run around the IRS, depriving the treasury of billions in tax revenue. And for his role in this sprawling and massive fraud, he is now paying the price.” 

According to the Indictment previously filed in Manhattan federal court, the proof at Parse’s trial, and statements made during his sentencing proceeding: 

PARSE, who was also a certified public accountant, was a broker and investment representative at DB’s Chicago offices between 1997 and 2003. During that period, he worked with attorneys at J&G and accountants from BDO, as well as other DB brokers, on the design, marketing and implementation of high-fee tax strategies for individual clients. Those strategies, or “tax shelters,” were designed to allow high-net-worth clients to eliminate, reduce, or defer taxes on significant income or gains. 

Among the fraudulent tax shelters designed, marketed, and implemented by PARSE and his co-conspirators were “Short Sales,” “Short Options Strategy” (“SOS”), “Swaps,” and “HOMER.” The Short Sale tax shelter was marketed and sold from 1994 through 1999 to at least 290 wealthy individuals, and generated at least $2.6 billion in false and fraudulent tax losses. The SOS tax shelter was marketed and sold from 1998 through 2000 to at least 550 wealthy individuals, and generated at least $3.9 billion in false and fraudulent tax losses. The Swaps tax shelter was marketed and sold in 2001 and 2002 to at least 55 wealthy individuals, and generated more than $420 million in false and fraudulent tax losses.

Acquittal in Pflueger Involving Offshore Accounts (3/20/13)

I have previously blogged on the Government's offshore account prosecutions related to the Pflueger family in Hawaii.  See the blogs listed at the end of this blog below.  Some defendants pled.  One defendant, James (Jimmy) Pflueger, the family patriarch, decided to role the dice with a trial.  The trial was to a judge.  The judge acquitted James (Jimmy) Pflueger.  See Malia Zimmerman, Pflueger's Federal Tax Fraud Charges Vacated; Financial and Legal Woes Far From Over (Hawii Reporter 3/20/13), here.  The following are excerpts from  the article:

The 87-year-old retired automobile dealer - who founded the Pflueger dealerships – had been charged with filing false tax returns after the U.S. Justice Department said he hid nearly $15 million in a Swiss bank account without paying taxes on the $27.5 million sale of the Hacienda Corporate Plaza in California. 

 * * * * 

The defense team, headed by Steven Toscher [here], a Beverly Hills attorney from Hochman Salkin Rettig Toscher & Perez PC, and Edward M. Robbins Jr [here]., called just three witnesses including the former IRS acting chief as a summary witnesses and a handwriting expert who claimed Pflueger’s signatures were forged. Pflueger did not testify in his own defense. 

Although the judge said Leslie Osborne, chief of the Fraud and Financial Crimes division for the U.S. Attorney and Special IRS attorneys Timothy Stockwell and Dennis Kihm did not prove beyond a reasonable doubt that Pflueger knowingly conspired to defraud the United States of taxes he owed, the IRS will pursue a civil case against Pflueger to settle some $4.5 million in unpaid taxes from the sale of his California investment property, the Hacienda Corporate Plaza.

Addendum 3/25/13:  The (1) Order on Defendant’s Motions for Judgment of Acquittal and (2) Verdict in Non-jury Trial, is here.  My comments:

1. The Order denies the post-renewal of the Defense's Rule 29(a) motions at the close of the Government's case and then renewal at the close of both cases.  The Court says summarily:\

First, with respect to the original motion made at the close of the Government's case, viewing the evidence in the light most favorable to the Government, the Court concludes that a rational trier of fact could find each element of each crime beyond a reasonable doubt. Second, with respect to the renewed motion made at the close of the entire case, viewing the evidence in the light most favorable to the Government, the Court also concludes that a rational trier of fact could find each element of each crime beyond a reasonable doubt. The Court HEREBY DENIES both the original Rule 29(a) motion and the renewed motion.

In effect, the denial of the Rule 29(a) motion means essentially that the charges must be resolved by the fact-finder rather than by the court.  This division is most clearly seen where a jury is involved as the ultimate fact-finder.  In that case, the office of the Rule 29(a) is to determine whether there is enough evidence to submit the issue to the jury (sort of like a directed verdict in a civil case tried to a jury.)

HSBC India Depositor Sentenced (3/18/13)

A reader commented that Josephine Bhasin was sentenced on 3/8/11.  The docket entries from Pacer indicate that the only available document related to sentencing is a Sentencing Form, dated 3/8/13, here.  That form gives the core information related to the sentencing -- i.e., the sentence, fine, probation, etc., but not the underlying details.

My prior blog entry on the guilty plea is here.  The DOJ Tax Press Release for the original guilty plea is here.

From the limited information available:

Defendant:  Josephine Bhasin
Count of Conviction (By Plea):  Tax Perjury, Section 7206(1)
Conduct of Conviction:  Failure to report $168,000 interest and to answer foreign account question on Schedule B.
Incarceration:  0 months
Probation: 2 years
Fine: $30,000
Bank: HSBC India
High Balance (2008):  $8.3 million
Court:  USDC EDNY
Judge:  Arthur D. Spatt

Very little information is available.  I note that sentencing was delayed several times, with an indication that the defendant was cooperating.  The sentencing minute entry says:  "Transcript is sealed & is available to counsel upon request."

Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (3/16/13)

The Sentencing Commission has received comments and testimony from principal constituents as to the issue of whether unclaimed deductions and credits should be permitted to reduce the tax loss in the critical tax loss calculation for sentencing purposes.  The sentencing tax loss, like the loss in other financial crimes, is the most influential determinant in the sentencing guidelines calculations in most cases.  I have previously discussed this and cited to an article by Messrs. Toscher and Perez.  See The Role of Unclaimed Deductions in Computing Tax Loss For Sentencing (3/1/13), here.

I offer the following comments principally to DOJ Tax's comments urging that unclaimed deductions and credits not be considered for the tax loss determination.  Here are some key excerpts from the DOJ Tax letter that should set the stage for persons generally familiar with the issue:

"Tax loss" under the Guidelines is distinct from a tax deficiency in a civil tax case or an order of restitution. Tax loss, by definition, should address the entirety of the harm intended by the defendant, including for example the harm caused by concealment through omitting certain deductions. It is only through civil enforcement that the government should be charged with determining the correct tax liability, and restitution serves merely as an aid in the collection of that liability. 

The Tax Division, along with the sentencing courts, has extensive experience in considering claims concerning uncharged expenses in Guidelines calculations. As demonstrated by several examples included below, any attempt to determine whether and when to allow a  deduction that the defendant did not report on an original tax return will require inappropriate speculation, and may implicate complex tax issues and result in unjust anomalies. At a minimum, it will turn routine sentencing hearings into tax mini-trials. Further, in civil tax enforcement, the taxpayer bears the burden of claiming and substantiating deductions, and the IRS's determinations are accorded a presumption of correctness - fundamental principles that are not incorporated into Options 1 or 3. Either of these proposed amendments runs the risk of giving convicted tax evaders advantages over taxpayers with honest disputes with the IRS.

Article Targeted to Jewish Readers As A Result of Israeli Bank Developments (3/16/13)

Readers already know that, now that the Government is doing, in some respects, a mop-up operation for Swiss Banks (plenty to come, but the sights are set), the Government is focusing on banks in other countries -- now particularly Israel.  See the links to Bank Leumi and Mizrahi-Tefahot Bank in the links below.  A reporter for the New Jersey Standard recently interviewed Larry Horn, here, a prominent lawyer heavily involved in the offshore account practice, regarding this initiative.  Larry Yudelson, Time to Come Clean (New Jersey Jewish Standard 3/15/13), here.  Key excerpts are:

Another indication that Bank Leumi is under investigation by U.S. authorities — and may be disclosing account holders to American tax authorities — came last week, when the bank said it set aside $90 million to cover costs for the investigation. In February, an Israeli-born Los Angeles businessman struck a plea deal concerning $4 million hidden in overseas banks — reported to be Bank Leumi and Mizrahi Tefahot Bank. 

“Once the bank gives your name to the IRS, you’re disqualified” from entering the disclosure program, Horn said. “If you’re under an audit, under examination, or the bank has disclosed your name, you can’t enter the program.” 

Another indication that Bank Leumi is under investigation by U.S. authorities — and may be disclosing account holders to American tax authorities — came last week, when the bank said it set aside $90 million to cover costs for the investigation. In February, an Israeli-born Los Angeles businessman struck a plea deal concerning $4 million hidden in overseas banks — reported to be Bank Leumi and Mizrahi Tefahot Bank.
“Once the bank gives your name to the IRS, you’re disqualified” from entering the disclosure program, Horn said. “If you’re under an audit, under examination, or the bank has disclosed your name, you can’t enter the program.” 

* * * *  

He warns that prison terms are a possibility for people who get caught up in the IRS’ dragnet — particularly if they’ve been hiding accounts worth a million dollars or more.
At that level, unreported taxes on interest earned by the accounts can equal tens or hundreds of thousands of dollars — and that rises to the level of criminal tax evasion and possibly three years in prison.

U.S. Taxpayer Pleads to FBAR and Tax Perjury Violation (3/14/13)

In a Bloomberg article that I just posted, there is a discussion of an FBAR plea agreement which I had not been aware of before.  David Voreacos & Patricia Hurtado, U.S. Tax Cheats Nailed After Swiss Adviser Mails It In (Bloomberg 3/13/13), here.  According to the Article, Michael Canale pled guity to an FBAR Violation and a Tax Perjury.  The plea occurred in December and sentencing is schedule next month.  The pertinent parts of the article are:

Both Thomann [another Swiss Banker/Enabler[ and Singenberger helped Canale, the retired Army surgeon, according to Canale’s charging document, known as a criminal information. 

Thomann had handled the account of a relative who died in 2000, leaving the money to Canale. Thomann introduced Canale to Singenberger to set up a structure that “would, to the greatest extent possible, obscure from the IRS” his ownership of his undeclared account, according to the information. 

Singenberger set up a Liechtenstein foundation for Canale, and helped him open an account at Wegelin, prosecutors said. By 2009, the account had grown to $1.5 million. 

Bronze Star 

Canale, 62, is a Bronze Star recipient who worked for the Army as a field surgeon during Desert Storm in Saudi Arabia, Iraq and Kuwait, according to one of his lawyers, Martin Press. He also was a surgeon in Macedonia and Kosovo, Press said. 

* * * * 

Canale, who was also a paratrooper, worked for the Veteran’s Administration from 2010 until retiring last year, Press said.

U.S. Using a Client List of Indicted Swiss Banker/Enabler (3/14/13)

There is an interesting story that the IRS obtained a list of a Swiss Banker's clients and is using it as a road map to identify clients, prosecute some and collect money from others.  David Voreacos & Patricia Hurtado, U.S. Tax Cheats Nailed After Swiss Adviser Mails It In (Bloomberg 3/13/13), here.  The Swiss Banker is Beda Singenberger (see blogs mentioning Singenberger here.)  According to the story, he inadvertently mailed the list and it somehow ended up with the IRS or DOJ.

The article continues:

“He was sending mail to someone in the United States, and apparently in error he included a list of U.S. taxpayers,” Assistant U.S. Attorney Dan Levy said on March 5 at the sentencing in New York of Wajsfelner. “The government has mined that list to great effect and prosecuted a number of people who were on that list.” 

* * * * 

It is not clear from court records how Singenberger’s wayward mail enclosure -- which included such client details as their residences, their Swiss banks, and the ways they hid accounts from the IRS -- found its way to prosecutors.

The article discusses some U.S. persons involved:

Now, U.S. authorities appear to be picking off the clients on that list one by one. Singenberger’s goof has already ensnared Jacques Wajsfelner, an 83-year-old exile from Nazi Germany, and Michael Canale, a retired U.S. Army surgeon, court records show. Another customer, cancer researcher Michael Reiss, pleaded guilty, though his court records don’t mention the list.

I have blogged on Wajsfelner and Reiss before.  See on Wajsfelner Credit Suisse / Wegelin Client Pleads Guilty to FBAR Violation in SDNY (8/21/12), here and on Reiss Doctor / Medical Professor / UBS Client Sentenced (1/11/12), here.  I have not previously blogged on or been aware of Canale and will post a separate blog on that containing, in part, information from this article.

Addendum 3/16:

Former IRS Large Case Auditor Pleads to Criminal Conflict of Interest & Wrongful Disclosure (3/13/13)

The USAO SDNY announced yesterday that Dennis Lerner, a former IRS employee, pled to two 5 year felony counts -- (i) criminal conflict of interest and (ii) disclosing confidential audit information (Section 7213).  See USAO Press Release, here.  According to the press release, the following is the USAO summary of the charges.

From June 2010 through August 2011, LERNER worked as an International Examiner in the New York office of the IRS. For several months leading up to his resignation from the IRS, one of his chief responsibilities involved conducting an audit of an international bank (“Bank 1”) related to approximately $1 billion in allegedly unreported income. Shortly before his resignation, LERNER led negotiations on behalf of the IRS which resulted in a proposed $210 million settlement between Bank 1 and the IRS. The settlement was still pending final approval at the time of his departure. Unbeknownst to his colleagues and supervisors, LERNER applied for, interviewed for, and accepted the position of Tax Director at Bank 1 during the time period in which he was representing the IRS in the Bank 1 settlement discussions. He also sent multiple emails to an individual in which he expressed both his dissatisfaction with his job at the IRS and his hope that he would secure the Bank 1 job. At no time did he notify the IRS of his efforts to obtain employment with Bank 1. 

LERNER also engaged in improper disclosure of IRS tax return information during the time period that he worked as an IRS International Examiner. Specifically, he revealed the identity of a bank he was auditing to an individual who was not employed by the IRS.

Bank 1 is identified in the press as Commerzbank AG.  Plea agreements usually require cooperation.  Since the type of conduct for which Lerner was charged take two to tango, so to speak, I wonder whether the shoe will now fall on Commerzbank and/or its employees.

I previously blogged the original complaint, Former IRS Agent Charged with Conflict of Interest and Disclosing Return Information Including Whistleblower Name (9/27/12), here.

Addendum:

Statutes of Limitations for FBAR Noncompliance Related to Tax Noncompliance (3/12/13)

A person commenting on an earlier blog asked the following question (modified slightly for clarity):

Does the statute of limitations for the FBAR penalty (both civil and criminal) toll if the taxpayer is outside the U.S.? 

I answered at least the criminal part of the question in a comment reply.  I thought the question was worthy of a blog entry to expand the reply and alert readers who may not work their way to the comment and reply.

Suspension of the FBAR Criminal Penalty Statute of Limitations

Before I answer the question, I should first state why the question may be important.  A U.S. person with a concern of criminal prosecution for FBAR violations may absent himself from the U.S. until the statute has run on the FBAR violations and thereby hope to avoid prosecution.  That person, of course, would want to become compliant prospectively upon adopting the strategy, if it worked, so that, with enough time (5 years for FBAR prosecution), the risk of FBAR prosecution would go away.

With that background, I think the direct answer is that the FBAR criminal statute of limitations would be tolled (or suspended). 18 USC 3290, here, provides simply and cryptically "No statute of limitations shall extend to any person fleeing from justice." Title 18 is the general criminal code.  The immediate question, of course, is whether  § 3290 applies to crimes outside Title 18, such as the FBAR crime codified in Title 31.   I have not researched the issue in great detail.  But I did find a case where for an immigration crime (18 USC 1326, felony re-entry), the  Second Circuit applied  § 3290.  United States v. Rivera-Ventura, 72 F.3d 277, 284 (2d Cir. 1995).  Section 3290 requires that the person be "fleeing from justice" (whether inside or outside the U.S.).  I suppose the question then is what this means.  As I say in my Federal Tax Crimes book, the “majority rule” for §  3290 is that “intent to avoid arrest or prosecution must be proved” for § 3290's fugitive definition to apply; the minority rule is that mere absence from the jurisdiction, regardless of intent, is sufficient (I suppose just the objective fact of being absent from prosecution of justice is sufficient).

Saltzburg Article on Privilege Assertion to Grand Jury Subpoenas for Documents (3/11/13)

As readers know, there has been a flurry of activity recently regarding grand jury subpoenas for records required to be maintained for FBAR reportable foreign financial accounts and the potential for application of the Fifth Amendment privilege based upon testimony inherent in the act of production.  (See the required records link below.) I have just read Stephen A. Saltzburg's article titled Privilege Objections to Grand Jury Subpoenas for Documents, 27 ABA Criminal Justice, Number 3, 44 (Fall 2012).  Professor Saltzburg's article deals with related issues although not in a required records context.  The article discusses the assertion of the attorney-client privilege and the Fifth Amendment privilege in a recent case, In re Grand Jury Subpoena (Mr. S.), 662 F.3d 65 (1st Cir. 2011), here.

The subpoena in question was to a law firm requesting documents in the possession of the firm.  The facts and the analysis of the First Circuit (Judge Selya for the panel, in his usual style) are interesting and I refer readers to the opinion.  I thought what would be most helpful to busy readers, however, are Mr. Saltzburg's "Lessons" from the opinion.

1. Grand juries have broad subpoena power and can issue subpoenas to clients, lawyers or both.  The subpoenas need not be based on reasonable suspicion or probable cause.
2. A valid claim of privilege can trump a grand jury subpoena and result in its being quashed, but the burden is on the person claiming privilege to demonstrate entitlement.  Although the First Circuit did not finally determine the burden that applies, it is likely to be a preponderance of the evidence in most cases.  [JAT Note: The client had claimed that he must simply make a prima facie showing, but the First Circuit said that it did not have to resolve the issue because the client's showing did not even rise to a prima facie case.]
3. Not all documents that clients give to lawyers or that lawyers prepare for clients are privileged.  Generally speaking, preexisting documents (i.e., those that existed before the attorney-client relationship) are not privileged because they were not made as part of the attorney-client relationship.  What clients tell their attorney about preexisting documents will be privileged, as long as the clients are seeking legal advice.
4. A lawyer who acts as a mere scrivener or a disburser of money may not be deemed to be providing legal advice, and the privilege may not attach to documents prepared by a scrivener that simply reflect a disbursement.
5. A person may validly claim a privilege against self-incrimination when production of a document may be tantamount to providing incriminating information.  As Mr. S. recognized "[s]uch a case may arise when an individual's compelled production of documents would amount to a tacit concession that the documents exist, are authentic, and are in his custody or control."  (Id. at 73.) But the burden is on a person claiming the privilege to who that there is a reason to believe that productions could be incriminating.
6. Finally, clients may object to their lawyers responding to subpoenas where production by the lawyer would violate the attorney-client privilege as Fisher recognized. But to successfully object, a client must show that, if the documents were in the clients hands, production in response to a subpoena would violate the clients privilege against self-incrimination.

Jones Article on Civil Fraud Penalties (3/11/13)

In a recent article, my partner, Larry Jones, here, provides a good summary of a civil audit with civil or criminal fraud potential.  Larry's article is Are More Civil Tax Fraud Penalties Being Proposed?, J. Tax Prac. & Proc. 13 (December 2012 - January 2013), here.  It is a good basic nuts and bolts description.  I recommend the article to readers.

Rettig Article on CTR Form 8300 and Its Context in Tax and Criminal Law Enforcement (3/11/13)

In my Federal Tax Procedure Book, I devote a short section to Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, often referred to as a Currency Transaction Report or "CTR."  The Form is here.  The short discussion is adequate for the book that must cover so much other ground.  However, there is a lot of detail behind the summary.  Fortunately, Chuck Rettig, a prominent practitioner, provides that detail in a recent article, Form 8300: Reporting Domestic Currency Transactions (J. Tax Prac. & Proc. December 2012-January 2013).  His article is posted on his website and may be linked here.  In addition to developing the nuances relating to the CTR, Chuck's article places in the CTR in the universe of federal reporting requirements and enforcement initiatives relating to money laundering activities.  To be sure, the Form 8300 is in the Internal Revenue Code and plays a prominent role in tax enforcement.  But it also plays a more prominent role in detecting money laundering and the crimes behind money laundering.

I strongly recommend Chuck's article to the readers of this blog interested in the Form 8300 and its criminal enforcement context.

I offer the following which is my summary description of the Form from my Tax Procedure Book (footnotes omitted).

(2) Currency Transaction Reports (“CTRs”).

There are still other return reporting requirements that are designed to identify income of types that might easily escape the tax system or that might evidence nontax illegal conduct.  The broadest example is § 6050I which requires that persons involved in a trade or business who receive cash payments in excess of $10,000 in one transaction (or more than one transaction, if the transactions are related) to report the receipt to the IRS.  The report is made by Form 8300 (sometimes referred to as a currency transaction report or “CTR”), which in its latest iteration is called both IRS Form 8300 and FinCEN Form 8300.  This means that the information is available to each of those agencies and may be used for congressionally approved purposes, most specifically federal law enforcement (not just tax law enforcement).  FinCEN is the acronym for the Government’s Financial Crimes Enforcement Network which gathers information useful in investigating and prosecuting financial crimes.  As most pertinent to this class, of course, the information is available to the IRS for both civil and criminal tax purposes.  But, ultimately, the information may be most useful for money laundering enforcement in which the IRS is a principal investigative and information source.

DOJ Tax Disavows Intent to Expand Required Records Exception to Act of Production Fifth Amendment Privilege (3/8/13)

Some practitioners have expressed concern that DOJ Tax would try to expand into other areas (including the general requirement that a taxpayer maintain records related to tax liablity) the Courts of Appeals' application of the Required Records Doctrine to overcome a Fifth Amendment privilege applying to the act of the production of offshore bank records.  Tax Notes Today addresses that subject in an article reporting on an ABA Tax Section webinar.  Shamik Trivedi, No Intention to Expand Required Records Doctrine, Keneally Says, 2013 TNT 44-3 (3/6/13).  Here are excerpts I thought particularly interesting:

[In the required records doctrince cases] [t]he government briefs discuss how retaining foreign bank account reports is a regulated area and "speak to the ability to impose requirements," Keneally [DOJ Tax AAG] said, adding that the arguments are not so broad that they affect other areas of record retention. "We're not making those arguments right now. I'm unaware of making any intention to make those arguments," she said.  

* * * * 

Under 31 U.S.C. section 5322, taxpayers must keep and maintain records concerning an offshore financial account, such as an FBAR, for five years, and they must be made available for inspection during that time. The Supreme Court has held that individuals are not required to produce materials that are testimonial and incriminating, but when the government has asserted the required records doctrine, lower courts have negated that protection if an administrative regime imposes a record-keeping requirement on the individual. 

In response to Keneally's point that FBAR retention is a regulated area and that the government is not intending to expand its use of the doctrine, Paula M. Junghans of Zuckerman Spaeder LLP said the government is not repudiating the result "if the courts go farther than you ask them to." 

Bank Leumi U.S. Clients Rejected from OVDP (3/8/13)

IRS has reportedly rejected Bank Leumi depositors from entry in the OVDP program.  See Janet Novack, IRS Yanks Criminal Amnesty Deal From Taxpayers With Secret Bank Leumi Accounts (3/7/13), here.  Key excerpts:

The Internal Revenue Service this week sent faxes to tax attorneys nationwide informing them that clients who were previously accepted into its criminal amnesty program for those who disclose once-secret offshore accounts, have “upon further review” been disqualified. 

* * * * 

Clearance green lights and the later letters are issued by the IRS’ Criminal Investigation division based on its checks of both criminal and civil proceedings.  McKenzie said his client received his clearance letter for the OVDP last summer. He speculated there might have been an administrative foul-up within the IRS —meaning  the government already had the taxpayers’ names, but the information wasn’t entered in the right computer system.   “I’m upset that I gave advice,  relying on the government letter, only to find I couldn’t rely on my government to do it properly,’’ McKenzie said. 

* * *  

[Ed Robbins, here] noted that many of the taxpayers  had not only gotten written clearance to participate in the OVDP,  but had also “proceeded to submit a complete disclosure including amended returns, FBARs, account information, etc.”

Added Robbins: “It would seem difficult for the government to actually pursue prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence. However, these individuals might not ultimately be afforded any civil benefits otherwise associated with participation in the IRS OVDP, etc. Time will tell.”

CI Stats on Criminal Tax Enforcement, FBAR Sentencing and Deportation (3/8/13)

A recent Tax Notes Today article -- Shamik Trivedi, CI Official Touts Filing Season Enforcement, Tax Crime Enforcement Rate, 2013 TNT 42-19 (3/4/13) -- covers some criminal tax subjects.  The following are the ones that caught my attention:

In 2012, CI initiated more than 5,100 criminal cases and made more than 3,700 prosecution recommendations, Haynes said. It also saw a 93 percent conviction rate and an 81.5 percent imprisonment rate after conviction, Haynes said. That imprisonment rate is important, said Edward Cronin, CI division counsel/associate chief counsel. "Straight probation is less than 20 percent. I really think that's a historically important moment," he said.  

* * * * 

Under section 5K1.1 of the sentencing guidelines, substantial assistance to authorities can reduce a defendant's potential sentence. The sentencing guidelines for crimes related to foreign bank account reporting default to the tax guidelines if the punishment would be greater, said Mark E. Matthews of Caplin & Drysdale. The Title 31 FBAR sentencing guidelines focus on the high balance of the unreported foreign account, he said.  

Convictions for Title 26 tax losses greater than $10,000 can result in deportation for noncitizens, Matthews said. But the Justice Department has offered most offshore account defendants the choice of being sentenced under Title 31 or Title 26 guidelines, he said. Although Title 31 sentences are longer, the risk of deportation disappears, he said. That can be important for green card holders facing expulsion from the United States, he said. 

JAT Comments:

Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/7/13)

A recent article in Tax Notes summarizes a recent PLI conference on tax penalties.  Marie Sapirie, Revised Guidance on Tax Shelter Definition on the Way, 2013 TNT 42-9 (3/4/13).

Perhaps most importantly for tax crimes afficionados are statements made by Daniel W. Levy, AUSA SDNY, who is a prominent player in the Government's offshore crimes juggernaut.  The article discusses Mr. Levy's comments as follows:

"What we're trying to do is drive deterrence," said Daniel W. Levy, assistant U.S. attorney, Southern District of New York. At some point people who pay their housekeepers and nannies off the books will be prosecuted for criminal tax fraud, he said. "If it all revolves around housekeepers, I've already got my snappy code name in the can and it's Operation Clean Sweep," he joked.  

For now, however, "we're looking for clear violations of law, clear evidence of willfulness, cases that don't involve the possibility of negligence," Levy said. "We want the strongest possible evidence of willfulness because those are the strongest possible criminal cases we have." But that doesn't mean that the government shies away from complex cases, he added.  

Offshore bank accounts sometimes presented situations of relatively low tax loss and low evidence of willfulness. "We've had to make hard judgment calls about whether it's worth prosecuting that person given relatively limited tax evasion -- that is, relatively limited tax loss to the United States," Levy said. "There are some people who just passed into the night."

Former Kirkland & Ellis Partner Pleads to Tax Crimes (3/6/13)

Theodore L. Freedman, a former senior partner in Kirkland & Ellis, pled guilty today to four counts of tax perjury (Section 7206(1)) of approximately $2,097,211.  See USAO SDNY press release here.

The press release provides the typical hype of such press releases in tax season to encourage others to report taxes properly:

Manhattan U.S. Attorney Preet Bharara stated: “Theodore Freedman was an attorney at a high-powered and prestigious law firm who lied about his multi-million dollar compensation in order to avoid paying taxes, breaking the law and violating his professional code of conduct. Two things are certain: Freedman will now have to pay his taxes and more; and Freedman is now an admitted felon who has sacrificed his reputation, career, and potentially his liberty, for a few dollars. Others should not make the same bad calculation.”

The press release provides more details.  The only comment I have is that the press release says the plea is to four counts of tax fraud, which commonly means tax evasion.  However, the press release further says that

FREEDMAN, 65, of Pine Plains, New York, faces a maximum sentence of three years in prison on each of the tax fraud counts, for a total maximum sentence of 12 years in prison.

Hence, since tax evasion is a five year felony, I infer that the plea was to four counts of tax perjury rather than tax evasion.  Extrapolating from  other mainstream tax sentencings and the sentencing guidelines, as well as other white collar crime cases, he is unlikely to be sentence anywhere near 12 years.

Guest Blog - Morris on Inadvertently Running Afoul of the Tax Law (3/6/13)

Inadvertently Running Afoul of the Tax Law

Donald Morris, Professor of Accounting, University of Illinois Springfield

Author of Tax Cheating: Illegal—But Is It Immoral?

The term negligence holds an important place when talking about the work of a professional or a manufacturer or even about driving a car, where expectations for performance are clear and well established. Negligence in those circumstances is the “failure to use such care as a reasonably prudent and careful person would use under similar circumstances.” But what about negligence when applied to a taxpayer?  IRC § 6662 employs a generic meaning for negligence, which includes “any failure to make a reasonable attempt to comply with the provisions of the Code.” But measuring “reasonable” in the context of individual taxpayers is a contentious issue.

In 2011, the IRS audited 1,594,049 individual income tax returns, 1.1 percent of the 143,608,000 returns filed for the previous year. For correspondence audits, the IRS identified errors 79 percent of the times, resulting in corrections, and for field audits, the IRS identified errors 91percent of the time, resulted in IRS changes. Also for 2011, 28,749,882 of the returns filed—or one out of five—was assessed a civil penalty, while 500,472 of the returns audited was assessed an accuracy related (or negligence) penalty—a 31% penalty rate for negligence. If these results can be generalized to the taxpaying population, it is possible that 80 to 90 percent of individual tax returns, if examined by the IRS, would be found wanting, and of those, almost one-third would involve taxpayer negligence.

One question raised by these figures is whether taxpayers are truly that negligent—failing to use such care as a reasonably prudent and careful person would use under similar circumstances—or more likely, that the concept of negligence is out of place when applied to individual taxpayers confronting the notoriously complex tax law. At some point, what is officially seen as taxpayers failing to make a reasonable attempt to comply with the provisions of the Code, must instead be viewed as the congressional failure to provide a code that offers plain and clear guidance so that what a reasonably prudent and careful person would do under similar circumstances can be fairly determined.

A recent case in the U.S. Tax Court illustrates how easily the average taxpayer can cross the line to negligence without even knowing there was a line. In David P. Durden, et ux. v. Comm., TC Memo 2012-140 (05/17/2012), here, the taxpayers contested the IRS’s disallowance of a $25,171 charitable donation to their church. The IRS determined a tax deficiency of $7,552 and an accuracy-related penalty (§ 6662) of $1,510.40 with respect to the taxpayers’ 2007 jointly filed income tax return.

Proposed New FBAR Form And Explanation (3/5/13)

There is a proposed new FBAR, here.  The following is from the Notice and Request for Comments (some footnotes omitted):

Current Action: FinCEN is proposing to update the current TD F 90–22.1 report to standardize it with other BSA electronically filed reports and add the capability for a third party preparer to file the report should the owner of the foreign account wish to employ this option. To standardize the FBAR with other BSA reports, FinCEN proposes to add an item to record taxpayer identification number (‘‘TIN’’) Type to Part I, item 3a; Part I, item 4; Part III, item 25a; Part IV, item 35a; and V, item 35a. The addition of a check box to indicate that the amount is unknown is added to Parts II, III, IV, and V in item 15a. FinCEN also proposes to add a new item ‘‘Suffix’’ to Part I, item 8a; Part III, item 28a; and Part IV, item 37a. This update includes a revised signature section. It adds item 44a, a check box with the instruction ‘‘Check here [box for checking] if this report is completed by a 3rd party preparer and complete item 46 and the third party preparer section.’’ 3 A new section, ‘‘3rd Party Preparer Use Only,’’ is added to the report to support this method of filing.  The 3rd Party Preparer section consists of the preparer’s last name, first name, and middle initial (items 47, 48, and 49); preparer’s signature (item 50); a check box to indicate if the preparer is self-employed (item 51); the preparer’s TIN and TIN Type (items 52 and 52a); and a contact telephone number and extension, if applicable, (items 53 and 53a). If the preparer is an employee of a firm, the firm’s name and employer identification number (‘‘EIN’’) are entered in items 54 and 55. Finally, the address (street number, city, state, ZIP/ Postal Code, and country) of the preparer (if self-employed) or the firm is entered in items 56 through 60.matters.2

Title: Reports of foreign financial accounts (31 CFR 1010.350). OMB Control Number: 1506–0009 (The IRS’s OMB control number is 1545–2038).
Current Action: There is no change to the existing regulations.

Bank Leumi Takes Financial Statement Charge for U.S. Tax Investigation (3/5/13)

Bank Leumi has taken a charge to earnings for anticipated losses related to the U.S. probe of foreign bank activity in U.S. tax evasion.  Tova Cohen, Israel's Bank Leumi takes charge on U.S. tax probe costs (Bloomberg 3/4/13), here.  This is a financial statement provision / estimate only and is not a current payment or agreement to pay the U.S.

Excerpts from the article:

Leumi also said that since it does not know for certain how much it will have to spend on the U.S. investigation, the final expense could be significantly higher. 

The bank has urged U.S. clients to disclose information about their accounts to U.S. authorities, who are investigating Leumi and other foreign banks as part of a wide-ranging campaign to crackdown on Americans using offshore banks to avoid taxes. 

The U.S. effort has been focused largely on banks in Switzerland, but it has been known that banks in other countries, including Israel, are under scrutiny. 

In a December 16 letter obtained by Reuters, Leumi urged U.S. clients to join the Internal Revenue Service's voluntary disclosure scheme. 

Leumi's fourth-quarter provision is to cover any expenses arising from the investigation, which relates to the period 2002-2010, including the cost of advisers hired by the bank. 

"This provision is not an admission regarding any complaint that might be raised against the group by U.S. tax authorities," Leumi said in a statement.

Wegelin Sentenced (3/5/13)

Wegelin & Co. was sentenced on March 4, 2013.  The Press Release for USAO SDNY is here.  Since Wegelin is a lifeless, breathless artificial entity (although it may be a person in the Supreme Court's mythos), it cannot be sentenced to prison.  So, there are other punishments for criminal conduct.  Here they are as imposed by the Judge Rakoff (consistent with the plea agreement):

1. $16.3 million in forfeitures previously approved.
2.  $22.05 million fine
3. $20 million in restitution

Most of the press release recites a summary Wegelin's skulduggery / crimes,  most of which was known.  Here is the paragraph on the sentencing:

Preet Bharara, the United States Attorney for the Southern District of New York, and Kathryn Keneally, the Assistant Attorney General for the Tax Division of the Department of Justice, announced that WEGELIN & CO. (“WEGELIN”), a Swiss private bank, was sentenced today and ordered to pay approximately $58 million to the United States for conspiring with U.S. taxpayers and others to hide approximately $1.5 billion in secret Swiss bank accounts, and the income generated in the accounts, from the Internal Revenue Service (the “IRS”). Together with the April 2012 forfeiture of more than $16.2 million from WEGELIN’s U.S. correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million. WEGELIN pled guilty in January 2013 to one count of conspiracy to defraud the IRS, file false federal income tax returns, and evade federal income taxes before U.S. District Judge Jed S. Rakoff, who also imposed today’s sentence. This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea and sentencing of such a bank.

From Nate Raymond, UPDATE 2-Swiss bank Wegelin to pay $58 mln in US tax evasion case, here:

But while Rakoff approved the plea deal, he said there was a "funny tension" between the U.S. Justice Department's decision not to seek the maximum $40 million fine and its assertion Wegelin acted with "extreme willfulness." 

Rakoff said even including the $16.3 million the government recovered in April 2012 by seizing money in Wegelin's U.S. correspondent account, the bank will be giving up just 12 percent of the 560 million Swiss francs ($613 million) it earned after it sold most of its assets to regional Swiss bank Raiffeisen last year. 

"Not much pain there, is there?" Rakoff said. 

Rakoff, who has previously rejected U.S. Securities and Exchange Commission settlements with Citigroup Inc and Bank of America Corp, ultimately accepted the proposal, which prosecutor Daniel Levy called "very substantial." 

The judge said the government could justify a smaller fine to avoid the jurisidictional challenges of pursuing Wegelin. 

Wegelin said in a statement that it was pleased with the judge's decision.

Second Circuit Holds That Fraud on the Return -- Even If Not the Taxpayer's -- Causes an Unlimited Civil Assessment Statute of Limitations to Apply (2/4/13; Material Corrections on 2/5/13)

I have written in the past on nontaxpayer fraud as the fulcrum for an unlimited statute of limitations under Section 6501(c)(1) & (2), here.  I provide a list of the most pertinent blogs on this issue.  The issue arose from the Tax Court's opinion in Allen v. Commissioner, 128 T.C. 37 (2007), which held for the first time that preparer fraud invokes the unlimited statute of limitations.  The IRS had earlier held that, where a joint tax return was filed, one spouse's fraud would permit the unlimited statute as to the innocent spouse.  But the conventional wisdom to that point was that some taxpayer fraud was required to the unlimited statute.  The Tax Court in Allen read the statute literally; it included no requirement of taxpayer fraud.

In City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), here and here, the Second Circuit -- the second court to confront the issue head on -- aligned itself with Allen in a case involving preparer fraud that was included on the return of otherwise innocent taxpayers.  I quote the key part of the Second Circuit decision:

In analyzing § 6501(c)(1), we remain mindful that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the [Commissioner]." Bufferd v. Comm'r, 506 U.S. 523, 527 n.6 (1993) (internal quotation marks and citations omitted). "Accordingly, taking [that obligation] into account, we conclude that the limitations period for assessing [the taxpayer's] taxes is extended if the taxes were understated due to fraud of the preparer." Browning v. Comm'r, 102 T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n.14 (2011) (quoting Allen v. Comm'r, 128 T.C. 37, 40, 2007 WL 654357, at *40 (2007)). This makes intuitive sense because "the special disadvantage to the Commissioner in investigating fraudulent returns is present if the income tax return preparer committed the fraud that caused the taxes on the return to be understated." Allen, 2007 WL 654357, at *40.

So, the Second Circuit dealt perfunctorily with the Allen issue, but summarized the analysis.

Tax Counts of Conviction Drive the Bribery Sentence (2/2/13)

In United States v. Heard, 709 F.3d 413 (5th Cir. 2013), here, the defendant Heard was charged with bribery-related counts and with certain tax crimes.  The tax charges (Klein conspiracy (18 USC § 371) and tax evasion (§ 7201) were as follows:

The Government alleged that over the course of eighteen years, Heard, Lambert, and other defendants conspired to defraud the United States out of millions of dollars in employment taxes withheld by Heard's security companies. Overall, the Government alleges that the companies failed to pay a substantial sum in employment taxes, totaling over $5 million. According to the Government, the conspirators opened and closed all of these corporations, changed company names, moved physical locations, used different versions of the company names, signed documents with fictitious names, and used mail drops to prevent the IRS from discovering the individuals operating these companies and collecting the unpaid employment taxes. On appeal, neither Heard nor Lambert challenges the existence of a conspiracy to defraud the United States. 

The Government presented evidence that Heard diverted funds from his corporations to finance his lavish lifestyle, including purchasing a steer at the Houston Livestock Show and Rodeo. There was evidence that Heard had his employees cash corporate checks, often signed using a stamp with a fictitious name made in the course of the conspiracy, and give the money to him. This behavior formed the basis of the two tax evasion charges. The Government put on evidence that Heard failed to report distributions from SPI in 2001 and 2003. The Government has noted evidence that Heard filed false tax returns in other years as well.

The opinion does not describe the other tax charges for which he was convicted -- tax perjury (Section 7206(1)) or for tax obstruction (Section 7212(a)), apparently because none of the tax convictions were contested on appeal.

The principal issue on appeal was the bribery of a public official.  I do not address bribery and focus instead on some tax issues related to Heard's sentencing.

First, Heard objected to the two-level increase to the base offense level for failure to report illegal income.  See Guidelines § 2T1.1(b)(1).  The Court rejected the argument on the basis that Heard's failure to pay over the tax to the IRS permitted the corporation to make the distributions that constituted the income in question.

Second, Heard then objected to the reasonableness of the sentence.  The sentence was 151 months.  That sentence was based on the bribery count (which permitted a maximum of 15 years, but as noted below the Guideline calculation was driven by the tax counts of conviction):

Daugerdas Related Defendant Is Sentenced for Bullshit Tax Shelter Work (3/2/13)

Donna Guerin, a member of the Daugerdas team of bullshit tax shelter purveyors, has been sentenced "to eight years in prison on conspiracy and tax evasion charges stemming from her work on the design, marketing, and implementation of fraudulent tax shelters that allowed her clients to claim billions of dollars in fraudulent tax losses." USAO SDNY press release, here.  (For the earlier blog on Ms. Guerin's guilty plea, see Guerin, Daugerdas Sidekick, Pleads Guilty (Federal Tax Crimes Blog 9/14/12), here.)

The press release on her sentencing describes her conduct:

GUERIN was a partner at Altheimer & Gray (“A&G”), a Chicago law firm, between 1994 and 1998, and later moved with a small group of A&G attorneys to the newly-formed Chicago office of Jenkens & Gilchrist (“J&G”), a Texas-based law firm with offices throughout the United States. At different times between 1999 and 2005, GUERIN was a shareholder or partner at J&G. 

Between 1996 and 2004, GUERIN and other attorneys at J&G worked on the design, marketing and implementation of high-fee tax strategies for individual clients. Those strategies, or “tax shelters,” were designed to allow high-net-worth clients to eliminate, reduce, or defer taxes on significant income or gains. GUERIN and other J&G attorneys worked together with brokers from a financial institution, partners and employees of the accounting firm BDO Seidman, and other entities, in marketing and implementing the tax shelters. 

Among the fraudulent tax shelters designed, marketed, and implemented by GUERIN and her co-conspirators were “Short Sales,” “Short Options Strategy” (“SOS”), “Swaps,” and “HOMER.” The Short Sale tax shelter was marketed and sold from 1994 through 1999 to at least 290 wealthy individuals, and generated at least $2.6 billion in false and fraudulent tax losses. The SOS tax shelter was marketed and sold from 1998 through 2000 to at least 550 wealthy individuals, and generated at least $3.9 billion in false and fraudulent tax losses. The Swaps tax shelter was marketed and sold in 2001 and 2002 to at least 55 wealthy individuals, and generated more than $420 million in false and fraudulent tax losses. 

In return for receiving a fee from tax shelter clients based on a percentage of their purported tax losses – usually 5% for ordinary losses and 4% for capital losses – GUERIN and others at J&G assisted clients in implementing all of the stages of the fraudulent tax shelters, including setting up bank accounts and entities such as corporations and partnerships. GUERIN and others at J&G also provided the tax shelter clients a “more likely than not” legal opinion from J&G.

E&Y Admits Wrongdoing on Bullshit Tax Shelters; Will Pay $123 Million (3/1/13)

Ernst & Young has entered a non-prosecution agreement admitting "wrongful conduct by certain E&Y partners and employees in connection with the firm’s participation, from 1999 to 2004, in four tax shelters that were used by approximately 200 E&Y clients in an effort to defer, reduce, or eliminate tax liabilities of more than $2 billion."  See the USAO SDNY press release, here.  The NPA requires E&Y to pay the United States $123 million and undertake certainty prophylactic measures in its practice.  The press release further states:

According to the Statement of Facts to which E&Y has admitted, and as proven at the criminal trial of certain former E&Y partners (emphasis supplied by JAT):

Beginning in 1999 and ending in 2002, E&Y, in conjunction with various law firms, banks, and investment advisers, developed, marketed and implemented four tax shelter products called COBRA, CDS, CDS Add-On, and PICO. E&Y implemented these four tax shelter products for approximately 200 high net worth clients in an effort to defer, reduce, or eliminate $2 billion in aggregate tax liabilities. E&Y prepared tax returns reflecting tax losses claimed to have been derived from those tax shelter products and subsequently defended certain of its clients in connection with audits of those transactions by the IRS. 

A small group within E&Y known as the Strategic Individual Solutions Group (“SISG”) was primarily responsible for supervising and coordinating the marketing, implementation and defense of E&Y’s tax shelter products. Certain SISG tax shelter products were designed to appear to the IRS to be substantive investments that had favorable tax consequences when, in reality, the products were actually designed and marketed to clients as a series of preplanned steps that would defer, reduce or eliminate their tax liabilities. The typical client participating in these shelters was primarily, if not exclusively, motivated to achieve a desired tax savings. 

In order to deceive the IRS as to the true nature of the tax strategies, and to bolster arguments that the transactions had economic substance, some SISG personnel agreed upon and directed other E&Y employees to participate in a concerted effort not to create, disseminate, or publicize documents reflecting the tax motivation behind the strategies, or the preplanned sequence of steps necessary to effect the strategies. These SISG personnel thereby sought to prevent the IRS from detecting their clients’ purposes in employing these strategies. For example, in certain instances, members of SISG falsely portrayed the transactions under examination as purely investment-driven transactions, and falsely denied a tax motivation for the transactions in response to IRS Information Document Requests and in testimony to the IRS. 

Further, in implementing the sale of tax shelter products, certain members of SISG also prepared documents or correspondence that falsely and inaccurately reflected events or conversations, and that were designed to improperly influence the IRS’s view of the merits of the transactions in the event of an audit. These activities continued into 2003 and 2004.

Is This The Real Switzerland Or Just A Public Relations Facade? (3/1/13)

Switzerland is acting like it cares about its banks enabling other country tax evasion.  See Christopher M. Matthews, Switzerland Proposes Tax Evasion Crackdown (WSJ Blog 2/28/13), here.  I guess that it wants other countries and the world (except tax evaders who, I suspect, it will continue to welcome) to think that it no longer wants to enable citizens of other countries to commit tax evasion.  Sue.

Here is an excerpt from the WSJ Blog (emphasis supplied):

The Swiss Bankers Association welcomed most of the legislation but said it opposed a proposal requiring banks to review existing customer relationships for tax compliance. 

“The strategy of tax-compliant assets is forward-looking and should hinder the influx of untaxed new assets and should not be applied retroactively,” the group said in a news release Wednesday. ” Under no circumstances should it be extended to include the unilateral solution for the past.”

So, it wants to continue to protect its friends -- tax evaders as well as despots and drug dealers who are Switzerland's friends for the right price.

The statement from the Swiss Bankers Association (Statement from the SBA regarding the implementation of the extended due diligence requirements in tax matters and money laundering (adoption of the FATF guidelines) (2/27/13), is here.

Now, here are some interesting quotes from the SBA statement:

The Swiss Bankers Association (SBA) has long advocated a tax compliant financial centre.  [JAT Note:  just how long? Was it pre-Birkenfeld or post-Birkenfeld?  And, we all know the claim of advocacy (if truthful at all even now) is reluctant advocacy and post-Birkenfeld.  And so forth.] 

The SBA thus generally supports the approach taken by the Swiss Federal Council to embed both the extended due diligence requirements for financial intermediaries aimed at defending against untaxed assets, and the FATF predicate offences for money laundering (incl. tax offences) in the Anti Money Laundering Act (GwG). [JAT Note:  Oh, sure, readers can see where this is going and believe it if they choose to.]

HSBC India Client Pleads to Evasion (3/1/13)

Sameer Gupta, a New Jersey resident, pled to an information charging one count of tax evasion.  The announcement for the USAO D-NJ is here.  Gupta diverted corporate business receipts to 17 bank accounts into offshore banks accounts for himself and his family, 6 of which were with HSBC in India.  He also diverted significant amounts into other accounts (there may have been some evasion unrelated to offshore accounts).  In all, he evaded taxes of $1,198,054 in income for 2006 through 2009.

He "agreed to pay a one-time FBAR penalty of $259,045."

"The tax loss resulting from Gupta’s conduct is greater than $200,000 but less than $400,000"

The judge is District Judge Faith Hochberg.  (Wikipedia entry here.)

Court Rejects Ineffective Assistance of Counsel Related to Willful Blindness (3/1/13)

In Poole v. United States, 2013 U.S. Dist. LEXIS 20847 (D. Md. 2013), [link to be added later], the Court denied the petitioner's motion "to Vacate, Set Aside or Correct his Sentence pursuant to 28 U.S.C. § 2255."  Petitioner had been charged with others of one court of Klein conspiracy count (18 USC Section 371), four counts of aiding and assisting (Section 7206(2)), and one count of tax perjury (Section 7206(1)).  Petitioner waived jury trial, and the Government consented.  The judge found him guilty of the aiding and assisting counts but innocent of the conspiracy count.  (It is unclear what happened on the tax perjury count).  Poole was sentenced to 24 months on each count of conviction, to be served concurrently.

Poole did not like his conviction and sentence.  He appealed.  The conviction and sentence were affirmed on appeal.  Hence, Poole filed the § 2255 raising the typical arguments of ineffective assistance of counsel, among other arguments.

I focus here on his claims related to willful blindness.  The willful blindness concept goes by several names -- conscious avoidance, deliberate ignorance, etc.  I usually use conscious avoidance, but will use willful blindness here because that is what the Court used.

First, he argued that the trail court erred in applying the willful blindness concept.  I quote the decision's discussion of this issue in full:

B. Petitioner's Claim that This Court Erred in its Application of the Willful Blindness Standard 

Petitioner's second ground for vacating his sentence concerns the application of the willful blindness standard. Petitioner asserts that this Court improperly shifted the burden of proof on to the Petitioner when it determined that he was willfully blind, thereby establishing the guilty knowledge element of the crime of aiding and assisting in the filing of false tax returns in violation of 26 U.S.C. § 7206(2). Mot. to Vacate ¶ 14.

Failure to File Statute of Limitations Commences on Failure to File by Extended Due Date (3/1/13)

In United States v. Lyerly, 20132 U.S. Dist. LEXIS 20743 (SD AL 2013) [link to come], Judge Proctor, in a well-reasoned opinion, held that the statute of limitations for criminal failure to file when the taxpayer filed for an automatic extension to 10/15 but then failed to file by 10/15 begins to run on 10/15, the last day the taxpayer could have filed.  The taxpayer argued that, his failure to file by 10/15 meant that the extension was invalid and thus the return was due 4/15; hence, his failure to file by 10/15 started the criminal statute of limitations under Section 6531.

The Court noted, in essence, that the statute cannot begin running until the crime is committed.  The taxpayer could not be prosecuted for failure to file until 10/15 had come and gone without filing.

I had not included this nuance in the Federal Tax Crimes book.  I have added this to the ongoing draft and it will be included in the next version of the book.

The Role of Unclaimed Deductions in Computing Tax Loss For Sentencing (3/1/13)

Steven Toscher, here, and Dennis Perez, here, have a new article titled Recently Proposed Amendment to the Federal Sentencing Guidelines Affect Criminal Tax Cases, J. Tax Prac. & Proc. 47 (2013), here.  As readers of this blog probably already know, the tax loss is the primary driver of sentencing under the Guidelines.

One of the proposed options would assure that unclaimed deductions are allowed in the sentencing calculation.  Courts have not consistent on that issue.  Courts that disallowed unclaimed deductions focused on the Guidelines' definition of the tax loss as the "intended" tax loss.  Reasoning that the taxpayer did not claim the deductions on the return; hence, hence the tax loss he or she intended was the tax loss without the unclaimed deductions.

Several points are worth noting.

First, as the authors noted, "deductions related to the fraudulently omitted income somehow seem to get left off the tax return."

Second, if the tax loss is relevant to the elements of the crime (most importantly for tax evasion, where an element is a tax due and owing), unclaimed deductions are in fact considered in reducing the tax due and owing during the guilt finding phase.  Often, that will not save the day in that phase because the unclaimed deductions will not be enough to eliminate the tax due and owing or reduce the tax due and owing to an amount that makes it sufficiently insubstantial that the element is lacking.  But, in either case, the sentencing is based on an amount that really exceeds the real tax due and owing if unclaimed deductions are not considered.

As the authors note:

A very strong argument can be made that if we are going to punish tax offenders based upon the harm or tax loss, we should look to the actual tax harm or loss to the Government. If a restaurant owner decides to omit income, but also omits legitimate food costs that would otherwise be deductible, isn’t the actual harm to the government the lesser amount?