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."

The article also indicates that the IRS is now working on a definition of tax shelter which will be incorporated in new regulations.   Congress, the IRS and the courts have had difficulty in defining what is a tax shelter.  Hence, in some respects, it is an "eye of the beholder" exercise to identify a tax shelter.  In the oft used analogy, it is like pornography which Justice Potter Stewart famously said

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

Justice Potter Stewart, concurring opinion in Jacobellis v. Ohio 378 U.S. 184 (1964); see also the discussion in Wikipedia, here.

Section 6662(d)(2)(C), here, provides a general definition as follows:

(ii) Tax shelter For purposes of clause (i), the term “tax shelter” means—
  (I) a partnership or other entity,
    (II) any investment plan or arrangement, or
    (III) any other plan or arrangement,
 if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax.

Roland Barral, area counsel (financial services industry, IRS LB&I, is quoted as saying about the yet to be announced regulations:  "There's not going to be a hard and fast definition of what a tax shelter is -- it's not going to resolve any potential controversy out there on the definition -- but it's promised to be a more useful definition that's flexible and adaptable."

We'll see.