Tuesday, April 30, 2013

John Doe Summons Issued to Wells Fargo for Records of CIBC FirstCaribbean International Bank Correspondent Account (4/30/13)

DOJ has announced, here, that a district court approved John Doe Summons for records of CIBC FirstCaribbean International Bank's correspondent account at Wells Fargo, N.A. The goal of the summons is to "allow the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used FCIB’s Wells Fargo correspondent account."

The correspondent account and its use in tax enforcement in the context of offshore banks is described as:
A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers. All of this information the IRS can obtain through a John Doe summons issued to the U.S. bank holding the correspondent account.
As best I understand it, through the correspondent bank, the offshore bank without any other U.S. presence can service U.S. customers for some of their needs.  But, the U.S. bank establishing the correspondent  relationship -- in this case, Wells Fargo -- has a U.S. presence which means that it is subject to U.S. process, including a John Doe Summons which can be used to ferret out information of the offshore bank's customers using the relationship.  The use of such correspondent bank relationships to service U.S. customers needs is the weakness in offshore banks' claims of impregnability to U.S. tax and law enforcement because they have no U.S. presence.  A similar JDS was issued to UBS's U.S. branch for records of its correspodent relationship with Wegelin  & Co.  See prior coverage on the Wegelin related JDS.  IRS Issues John Doe Summons to UBS (All Over Again) (1/28/13; updated 2/2/13), here.

Monday, April 29, 2013

Tips to Avoid an IRS Criminal Investigation or, Worse, a Tax Grand Jury Investigation (4/27/13)

Kelly Phillips Erb, here, has authored this article:  Ten Ways Not To Say Goodbye: Avoiding Jailtime For Tax Charges (Forbes 4/26/13), here.  She opens her top ten list as follows:
When asked by a (repeat) client how to stay out of jail, criminal defense attorney Charlie Thomas offered this sage advice: Stop stealing shit. 
The same logic applies to taxes. If you want to avoid jail time, for the most part, the best advice is to file and pay on time. But I know that doesn’t always happen so let’s assume that you didn’t do that. What next? 
It’s important to understand that the Internal Revenue Service doesn’t want to throw you in jail. Criminal investigations consume a lot of resources: they take time and they’re expensive. So for most taxpayers, a criminal investigation isn’t a first step, but rather the end process of lengthy attempts to get you to resolve your tax obligations. In other words, it’s rare that an agent will show up on your doorstep one day with cuffs in hand.
Here are her top ten tips - I provide the bullet point only; she has discussion in her article.

  1. File and pay your taxes on time. 
  2. Open your mail and respond appropriately. 
  3. Cooperate during an examination/audit. 
  4. Be consistent. 
  5. Don’t destroy records. 
  6. Don’t lie. 
  7. Don’t be overconfident. 
  8. Hire a defense attorney. 
  9. Read the fine print. 
  10. Understand that there is no Perry Mason. 

Saturday, April 27, 2013

Using Kovel Experts to Protect the Attorney-Client Privilege and Work Product Privilege (4/27/13)

I draw readers attention to a recent excellent article on the use of "Kovel" experts in delivering legal services and protecting the attorney-client privilege and work product "privilege" for their work.  Sara E. Kropf and Julie Marie Blake, Protecting the Confidentiality of the Work of an 'Outsider' on the Defense Team Maximizing the Protections of the Attorney-Client Privilege and Work Product Doctrine, 37 Champion 26 (2013).  The article is available on the NACDL site here for members of NACDL.  The article is also available publicly on Sara Kropf's web site here.

I strongly recommend that readers interested in the subject read the article.

I offer below a cut and paste (footnotes omitted) of my less complete discussion from my Federal Tax Procedure book of the subject with reference to the attorney-client privilege, but the concepts should also apply to work product:
2. Protecting Information Developed in the Audit (Kovel). 
In delivering legal services, an attorney will often need the assistance of non-lawyers who will become privy to confidential information.  At its most basic level, non-attorney personnel in the lawyer’s firm – paralegals and other assistants, secretaries, etc. – will become privy to the information.  Disclosures of such information to these personnel will not constitute a waiver of any privileges that may otherwise apply.  Often, however, the attorney will find it helpful to engage personnel outside the firm.  For example, often in a tax engagement, an attorney will hire an outside accountant to assist the lawyer in delivering legal services to the client.  The lawyer may want the accountant to meet with the client and obtain information directly from the client, and cloak that information in the attorney-client privilege just as if the lawyer obtained it directly rather than through the accountant.  The traditional method by which that is done, at least in a tax practice, is through an arrangement whereby the lawyer engages the outside personnel – accountant in the present example – to become part of the team delivering legal services to the client.  
This procedure was approved early on in a case called United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).  The case is now shorthand for the concept.  The engagement for such legal related services is now commonly called a Kovel engagement, and the service provider is called a Kovel accountant or whatever is appropriate for the nature of the services.  Here, as in many areas of the law, it is imperative to do it and do it right.

More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13)

Yesterday I posted the general summary of the GAO report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here, and made comments regarding the general summary.  Yesterday's blog entry is GAO Report Targets Strategies Other than OVDP (4/26/13), here.  The focus of yesterday's blog was taxpayer use of alternative strategies to OVDP -- particularly quiet disclosure and go forward strategies.  Today, I will focus on the rest of the report that has some very interesting history of the IRS's identification of offshore account noncompliance and statistics of results, particularly from the 2009 OVDP.

Given the scope of the report, I will only present certain select issues.  I strongly encourage those with a particular interest in this general area to read the entire report to mine their own nuggets from it.  Where I quote, I omit footnotes.  However, footnotes are important for those wanting to dig into the report.

1.  The scope of the report is as follows (from opening letter to Senator Baucus):
You asked us to review IRS's 2009 Offshore Voluntary Disclosure Program (OVDP) -- IRS's second offshore program and the most recent program with enough closed cases for analysis. In this report we (1) describe the nature of the noncompliance of taxpayers participating in the 2009 OVDP, (2) determine the extent to which IRS used data from the 2009 OVDP in order to better prevent and detect future noncompliance, and (3) assess IRS's efforts to identify taxpayers who may have attempted quiet disclosures or other ways of circumventing some of the taxes, interest, and penalties that would otherwise be owed.
2.  "As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues."

Friday, April 26, 2013

JCT Staff Report on Selected Tax Procedure and Administration Issues" (4/26/13)

The Staff of the Joint Committee on Taxation has published "Present Law And Background Information Related To Selected Tax Procedure And Administration Issues" dated April 14, 2013, available here.

The three principal topics are (as presented):
I.  Background and Federal Tax Provisions and Practices Implicated in Identity Theft Fraud
II.  Authority to Regulate the Conduct of Paid Tax Return Preparers.
III. Civil Tax Penalties as a Factor in Voluntary Compliance.
I focus here on the last item -- Civil Tax Penalties as a Factor in Voluntary Compliance.  The subtopics are:
A. Civil Assessment Process
B. Civil Tax Penalties
Overview of penalties
Legislative and other history
Selected Issues Raised by Practitioner Groups and Others
The first first of these subtopics -- A. Civil Assessment Process -- is short and probably already known to readers of this blog.  Hence, I do not dwell upon that portion of the Report.  The first two divisions of the second subtopic - B. Civil Tax Penalties -- is probably also known to readers, hence I focus only on the last (Selected Issues) and quote it in its entirety (footnotes omitted), although it too is cryptic.
Whether penalties encourage voluntary compliance 
One criticism of the current regime is that many of the penalties which have been enacted, particularly over the past decade, seem to be designed for the purpose of raising revenue or punishing taxpayers rather than encouraging voluntary compliance. To support this assertion, practitioner groups and others have pointed to the strict liability penalty created under section 6662(b)(6) which imposes a penalty on transactions which lack economic substance and the strict liability penalty provided under section 6707A for failure to disclose reportable transactions. They argue that the lack of a reasonable cause defense under these provisions eliminates the opportunity, and the incentives, to remediate and to become compliant. Under section 6707A, for example, the penalty may be imposed even if the failure to disclose the transaction is not willful but instead inadvertent (perhaps because the taxpayer could not identify whether a transaction was a reportable transaction).

GAO Report Targets Strategies Other than OVDP (4/26/13)

The U.S. Government Accountability Office (GAO) has released a report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here.  The summary is here.

The summary page is here.
What GAO Found 
As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS. 
Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.

Hale Sheppard Article on Willful FBAR Penalty Cases (4/26/13)

Hale Sheppard, here, a player in the offshore account area, has published a new article, titled Government Wins Second Willful FBAR Penalty Case: What McBride Really Means for Taxpayers, J. Taxation (Spring 2013).  The article can be view, by link, on his Firm's Tax Blawg, here.  Here is a short summary of the scope of the article:
Taxpayers with undisclosed foreign accounts wish it were not true, but the reality is that the U.S. government, after a long period of inactivity and ineffectiveness, has taken significant steps over the past few years to identify and punish failures to file Forms TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), or foreign bank account reports (“FBARs”) as they are commonly known.  These steps include enacting legislation obligating foreign institutions to automatically provide the IRS with information about U.S. accountholders, paying handsome rewards to whistleblowers, introducing a new information return forcing taxpayers to report their foreign financial assets (including foreign accounts) to the IRS each year, imposing multi-million dollar fines and disclosure duties on foreign banks that collaborate with taxpayers to evade U.S. taxes, extracting valuable data about international tax transgressions from taxpayers participating in the Offshore Voluntary Disclosure Program (“OVDP”), and criminally prosecuting FBAR offenders.  Another step has become apparent in the past few months; that is, litigation to collect civil penalties for “willful” FBAR violations.  To date, two cases have been decided, both in favor of the U.S. government.  The attached article, “Government Wins Second Willful FBAR Penalty Case:  Analyzing What McBride Really Means to Taxpayers,” examines the most recent case.  The article was published in the Journal of Taxation (April 2013).
The article has detailed discussions of the two decided willful FBAR penalty cases (Williams and McBride), both finally won by the Government.  As I have noted  before, both cases have bad -- indeed egregious -- facts for the taxpayer, so I am not sure how to extrapolate any real world conclusions for U.S. taxpayers with better facts.

I recommend that readers having an interest in or concern about the willful FBAR penalty read the article in its entirety because it covers a lot of ground.  Here are some excerpts that I thought might be particularly helpful to readers:

Thursday, April 25, 2013

Sentencing Judge on Offshore Prosecution Chastises the Government for Lack of Judgment (4/25/13)

According to a newspaper report, the sentencing judge in the prosecution of Mary Estelle Curran of Palm Beach chastised the Government for prosecuting the case rather than resolving it civilly.  Ms. Curran was among the first group of 250 U.S. taxpayers ratted out by UBS and thus was not rejected from the OVDP program when she tried to join it.  Michele Dargan, Judge frees woman seconds after giving her probation (Palm Beach Daily News 4/25/13), here.  The Government prosecuted her.  In pleading to two counts of tax perjury (Section 7206(1)), she agreed to pay the standard 50% high amount FBAR penalty of  $26.6 million on a high account amount of $43 million.  Key excerpts:
U.S. District Judge Kenneth Ryskamp sentenced Mary Estelle Curran of Palm Beach to one year probation Thursday on tax charges, before revoking the sentence five seconds later and sending her out of the courtroom a free woman. 
Ryskamp chastised the government for prosecuting the 79-year-old woman when 38,000 other people in the same situation were given amnesty. 
* * * *\ 
“Based on these facts, did it ever occur to the government to dismiss these charges,” Ryskamp said. “Instead, the government decided it had to make a felon out of this woman?”\ 
Mark Daly, from the Department of Justice Tax Division, told Ryskamp that Curran’s husband, Mortimer, was a “very wealthy man” and shouldn’t have turned to a foreign national for an interpretation of U.S. Law.”

Another article:  Susannah Nesmith & David Voreacos, Widow Gets Less Than Minute of Probation in U.S. Tax Case (Bloomberg 4/25/13), here.  Excerpts:\

Thursday, April 18, 2013

TIGTA Report

TIGTA has released a recent report titled Taxpayer Referrals of Suspected Tax Fraud Result in Tax Assessments, but Processing of the Referrals Could Be Improved (2/20/13), Reference Number: 2013-40-022, here in pdf and here in html.
When individuals want to report possible instances of Federal tax fraud by a taxpayer, the IRS instructs them to complete and mail Form 3949-A, Information Referral, or to provide this information via a letter.  During Fiscal Years 2010 through 2012, the Small Business/Self-Employed (SB/SE) and Wage Investment (W&I) Divisions received and screened 274,976 Forms 3949-A.  During that same time period, examinations initiated from Form 3949-A referrals resulted in more than $66.5 million in tax assessments.  However, TIGTA previously reported that the IRS misrouted referrals it sent to other functions.  While corrective actions will reduce the number of referrals received by the SB/SE and W&I Divisions, both divisions can more efficiently and effectively process Forms 3949-A. 
This audit was initiated in coordination with a previous TIGTA audit based on a TIGTA Office of Investigations referral that reported thousands of identity theft cases reported on Form 3949-A were not being processed. 
TIGTA determined that both the SB/SE and W&I Division screeners improperly screened Forms 3949-A.  While improvements to the processes and better communication with the Accounts Management function will reduce the number of referrals the divisions receive, other issues affect the screeners’ ability to research and identify referrals worthy of examination.  Neither division has a routine review process to evaluate screened referrals not selected for examination.  Routine checks of screened work would identify potential areas for improvement.  In addition, the SB/SE Division does not have specific guidelines for screeners.  More detailed guidelines would allow SB/SE Division screeners to be more consistent when evaluating referrals. 
The SB/SE and W&I Divisions spent approximately $211,041 to screen the 102,465 Forms 3949-A received for Fiscal Year 2012 and assessed more than $29 million.  The divisions should reevaluate the Form 3949-A program’s effectiveness once corrective actions are complete and determine how much of their limited resources they should devote to the program.  Increased efficiency may make it more cost efficient for the divisions to place a higher priority on these referrals.

Bank Frey Executive and Swiss Lawyer Indicted (4/18/13)

The USA for SDNY has announced, here, the indictment of Stefan Buck, head of "Bank 1" (Bank Frey), and Edgar Paltzer, a partner at a Swiss law firm, a dual U.S.-Swiss citizen, and a registered attorney in NY.  (A copy of the indictment is here.)  According to the press release, they "are each charged with one count of conspiring with U.S. taxpayer-clients and others to hide millions of dollars in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts."  The following are other key excepts from the press release.
PALTZER is a U.S.- and Swiss-trained lawyer who began to practice at the Swiss Law Firm in 1998, in the fields of international private client work, wealth transfer planning, successions, trusts and foundations, and eventually became a partner. PALTZER is licensed to practice in New York State. 
In 2007, BUCK worked as a client adviser, and later, as the head of private banking at Swiss Bank No. 1, which provides private banking, asset management, and other services to clients around the world. In December 2012, BUCK became a member of Swiss Bank No. 1’s three-person executive committee. 
In March 2009, UBS AG (“UBS”), a Swiss bank that provided private banking services to U.S. taxpayers, entered into a deferred prosecution agreement with the Department of Justice and admitted engaging in a conspiracy to defraud the IRS. In February 2012, Wegelin & Co. (“Wegelin”), another Swiss bank that provided similar services, was indicted by a grand jury in the Southern District of New York for its conduct in conspiring with U.S. taxpayers to evade taxes, and ultimately pled guilty. Between March 2009 and February 2012, Swiss Bank No. 1 experienced an increase of approximately 300% in clients who were U.S. taxpayers. Further, as of September 30, 2012, Swiss Bank No. 1 had approximately 2 billion Swiss francs in assets under management (“AUM”), equating to approximately $2.12 billion. Approximately 882.5 million Swiss francs of this AUM, equating to approximately $938 million, or approximately 44 percent of Swiss Bank No. 1’s total AUM, was held on behalf of U.S. taxpayers living in the United States.

Update on U.S. Swiss Negotiations for a Global Settlement (4/18/13)

Reuters reports developments on this front.  Katharina Bart and Kim Dixon, Deal on the table in U.S.-Swiss tax dodger dispute (Reuters 4/17/13), here.  Excerpts:
The Swiss and U.S. governments were considering on Wednesday a possible solution to end their dispute over Swiss banks accused of helping wealthy Americans evade billions of dollars in taxes. 
[A] source familiar with the long-running and complex talks has told Reuters that the two countries have agreed on an outline for a deal. 
To determine how they should be dealt with, the source said, more than 300 Swiss banks would be divided into groups based on the extent to which they had helped U.S. clients hide money.
The article also discusses the indictment of a Bank Frey executive, Stefan Buck, and a Swiss lawyer, Edgar Paltzer, yesterday.  I will devote a separate blog to that indictment, but I do not here that the diplomatic negotiations and the indictment are probably related.

Wednesday, April 17, 2013

TIGTA Report on Actions to Identify Potential Fraud During Civil Audits (4/17/13)

TIGTA issued a new report, Actions Can Be Taken to Reinforce the Importance of Recognizing and Investigating Fraud Indicators During Office Audits, here.  Here are the published highlights:
Penalties, such as for civil fraud, are designed to promote voluntary compliance by imposing an economic cost on taxpayers who choose not to comply with the tax law. Because indicators of fraud are not always recognized and properly investigated, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury. 
This audit was initiated to determine whether fraud is recognized and pursued during office audits of individual tax returns in accordance with IRS procedures and guidelines.  The review is part of our Fiscal Year 2013 Annual Audit Plan and addresses the major management challenge of Tax Compliance Initiatives.  
TIGTA reviewed a statistical sample of 100 office audits, closed between October 2009 and September 2010, that involved high-income and sole proprietor taxpayers agreeing they owed additional taxes of at least $10,000.  The review identified 26 audits with fraud indicators that were not recognized and investigated in accordance with some key IRS procedures and guidelines.  When the sample results are projected to the population of 3,674 closed office audits meeting the above characteristics, TIGTA estimates that fraud indicators were not recognized and investigated in approximately 939 office audits during Fiscal Year 2010.  TIGTA estimates that additional assessments totaling approximately $5.8 million in civil fraud penalties may have been avoided by taxpayers. 
TIGTA’s evaluation indicates that a combination of factors caused the quality problems and that actions can be taken at the examiner and first-line manager levels to better ensure that fraud indicators are recognized and properly investigated.

Tuesday, April 16, 2013

Lesson for Students on the Civil Tax Collateral Consequences of a Criminal Case (4/16/13)

Last night in our Tax Fraud class at UH Law School, we covered a chapter on Civil Tax Considerations.  A Tax Court decision yesterday offers a good opportunity to reprise key points from the class.  The materials in this blog are directed to students rather than experienced practitioners.

In Laciny v. Commissioner, T.C. Memo. 2013-107, here, after pleading guilty to tax perjury (Section 7206(1), here), the IRS pursued the taxes for years of her counts of conviction and related years.  The Tax Court sustained the IRS's determination of additional taxes and the civil fraud penalty.  The following are key points from the opinion (and except for the student's curiosity, the reading the opinion is not necessary).

1.  The underlying tax misconduct was the diversion of corporate funds, thereby underreporting both corporate tax and individual tax.

2.  The wife had previously been indicted for multiple counts, including tax perjury for corporate and individual returns, conspiracy, and aiding and abetting.  She then pled guilty to two counts each of corporate and personal false returns (tax perjury).  The plea agreement had a schedule of total unreported diverted funds.  During her colloquy on plea, she admitted her misconduct including the intentional omission of income.

3.  The wife was sentenced to one year and one-day.  (Students will recall that the addition of one day over one year qualifies the defendant for the good time credit that will knock time off the sentence actually served,  provided, of course, the defendant behaves while incarcerated.)  She was also ordered to pay restitution in an amount not specified, although the respondent agreed that any payments of the restitution would be applied to reduce the tax liability (see fn. 9 on p. 13 of the slip opinion).

4.  The IRS issued a notice of deficiency to husband and wife relating to the tax liability involved and the civil fraud penalty.  (Students will recall that Congress recently enacted a provision that permits the IRS to assess amounts related to tax restitution immediately without having to issue a notice of deficiency; of course to the extent that the IRS seeks more than is included in an order of restitution (which typically would not include mere civil tax adjustments or penalties), the IRS will have to issue a notice of deficiency.)

Sunday, April 14, 2013

Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (4/14/13)

This is more or less a whimper from the past.  Readers may recall the Supreme Court decision in Boulware v. United States, 552 U.S. 421 (2008), here.  See also Boulware Wins the Battle Only to Lose the War (FTCB 3/9/09) , here (discussing the Ninth Circuit's opinion on remand from the Supreme Court.).

In HIE Holdings v. Commissioner, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, Boulware and his related corporations suffered the civil tax fall out from the criminal case.  The opinion is a nonprecedential opinion.  Many such opinions are cryptic; HIE Holdings is cryptic, but the key point for this blog is clear.  I quote the relevant portion in full:\
This appeal concerns tax positions filed by Hawaiian Isles Enterprises, Inc.  (HIE) and HIE Holdings, Inc. (Holdings). First, the founder and controlling shareholder of HIE and Holdings, Michael Boulware, faced criminal and civil litigation for fraud and tax evasion. HIE and Holdings paid Boulware's substantial legal defense fees and claimed these fees as deductible business expenses. * * * * In a thorough opinion, the Tax Court, for the most part, agreed, characterizing most of the legal fees as Boulware's personal expenses * * * *.  We affirm the judgment of the Tax Court. 
A. Legal Fees 
Boulware's contested legal defense fees are not an "ordinary and necessary" business expense under I.R.C. § 162(a) as they do not "arise[] in connection with the . . . profit-seeking activities" of HIE or Holdings, but instead spring from the personal fraud of Boulware. United States v. Gilmore, 372 U.S. 39, 40, 48, 83 S. Ct. 623, 9 L. Ed. 2d 570, 1963-1 C.B. 356 (1963). Nor are these fees theft losses under I.R.C. § 165(e), as HIE and Holdings knowingly paid for Boulware's fees. Taxpayers' attempt to raise the issue of the Lee expenses for appeal in a footnote fails under United States v. Strong, 489 F.3d 1055, 1060 n.4 (9th Cir. 2007) (holding that "[t]he summary mention of an issue in a footnote, without reasoning in support of the appellant's argument, is insufficient to raise the issue on appeal" (internal quotation marks omitted)). Taxpayers' attempt to object to the Tax Court's treatment of their bad debt is similarly unavailing, as the Tax Court's judgment was not adverse to the taxpayers on this issue. Finally, the Tax Court did not clearly err in determining that Boulware cannot deduct these fees himself as ordinary and necessary expenses of his systemic wrongdoings, as his various schemes did not amount to a trade or business, even an illicit one.
This is so cryptic that, from the opinion, not everything said under "Legal Fees" is clear.  Still, it is clear that the Tax Court's denial of those legal fees was affirmed.  The next related questions, not answered, is whether the corporations' payment of those legal fees would be either compensation or dividend distributions to Boulware and, if so, Boulware could himself deduct those fees (subject to any limitations on deductions).

Saturday, April 13, 2013

Negative Inference from NonParty Alleged Co-Conspirator's Invocation of Fifth Amendment in a Civil Case (4/13/13)

Last week, in the class that Larry Campagna, here, and I teach on Tax Fraud at UH Law School Larry, a student asked about the assertion of the Fifth Amendment by a third party witness -- alleged to be a co-conspirator -- permits a negative inference against a party alleged to be a co-conspirator.  It is a good question, so I took a look and thought I would post my very brief research -- I have not chased this to the ground.

Of course, it is common-place in criminal cases that a nonparty co-conspirator's testimony can be used against a co-conspirator defendant.  The applicable Federal Rule of Evidence, Rule 801(d)(2)(E), here, so provides:
(d) Statements That Are Not Hearsay. A statement that meets the following conditions is not hearsay: 
* * * * 
(2) An Opposing Party’s Statement. The statement is offered against an opposing party and: 
* * * * 
(C) was made by a person whom the party authorized to make a statement on the subject; 
(D) was made by the party’s agent or employee on a matter within the scope of that relationship and while it existed; or 
(E) was made by the party’s coconspirator during and in furtherance of the conspiracy.   
The statement must be considered but does not by itself establish the declarant’s authority under (C); the existence or scope of the relationship under (D); or the existence of the conspiracy or participation in it under (E).
The Notes of the drafting Committee say:

A Self-Proclaimed "Simple Man," "Utterly Uneducated" in Tax and Finance, but Still a Self-Made Multi-Millionaire Loses his Bullshit Tax Shelter Case (4/13/13)

In Kerman v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 7032 (6th Cir. 2013), here, the Sixth Circuit rejected the Kerman's claim for tax benefits or, at least, relief from penalties from a bullshit tax shelter, this one of the Cards variety that has met with uniform rejection from the courts.  I just gave you the final result.  But the opinion starts this way (usually you can tell the result from the opening):
A tax shelter can be legitimate — if the reported transaction has economic substance. But the shelter Mark Kerman participated in lacked such substance. The transaction had no purpose other than the creation of an income tax benefit. After Kerman claimed the benefit on his tax return, the IRS disallowed the deduction and imposed a valuation misstatement penalty pursuant to 26 U.S.C. § 6662(e), which was increased to 40 percent of the unpaid tax pursuant to § 6662(h). The tax court affirmed the IRS's decision. Kerman appeals, contending that the shelter was legitimate and that, even if it was not, the penalty should not be imposed. Because the transaction lacked economic substance and Kerman lacked reasonable cause or good faith to believe that it did, we AFFIRM.
Mark Kerman is a college-educated multi-millionaire.
Toward the end of the opinion another key signal dot is connected as follows:
Finally, Kerman argues, the tax court gave him too much credit. He's just a simple man, "utterly uneducated in the complex tax arena — let alone the more byzantine tax-shelter realm." Appellant's Br. 48. Consequently, he was forced to rely on personal advisors. And, he argues, his reliance was reasonable even if his advisors had conflicts of interest.
So, what should I say about the opinion?  Prudence and respect for my readers time counsels that I should not say anything except the bullet points from the case.  So, I won't.

Fraud Civil and Criminal and Collateral Consequences (4/13/13)

Professor Joshua Blank, Professor of Tax Practice and Faculty Director of the Graduate Tax Program, New York University School of Law, here, has posted this article to SSRN:
Blank, Joshua D. , Collateral Compliance (February 25, 2013). University of Pennsylvania Law Review, Forthcoming; NYU Law and Economics Research Paper No. 12-06. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2032788
This posting is a draft of 2/25/13 of an article that will, presumably subject to final revisions, appear in the 162 U. PA. L. REV. __ (forthcoming, 2013).

This draft says:
Please do not cite without permission
For this reason, I will not cite it quote it, etc., except for the table of contents below.  I do expect, however, to make a blog entry on it when the law review article is published.  In the meantime, readers having an interest in the area can read this draft

SSRN Abstract:
As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing. 
This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

Sentencing Guideline Amendment on Unclaimed Credits, Deductions and Exemptions (4/13/13)

The United States Sentencing Commission voted on its 2013 amendments.  The amendments are here,  with the tax amendments on p. 61.   The amendments change the Commentary in §2T1.1 to read as follows:
Unclaimed Credits, Deduction s, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).  
However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice).  
The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.
Hat tip to Peter Hardy, here, for calling this development to my attention.

For past postings on this issue, see

  1. Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (FTCB 3/16/13), here.
  2. Tax Conviction and Sentence Affirmed Under Unusual Circumstances (FTCB 12/3/12), here.
  3. Tax Due and Owing, Tax Loss, Restitution, Civil Tax (FTCB 5/23/12), here.
  4. Tenth Circuit Decision on Unclaimed Deductions for Sentencing Tax Loss Calculations (FTCB 8/16/11), here.

Taxpayer Signing Form 4549 Required by Plea Agreement Waives Ability to Contest Merits of Tax Assessment in CDP (4/13/13)

In Hall v. Commissioner, T.C. Memo. 2013-93, here, the taxpayer, a lawyer, pled guilty to a tax crime.  The plea required that she sign a Form 4549, waiving her right to a deficiency notice and permitting the IRS to assess immediately.  She signed the 4549.  The IRS assessed.  The taxpayer did not pay.  The taxpayer then brought a Collections Due Process ("CDP") proceeding to stall IRS collection efforts. In that proceeding, she wanted to contest the underlying tax liability.  The issue was whether she could contest the tax liability after signing a Form 4549.  Generally, a taxpayer may not contest liability in a CDP proceeding if the taxpayer had the opportunity to contest before, and signing a Form 4549, which waives the issuance of a notice of deficiency, presents the taxpayer an opportunity to contest by just not signing the Form 4549.  As described  by the Tax Court, the Form 4949 is:
Form 4549 lists adjustments to taxable income and the corrected tax liability and balance due. Form 4549 reflects a taxpayer's consent to the Commissioner's immediate assessment and collection of the taxes, penalties, and interest included therein. See Urbano v. Commissioner, 122 T.C. 384, 394 (2004); Gilmer v. Commissioner, T.C. Memo. 2009-296, 2009 Tax Ct. Memo LEXIS 299, at *9 n.7. In pertinent part Form 4549 states: 
Consent to Assessment and Collection — I do not wish to exercise my appeal rights with the Internal Revenue Service or to contest in the United States Tax Court the findings in this report. Therefore, I give my consent to the immediate assessment and collection of any increase in tax and penalties, and accept any decrease in tax and penalties shown above, plus additional interest as provided by law. * * *
This foreclosed the taxpayer in this case.  The Court reasoned (one footnote omitted):
A taxpayer may challenge the existence or amount of the underlying tax liabilities [in a CDP] if the taxpayer did not receive any statutory notice of deficiency for such tax liabilities or did not otherwise have an opportunity to dispute such tax liabilities. Sec. 6330(c)(2)(B). A taxpayer who waives her right to challenge the proposed assessments is deemed to have had the opportunity to dispute the underlying tax liabilities and is thereby precluded from challenging those tax liabilities in the CDP hearing or before this Court. See Aguirre v. Commissioner, 117 T.C. 324, 327 (2001); Coleman v. Commissioner, T.C. Memo. 2007-263, 2007 Tax Ct. Memo LEXIS 264, at *3-*4. By signing Form 4549 a taxpayer waives her right to raise the issue of her underlying liabilities in this Court. See Aguirre v. Commissioner, 117 T.C. at 327; Coleman v. Commissioner, 2007 Tax Ct. Memo LEXIS 264, at *3-*4.

Care Must Be Taken With Closing Agreements in the Offshore Initiatives (4/13/13)

In Nance v. United States, 2013 U.S. Dist. LEXIS 52050 (WD TN 2013), here, the Nances (husband and wife), guided by an attorney who held himself out as an experienced tax attorney, undertook some "offshoring" of their assets with consequent tax underpayment and failures to file.  In the 1990s, they created two corporations in the Bahamas and a trust in Costa Rica.  They transferred assets to these entities.  In late 1999, the attorney advised them that these activities "may 'no longer' be valid from a tax standpoint."  He did not advise them, however, to liquidate the entities or take any other remedial action (such as form filings); still, the Nances ceased further deposits.

In 2003, the IRS contacted the Nances to invite them into an earlier version of a voluntary compliance initiative targeted to offshore financial accounts, called the Voluntary Compliance Initiative.  Under that initiative, the tax was required and penalties as follows:  (i) a civil fraud penalty for a major year and (ii) an accuracy related penalty for the other years.  The letter advised that (i) an FBAR penalty would be assessed for 1 year and (ii) other penalties, such as for failure to filed Form 3520 or 5471, would not be asserted if delinquent returns were filed.  The Nances, guided by new counsel, joined the program.  The communications between the IRS and the new counsel indicated some confusion as to whether the Nances would be required to filed the information forms.  Ultimately, the new counsel submitted, among other things, Forms 3520-A to the agent for the years 1997 through 2003.  Thereafter, on February 23, 2006, the Nances and the IRS entered a Closing Agreement for the years 1997 through 2002, in which they paid $1,245,396.52 in tax and $446,344.50 in penalties.  That closing agreement provided "[t]his agreement is final and conclusive except . . . if it relates to a tax period ending after the date of this agreement, it is subject to any law, enacted after the agreement date, that applies to that tax period."

On September 11, 2006, the IRS asserted a penalty of $156,478.00 based on the Nances' failure to filed Form 3520-A for 2003, a form that was due on March 15, 2004.  The Nances asked for waiver of the penalty.  The IRS denied the request.  This suit following that denial.

Friday, April 12, 2013

AAG Tax Says DOJ Tax Will Be Fair in Determining Whether to Prosecute Taxpayers Kicked Out of OVDP (4/12/13)

In a prior blog, I reported on news accounts of Bank Leumi clients being kicked out of the offshore voluntary disclosure programs.  See Bank Leumi U.S. Clients Rejected from OVDP (FTCB 3/8/13), here.  Responding to inquiries about whether those taxpayers will be prosecuted, Kathy Keneally, AAG Tax, said the Government would consider fairness.  See Janet Novack, Taxpayers Who Lost Offshore Account Amnesty Promised Fair Treatment (Forbes 4/11/12), here.

Excerpts from Ms. Novack's fine article:
According to their attorneys, some of the taxpayers ejected from the program had already made a full disclosure of offshore accounts and unreported income and had even paid back taxes to the IRS. “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,’’ Edward M. Robbins Jr., of Hochman, Salkin, Rettig, Toscher & Perez, the big West Coast tax defense firm, told Forbes in March. 
Keneally said yesterday that  “the DOJ Tax Division will review each case based on its specific facts and circumstances before authorizing prosecution, as is its practice in all criminal tax investigations.’’ In what was obviously a carefully worded statement, she added:  “In  any case in which an individual received a conditional acceptance letter, made substantive disclosures, but was subsequently disqualified from participation in the OVDP, the Tax Division considers now and will continue to consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding against that individual, as part of the Tax Division’s review.” 
* * * *

Plea to Offshore Bank Charges Related to Israeli Banks (4/12/13)

DOJ Tax announces a plea in the following press release:  California Businesswoman Agrees to Plead Guilty to Conspiracy to Conceal Israeli Bank Accounts (DOJ Tax 4/12/13), here.  Key Facts:

Defendant:  Guity Kashfi
Conviction: By Plea
Count: Conspiracy (1 count)
Banks:  2 Israeli Banks (perhaps Mizrahi-Tefahot (Israel) and Bank Leumi (Israel) involved in similar conduct charged against Zvi Sperling (see here), whose charge and plea is referenced in the news release).
Court: CD CA
Judge: ?

Key narrative:
According to court documents, Kashfi, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel. The accounts were held in the names of nominees in order to keep them secret from the United States government. Kashfi used the accounts to obtain “back-to-back” loans from a branch of the bank in Los Angeles. Although the loans were secured or collateralized with certificates of deposit held in Kashfi’s undeclared offshore accounts, that fact was concealed to keep Kashfi’s offshore accounts secret.

According to the plea agreement, in 2008, Kashfi was told by a banker in Los Angeles that the bank was going to use the funds in her account in Israel to pay off her back-to-back loans in Los Angeles.   Rather than pay off the loans, Kashfi transferred approximately $2 million to an account located in Luxembourg at a branch of a second Israeli bank. Kashfi did this to avoid repatriating funds from her first Israeli account back to the United States to pay back her loans in Los Angeles.   Kashfi eventually used the funds in Luxembourg to obtain a new back-to-back loan from a branch of the second Israeli bank located in Los Angeles. In 2009, Kashfi went to Luxembourg to close her account. While there, two foreign bankers advised Kashfi that her money was safe in Luxembourg because the bank was a private bank and no one could get information relating to bank accounts located in Luxembourg. In 2011, Kashfi closed all her accounts in Luxembourg by signing paperwork in Los Angeles. She then transferred the funds to banks in the United States.

Convictions of U.S. Persons Related to UBS and Pictet Accounts (4/12/13)

DOJ Tax has this press release titled Arizona Businessmen and California Attorney Convicted for Hiding Millions in Secret Foreign Bank Accounts at UBS AG and Pictet & Cie (DOJ Tax 4/12/13), here.

Defendants:  Stephen M. Kerr and Michael Quiel
Conviction: by jury verdict
Counts of Conviction:  Tax Perjury (2 counts); FBAR (Kerr only, 2 counts).

Pior conviction by plea:  Christopher M. Rusch - conspiracy (1 count) and FBAR (1 count) on 2/6/13

Key excerpts:
According to the evidence presented at trial, Kerr and Quiel, with the assistance of Rusch and others, including Swiss nationals, established nominee foreign entities and corresponding bank accounts at UBS AG and Pictet & Cie to conceal Kerr and Quiel’s ownership and control of stock and income that were deposited into these accounts. Rusch testified at trial, admitting that he and others caused the sale of the shares of stock through the undeclared accounts . Kerr also hired Rusch to facilitate the domestic sale of 11.4 million shares of stock held in the name of a foreign entity controlled by Kerr and to transfer the proceeds from the sale of the stock to an undeclared foreign account at UBS AG to conceal that the money was income to Kerr that should have been reported on his tax returns.

The evidence established that in order to create a further layer of separation between Kerr and Quiel and the income they concealed in the undeclared foreign accounts, they directed Rusch to transfer some of the money in the undeclared accounts back to the United States through Rusch’s Interest on Lawyer’s Trust Account (IOLTA) before dispersing the money for Kerr and Quiel’s benefit. Rusch transferred approximately $2,000,000 through his IOLTA account so that Kerr could purchase a golf course in Erie, Colo.  Additionally, after transferring approximately $955,000 from Quiel’s undeclared foreign accounts to his IOLTA account, at Quiel’s direction, Rusch wrote checks payable to an Arizona bank account owned and controlled by Quiel. 
According to trial evidence, Kerr and Quiel filed false tax returns with the IRS that failed to report the proceeds of stock sales, interest and dividend income earned through the secret accounts, and further failed to report that they had a financial interest in bank accounts located in Switzerland. Kerr also failed to file FBARs in 2007 and 2008 that reported his offshore accounts to the IRS.  Accountants for Kerr and Quiel testified that neither Kerr nor Quiel disclosed the existence of their offshore accounts in Switzerland during the preparation of their tax returns.

NYT Room for Debate Discussion on Tax Havens (4/12/13)

The New York Times has a Room  for Debate Discussion titled Global Tax Dodge or Economic Boon (NYT 4/12/13), here.  The introduction to the discussions is:
The recent disclosure by a journalistic consortium of 2.5 million leaked files from offshore bank accounts and shell companies provided stunning insight into the estimated $21 trillion held in secretive offshore tax havens, like the Cayman Islands. 
Are these havens essential to a smooth-running world economy or just a tax dodge that benefits the rich and should be more tightly regulated? Can the U.S. government rein in their use?
The topics of the discussion and links are:

Powerful Opposition to Simple Reforms, here.
Changes in federal law would allow reporting and accounting of profits to be transparent and make the rich pay their share of taxes.

Tax Havens Allow Economic Vitality, here.
Competition from foreign financial institutions, unfettered by our laws, have held down U.S. tax rates.

An Unneeded Gift to Corporations, here.
Tax havens account for 43 percent of U.S. multinationals' overseas profit, but few of their foreign investments or foreign workers.

Help the I.R.S. Do Its Job, here.
Get tough with countries that act as tax havens, but also give the I.R.S. the money it needs to track down tax cheats.

Don’t Fight It if It Helps Competition, here.
Keeping profits untaxed overseas can keep companies on an even footing with those in growing economies like Brazil.


I discuss and link to the report here:  Investigative Journalists Report on the Maze of Offshore Accounts as Global Problem (Federal Tax Crimes Blog 4/4/13), here.

Statute of Limitations on Taxpayers' Claims Against Enablers of Bullshit Tax Shelters Starts on Issuance of FPAA (4/12/13)

In McMahan v. Deutsche Bank, 2013 U.S. Dist. LEXIS 49439 (ND IL 2013), here, the plaintiffs sued certain tax shelter-enablers for damages from their promotion to plaintiffs of certain Daugerdas related Son-of-Boss shelters (also called bull-shit tax shelters).  (Readers will recall that Daugerdas and some of his colleagues were prosecuted and convicted for SOB shelters; all but one of the convictions were reversed for juror misconduct, but the defendants whose convictions were reversed will be retried and one has already pled guilty.)

The defendants in this civil case, being displeased with having been sued, moved to dismiss some of the claims.  The court granted some of the defendants requests and denied others.  I focus on the defendants' motion to dismiss because the suit was outside the statute of limitations.

The key facts (accepted by the judge to test the motions; as I present some of these, they are extrapolations from the sparse facts offered in the opinion but the extrapolations are almost certainly in the complaint) are that the plaintiffs were promoted into the bogus tax shelter by the defendants who knew the shelters were bogus but did not warn the plaintiffs.  Indeed, not only did they not warn, they affirmatively misrepresented that the shelter worked (well, at least that it more likely than not worked).  The IRS ultimately discovered the false claims on the returns.
On October 26, 2010, the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA), in which Plaintiffs were advised that an increase in tax basis of $2,075,000 relating to the Son of BOSS investment was disallowed. As a result, Plaintiffs owed the IRS hundreds of thousands of dollars in additional taxes, penalties, and interest payments.
Plaintiffs assert that defendants' misbehavior is actionable on various a host of grounds.

The court rejected the defendants' statute of limitations argument as follows:

IRS Warrantless Access to Emails -- The Issues (4/11/13)

There has been much hyperbole about the IRS allegedly accessing emails of private citizens without a warrant.  This arises from an ACLU FOIA request and analysis.  The analysis, titled New Documents Suggest IRS Reads Emails Without a Warrant (ACLU 4/10/13), by Nathan Freed Wessler, ACLU Staff Attorney, is here.  The documents are here.  An Accounting today article, Michael Cohn, IRS Reads Taxpayer Emails Without a Warrant (Accounting Today 4/11/13), is here.  The ACLU FOIA request arose out of a case I had previously written on, United States v. Warshak, 631 F.3d 266 (6th Cir. 2010), here, reh'g and reh'g en banc denied, 2011 U.S. App. LEXIS 5007 (6th Cir. 2010), in two blogs:  Are Emails Stored on the ISP's Computer Subject to Fourth Amendment Protections? (7/28/12), here; and Are Kastigar Hearings Required Beyond Compelled Testimony Situations (7/30/12), here.  I refer readers to the first of my blogs (the one dated 7/28/12) for a detailed discussion of the legal issues swirling around this issue.

Excerpts from the Accounting Today article:
After the Warshak decision, the IRS’s position did not appear to change. In an email exchange in mid-January 2011 on the subject of “U.S. v. Warshak,” an employee of the IRS Criminal Investigation unit asked two lawyers in the IRS Criminal Tax Division whether Warshak would have any effect on the IRS’s work. A Special Counsel in the Criminal Tax Division replied: “I have not heard anything related to this opinion. We have always taken the position that a warrant is necessary when retrieving e-mails that are less than 180 days old.” 
In an indication that the IRS was considering the impact of the Warshak decision, an October 2011 IRS Chief Counsel Advice memorandum, which is available on the IRS Web site, an IRS employee asked for guidance about whether it was proper to use an administrative summons, instead of a warrant, to obtain emails that are more than 180 days old. The memo summarized the Warshak ruling and said that “as a practical matter it would not be sensible” to seek older emails without a warrant. However, the memo contended that Warshak applies only in the Sixth Circuit, but that, because the Internet Service Provider had informed the IRS that it did not intend to voluntarily comply with an administrative summons for emails, there was not “any reasonable possibility that the Service will be able to obtain the contents of this customer’s emails . . . without protracted litigation, if at all.”

Thursday, April 11, 2013

Restitution, Relevant Conduct, Counts of Conviction (4/11/13)

In United States v. Scheuneman,  712 F.3d 372 (7th Cir. 2013), here, the Seventh Circuit the trial court's sentencing for restitution of tax losses.  The defendant, a tax defier, was convicted of three counts of tax evasion, Section 7201, here, for the years 2003-2005 and one count of tax obstruction, 7212(a), here.  The tax obstruction count was (emphasis supplied):
From about May 2004 or before, and continuing to at least October 2007, in the Central District of Illinois, and elsewhere, the defendant, KURT E. SCHEUNEMAN, did corruptly obstruct and impede and endeavor to obstruct and impede the due administration of the Internal Revenue laws.
The sentencing court, "As a condition of supervised release, the district court also required Scheuneman to pay 'restitution to the IRS in the amount of $84,382, which represents the tax loss for the years 2000 through 2005.'"  The restitution clearly was properly included the years 2003-2005, for which the defendant was convicted of tax evasion.  Defendant complained on appeal that the years 2000-2002 had been improperly included in restitution.  To be sure, the years 2000-2002 could be relevant conduct for purposes of calculating the base offense level.  But restitution is not the same as relevant conduct (although it might often the same number).

Defendant's complaint was that restitution is limited to the years related to counts of conviction.  As he read the indictment, he had been convicted of evasion only for 2003-2005 and the tax obstruction count also did not go back to earlier years.  But focus on the wording of the tax obstruction count ("From May 2004 or before * * *").  Since it was the same pattern of conduct underlying both the evasion counts and the tax obstruction count, then that evasive conduct could and did go to pre-2003 years and, most importantly, since it was relevant conduct related to the same pattern of conduct, it could be years covered by the tax obstruction count of conviction.  The Court held (emphasis supplied):

Wednesday, April 10, 2013

KPMG Publication on FBAR Filing Requirements for Corporations and Executives (4/10/13)

KPMG has posted this helpful promo piece, called Navigating the FBAR Maze (4/8/13), here.  The publication is targeted principally to corporations with offshore operations and the executives who may inadvertently be caught in the FBAR reporting web.  The opening paragraph is:
The requirement to annually report foreign financial accounts on  Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts  (the “FBAR”), has become an area of increased IRS scrutiny in recent  years. Despite the publication of final FBAR regulations in 2011, many U.S. corporations remain confused regarding the FBAR filing requirements, including how the rules affect corporate officers and  employees who have signature or other authority over these accounts.  This article alerts taxpayers to the upcoming filing deadline for calendar year 2012 FBAR reports, with special focus on the requirements for officers and employees having signature or other authority over foreign financial accounts.
* * * *\ 
U.S. Persons Have a “Financial Interest” in Accounts of Their Greater-Than-50-Percent-Owned Subsidiaries and Other Entities 
In addition to having a financial interest in a foreign financial account when a U.S. person is a named owner of record or a named holder of legal title, a U.S. person is also treated as having a financial interest through indirect ownership, such as when the owner of record or holder of legal title is:
  • A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the voting power or total value of the shares;
  • A partnership in which the U.S. person owns directly or indirectly more than 50 percent of the profits interest or capital; or  
  • Any other entity in which the U.S. person owns directly or indirectly more than 50 percent of voting power, total value of the equity interest or assets, or interest in profits

Helpful article on the FBAR Willful Civil Penalty (4/10/13)

Steven Toscher and Lacey Strachan, Proving Wilfullness in Civil FBAR Cases (Los Angeles Lawyer April 2003), here.  Excerpt - the Conclusion:

The Williams and McBride decisions do not substantially alter the analysis of the types of cases in which the willful penalty will apply, but the dicta in the cases, which suggest that a recklessness standard may apply and impose a lesser burden of proof on the government, will no doubt fuel the government to be more aggressive in selection of the cases that it proceeds with on a willfulness penalty. That, unfortunately, is the way of the common law, and ultimately the courts will find the right balance based upon the facts of the individual cases. However, for now, practitioners should anticipate a more aggressive government stance on the imposition of the willful FBAR penalty.
JAT Comments: The cases do have dicta and off the cuff comments that more thoughtful courts might view differently in different fact circumstances.  I listened in on a tax webinar today on opting out (see here).  John McDougal, a principal IRS spokesman for its offshore account  initiatives, indicated that there is some hyperbole about what these courts said or at least said seriously (my interpretation of what McDonald said).  He said: merely checking the box "no" on Schedule B is not proof per se -- much  less conclusive proof per se -- of willfulness or,  perhaps even the absence of a mitigating circumstance for the nonwillful penalty or reasonable cause relief.  The IRS must have much more nuance facts and circumstances establishing willfulness before it will assert the willful penalty.  I don't know that the authors of this article really say anything different than that, but I just wanted to say it my way.

Addendum on 4/11/13:  Tax Notes Today has an article summarizing the webinar.  Jaime Arora, Few Have Been Disqualified From OVDP After Being Previously Cleared, Officials Say, 2013 TNT 70-7 (TNT 4/11/13).  The relevant excerpt is:
FBAR Penalties and Willfulness 
Considering a recent court decision on the standard of willfulness, Caroline D. Ciraolo of Rosenberg Martin Greenberg LLP deemed United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) , "a tough case." She said the decision seems to suggest that once the government has proved that an individual has signed the return, it has proven willfulness. The court makes that leap by noting that if an individual signed the return, the individual read the return and had knowledge of its contents and must have known about the report of foreign bank and financial accounts, she said. Ciraolo said that willfulness is then asserted because the taxpayer did not indicate an interest in a foreign account on Schedule B and prepare a foreign bank account report.
Ciraolo called that "a scary argument" but said she would not tell clients that they will be hit with a willfulness penalty if they sign a return. "I think it was a case of bad facts making bad law," she said, adding that the IRS is generally reasonable and is still likely to consider all the facts and circumstances of every case. 
McDougal said that he does not read McBride as providing strong support for a per se willfulness penalty. In that case, he said, the judge gave importance to the type of transaction the individual entered into, concluding that it was so inherently risky that the taxpayer was on notice that he would need to read the return carefully. (Prior coverage .) 
The IRS is training agents not to assert willfulness penalties based on failure to check the box on Schedule B, McDougal said. Instead, they should make a unique evaluation of the taxpayer, considering factors like the individual's level of training and the nature of the activity, he said. McDougal said that agents will consider all the facts and circumstances, but the IRS may try to make the case for willful blindness if the transaction is "the kind that you should be nervous about."
As someone noted in webinar, opting out is not routine but still a sufficient number of cases have opted out and have obtained good results that we can fairly conclude that checking the box no and not including the offshore account income is not per se proof of willfulness.

European Countries Up the Ante - Birkenfeld's Long Shadow (4/10/13)

Steven Erlanger and David Jolly, European Countries Move to Toughen Stance on Tax Evasion (NYT 4/10/13), here.

Excerpts from the opening:
Buffeted by a political scandal, a stagnant economy and angry public reaction to a report about secret offshore bank accounts, President François Hollande of France announced the creation of a special prosecutor Wednesday to pursue cases of corruption and tax fraud and vowed to eradicate tax havens “in Europe and the world.” 
As he spoke, one of those tax havens, Luxembourg, said it would bow to pressure from its European allies and begin forwarding the details of its foreign clients to their home governments. Luxembourg, with only half a million people and a banking sector more than 20 times larger than its gross domestic product, is one of Europe’s largest financial centers and has been compared to Cyprus, a fellow member of the euro zone that had a huge banking sector fueled by foreign money. 
The announcement from Luxembourg came a day after the five European countries with the biggest economies — France, Britain, Germany, Italy and Spain — agreed to exchange banking data and create their own automatic tax data exchange, one modeled on the U.S. Foreign Account Tax Compliance Act, passed by Congress in 2010 to try to track down the overseas assets of Americans who might be dodging taxes.
The European governments said they hoped the information exchange would not only “help in catching and deterring tax evaders” but also provide “a template” for a wider multilateral agreement. In a joint letter released Tuesday, they urged the European Union commissioner responsible for taxation, Algirdas Semeta, to work to get all 27 E.U. member states to sign up. 
The announcements come a week after the publication of an exposé by a Washington-based group, the International Consortium of Investigative Journalists, into the assets held in overseas tax havens. The report, which centered on the Caribbean, and especially the British Virgin Islands and the Cayman Islands, also embarrassed European governments, including Luxembourg, by showing how wealthy citizens routinely hide assets, sometimes legally and sometimes not, and avoid paying taxes by setting up offshore companies. 
The report has set off something of a scramble to calm public anger over widespread tax dodging by the rich at a time when governments are cutting their budgets and calling on citizens to pay higher taxes.
And you can read the rest.

I think these countries owe Birkenfeld at least a thanks, if not some monetary award.

Luxembourg Will Cooperate with Other Countries on Taxes (4/10/13)

Luxembourg Agrees to Help Fight Tax Cheats (AP via NYT 4/10/13), here.

The opening:
Luxembourg is to start exchanging information with the rest of Europe to help fight tax evasion, the government said Wednesday in a move it hopes will make the country's massive financial sector more transparent.
* * * *
The country added that the fiscal regime for U.S. citizens "will be dealt with in a bilateral agreement under negotiation between the governments of Luxembourg and the United States." 
This world is changing.

Tuesday, April 9, 2013

Lies, Dams Lies and Statistics - DOJ's Promo Stats (4/9/13)

DOJ has just released DOJ Tax's promo PR as it Raison d'être, here.  This is a promo piece for DOJ -- and DOJ Tax, specifically.  And the piece has statistics, a play on Moneyball.  As I note in my Tax Procedure Book, Benjamin Disreali (or someone else) once mused that “there are lies, damned lies, and statistics.” I have discuss and expressed skepticism before about the DOJ Tax's statistics as they are presented in promo pieces.  The question is whether the statistics are even valid, but more importantly whether, as presented, they convey truth.  (Truth is not the same as literal accuracy.)   [Here are the contents of my footnote for the Disreali quote:  "This quote is commonly attributed to Benjamin Disreali, but sometimes it is attributed to Mark Twain. See http://en.wikipedia.org/wiki/Lies%2C_damned_lies%2C_and_statistics.  Even the attribution to Disreali has its doubters.  See http://www.york.ac.uk/depts/maths/histstat/lies.htm.]  I have tried unsuccessfully to have DOJ explain its claims / statistics before, without success; I will try once again to see what is behind the claims; in the meantime, I can present here only the claims; I do offer, however, to DOJ Tax personnel reading this blog entry to publish a guest blog going beneath the statistics claimed; I hope DOJ Tax will take my invitation.]  Here are the some excerpts (bold facing added by JAT):
The Tax Division’s primary purpose is to enforce the nation’s tax laws fully, fairly, and consistently, through both criminal and civil litigation. Some of the division’s accomplishments from the past fiscal year (FY 2012) include  
· Favorable outcomes were achieved in over 95 percent of all civil and criminal cases litigated by the Tax Division. 
· The division authorized 938 grand jury investigations and 1,751 prosecutions of individual defendants. 
· Division prosecutors obtained 127 indictments and 137 convictions. Those figures do not include additional criminal tax prosecutions handled exclusively by U.S. Attorney’s Offices nationwide. 
· The division collected over $290 million through affirmative civil litigation and retained over $1.1 billion through defensive tax refund and other litigation. 
· Taking into account the tax dollars collected and refunds not paid as a result of our successful litigation efforts, over the past five fiscal years (FY 2008-2012), the division’s attorneys have returned to the Federal Treasury an average of $14 for each dollar invested. 
* * * *

Saturday, April 6, 2013

The Sentencing Sophisticated Means Enhancement Is Not Easy to Avoid (4/6/13)

The critical Sentencing Guidelines calculations for tax cases require a two step enhancement to the Base Offense Level for "sophisticated means" in the commission of the crime of conviction.  S.G. 2T1.1(b)(2), here.  Observers of the tax crimes scene have noted for some time that it does not take very much for a tax crime to have been committed by sophisticated means, thus requiring the enhancement.  In United States v. Jennings, ___ F.3d ___, 2013 U.S. App. LEXIS 6690 (9th Cir. 2013), here, the Ninth Circuit reminded us that most tax crimes of the type that actually get prosecuted involve sophisticated means.

In Jennings, the evasion was a corporate diversion to an account owned by Jennings but titled in a name that was very close to one of the corporation's legitimate vendors.  The paperwork establishing the account showed that Jennings owned it and had his social security number associated with it.  Jennings and another co-owner defendant used the account to fund their person living expenses.  The income was not reported.

On this fact pattern, the Ninth Circuit sustained the sophisticated means enhancement.  Here is the Court's entire discussion (bold face added by JAT):
Under the Guidelines, a two-level sentencing enhancement should be imposed when a defendant's offense "involved sophisticated means." U.S. Sentencing Guidelines Manual § 2T1.1(b)(2) (2010). Application Note 4 explains that the term "sophisticated means," for purposes of subsection (b)(2), "means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means." Id. at cmt. n.4. 
Defendants argue that they did not employ means as sophisticated as those listed in the application note. They argue, for instance, that the enhancement should not apply because they did not create corporate shells or offshore accounts. But the list contained in the application note is not exhaustive. We agree with other circuits that the enhancement properly applies to conduct less sophisticated than the list articulated in the application note. See United States v. O'Doherty, 643 F.3d 209, 220 (7th Cir. 2011); United States v. Clarke, 562 F.3d 1158, 1160, 1165 (11th Cir. 2009); United States v. Lewis, 93 F.3d 1075, 1082-83 (2d Cir. 1996) (applying enhancement to scheme involving fake bank accounts of non-existent businesses).

Good Overview Article on Financial Issues for Americans Living Abroad (4/5/13)

Paul Sullivan of the New York Times yesterday offered a good overview article titled Overseas Finances Can Trip Up Americans Abroad (NYT 4/5/13), here.  He covers a range of issues that American's living or working abroad should consider, including the offshore account reporting maze that occupies so much of our attention on this blog.

Most of the offshore account issues are familiar to most readers of this blog; but I will quote that part along with the lead-in, but urge readers to read the article because it deals with other issues as well:
LIVING and working abroad may sound romantic. But having a financial life in more than one country — if one of those countries is the United States — is becoming increasingly complicated.\ 
Managing an international financial life was once solely the purview of the superrich, who jetted around the world. But given the still-high unemployment rate in the United States, opportunities for middle-class jobs abroad, in areas like finance, oil and construction, are becoming more appealing.\ 
By taking those jobs, though, many middle- and upper-middle-class Americans have found it more and more difficult to comply with requirements on reporting the existence and value of bank accounts overseas and to reconcile the taxes of different countries. 
At the same time, Americans from immigrant families who have bank accounts in their home countries that they may have overlooked are being swept up by the same laws used to ferret out millionaires and billionaires stashing money in secret Swiss accounts. The Internal Revenue Service has increased its examination of such accounts, lawyers said, with serious penalties for those who have not reported them. 
So how should Americans working abroad or with a financial life in two countries manage their finances?

Thursday, April 4, 2013

District Court Denies Bankruptcy Discharge for BLIPS Shelter Investor (4/4/13)

I previously reported on a Bankruptcy Judge's Order applying 11 USC 523(a)(1)(C), here, denying a KPMG BLIPS tax shelter investor a discharge in bankruptcy for the taxes, penalties and interest arising from that misguided adventure.  BLIPS Tax Shelter Investor Denied Bankruptcy Discharge for Fraudulent Return and Evasion (Federal Tax Crimes Blog 1/10/12), here.  The district court has now sustained the Bankruptcy Judge's order.  Vaughn v. United States, 2013 U.S. Dist. LEXIS 45516 (D CO 2013), here.

Key excerpts from the district court's Opinion and Order Affirming Bankruptcy Decision are (most footnotes omitted):
Mr. Vaughn asserts error in the Bankruptcy Court's determinations under 11 U.S.C. §523(a)(1)(C) that he: (i) made a fraudulent tax return and (ii) willfully attempted to evade or defeat taxes owed for years 1999 and 2000. The IRS asserts error in the Bankruptcy Court's denial of its Motion for Summary Judgment in which it sought a determination that the taxes owed for 1999 and 2000 were non-dischargeable pursuant to 11 U.S.C. § 523(a)(1)(A). The Court begins with Mr. Vaughn's challenges. 
Under 11 U.S.C. § 523(a)(1)(C), tax debts can be excluded from discharge on two alternative grounds: (i) making a fraudulent return or, (ii) willfully attempting to evade or defeat a tax. The Bankruptcy Court determined that Mr. Vaughn's tax debt was excepted from discharge on both grounds. Mr. Vaughn challenges both determinations, but in order for this Court to reverse the finding of non-dischargeableability of the tax debt, Mr. Vaughn must show that both determinations are erroneous. Because the Court finds no error with regard to the Bankruptcy Court's determination that Mr. Vaughn willfully attempted to evade his 1999 and 2000 tax obligations, it is unnecessary to address the interesting issues raised by Mr. Vaughn with regard to the Bankruptcy Court's finding that he filed a fraudulent tax return. For the same reason it is not necessary to explore the issues raised by the IRS in its cross-appeal.

Investigative Journalists Report on the Maze of Offshore Accounts as Global Problem (4/4/13)

Earlier today, a reader pointed me to a report that had gained currently overseas but apparently not in the U.S.  The link is an investigative journalism report by the International Consortium of Investigative Journalists titled Secrecy for Sale: Inside the Global Offshore Money Maze, here.  I just noticed that the New York Times and, presumably, other news organizations will pick up the story.  The New York Times story is Rick Gladstone, Vast Hidden Wealth Revealed in Leaked Records (NYT 4/4/13), here.

Excerpts from the NYT Article :
An enormous leak of confidential financial records has revealed the identities of thousands of wealthy depositors — including European officials and corporate executives, Asian dictators and their children, and even American doctors and dentists — who have stashed immense amounts of money in offshore tax havens. 
The leak of records, mainly from the British Virgin Islands, the Cook Islands and Singapore, covers 2.5 million files that disclose proprietary information about more than 120,000 offshore companies and trusts and nearly 130,000 individuals and agents, including the wealthiest people in more than 170 countries. 
* * * * 
The International Consortium of Investigative Journalists, a network of reporters that obtained the secret records, collaborated with The Guardian, Asahi Shimbun, Le Monde, The Washington Post and more than 40 other news organizations to untangle and report their contents. 
The project, titled “Secrecy for Sale,” appeared to have the potential to create political shock waves, particularly in Europe, where an economic malaise caused by the euro zone debt crisis has created enormous popular resentment toward austerity policies and widened the gap between rich and poor. The project said some of the world’s top banks in Europe, including UBS and Deutsche Bank, had “aggressively worked to provide their customers with secrecy-cloaked companies in the British Virgin Islands and other offshore hideaways.”

Bad Acts Evidence Must be Relevant and Not Prejudicial (4/4/13)

In Nagy v. United States, 2013 U.S. App. LEXIS 6333 (4th Cir. 2013), here, an unpublished opinion, Robert J. Nagy, a CPA, who rendered tax advice to a promoter of an allegedly abusive tax shelter.  The IRS asserted the Section 6700 penalty, here, against Nagy for his role in the allegedly fraudulent tax shelter.  Nagy partially paid the 15% of the assessment under the special Flora mitigation rule and sued for refund.  Section 6703(c).  The liability issue was tried to a jury.  The jury ruled against Nagy.  On appeal, Nagy raised several arguments.  The one that gained traction -- and hence warranted reversal for new trial -- was Nagy's claim that the trial court had erred prejudicially in admitting evidence of his failure to file some of his personal income tax returns in the years in which he participated in the tax shelter.

The following is a reasonable summary of the Section 6700 penalty (United States v. Benson, 561 F.3d 718, 721-722 (7th Cir. 2009)):
Section 6700 imposes a penalty on any person who (1) organizes (or assists in the organization of) any plan or arrangement, or participates (directly or indirectly) in the sale of any interest in an entity or plan or arrangement, and (2) in connection with such organization or sale, makes or furnishes a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement (3) which the person knows or has reason to know is false or fraudulent (4) as to any material matter. 26 U.S.C.
The ultimate holding in Nagy was that Nagy's failure to file personal tax returns was not relevant to the issue of his liability under Section 6700.  Generally, trials should include only evidence that is relevant to the issue being tried.  That general truism is necessary to keep trials in proper bounds and to prevent prejudice that might arise from irrelevant matters.  So, according to the Fourth Circuit in Nagy, the prosecutors could never articulate a persuasive reason that the failure to file income tax returns was relevant to the Section 6700 issue.

But, simply because irrelevant evidence creeps into a trial -- almost all trials have some irrelevant  evidence -- does not mean that the result was affected or affected prejudicially.  Reversal is warranted only if the irrelevant matter is prejudicial.

Wednesday, April 3, 2013

Trial Strategies - Win Some, Lose Some (4/3/13)

Most 28 U.S.C. § 2255, here, a form of federal habeas corpus, cases are ho-hum, desperate attempts to seize victory from the jaws of defeat.  But a recent one was interesting to illustrative that facially creative trial strategies that may not work.  By way of general background, criminal trials (as well as civil trials) involve many strategic decisions, large and small, that may affect the outcome of the case -- most of the time, positively, if well conceptualized and implemented.  Some don't work, which often means that other strategies that might have worked were not pursued into order to pursue the one that, hindsight tells, did not work.  So, I present the recent case of Cantrell v. United States, 2013 U.S. Dist. LEXIS 45107 (ND IN 2013), here.

The Court gives a short summary of the background facts to set the stage:
The substantive facts and procedural posture underlying this case are familiar to all parties, as well as the Court. Defendant, Robert J. Cantrell, was charged in an eleven count indictment. Counts One through Four alleged mail fraud and wire fraud, in violation of Title 18 U.S.C. sections 1341 and 1346. Counts Five through Seven charged Defendant with insurance fraud, in violation of Title 18 U.S.C. section 1341, by fraudulently representing that his adult children were employees of Addiction and Family Care, Inc. ("AFC") in order to procure health insurance for them under AFC's group insurance plan. Counts Eight through Eleven alleged Defendant filed false income tax returns for the years 2001 through 2004, in violation of Title 26 U.S.C. section 7206(1). 
On May 27, 2008, a jury trial commenced in this case. The Government introduced evidence for five days and, on June 5, the Government concluded its presentation of testimony and evidence. After the Government rested its case, the Defendant orally moved for a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure. The Defendant raised a host of arguments as to why he was entitled to judgment as a matter of law. Among those, Defendant argued that "no one ever identified Mr. Cantrell in court as the Defendant." (Gov. Ex. 0, p. 3). The Court denied the Rule 29 motion in all respects, except as to the issue of whether the Government properly identified the Defendant. (DE# 62). This issue was taken under advisement and the trial continued. At the conclusion of trial, the jury returned guilty  verdicts on all eleven counts. Following the jury verdict, the Court denied Cantrell's motion for judgment of acquittal and motion for new trial.

Tuesday, April 2, 2013

FBAR Penalty Collection -- Beyond the Collection Suit, Administrative Offsets Loom Large and Long (4/2/13; Updated 4/10/13)


A reader named Researcher made a cogent comment the other day that I think is worthy of elevating to a full blog.  Researcher's comment is quoted in full below and may be viewed in the context in which made here.  The context for the comment was the IRM provision, as currently offered on the web, that the IRS has 10 years to collect the FBAR by administrative offset.  The IRM provision is  (11-01-2011), titled FBAR Penalty Statute of Limitations on Collection, here.

Researcher's comment is as follows:
I do not think the 10 year limit on administrative offset payments is valid any more. This is what I found in the law for offsets: 31 USC 3716(e) 
(1) Notwithstanding any other provision of law, regulation, or administrative limitation, no limitation on the period within which an offset may be initiated or taken pursuant to this section shall be effective. 
I think there WAS a 10 year limit on collection via offset, but Congress removed that limit in 2008 or 2009. I think this provision applies to ALL undischarged federal debt for which the 10 year limit had not expired at the time of enactment. (So much for the contention by 'Guest' that it is scaremongering to be concerned about retroactive changes of the law by Congress). Although the IRM section you reference postdates this statute, it probably hasn't been updated and the 10 year limit on collection is not valid any more. 
Now, its easy to avoid getting tax refunds by adjusting withholding, but most people do expect to get Social Security payments (and possibly other federal benefits) in their lifetime. A federal debt that never expires, and moreover accrues interest could easily wipe out a significant chunk of an expected SS pension (although a basic SS amount could still be paid out even under offset). Equally, there is the possibility of such a debt being reported to credit agencies, which could impact a person's credit and mortgage rates etc.
Section 31 USC 3716 is here; subsection (e)(1) is indeed as quoted by Researcher.