Liechtensteinische Landesbank Enters NPA (7/30/13)

Note: This blog entry was substantially revised on 11/31/13 at 4:30pm.

Liechtensteinische Landesbank AG entered a nonprosecution agreement ("NPA").  The
nonprosecution agreement is here.  The related forfeiture complaint is here.  The DOJ Tax press release is here;the USAO SDNY press release is here.

Although I provide substantial excerpts from the NPA and Forfeiture Complaint below, I cut and paste first significant portions of the DOJ Tax press release (I have not compared the two press releases, but assume that they are the same in material respects; I do note that the USAO SDNY press release links to the key documents for which I copy the links above):

[DOJ Tax, USAO SDNY and the IRS] announced today that Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein (LLB-Vaduz), has agreed to pay more than $23.8 million to the United States and entered into a non-prosecution agreement (NPA) with the U.S. Attorney’s Office for the Southern District of New York.  The NPA provides that LLB-Vaduz will not be criminally prosecuted for opening and maintaining undeclared bank accounts for U.S. taxpayers from 2001 through 2011, when LLB-Vaduz assisted a significant number of U.S. taxpayers in evading their U.S. tax obligations, filing false federal tax returns with the IRS and otherwise hiding accounts held at LLB-Vaduz from the IRS.  The NPA requires LLB-Vaduz to forfeit $16,316,000, representing the total gross revenues that it earned in maintaining these undeclared accounts, and to pay $7,525,542 in restitution to the IRS, representing the approximate unpaid taxes arising from the tax evasion by LLB-Vaduz’s clients.  The NPA applies only to LLB-Vaduz and not to any of its subsidiaries or any individuals.  LLB-Vaduz has decided to close its wholly-owned Swiss subsidiary, Liechtensteinische Landesbank (Switzerland) Ltd. and has also decided to sell another wholly-owned subsidiary, Jura Trust AG.
         
Assistant Attorney General Kathryn Keneally stated “this non-prosecution agreement addresses the past wrongful conduct of LLB-Vaduz in allowing U.S. taxpayers to evade their legal obligations through the use of undisclosed Liechtenstein bank accounts, while also acknowledging the extraordinary efforts of the bank in bringing about significant changes in Liechtenstein law.  As a result of new Liechtenstein legislation, U.S. taxpayers who thought that they had obtained the benefit of Liechtenstein’s tax secrecy laws have learned that their bank files were turned over on the request of the Department of Justice.”

“With this agreement, one of Liechtenstein’s most important banks has put an era behind it.  Today’s agreement with Liechtensteinische Landesbank AG reflects the unprecedented nature of the bank’s cooperation, and serves as another reminder for U.S. tax cheats who mistakenly believe that their offshore bank will never turn over their account files to U.S. authorities.  To them we say, you can hide, but not forever”, said U.S. Attorney Preet Bharara.

 “In 2008, Liechtensteinische Landesbank AG began requiring all U.S. taxpayers with accounts at LLB-Vaduz to declare their income.  In addition, Liechtenstein’s Parliament amended their national law on tax matters to make easier the identification to the United States of non-compliant taxpayers. Today’s action sends a strong message to those Americans who hide their true income from the IRS.  It's time to come clean and pay your fair share of taxes like law-abiding citizens do every day”, said IRS-CI Chief  Weber.

Juror Unanimity and Predicate Facts (7/29/13)

Jury unanimity is required as to the elements of an offense.  Thus, if the crime requires elements 1, 2 and 3 and the jury reaches unanimity only as to elements 1 and 2, then the jury cannot -- well, should not -- convict.  But, I have just given you the easy case as to jury unanimity.  What if element 3 had some subsidiary facts required to constitute element 3.  Must the jury be unanimous as to the same subsidiary facts constituting element 3?

Consider this from Eric S. Miller, Compund-Complex Criminal Statutes and the Constitution:  Demanding Unanimity as to Predicate Acts, 104 Yale L.J. 2277 (1995) (footnotes omitted):

In his first judicial act, Daniel, who would become one of the Hebrew Bible's most respected judges, saved an innocent woman from a death sentence.  Susanna, wife of the wealthy and respected Joakim, went to her garden to bathe. In the garden, two lecherous elders trapped her alone and demanded that she have sex with them. If she refused, they threatened to accuse her publicly of having sex with a man other than her husband, a crime whose punishment was death. Susanna did refuse, and the next day the elders accused her of adultery, telling the judges that they saw a young man lying with her in her garden. The judges believed the elders and sentenced Susanna to death. 

As Susanna was being led to her execution, Daniel cried out, "Are you such fools, O Israelites! To condemn a woman of Israel without. . . clear evidence?"  Questioning the elders separately, Daniel asked each, "[U]nder which tree did you see them together?"  One elder answered, "Under a mastic tree";  the other answered, "Under an oak."  On the basis of this lack of agreement, Susanna was freed. "Thus was innocent blood spared that day . . . And from that day onward Daniel was greatly esteemed by the people." 

In modern criminal procedure terminology, Daniel was confronted with a problem of verdict specificity. To Daniel, a determination that the accused was guilty of the crime charged was not enough. Instead, he demanded "clear evidence" of how the crime was committed. Without such evidence, Daniel said, the judges were "passing unjust sentences" and "condemning the innocent."  

Like Daniel, the United States Constitution demands a certain level of verdict specificity. The Sixth Amendment requires that convicting jurors in federal criminal trials be unanimous not solely as to the ultimate question of guilt or innocence, but also as to the principal factual elements of the crime charged. 

The question is one of specificity.

Reciprocity -- the U.S. Issues John Doe Summonses to Identify Norway Tax Cheats (7/29/13).

Janet Novack reports this morning that the IRS has filed John Doe Summons "petitions in nine different federal district courts asking judges to approve summonses for records that could reveal the identities of Norwegian taxpayers with secret U.S. bank accounts and of residents of Norway who should be, but aren’t, paying taxes there."  U.S. Seeks PNC, Wells Fargo, JP Morgan Records To Find Tax Cheats--From Norway (Forbes 7/28/13), here. The summonses are sought pursuant to Norway's request under the double tax exchange of information provision, which requires a treaty partner upon the request of the other to use internal processes to obtain information relevant to taxes of the requesting treaty partner.

Further, Ms. Novack reports::

Already, judges have approved previously unreported summonses for records from PNC Bank and RBS Citizens in the Western District of  Pennsylvania; USAA Federal Savings Bank in the Western District of Texas;  BOKF  and 66 Federal Credit Union in the Northern District of Oklahoma;  Prairie Sun Bank in Minnesota; and East West Bank and Global Cash Card in the Central District of California.  Summons requests involving Wells Fargo WFC -0.32% and JP Morgan Chase, among others, are pending. There is no suggestion in the DOJ’s court filings that any of the U.S. institutions have done anything improper.

Each of the summonses

asks for information about bank account applications, signature cards and other records tied to one or a few specific payment or credit card numbers that have been used over a period of years for ATM withdrawals and other transactions in Norway which require a PIN, but don’t require the card holder’s name.  For example, according to a court-filed affidavit from IRS agent Cheryl Kiger, Norway reports one East West Bank payment card it wants information about was used from 2004 through 2012 for 661 transactions in Norway totaling 1,305,400 Norwegian Krone (NOK).  (That’s $221,918 at an average exchange rate for the period of one Krone equaling 17 U.S. cents.)

I will post more as I receive it, but obviously if the U.S. insists on such John Doe treaty requests when it makes them, it will have to reciprocate when treaty partners make them.  In this regard, historically exchange of information treaty requests have required some identification of the taxpayer.  However, as observers of the U.S.-Swiss spat know, Switzerland has recently approved "group requests" -- I call them John Doe treaty requests.  See Swiss Court Ruling in Credit Suisse Case (Federal Tax Crimes Blog 7/8/13), here.

2d Circuit Majority and Concurring Opinions of Fraud and Sentencing (7/28/13)

In United States v. Corsey, ___ F.3d ___, 2013 U.S. App. LEXIS 14897 (2d Cir. 2013), here, a per curiam decision, the Second Circuit opens its opinion:

This appeal principally raises two issues: (1) whether the misrepresentations underlying these convictions were not material because no reasonable financial professional would have believed them, and (2) whether the sentences imposed on appellants are procedurally unreasonable. 

The Fraud Issue 

In an FBI directed sting operation, the defendants attempted to sell the FBI informant in the financial brokerage industry on a laughable financial scheme.  I won't get into the details of it since they are well summarized in the opinion linked above.  The opinion later captures the flavor of this comical adventure in a question posed by defendant's counsel at sentencing:

"[W]hat hedge fund would fall prey to a purported coalition of Buryatian nationals and Yamasee tribesmen using AOL email accounts to offer five billion dollars in collateral for a loan to build a pipeline across Siberia? 

Buryatia is a federal republic of Russia, in the south central area of Siberia.  Yamasee is a confederation of native Americans.

But, the scheme, if anyone would have believed it and acted on it, could have defrauded a lender of over $3 billion. The problem in the case was that no lender with that kind of resources would have been defrauded because minimum due diligence would have easily uncovered the Three Stooges transparency of the fraud. That set the stage for the defendants claim that they should not have been convicted of a fraud that could not occur.

The Court of Appeals first states the test of fraud:

Fraud requires more than deceit. A person can dissemble about many things, but a lie can support a fraud conviction only if it is material, that is, if it would affect a reasonable person's evaluation of a proposal. "In general, a false statement is material if it has a natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it was addressed." Neder v. United States, 527 U.S. 1, 16 (1999)  (internal quotation marks and brackets omitted).

I should note that Neder involved convictions for mail fraud, wire fraud, bank fraud and tax perjury (Section 7206(1)).  Each of the fraud statutes involved explicit textual requirement of fraud.  Tax perjury does not require fraud, but it does require materiality as to the perjury.  And, the fraud statutes of conviction were read as having an element of materiality -- that is, there is no fraud unless there is the fraud is material.

The U.S. - Swiss Spat: On Leaver Lists and the Like (7/27/13)

I have made only passing reference to so-called "leaver lists" in the U.S. - Swiss offshore account spat.  Because of recent developments, I thought I would pass on what I know about those lists.  I hope that readers with more nuanced information with add to, clarify or correct this blog by making comments.

The U.S. needs information on U.S. depositors using Swiss banks for tax evasion.  Relatedly, the U.S. needs information on the Swiss banks involved and the individuals related in some way to enabling the U.S. depositors in their U.S. tax evasion.  These include the banks and the persons associated with the banks (employees or independent persons such as attorneys with a relationship with the banks).

As to U.S. depositor information, Switzerland has historically not provided information about U.S. depositors, except pursuant to its restrictive interpretation of the double-tax treaty exchange of information provision.  That interpretation required the U.S. to name the depositor and give some indication of tax fraud and the like.  While the Swiss might relax that, by interpretation, the Swiss usually would not respond to what I call John Doe treaty requests -- i.e., identifying persons by categories rather than by individual names which the U.S. does not know.  However, as I noted in a recent blog, Switzerland has relaxed its rules about John Doe treaty requests, which it calls "group requests."   Swiss Court Ruling in Credit Suisse Case (Federal Tax Crimes Blog 7/8/13), here.  As best I understand this relaxed interpretation, the U.S. must still provide some information indicating fraud in order for the Swiss to respond.

In order to frame good "group requests," of course, the U.S. needs to be able to identify the Swiss banks involved.  At one level, of course, the U.S. could just send a group request for every Swiss bank (including all financial institutions), but I suspect such a mass group of group requests would be treated as a fishing expedition.  How best can the U.S. identify the more active offending banks, other than those it already knows were big players in the U.S. tax evasion market?  Apparently, one way is to identify the banks who received transfers of U.S. deposits from targeted Swiss banks as they got in the IRS's cross-hairs.  U.S. depositors wanted to hide their money would move the deposits from the targeted banks to other Swiss banks (destination banks) to keep the evasion going.  Indeed, as in the Wegelin case, these destination banks actively solicited the transfers, on the notion / sales pitch that secrecy would prevail because, without a U.S. presence such as UBS had, the destination banks were not susceptible to pressure that would force them to disclose the U.S. depositors' information.  Aha, the U.S. figured out, if the U.S. could obtain so-called "leaver lists" -- i.e., lists that, without disclosing U.S. depositors' identity, would disclose the closing of U.S. depositor accounts at the target bank and the transfer of the funds to the destination Swiss bank.  With that information, the U.S. could identify the banks who actively promoted U.S. tax evasion and thus who should be targets for additional group requests and perhaps even criminal prosecution in the U.S.  So, as I understand it, upon request, the banks will have to provide "leaver lists" to the U.S.

Must a Defendant Prove Innocence of Uncharged Crime to Reverse Wrongful Conviction? (7/26/13)

In United States v. Caso, ___ F.3d ___, 2013 U.S. App. LEXIS 14624 (D.C. Cir. 2013), here, the Court dramatically opens its opinion as follows:

Russell James Caso, Jr. is innocent of the crime for which he was charged and convicted. The government does not dispute the point. Nonetheless, Caso was denied an opportunity to collaterally attack his conviction and sentence because he could not demonstrate that he is also innocent of a separate and uncharged offense that has a lower sentencing range under the United States Sentencing Guidelines. Because Caso was not required to make such a showing, we reverse the order denying his motion to vacate his conviction and sentence.

Now, that got my attention and perhaps yours as well.  What is the concept that a defendant wrongfully convicted of one crime must prove -- "demonstrate" -- that he is innocent of another uncharged crime in order to secure reversal of the conviction of the crime for which he is innocent?

The defendant previously served on a Congressman's staff.  He was compromised by a nonprofit consulting firm's engagement of his wife to perform editing services.  She appeared to do de minimis work and was paid $19,000 which did not appear commensurate with the work performed.  The defendant did not include the payment on the disclosure form he was required to file as a congressional staff person.  The defendant was charged with "conspiracy to commit honest-services wire fraud, in violation of 18 U.S.C. §§ 371, 1343, and 1346."  The defendant pled to that charge.  The defendant was sentenced to three years probation and 170 days home confinement.  The defendant apparently did not appeal, perhaps because his plea agreement waived appeal.

Shortly after Caso was sentenced, the Supreme Court handed down Skilling v. United States, 130 S. Ct. 2896 (2010), a decision that substantially limited the permissible reach of 18 U.S.C. § 1346, the honest-services fraud statute. Prior to Skilling, the government had used that statute to prosecute public officials who failed to disclose conflicts of interest, on the theory that such nondisclosure constituted a "scheme or artifice to deprive another of the intangible right of honest services," 18 U.S.C. § 1346. See Skilling, 130 S. Ct. at 2932-33. In Skilling, however, the Court interpreted § 1346 more narrowly. In an effort to avoid a "vagueness shoal," id. at 2907, the Court held that § 1346 "proscribe[s] bribes and kickbacks -- and nothing more." Id. at 2932.

The Skilling opinion is here.

Fourth Circuit Holds Defendant to His Tax Loss Stipulated in the Plea Agreement (7/24/13)

In United States v. Weon, 722 F.3d 583 (4th Cir. 2013), here, the defendant pled guilty to 5 counts of tax evasion, Section 7201, here.  The plea agreement stated that "for purposes of this plea agreement and sentencing, the total tax loss is approximately $2,400,000."  Apparently, in negotiating the plea, the Government urged that the tax loss was more than $2,500,000 and Weon urged that it was much lower than $2,400,000.  So, the stipulation in the plea agreement was a compromise.  There were other compromises in the plea agreement -- i.e., the Government dropped serious charges, etc.  The opinion then describes the Rule 11 plea hearing (JAT emphasis supplied):

[T]he court determined that Weon's guilty plea was entered knowingly and voluntarily. The parties represented at the Rule 11 hearing that the amount of tax revenue loss "we have agreed to regarding this plea agreement and sentencing is approximately $2.4 million," but noted that the figure was subject to change for restitution purposes only depending on the result of an anticipated civil agreement between Weon and the Internal Revenue Service (IRS).

Between the plea hearing and  ultimate sentencing, Weon began again questioning the amount of the $2,400,000 loss.  Weon apparently was working in earnest to drive down his Guidelines sentencing exposure based on the offense level, which is principally based on the amount of the tax loss.  He engaged a new accountant who produced a report that the actual tax loss was around $40,000.  Weon sought to avoid the tax loss from the amount he stipulated in the plea agreement. The district court ultimately rejected Weon's attempt, holding Weon to  the benefit of the bargain he had struck on that issue in the plea agreement.  Weon then moved to withdraw his guilty plea. The court denied that as well, holding that Weon had entered the guilty plea knowingly and voluntarily.

At sentencing, the court calculated the Guidelines range based on the stipulated tax loss.  Further, in making the18 USC 3553(a) Booker determinations, the Court "refused to consider any evidence or argument that the tax revenue loss was materially lower than $2,400,000."  The court then sentenced Weon to 30 months, which was at the lower end of the indicated Guidelines range.

The Court of Appeals first held that the appeal waiver was not unambiguous as to the issue Weon raised on appeal as to the tax loss.  The court then looked to the terms of the plea agreement -- the contract -- as to the nature of the contractual agreement that the tax loss was $2,400,000.  The Court handily held Weon to the benefit of his bargain on the amount, finding that he was attempting a "unilateral reneging" of that agreement.

Weon had a fall-back argument that is ingenious, although it was a loser.  Here it is as described and resolved by the Court of Appeals:

Taxpayer's Counsel Attending IRS CI Interviews of Third Party Witness (Principally Accounts) (7/23/13)

A frequently encountered issue in the tax controversy practice is the IRS's interview of the taxpayer's accountant.  The IRS has the right to do that.  The question is whether taxpayer's counsel can attend the interview.  Yesterday, I updated my Federal Tax Crimes book to include the following discussion and provide the updated text for readers (some footnotes omitted).\

c. Third Party Witness Interviews. 

An issue frequently arising in the investigation stage is whether the taxpayer’s counsel can be present during the interviews of the third parties.  In tax cases, the accountant / return preparer (hereafter in this section, the accountant) is the quintessential third party whose interview the taxpayer’s counsel would want to attend.  But, the issue is presented for other third party witnesses as well.  Obviously, if the taxpayer’s counsel could be present during the interviews, the counsel’s ability to represent the taxpayer is greatly enhanced, because, in this “game,” knowledge is power. 

From the Special Agents’ perspective, the presence of someone other than the witness and, if engaged, the witness’ counsel is problematic, particularly if the other person present is taxpayer’s counsel.  Generally, taxpayers and their counsel are not entitled to the fruits of a criminal investigation except as required in disclosure in any criminal case that may follow from the investigation.  So, the IRS will prefer to keep the investigation close to the vest where possible.  Moreover, having taxpayer’s counsel present could result in disruptions by taxpayer’s counsel and, even where not  overtly disruptive, subtle pressure on the third party witness to shape his testimony so as not to directly offend the taxpayer who will quickly learn what the witness said during the interview.  So, all other things being equal, the Special Agents will not want taxpayer’s counsel at the interview of third party witnesses. 

Let’s focus first on the accountant as the third party being interviewed.  Most accountants will be subject to professional obligations that will require that they receive compulsory process before providing information to anyone, including an investigator.  Usually, the accountant will have advised taxpayer’s counsel that the IRS desires the interview but, in any event, the IRS is required to notify the taxpayer when it issues the summons because the accountant is within the class of persons designated as “third party recordkeepers.” n1462  So the taxpayer’s counsel will have the opportunity to raise and resolve, if possible, the taxpayer’s counsel attendance at the interview.
   n1462 § 7609(c)(2)(E) (excluding from the notice requirement summonses in criminal cases except for third party recordkeeper summons).

Liechtenstein Bank In U.S. Cross-Hairs (7/20/13)

It is reported that Liechtenstein Landesbank AG (LLB) has increased to $50 million its reserve for settlement with U.S. tax authorities.  See Giles Broom, Liechtenstein Bank Triples U.S. Probe Provision to $50 Million (Bloomberg 7/18/13), here.  Other key points from the article:

• LLB represented is quote as having said that LLB "is confident that a solution can be found for Liechtensteinische Landesbank AG, Vaduz, in the coming weeks.”  This could be the third bank, after UBS and Wegelin, to make its peace with the U.S.
• The U.S. information request was for "[a]ccounts that contained at least $500,000 at any time since the beginning of 2004." 
• Responding to the request was "facilitated by Liechtenstein amending a tax law in March 2012."

Wegelin Chief Interviewed; Accepts Responsibility Somewhat (7/20/13)

This is an amazing article of an interview of Konrad Hummler, former president of Wegelin & Company (Wikipedia entry here) which unintentionally committed suicide through aggressive and incredibly stupid activity in assisting U.S. taxpayers cheat on their U.S. taxes.  See Wegelin chief takes blame for bank's collapse (The Local: Switzerland's News in English 7/18/13), here.  Hummler on the one hand accepts blame but on the other deflects it.  Read it for what it is worth.  I started to do significant excerpts, but I think the whole article should be read; please link to it.  However, these are a couple of excerpts:

He acknowledged he had underestimated the US authorities and the risk of penalties. 

While stressing the bank had always respected Swiss law, he admitted exploiting "differences between the (legal systems) in Switzerland and the United States."

Basically, as with many criminals, what he really regrets is (i) having been discovered and (ii) being too exposed on what the United States could do.  As his minions hawked Wegelin to U.S. taxpayers fleeing or driven from UBS, he was assuring them that there was nothing the U.S. could do to Wegelin's ability to keep the client data secret.  He was wrong.

The article also alludes to the situation of the Holocaust Jews with money in Swiss banks. Hummler uses that episode to paint Swiss bank secrecy as a good thing.  That episode had its darker side, of course, when the Swiss banks just decided not to return the money in many cases.  See The Wikipedia entry, World Jewish Congress lawsuit against Swiss banks (Wikipedia), here.  This is a mixed defense of secrecy as implemented by the Swiss.

New York Art Dealer Previously Arrested on Complaint Is Formally Indicted (7/20/13)

USAO SDNY has announced the indictment of Glafira Rosales, art dealer, "For Massive Art Fraud, Money Laundering, And Tax Scheme," here.  The opening of the release succinctly summarizes the charges:

filing of a seven-count Indictment charging GLAFIRA ROSALES, an art dealer, with participating in a $30 million fraud in which she sold over 60 works of fake art to two Manhattan galleries. ROSALES was also charged with money laundering and tax crimes related to the art fraud scheme. 

I previously reported the filing of a complaint that permitted her expedited arrest.  Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case (Federal Tax Crimes Blog 5/22/13), here.  The complaint alleged only tax charges - Tax Perjury (3 counts); Failure to file FBAR (4 counts).  The indictment now expands the charges to the heart of the criminal case -- fraud related charges of wire fraud and money laundering.

Key Elements:

Defendant:  Glafira Rosales
Charges:  Wire Fraud (1 count - 20 years); money laundering (1 count - 20 years); Tax Perjury (3 counts - 3 years each count; 9 years total)); and FBAR violations (2 counts - 5 years each count; 10 years total).
Maximum sentence:  59 years.
Tax Loss:  $3.5 million (See oringal blog entry per link above)
Bank:  Caja Madrid (see original blog entry per link above)
Entities:  Yes (see original blog entry per link above)
Court:  DC NY
Judge:  Katherine Polk Failla (Wikipedia entry here)

The gravamen of this case is massive fraud perpetrated against individuals and companies, with tax related counts added.  Accordingly, I will include her in the spreadsheet but indicate that the case is not a typical case so that it will be eliminated from certain of the statistical reports.

Other Key Excerpts:

The indictment depicts a complete circle of fraud perpetrated by Glafira Rosales – fake paintings sold on behalf of non-existent clients with money deposited into a hidden bank account. The one thing about this story that is true is that this alleged fraud will be prosecuted.” 

Interview of Swiss Bank Whistleblower (7/17/13)

Der Spiegal has a great interview of Swiss Bank whistleblower, Herve Falciani.  Swiss Bank Leaker: 'Money Is Easy to Hide' (Spiegel Online International 7/16/13), here.  Some interesting excerpts are:

At the end of 2008, Hervé Falciani committed what is believed to have been the most portentous theft of banking data in history. The systems engineer and former employee at the Geneva offices of HSBC left Switzerland for France and took data from around 130,000 customers at the Anglo-Asian bank along with him. 

* * * * 

Falciani, 41, has also cooperated with the American authorities. Indeed, on the strength of the information he provided, HBSC was forced to pay a $1.9 billion settlement with the United States after a Senate committee found that failures in HSBC's money-laundering controls had enabled terrorists and drug cartels to gain access to the US financial system. 

* *  * * 

Falciani: Banks such as HSBC have created a system for making themselves rich at the expense of society, by assisting in tax evasion and money laundering. 

* * * * 

SPIEGEL: Many Swiss banks now profess to engage only in legal practices, kicking out any clients who don't disclose whether they have paid taxes. Do you find this shift credible? 

Falciani: No, I don't. Just the fact that they face international competition ensures that banks will continue to offer wealthy clients ways to evade tax authorities. 

SPIEGEL: The European Commission wants to create a comprehensive automatic system for exchanging information throughout Europe. How effective would such regulations be in putting a stop to shady practices engaged in by banks and tax evaders? 

Another Guilty Plea Related to an Israeli Bank (7/17/13)

DOJ Tax has announced, here, the guilty plea of Moshe Handelsman to a count of tax perjury, Section 7206(1), for a single year, 2007.

Here are the key details (to be supplemented later)

Taxpayer:  Moshe Handelsman
Count of Conviction (by Plea):  Tax perjury, section 7206(1)
Bank(s):  ? [one is a Tel Aviv bank]
Enablers:  tax return preparers (who deducted the money sent offshore)
Tax Loss:  ?
FBAR Penalty:  50% of the high year balance
Court:  ND CA

Here are the key excerpts from the press release (JAT bold-face emphasis added):

According to the plea agreement, between approximately 1993 and 2000, Handelsman, a U.S. citizen, used three bank accounts held in the names of two different foreign corporations at foreign banks to falsely reduce his taxes. The last of those accounts was held at an Israeli bank located in Tel-Aviv, Israel.  The foreign bank accounts and foreign corporations were set up with the assistance of his tax return preparers.
According to court documents, in approximately 2000, Handelsman traveled to Israel and met with a banker at the Israeli bank who referred him to an Israeli attorney to set up a foreign corporation. The foreign corporation was called Exportus Ltd. and was the named account holder of the account at the Israeli bank.  From 2003 through 2008, Handelsman sent $1,808,075 from a domestic corporation he controlled called Advanced Forecasting Corp. to the Exportus Ltd. bank account. With the assistance of his tax return preparers, the funds transferred offshore were then deducted as false “Information Acquisition” expenses on the Advanced Forecasting Corp.’s tax returns.  The false business expenses on the corporate tax returns resulted in an under-reporting of Handelsman’s income on his individual income tax returns for 2003 through 2008.  Handelsman also failed to disclose the existence of his foreign bank account on his individual income tax returns. According to the plea agreement, in 2009, Handelsman closed his account at the Israeli bank and repatriated the money by transferring the funds into a second Israeli bank account and then to a U.S.-based Charles Schwab account in the name of a relative.  The funds were then transferred from the Charles Schwab account to Handelsman to make it appear that the funds were a non-taxable gift from the relative.    

* * * * 

Handelsman faces a potential maximum prison term of three years and a maximum fine of $250,000. In addition, Handelsman has agreed to pay a civil penalty to the Internal Revenue Service (IRS) in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.

UBS Client, 78 Years Old, Sentenced to One Year and One Day (7/16/13)

The USAO ND IL announced  the sentencing of Peter Troost, 78, to a year and one day.  The press release is here.  For prior reporting on Troost, see Another UBS Customer is Charged (Federal Tax Crimes Blog 2/28/13), here.

Key details:

Defendant:  Peter Troost
Age: 78
Bank: UBS
Tax loss:  $1,039,343
FBAR Penalty: $3.75 million.
Fine: $32,500
Court: ND IL
Judge John J. Tharp, Jr. (Wikipedia entry here)

Key excerpts from the USAO ND IL announcement are (bold face emphasis supplied by JAT):

Troost, 78, of Skokie, has already paid $1,039,343 in back taxes to the Internal Revenue Service, as well as a civil penalty of approximately $3.75 million, but U.S. District Judge John J. Tharp, Jr., said those payments alone would not sufficiently deter wealthy individuals from failing to meet their voluntary tax obligations. 

According to Troost’s plea agreement, from at least 1999 until 2009, he transferred hundreds of thousands of dollars from the United States to his individual offshore UBS account for the sole purpose of evading domestic income taxes. He maintained at least one offshore UBS account between 1981 and 2009, while maintaining at least one additional joint account. He managed both accounts with the assistance of a UBS personal banker based on the island of Jersey. In addition to failing to report interest income, Troost admitted that he intentionally failed to report all of his income from his monument business and his rental properties. 

Between 1999 and 2009, Troost failed to report income from all sources totaling $3,338,929, on which he owed $1,039,343 in federal taxes. In addition, Troost stated on his returns for each of those years that he did not have an interest in a financial account in a foreign country, when, in fact, he knew he maintained the offshore UBS account.

Note the part I bold-faced above.  But, even though the sentence is significant, it is still below the indicated guidelines range for a tax loss exceeding $1 million.  I don't have time now, but will supply the guidelines calculations tomorrow as best I can construct them on the information known to me.  Still, even though below the guidelines ranges, the fact that a 78 year old is given a sentence for the reason that financial payments alone are not sufficient to deter the conduct may represent some hardening in the court's attitudes to offshore evasion, although one or two cases may not constitute a trend.

I remind readers that the sentence to one year and one day is a gambit to permit the defendant to get an actual sentence is about 15% less than one year.  I will provide that calculation also tomorrow.

Article on Real People Consequences of the Rigidity of OVDP/I (7/16/13)

Tax Notes has a great article on the plight of Marie Sapirie, The Personal Impact of Offshore Enforcement, 140 Tax Notes 187 (July 15, 2013), here.  I offer only the opening excerpts to grab readers' attention if interested in this area.

They often refer to themselves as minnows. They are -- or, in some cases, were -- Americans who reside abroad and who had undisclosed bank accounts in their local jurisdictions. In an attempt to become compliant, some found themselves entangled in the offshore voluntary disclosure programs (OVDPs) that were intended for larger and more culpable taxpayers. 

Some were U.S. taxpayers who intentionally hid money from the IRS in foreign bank accounts. Some continue to hide assets. But not everyone who entered the 2009 or 2012 OVDPs or the 2011 offshore voluntary disclosure initiative (OVDI) was intentionally concealing large sums and purposely evading tax. 

The stated objective of the offshore disclosure programs was to bring taxpayers "that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax" into compliance. However, the language in the FAQs for the programs appeared to apply generally to anyone with an undisclosed foreign account, regardless of circumstances. 

U.S. citizens who have moved abroad and have bank accounts there often may not fit the profile of a tax evader. This set of taxpayers typically faces unique and diverse filing and reporting challenges. Those who wish to be compliant frequently have limited access to professional assistance and have difficulty determining the appropriate tax treatment of specific foreign accounts. Since the UBS scandal opened the floodgates of offshore enforcement in 2008, those taxpayers have sometimes lived in fear of owing large, and perhaps financially devastating, penalties for unwitting compliance mistakes. Some taxpayers have legitimate reasons for owning foreign bank accounts, and their failure to declare them was merely negligent, as National Taxpayer Advocate Nina Olson has pointed out.

After that, the author presents some real world taxpayers who have journeyed through the process, often with many twists and turns, but usually with what appears effort and angst which, in my view, are not compelled by systemic revenue imperatives.  The IRS has appeared slow to correct as these glitches in the offshore initiatives began to present themselves.

I hope the IRS is listening / reading.  I also hope that readers encountering similar situations will find some hope and strategies for action.

P.S. I have not had time to read the article in sufficient detail to collect my thoughts and present more detailed analysis succinctly here.  I will be back later.

Taxes and Morality (7/15/13)

I just revisited a Pew Research study titled A Barometer of Modern Morals:

Sex, Drugs, and the 1040 (3/28/06), here.  Here are the results of a poll of 745 people, with the percentages of people classifying each behavior as morally wrong:
· 85%  Married People Having an Affair
· 79%  Not Reporting All Income on Taxes
· 61%  Drinking Alcohol Excessively
· 52%  Having an Abortion
· 50%  Smoking Marijuana
· 50%  Homosexual Behavior
· 43%  Lying to Spare Someone's Feelings
· 35%  Sex Between Unmarried Adults
· 35%  Gambling
· 32%  Overeating

Some excerpts on tax from the discussion of the research:

Cheating on your taxes is almost as bad as cheating on your spouse. 

* * * * 

The survey did not measure intensity of feelings. It’s possible, therefore, that the difference between the 79% who say it’s morally wrong to cheat on one’s taxes and the 88% who say the same about cheating on one’s spouse is greater (or smaller) than those numbers indicate. Judgments about right-and-wrong are by nature profound, and – in real life – often nuanced and situational. By contrast, this survey questionnaire is a blunt instrument. 

* * * * 

About that 1040 

As April 15 approaches and tens of millions of Americans prepare their tax returns, they may be interested to know that eight-in-ten of their fellow citizens (79%) consider not reporting all income on one’s taxes to be morally wrong, while just 5% consider it morally acceptable and 14% say it’s not a moral issue. 

Moral disapproval is one thing, behavior another. Earlier this year the IRS reported that in 2001 (the last year for which it had conducted such research) there was a gross “tax gap” of $345 billion, resulting from an overall non-compliance rate of about 16 percent. Of that gap, the biggest missing slice, some $197 billion, was from underreporting of income on individual income tax returns; most of that missing sum, in turn, resulted from underreporting of business income on those individual returns, the IRS found.

DOJ Requests Tougher Sentencing for Tax Crimes Involving Offshore Accounts (7/13/13)

DOJ has sent the U.S. Sentencing Commission its annual report "commenting on the operation of the sentencing guidelines, suggesting changes to the guidelines that appear to be warranted, and otherwise assessing the Commission's work."  The report is here.  The following is the excerpt on tax crimes involving offshore banks (footnotes omitted).

F. "Hidden Foreign Bank Accounts" Involved in Tax Crimes 

By law, U.S. taxpayers are required to report worldwide income from all sources, including income from offshore accounts. Similarly, the law requires a U.S. taxpayer to report to the U.S. Treasury Department his or her foreign accounts with balances in excess of $10,000 as to which he or she has certain ownership interests and/or control. The use of bank or investment accounts maintained in a tax haven with strict bank secrecy laws is often done less for customary investment purposes (due to low rates of return and high fees) than because it increases the difficulty of U.S. law enforcement agencies to discover the accounts and enforce U.S. laws. 

Our national tax enforcement program is enhanced when wrongdoers are appropriately sentenced, and those who would contemplate engaging in similar conduct are deterred. Conversely, the program is impaired and tax revenue is correspondingly lost when the offshore cases that are criminally prosecuted result in sentences that do not deter continued evasion. For example, where there is insufficient evidence to prove that the assets in an offshore bank account are themselves untaxed income, the tax loss (which determines the guideline offense level) is limited to the income earned on the offshore account, which can be low even if the account balance is high (as a result of low rates of return and high fees charged in exchange for the secrecy procured). 

We propose that the Commission amend the commentary in §2T1.1 to recognize that an upward departure may be warranted where the tax loss, the customary proxy for harm in tax-related cases, substantially understates the seriousness of the offense. We believe a provision patterned after Application Note 19 in §2B1.1 would best accomplish this and be most consistent with the current guideline structure. We propose a new Application Note 8 to §2T1.1 as follows: 

8. Upward Departure Consideration—There may be cases in which the offense level determined under this guideline substantially understates the seriousness of the offense. In such cases, an upward departure may be warranted. 

For example, a defendant who willfully fails to disclose an offshore bank account may have unreported income from the account that is relatively small in comparison with the value of the assets hidden, as a result of low rates of return and high fees charged in exchange for the secrecy procured. In such a case, the tax loss table in §2T4.1 may produce an offense level that substantially understates the seriousness of the offense. If so, an upward departure may be warranted.

Swiss Banks and Swiss Government Move to Resolve Their Spat with the U.S. (7/12/13)

I provide below some links to and excerpts from article describing key aspects of the current state of play in the Swiss / U.S. spat over Swiss banks' participation in lost U.S. tax revenue.  The key point is that the Swiss banks know something bad is in the offing unless they get the UBS result (with or without a DPA, but with no criminal conviction) and without the Wegelin result (prosecution and demise as an entity).

Katharina Bart, Swiss banks seek permission to send data in U.S. probe: sources (Reuters 7/12/13), here.  Excerpts (bold-faced supplied by JAT):

Credit Suisse and Julius Baer are among five Swiss banks which have sought government approval to hand data to U.S. prosecutors in a bid to reach settlements in a long-running tax dispute, four sources familiar with the matter said. 

The requests represent a push towards sealing a final deal for some of the dozen Swiss banks in the crosshairs of U.S. prosecutors for helping wealthy Americans evade taxes through hidden accounts. 

Some of the five, which also include local government-backed banks Zuercher Kantonalbank and Basler Kantonalbank and the Swiss arm of Britain's HSBC, expect the government to approve their request in the coming days, two sources said. 

* * * * 

The five banks have already handed over data on their U.S. dealings as well as staff involved in the offshore business, but the U.S. authorities still want information on where clients closing their accounts moved their money. 

The Swiss government paved the way for the banks to comply last week, saying it would grant them individual permission to deliver exit lists [JAT Note, apparently called "leaver lists in other sources], information which will help investigators pursue tax evaders and their bankers. 

Swiss Finance Minister Eveline Widmer-Schlumpf said last week the move should allow the dozen banks to settle.

Tax Obstruction, Section 7212(a), Sentenced Under Tax Guidelines Rather than Obstruction Guidelines (7/10/13)

In United States v. Neilson, 721 F.3d 1185 (10th Cir. 2013), here, the defendant was convicted by plea of tax obstruction, Section 7212(a), here.  Defendant admitted the following as the basis for his plea:

[D]uring the period alleged in Count Two of the Indictment I did corruptly endeavor to obstruct and impede the due administration of the Internal Revenue laws by using third parties to accomplish the transfer of property to trusts; reporting financial information to the IRS that was different from the information I reported to lenders from whom I sought loans; mailing frivolous letters to the IRS as part of a scheme wherein I sought to "redeem" the value of my birth certificate by stamping "Accepted for Value" on documents sent to me by the IRS and attaching them to such letters; presenting "Bills of Exchange" as payment of my tax debts; declaring that I was a sovereign citizen of the State of Utah and not subject to the laws of the United States; and sending harassing documents to the IRS seeking personal information on all IRS employees.

The defendant's pattern of conduct was not untypical conduct to hide assets from the IRS and probably could have been charged several ways, including possibly tax evasion.  Still, it is also an obstruction crime.  For sentences for convictions of Section 7212(a), the Guidelines refer to two different Guidelines - the tax Guidelines in 2T1.1, here, and the obstruction Guidelines in 2J1.2, here.  Both cannot apply, so the sentencing court is tasked to pick the most appropriate one.  That task is done by assessing the conduct in question, assessing the type of conduct clearly covered by the two Guidelines, and picking the closest Guideline.  In Nielsen, the court picked the tax Guideline.  Nielsen preferred the obstruction guideline and appealed.  (JAT Note, the key difference between the two relates to the Base Offense Level and Specific Offense Characteristics in the two cited Guidelines provisions; once the calculations clear Part Two, they would be the same.)

On appeal, the court affirmed the sentencing court's application of the tax guidelines.  The Court reasoned (bold face supplied by JAT):

Comparing the stipulated conduct to the conduct covered under each guideline, we agree with the district court that Section 2T1.1 was the most appropriate guideline. Although some of Defendant's conduct may also have obstructed justice, his conduct overall had more to do with taxation. The actions he stipulated to—using third parties to transfer property to trusts, reporting different financial information to the IRS than he reported to lenders, mailing frivolous letters seeking to "redeem" the value of his birth certificate, declaring that he was not subject to the laws of the United States, harassing IRS employees, and seeking to satisfy his tax debts through "Bills of Exchange" rather than payment—are more akin to the other types of tax offenses covered under Section 2T1.1 than to the other types of obstruction of justice covered under Section 2J1.2.

Tax Restitution and Doubt As to Amount (7/10/13)

In United States v. Wirth, 719 F.3d 911 (8th Cir. 2013), here, the court opens with.

Jeffrey John Wirth appeals from the district court's restitution order of $6,457,500, representing the amount of taxes Wirth owed but failed to pay from 2003 to 2005. He argues that the district court erred by relying on the testimony of an Internal Revenue Service (IRS) agent when calculating the amount of actual loss because the agent's calculations were not sufficiently supported by evidence and were otherwise erroneous. He also challenges the sufficiency of the evidence and argues that the district court erred by considering conduct outside the scope of the plea agreement, by failing to establish a restitution payment schedule, and by awarding restitution despite the complexity of the calculation thereof. We affirm.

I focus first on some predicate matters not in the opinion, principally for students and relatively new practitioners.

First, the defendant pled to a single count of Klein / tax defraud conspiracy, with the other tax counts dismissed.  Plea on a single count is fairly typical, and if conspiracy is one of the counts, the plea is often to the conspiracy count.

Second, the principal issue on appeal was restitution.  The defendant pled, so cannot challenge the conviction.  Restitution is generally not permitted if the offense(s) of conviction are tax crimes under title 26.  (Even though not permitted for tax crimes, the DOJ will usually require "contractual" restitution if tax crimes are pleas of conviction.)  In Wirth, the count of conviction was under Title 18, for which restitution is permitted.  Usually, even in nontax crimes, DOJ and the defendant will reach agreement as to restitution.  In Wirth, they did not reach agreement.  That meant that the Government was required to prove the amount of restitution.

In Wirth, the district court held a restitution hearing.  At sentencing, the Court sentenced the defendant to 54 months' imprisonment.  The Court also:

ordered $6,457,500 in restitution, consisting of $2,132,760 for the year ending December, 31, 2003; $1,474,011 for the year ending December 31, 2004; and $2,850,729 for the year ending December 31, 2005. The district court based its restitution order on the following findings, among others: that the restitution calculation was not so complex as to preclude the entry of such an award; that Bosshart's testimony "was thorough, exhaustive and credible"; that Wirth had improperly deducted a wide array of expenses and understated his wages; that Wirth benefitted from Bosshart's application of a 39-year straight-line depreciation method; that Wirth failed to offer credible evidence that he was entitled to the benefit of net operating losses (NOLs) from 2002 and 2007; that the government, in all likelihood, had understated Wirth's tax obligations; and that any confusion regarding the restitution calculation was a product of Wirth's poor bookkeeping. 

One of Wirth's claims on appeal is that, in calculating restitution, he was not given net operating loss (NOL) carryforwards from earlier years.  The sentencing court held that he had not proved the right to claim the NOL carryforwards and therefore denied them in calculating restitution.  The court of appeals affirmed the holding in the following discussion (emphasis supplied):

Wirth first argues that Bosshart [the IRS Agent testifying as to the tax involved] failed to afford him the benefit of NOLs from 2002 and 2007. He argues that he was given the benefit of a NOL from 2006 and that Oakes [his accountant] testified that if he were afforded the benefit of NOLs from 2002 and 2007 there would be no actual loss to the government and thus no restitution. The district court concluded that Wirth was not entitled to the benefit of the claimed 2002 or 2007 NOLs because they were "not credibly based on reliable tax return information[.]" Bosshart testified that, in making her adjustments and calculations, she did not afford Wirth the benefit of the claimed 2002 or 2007 NOLs because she did not find them credible, because the 2002 records were closed, and because Wirth could seek the benefit of the NOLs at later collection proceedings. Considering Bosshart's testimony, the scope of Wirth's tax fraud, the disarray of his accounting records, and that the NOLs were included in tax returns prepared by Murry, we cannot say that the district court clearly erred in finding that Wirth was not entitled to the benefit of the claimed 2002 and 2007 NOLs at this time.

My comments:

HSBC India Depositor Sentenced (7/10/13)

Sameer Gupta, an HSBC depositor, was sentenced yesterday to 19 months in prison, according to a press release from the USAO D NJ, here.  Some details are:

Defendant:  Sameer Gupta
Conviction (by Plea):  Tax Evasion, 7201 (5 year maximum)
Foreign Bank(s):  HSBC India.
Omitted Income: $1,198,054
Tax Loss: $383,475.
Fine: $20,000
FBAR Penalty:  $259,045 (doesn't say how derived)
Court:  D NJ
Judge:  Faith Hochberg (Wikipedia entry here)

The following is from the press release:

Gupta is the 50 percent owner of J.S. Marketers Inc., which sells adult paraphernalia to large adult store chains and smaller retail video stores and bodegas. From 2006 through 2009, Gupta diverted $822,916 of the business’ receipts into 17 different personal bank accounts held in the names of various individuals, including himself and family members. He directed more than $250,000 of those diverted funds into six different accounts held offshore at a branch of HSBC in India. From 2007 through 2009, Gupta caused 22 J.S. Marketers corporate checks to be made payable to himself and family members in amounts identical to invoices from the business’ suppliers. Gupta endorsed those checks, which totaled $375,138, and deposited them into bank accounts that he controlled. Gupta filed individual income tax returns for the years 2006 through 2009 that did not report his income from the diverted funds. 

As a result, Gupta evaded taxes on $1,198,054 in income for 2006 through 2009. He also failed to file Reports of Foreign Bank and Financial Accounts, (FBARs), for 2006 through 2008. The tax loss resulting from Gupta's conduct, not including interest and penalties, is $383,475. 

In addition to the prison term, Judge Hochberg sentenced Gupta to serve two years of supervised release. As part of his plea agreement, Gupta has paid to the United States Treasury a one-time FBAR penalty of $259,045 and has cooperated with the IRS in the investigation of his outstanding taxes due and owed for 2006 through 2009. Judge Hochberg also ordered Gupta to pay an additional $20,000 fine.

Swiss Court Ruling in Credit Suisse Case (7/8/13)

The Swiss Federal Supreme Court has ruled, here, that the U.S. "group requests" under the treaty exchange of information provision are permissible if the request includes enough detail to establish grounds for suspicion of tax fraud and the like.  The holding came from a U.S. treaty request for information from Credit Suisse.  The core of the ruling is:

Group requests are permitted under the 1996 Double Taxation Agreement with the United States, provided that the facts are described with sufficient detail so as to provide grounds for suspicion of fraud and the like and to enable the identification of the taxpayers involved. 

In November 2012, in response to a request for administrative assistance issued by the American tax authorities, the Swiss Federal Tax Administration decided to transfer the bank records of a United States resident, who was the beneficial owner of a company holding an account with Credit Suisse. In a decision rendered on the 13th March 2013, the Federal Administrative Court rejected an appeal against this decision (A-6011/2012). 

Today, the Federal Supreme Court rejected the appeal against the decision of the Federal Administrative Court. It held that requests for administrative assistance in relation with fraud and the like are in principle admissible under the 1996 Double Taxation Agreement with the United States, regardless of whether the suspicion falls on one or more persons and whether the said persons are explicitly named in the request. As the Double Taxation Agreement contains no express provision concerning the minimum content of a request for administrative assistance, the content had to be assessed by interpretation. The Federal Supreme Court thus considered that the mere absence of indications relating to the identity of the persons involved did not constitute an inadmissible fishing expedition, provided that the request for administrative assistance fullfills the strict requirements concerning the degree of detail in the description of the facts. 

Regarding the actual facts presented by the American tax authorities, the Federal Supreme Court held that the method chosen by the clients of the bank involved, by which the financial assets held by a domiciliary company which was not subject to United States taxes, sought not only to avoid income tax owed by the beneficial owner of the company, but was also a way to escape American fiscal procedures put in place in order to ensure the payment of this tax. The process was described with sufficient detail to render the presence of tax fraud plausible.

The U.S. request sought Credit Suisse information on U.S. depositors holding financial assets through a "domiciliary company" which was "a way to escape American fiscal procedures put in place in order to ensure the payment of this tax."

Swiss Prepared to Interpret Exchange of Information Treaty Requests More Leniently; Credit Suisse to Deliver Information (7/7/13)

I link to two articles below on the continuing U.S.-Swiss saga over access to client information.  The key points are:

1.  After the failure of a legislative solution, the Swiss Government is prepared to be more lenient in allowing Swiss banks who are targets of U.S. angst to share information.  By sharing information, these banks hope to avoid indictment and/or large penalties.  Presumably this sharing will be by more lenient interpretation of the exchange of information treaty provision.

2.  Switzerland's high court ruled that Credit Suisse was free to transfer client data to the U.S.  The ruling came in response to U.S. clients suits to prevent the transfer.  The Court is reported to have ruled that the U.S. treaty request is not a "fishing expedition" even though the request did not name the taxpayers for whom information was sought.  Instead, the U.S. request was "detailed enough to show grounds for suspecting tax fraud or similar offences and to allow the identification of the wanted persons."


Alanna Petrof, Chipping away at Swiss bank secrecy (CNN Money 7/5/13), here.

Swiss court OKs Credit Suisse data transfer (The Local 7/6/13), here.

Another Court Application of the Required Records Doctrine for Foreign Bank Account Documents (7/4/13)

In United States v. Chen, 952 F. Supp. 2d 321 (7/3/13), here, the district court added to the critical mass of Government victories on the application of the required records doctrine to trump the Fifth Amendment act of production doctrine with respect to offshore bank records.  Chen involved an IRS administrative summons, whereas the prior cases involved grand jury subpoenas.  I don't; think that makes any difference as to the validity of Fifth Amendment assertions and the required records doctrine.

The Court's holding is fairly standard on this issue which I have covered in prior blogs.  The Court goes through the routine for IRS summonses of satisfying itself that the minimal "Powell" standards are present. United States v. Powell, 379 U.S. 48 (1964).  (I will address one of the footnotes at the end of this blog, but defer it for now because it is not relevant to the gravamen of this blog.)

Finding the summons to have met the Powell standards, the Court then addresses the required records issue.  It's analysis is good  but routine.  I do not address it further because that issue has been discussed in prior blogs.

The Court then addressed the taxpayer's Fifth Amendment claim as to "Non-Offshore-Banking Documents" where, of course, there is no counterpart to BSA's requirement to keep records regarding foreign accounts  This analysis also is fairly routine, but in this blog I have not addressed it that much.  So, I quote the entire discussion of that issue:

Having argued that this Court could enforce the summons with respect to the documents that are implicated by the recordkeeping requirements of the Bank Secrecy Act, the IRS asks this Court to "rule upon the Respondent's Fifth Amendment objection with respect to all other summonsed documents after an in camera privilege review of those documents." Mem. Supp. 5. 

Although the Supreme Court has held that the filing of tax returns is one of the "many burdens [an organized society imposes] on its constituents," California v. Byers, 402 U.S. 424, 427 (1971), it notes that "there is some possibility of prosecution — often a very real one — for criminal offenses disclosed by or deriving from the information that the law compels a person to supply," id. at 428. As already noted, such information might incriminate Chen merely by virtue of Chen's act of production. See Smith v. Richert, 35 F.3d 300, 302 (7th Cir. 1994) ("If a subpoena demanded all the documents possessed by the subpoenaed person concerning some subject, by producing them the person would be acknowledging that he possessed them and that they concerned the subject in question, and if this acknowledgment was self-incriminating he could not be forced to produce them."). This is true notwithstanding the fact that, save for the act of production privilege, "the government could compel the production of nonrequired records, because their creation, and the setting forth of potentially self-incriminating facts entailed by that creation, were the author's voluntary choice." Id. In these circumstances, where "the Court is confronted with the question of a compelled disclosure that has an incriminating potential, the judicial scrutiny is invariably a close one." Byers, 402 U.S. at 427.

Information on Filing Delinquent FBARs (7/3/13)

A reader, Virginia La Torre Jeker, provided the following information that I thought deserved a blog:

I called the E-Filing Regulatory Hotline for FBARs (FinCen) and asked if all “late” FBARs must be filed electronically (e.g., for 2012 and earlier years such as 2011 back through 2007). A rep from the E-Filing Regulatory Hotline called me back and explained that “YES”, the late FBARs must be e-filed; the date of the report should be changed on the e-file to reflect the year for the filing of that particular FBAR. He said that currently the e-filing system does not support the capacity to attach a letter or statement  explaining why the FBAR is being filed late. This capacity may become active later this month. They are advising taxpayers to keep all supporting documentation on file because normally the IRS will come back to the taxpayer and ask for it.  If you wish to separately send in a paper letter explaining the late filing, then you should reference the confirmation number you get from the e-filing of the late FBAR(s).

The Regulatory Hotline Number is (800) 949-2732.  The Regulatory Hotline only accepts requests at the number provided.  They do not provide support via email.

Thanks, Virginia.

Virginia is a U.S. tax attorney who practices in Dubai.  I have found her very knowledgeable about the IRS's offshore iniitiatives.  Readers may see her professional summary here.

Depositor Pleads to False Return; Depositor in Luxembourg Branch of Israeli Bank (7/1/13)

DOJ Tax announced today that Alexei Iazlovsky of Potomac, Md., pled guilty to filing a false tax return for 2008 related to his interest in a foreign account, here.  The plea agreement and information are here and here.  Key facts:

Name:  Alexei Iazlovsky
Conviction (by plea):  Tax Perjury, 7206(1) (1 count for 2008)
Foreign Bank(s):  Luxembourg branch of an Israeli bank (unnamed in release);
FBAR Penalty:  50% of the high balance.  (High balance not stated.)
Omitted income:  $2.6 million
Tax Loss:  More than $400,000.
Admitted conduct:  False individual and corporate returns
Enabler: Nadav Kalai, a return preparer (see below).
Court:  CD CA
Judge:

Cut and paste from the press release):

According to court documents, Iazlovsky, a U.S. citizen, maintained an undeclared bank account held in the name of a foreign corporation at the Luxembourg branch of an Israeli bank. Iazlovsky owned a corporation that produced documentaries for Russian television stations. A tax return preparer suggested to Iazlovsky that he could reduce his taxes by keeping money out of the United States and diverting payments from his Russian clients to a foreign bank account held in the name of a foreign corporation.  Iazlovsky met with a banker from the Israeli bank at a New York hotel to open the Luxembourg account.

According to court documents, Iazlovsky diverted a total of $2.6 million in untaxed payments from his Russian clients to his undeclared bank account in Luxembourg. From 2002 through 2009, Iazlovsky filed false individual and corporate tax returns that failed to report his authority over and ownership of the bank account in Luxembourg. He also omitted the income diverted to and generated by the undeclared account in Luxembourg. Iazlovsky has admitted that the tax loss is more than $400,000.

Iazlovsky is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with failing to report income from undeclared accounts held at Israeli banks.

 I will update the spreadsheet later this week.

On Writing: Strunk & White's Elements of Style (7/1/13)

This writing is on Today's Writer's Almanac, here.  Since I recommend Struck and White's Elements of Style (4th Edition 1999), here (Wikipedia entry here) to my students, I thought I would pass the Writer's Almanac Entry on:

It's the birthday of American grammarian William Strunk Jr. (books by this author). (1869), born in Cincinnati, Ohio. He was an English teacher at Cornell for 46 years, and edited works of Shakespeare and James Fenimore Cooper. In 1918, he self-published a little book for the use of his students, called The Elements of Style. It was a 45-page volume intended, according to Strunk's introduction, "to lighten the task of instructor and student by concentrating attention ... on a few essentials, the rules of usage and principles of composition most commonly violated." He revised it in 1935; and in the late 1950s, one of his former students, the writer and New Yorker editor E.B. White, revised and reissued the 1935 edition. It's now colloquially known as "Strunk and White." 

The Elements of Style is full of helpful advice to aspiring writers and students everywhere. In it, one may find such wisdom as, "Instead of announcing what you are about to tell is interesting, make it so," and "Never call a stomach a tummy without good reason." 

American author Dorothy Parker once wrote: "If you have any young friends who aspire to become writers, the second-greatest favor you can do them is to present them with copies of The Elements of Style. The first-greatest, of course, is to shoot them now, while they're happy."