Toscher Article on Update on Offshore Account Sentencings (2/18/14)

Steve Toscher, here, a major player in the offshore bank account arena, has an excellent recent article, titled Update on the Department Of Justice’s and Internal Revenue Service’s Criminal And Civil International Enforcement Program: Don’t Let the Statistics on Sentencing Fool You (Bloomberg BNA Tax Management Memorandum 2014), here.  The following are some excerpts:

What the sentencing statistics for the offshore cases since 2009 show is that the defendants who have been prosecuted and have pled guilty have received substantially lower sentences than we might have expected under the now advisory Federal Sentencing Guidelines (‘‘Guidelines’’). These cases are ‘‘outliers.’’ While I have not undertaken an empirical study to support my views, I will provide my thinking as to why these cases are outliers in criminal tax sentencing, why they are not reflective of sentencing for tax crimes in general and, importantly, why these sentences may not be a good indicator of sentences in offshore criminal tax cases in the future.  

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The word on the street is that because of the amount of resources required to administer the OVDI programs, the IRS is revamping the program, but it will no doubt work very much like the 2012 program, which looked very much like the 2009 and 2011 programs, but with possible increased penalties. 

While there have been criticisms of the OVDI programs, both in the terms of the way they were administered and the ‘‘one size fits all’’ penalty approach, it is fair to say that from a tax enforcement and compliance perspective, it has been a great success. The OVDI programs have brought more than 43,000 U.S. taxpayers back into U.S. tax compliance and are credited with the collection of tax, interest and penalties in excess of $5 billion.1 The level of voluntary disclosures and increased offshore tax compliance is unprecedented. 

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For fiscal year 2012, the United States Sentencing Commission statistics [for all tax crimes sentencings] reflect that the average (mean) length of imprisonment for tax offenders was 23 months and the median time to serve was 18 months. 

The sentences received in the offshore cases since 2009 appear to be substantially below these averages. The sentences have ranged from approximately one minute of probation to 19 months in prison. Most defendants have received probation with home detention. The highest sentence to date — oddly — appears to have gone to the whistleblower who brought the whole UBS matter to the government’s attention. In addition to his over $100 million dollar whistleblower award, he was awarded 40 months in prison. 

Many criminal tax defense counsel have been asking themselves the question why these foreign account cases appear to have a more lenient sentencing outcome than the run-of-the-mill criminal tax cases. The answer lies in no single factor; there are a number of reasons.  

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The DOJ has been so concerned regarding the level of sentencing in offshore cases, that they have asked the Sentencing Commission to provide a policy statement or a commentary which would direct a district court judge to consider an ‘‘upward departure’’ from the Guidelines where an offshore account was involved.20 The stated basis for the request is that in many cases, information regarding the true amount of the tax loss cannot be ascertained or is so old that it will not be within the scope of the Guidelines, and therefore, the tax loss amount, the primary driver of the Guidelines, does not accurately reflect the nature and circumstances of the offense.

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Cooperators and Enablers 

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Many of the cases reflect that these criminal tax defendants are cooperating. While the plea agreements do not specifically state whom they are cooperating against or the nature of the cooperation — and often motions for downward departure under §5K are filed under seal in order to maintain confidentiality — the public plea agreements suggest there is a substantial level of cooperation that has gone on in these initial offshore cases. Why? The DOJ and the IRS recognize that this type of offshore tax evasion could not occur without the formal institutional involvement of the foreign banks. Just like the enablers of the large tax shelters in the late ’90s and 2000s, foreign bankers are the enablers. By going after the enablers, the prosecution not only gets cooperation from the enablers against other taxpayers, they bring the practice of secret offshore accounts to an end. 

As noted above, there have been a number of cases filed against the so-called foreign enablers — most of whom remain outside the United States and who have not been brought to trial. The U.S. Government views the jurisdiction to charge a foreign person very broadly — but the ability to physically bring that person to trial is much more limited. Extradition for tax crimes is rare if legally available at all and there have been no instances at least publicly reported of efforts to extradite these foreign enablers. Nevertheless, many of the foreign persons who are under U.S. indictment cannot feel comfortable living in their own country, much less trying to cross an international border and potentially being detained. This may well account in large part why the Swiss government and the United States continue to negotiate and try to come to a final resolution of the investigations and prosecutions.

 [After reviewing Guidelines factors that might suggest a higher sentence for offshore bank account evaders, Toscher states]

So all of this would suggest that the sentences in the offshore cases should be higher, not lower than the average criminal tax case — but they are not. Perhaps, the analogy here is that U.S. individuals who have engaged in this type of activity are not terribly different than the many high-net-worth individuals who engaged in structured tax shelter transactions in the 2000s that were promoted by large law firms and accounting firms. Many lawyers and accountants were criminally prosecuted for their conduct. 

Many of us who defended the individual taxpayers were concerned with potential criminal liability of the taxpayers themselves even though they were following the lead of the lawyers and the accountants. The government, however, never prosecuted any of the individual taxpayers, at least that I am aware of, but instead used the taxpayers as witnesses in the prosecution against the accountants and lawyers — so-called enablers. 

While the government has in fact prosecuted many U.S. taxpayers who had offshore accounts, how different is the U.S. taxpayer who has an offshore account and who followed a foreign banker’s recommendation that having a secret foreign account was legal. After all, if UBS or HSBC told you it was legal, may be it was. 

I am not saying these cases are just like the tax shelters, but there are sufficient similarities in them which would give one pause as to whether this has had an impact in terms of the sentences involved.  

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CONCLUSION — A NON-PREDICTION 

Sentencing by its very nature in the post-Booker world is discretionary and individualized. The overarching policy of the Guidelines is to hand down a sentence which is ‘‘sufficient but not greater than necessary’’ to achieve the goals of sentencing. While the offshore tax crimes are very serious, the history and characteristics of these defendants seem to be playing a role in the sentences we have seen to date.  

The best example of this, and it is just an example, was the prosecution of Ms. Curran. She was an extremely wealthy and charitable socialite who, while technically guilty of the crime, did not fit your normal paradigm of a tax cheat. The reaction of the court says it all. Ms. Curran was sentenced to a term of probation, typical for these offshore cases, and then at the sentencing, the court terminated the probation after about a minute. The judge called the prosecution misguided and suggested the government support a request
for a pardon on behalf of Ms. Curran.  

Curran is an extreme case, but one has to think that the demographics of these individuals selected for prosecution is having an effect on the sentences that are being handed down. After all, Mr. Warner engaged in a much more extensive tax evasion scheme  than Ms. Curran, and while he did not get the judicial endorsement for a pardon — his charitable works helped him avoid prison. Perhaps making Beanie Babies, which have brought smiles to millions of children, including those who could not afford them — helped as well.