Good Article on the Non-Willfulness Certification for Streamlined and Related Issues (6/30/14)

I have written on the risks in the non-willful certification to get the Streamlined program benefits.  See The New Streamlined Processes' Requirement of Certifying Non-Willfulness (Federal Tax Crimes Blog 6/19/14; rev'd 6/21/14), here.  Readers interested in this subject will find the following article helpful:  Laura Saunders, The Hazards of Offshore-Account Disclosure (WSJ 6/27/14), here.

Key points:

1.  People certifying non-willfulness can be at risk of "severe penalties and criminal prosecution."

2.  Willful / non-willful is a facts and circumstances test requiring careful judgment.

3.  Loser Arguments for Certification of Non-Willfulness:

Scott Michel, a criminal tax lawyer at Caplin & Drysdale in Washington, says people often assume they weren't willful if they had "compelling emotional reasons for not declaring the account," such as safeguarding assets from expropriation, or that they were told by a relative never to reveal it. "If those are your only reasons, they're losers," he says.

4.  Evidences / indicia of willfulness include:

having an account in a country with bank secrecy rules; holding the account in a trust, foundation or other entity typically used to conceal ownership; moving the account from a firm under U.S. pressure to another, presumably to avoid disclosure; making large cash withdrawals; instructing a firm not to mail statements to the U.S., or communicating in code with it; or having secret meetings with advisers or account representatives.

5.  Size Matters (Maybe, Well Likely but not Certainly):

The amount of money at stake also is important, says Edward Robbins, a criminal tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Los Angeles. "In the real world, the biggest factor determining willfulness is the size of the account," he says. "If a person has a $10 million account, I don't want to hear he was nonwillful, and neither does the government."

* * * * 

Mr. Robbins says that although IRS resources are severely strained, he expects the agency will keep an eye out for taxpayers with large accounts making fraudulent claims in the streamlined program and punish them severely to send a warning.

 6.  Evidence of Non-Willful Behavior:

Experts say that evidence of nonwillful behavior could include having a small account, especially in comparison to the taxpayer's other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; and no prior U.S. tax filings.

U.S. International Tax Enforcement -- Exchange of Information and Collection (6/28/14)

I often get the question of whether the U.S. can request treaty partner assistance to collect taxes from taxpayers resident in foreign country or against property in a foreign country.  The U.S. can do that by treaty, but that is not a standard provision in the bi-lateral double tax treaties that the U.S. has.  There is a multilateral treaty, called the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which the U.S. is a party.  The OECD's resources on this Convention, including the Convention, are here.  The U.S. has made reservations the effect of which is to deny its obligation to collect other countries' taxes and, because reciprocal duties are required, relieve other countries from the obligation collect U.S. taxes.

Now, to the broader subject of U.S. international tax enforcement, I offer the following (footnotes omitted) from a JCT report, titled Joint Committee on Taxation, Explanation of Proposed Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, (JCX-9-14), February 21, 2014, which may be downloaded here:

The report has a great discussion of the state of the law on international enforcement.  Here are key excepts related to international enforcement mechanisms under Current Law (footnotes omitted; I do not indent because of the length of the material copies; in some cases I have bold-face to draw readers' attention)

I. SUMMARY

* * * *

Ratification of the protocol is not intended to alter the reservation of rights or declarations of understanding that the United States made when it ratified the existing convention in 1991. In its instrument of ratification, the United States reserved the right not to provide (1) assistance for taxes imposed by possessions, political subdivisions, or local authorities of other parties to the convention; (2) tax collection assistance; or (3) assistance in serving documents (except the service of documents by mail). The reservations are reciprocal; to the same extent that the United States will not provide assistance, other parties need not assist the United States. Thus, only the provisions relating to information exchanges and service of documents by mail are in effect for the United States. Those reservations would continue to govern the effect of the treaty with respect to the United States upon ratification of the proposed protocol.

* * * *

II. OVERVIEW OF TAX ADMINISTRATION IN CROSS-BORDER CONTEXT 
A. General Background of OECD 
B. Emerging Consensus on OECD Transparency Standards 
C. Extent of Mutual Assistance Under Present Law

The difficulties one jurisdiction has in piercing the “bank secrecy” of another jurisdiction can be traced to the centuries-long tradition against expecting one jurisdiction to assist another jurisdiction with collection of its taxes. This doctrine, known as the “Revenue Rule,” is rooted in common law and sovereign immunity. It is often referred to as the Lord Mansfield Rule, in recognition of the jurist's statement, “For no country ever takes notice of the revenue laws of another.” Although its vitality and scope have been questioned, most recently in Pasquatino v. United States [544 U.S. 349 (2005), here], the doctrine remains a cornerstone of all common law jurisdictions, as well as many others. To the extent that countries have provided administrative assistance of any sort, including exchange of information, it has been a result of State-to-State negotiations, resulting in a multilateral or bilateral international agreements or treaties, ensuring that any waiver of the principle will be reciprocated.

Sentencing Tales Told in Spreadsheets (6/28/14)

I offer today three spreadsheets offered in two sentencing proceedings from prominent convictions of Beanie Babies founder, Ty Warner, and of lawyer/tax shelter promoter, Paul Daugerdas.  I post below links to the prior blogs dealing with the sentencings of each of them.  Warner was the largest offshore account conviction in terms of dollars.  Daugerdas was the larger tax shelter conviction -- in terms of dollars.  Tax shelter is euphemism for bullshit tax shelter.

• Defense Spreadsheet in Ty Warner Case, here.  The spreadsheet is a selective reporting of the sentencing characteristics of others prosecuted for use of offshore financial accounts.  Whether the data set is sufficient may be another issue, but it is clear that offshore account sentences generally draw lesser sentences than other tax and tax-related crimes.
• Gov't Spreadsheet #1 in Daugerdas Case, here.  This spreadsheet is a selective presentation of the sentences imposed in the more egregious bullshit tax shelter cases.
• Gov't Spreadsheet #2 in Daugerdas Case, here.  This spreadsheet is a selective presentation of general tax crimes sentences.

It is unclear what specific effect these spreadsheets had on the sentencing judges, except to say they contributed to the tone the parties presenting the spreadsheets desired and, in the final analysis, the parties presenting the spreadsheet either got or came close to getting their required sentencings.

Prior Federal Tax Crimes Blogs on the Warner and Daugerdas Sentences are:

• The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14), here.
• Daugerdas Gets 15 Year Sentence (6/25/14), here.

Of course, Warner is on Government appeal to the 7th Circuit, and Daugerdas likely will be appealed to the 2nd Circuit.

False Statements Crime Element of "Knowingly and Willfully" Requires Proving Knowledge that Making False Statement Is Illegal (6/26/14)

Since we have been spending so much time on the term "willfully," a chameleon of a word varying with context, I wanted to offer this development in the interpretation of the false statement statute, 18 USC 1001(a), which also has a "knowingly and willfully" requirement for the crime of making false statements to a Government agent.  This charge is often used in tax related contexts.

The DOJ is reported to have abandoned its prior interpretation that a false statement a prosecution and conviction could be made with proof only that the defendant knew the statement was false.  Rather,  the DOJ has indicated in some briefings that this the DOJ now interprets the provision in position Section 1001(a) to require that the defendant know that making the false statement was illegal.  See Tony Mauro, U.S. gives up a widely decried charging theory (American Lawyer 5/12/14), here.  This interpretation seems to bring this statute and related statutes in line with the tax crimes definition of willfulness and the FBAR crimes and civil penalty definition of willfulness.

In pertinent part, the article states that DOJ has now clarified that:

that to make the case that a defendant acted "willfully," the government must prove that he or she knew the statement was unlawful — not just that it was false. That requires a state-of-mind element that can be hard to nail down. Defendants often claim they were unaware that lying to the government was illegal, especially in casual conversations or when not under oath.

Further,

In making such an important shift in the interpretation of a law invoked hundreds of times a year, the department did not shout it from the rooftops. Solicitor General Donald Verrilli Jr. sprinkled mentions of the change into several largely unnoticed briefs filed in March in routine cases before the Supreme Court. Only one reference appears to be available online, on pages 11 and 12 of the government's brief opposing certiorari in Natale v. United States, in which a surgeon was convicted of making false statements in a matter that involved a health care benefits program. 

What's more, none of the cases in which Verrilli confessed error actually involved Section 1001, instead arising under Section 1035, a health care fraud provision that mimics the ­"knowingly and willfully" language of the false-­statements law. 

The Justice Department's change of mind is slowly being felt. On April 21, the Supreme Court sent two cases back to lower courts "for further consideration in light of the confession of error by the solicitor general." The court's orders will likely set in motion a lengthy reassessment of false-statement precedents in most circuit courts.

Hat tip to Lawrence S. Goldman, DOJ Narrows Basis for Section 1001 Prosecutions (White Collar Crime Prof Blog 6/19/14), here.

The DOJ CTM, here, now does not reflect this change in interpretation.  It provides:

Daugerdas Gets 15 Year Sentence (6/25/14)

Paul M. Daugerdas, previously convicted of tax crimes, was sentenced to 15 years.  See the DOJ press release here:  Key excerpts from the press release:

Deputy Assistant Attorney General Ronald A. Cimino for the Tax Division of the Department of Justice and U.S. Attorney Preet Bharara for the Southern District of New York announced that Paul M. Daugerdas, 63, a tax attorney and certified public accountant, was sentenced today in Manhattan federal court to serve 15 years in prison for orchestrating a massive fraudulent tax shelter scheme in which he and his co-conspirators designed, marketed and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the Internal Revenue Service (IRS).  The 20-year scheme, which Daugerdas hatched while working at the Arthur Andersen accounting firm and then continued while a partner at two law firms – Altheimer & Gray and then Jenkens & Gilchrist (J&G) – generated over $7 billion in fraudulent tax losses and yielded approximately $95 million in fees to Daugerdas personally.  

* * * * 

According to the evidence at trial and other documents filed in the case: 

 From 1994 through 2004, Daugerdas, who is a lawyer, a certified public accountant, and the former head of the Chicago office of J&G and its tax practice, participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters. 

 As part of the scheme, Daugerdas and others plotted to defraud the IRS by, among other things, corruptly endeavoring to prevent the IRS from: detecting their clients’ use of these shelters; understanding how the transactions operated to produce the tax results reported by the clients; learning that, rather than serving as legitimate investment transactions, the tax shelters lacked economic substance in that they were designed and marketed as cookie-cutter products intended exclusively to eliminate or reduce large tax liabilities; learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and learning that, from the outset, all of the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits they sought.  Daugerdas and others created and assisted in creating transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits. 

 As part of the scheme, Daugerdas and his co-conspirators also fraudulently backdated some of the tax shelter transactions.  In particular, Daugerdas and his co-defendants learned that certain tax shelter transactions had been implemented incorrectly during the year of the transactions in that they failed to produce the amount or type of tax losses requested by the clients.  Rather than reporting those tax shelter results as they occurred – as required by the Internal Revenue Code – Daugerdas and others engaged in corrupt “correcting” transactions after the close of the pertinent tax years, and then backdated the tax shelter documents to make it appear that the amount and type of tax losses sought by the clients had in fact been generated during the pertinent tax years.  Daugerdas also authored fraudulent tax opinion letters that falsely described when certain aspects of the transactions had actually occurred.  As a result of the fraudulent backdating, Daugerdas and others caused tax shelter clients to file tax returns that falsely and fraudulently claimed tens of millions of dollars of tax losses to which the clients were not entitled.

New Policy on Not Approving Comments that Are Not Helpful to the Intended Audience of this Blog (6/21/14)

Beginning immediately, I will not approve comments that are not helpful to the intended audience of this blog.

This invites me to articulate the intended audience for this blog.  I initially intended the blog to be for respectful discussions among academics, tax professionals and students in the processing of training for academia or a tax profession.  In many ways, I intended it as an extension of my courses I teach at University of Houston School of Law.  The target audience did not include lay people.

Since the IRS started its offshore initiative and specifically implemented the first OVDP in 2009, however, many lay people began using the blog as a resource to better equip them to make the decisions appropriate to their circumstances involving offshore accounts.  At first, I did not welcome that development because I was concerned that the content of the blog entries, not pitched to lay people, would be confusing to them and might lead to poor decisions.  I thereafter began to feel that such lay readers were getting something useful, even as I maintained my principal approach to target tax professionals and tax students in the content provided.  I have thus expanded my vision of the intended audience for the blog.

For that intended audience, I will use the comment moderation feature to block those comments that are not helpful.  Let me just use an example from today's comments:

Censorship in defense of bigotry. Such was a favored practice of the Nazi regime. Is this America's desired future?

This is a fairly typical comment by this person.  This comment does not help my intended audience deal with real issues.  I therefore have rejected the comment and will reject others by any commenter that I do not believe to be helpful to serious readers of this blog.

My goal is to be helpful.  I will strive to serve my intended audience in moderating the emails.

Comments by IRS Personnel on New Streamlined and OVDP Procedures (6/21/14)

I offer some points from Amy S. Elliott, IRS Answers Questions on Updated OVDP and Streamlined Filing, 2014 TNT 120-9 (6/23/14) which summarizes the comments of IRS officials at NYU's Tax Controversy Forum yesterday.  The two IRS officials were Jennifer Best, senior adviser, IRS Large Business and International Division,, and John McDougal, special trial attorney and division counsel, IRS Small Business and Self-Employed Division.  I only include here the items I think of most relevance to most of my readers.

1. The expanded Streamlined procedures were "were expanded in response to criticism that there wasn't an appropriate compliance path for individuals whose failure to report offshore accounts wasn't willful."  [This is not a direct quote from  the speaker.]

2.  The new procedures were designed to "encourage folks who are considering quiet disclosures to come in with their hands up"' and avoid taxpayers coming into OVDP with the intention to opt out.  [The quotations are indicated to be direct quotes from the speaker.]

3.  McDougal sais that a person is non-willful if he "isn't really worried about being prosecuted."  [That appears not to be a direct quote from the IRS employee but a statement of what the author heard him to say.]

4.  McDougal is quoted as saying: "The concept of willfulness is well documented in the case law," and "We're depending on the practitioners to help the clients work their way through what the risk is of criminal prosecution and significant penalties."  [JAT Note:  At least one blogger on this has lamented that these programs seem to require the taxpayer to engage counsel.  This is probably a subject for a separate blog.]

5.  As to the increase in the penalty rate from 27.5% to 50% if there is public disclosure of a bank or facilitator, the "public announcements that count for purposes of the 50 percent rate increase are those by the DOJ." [This is not presented as a direct quote from the speaker.]  Taxpayers delaying are at risk of a public disclosure before they act:  "it's risky to wait given that John Doe summonses, in particular, usually come with no warning."  [This is presented as a direct quote from the speaker.]

The Credit Suisse / DOJ Negotiations (6/19/14)

Lynnley Browning has a great article on the intrigues in the Credit Suisse / DOJ negotiations.  How Credit Suisse Got Off Easy (Newsweek 6/18/14), here.  Ms. Browning focuses on the intrigue of the Swiss blocking of Credit Suisse' ability to disclose the names of the U.S. depositors.  The $2.6 billion dollar cost was substantial but not that material to Credit Suisse.  And, in terms of its business operations, Credit Suisse did not miss a beat.  But, as she presents the story, it was all about the names and the Swiss authority threatened prosecution of the bank's officers if names were turned over.  One of the great quotes regarding this back and for is that the "the Justice Department 'did not trust' the Swiss."  That strikes me as a reasonable assessment.

The New Streamlined Processes' Requirement of Certifying Non-Willfulness (6/19/14; rev'd 6/21/14)

I am going to do a series of separate blogs on certain discrete facets of the IRS announcement on June 18.  See IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (Federal Tax Crimes Blog 6/18/14), here.  In this blog, I focus on the liberalized streamlined procedures' requirement that the offshore account conduct not be willful.  I think this requirement goes to the core of the penalty mitigation offered by the new processes.

In invoking either of the streamlined procedures, the U.S. person with an offshore account problem is required to certify that the "the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct."  I will refer to that U.S. person as the taxpayer.  The certification forms are for residents, here, and for nonresidents, here.  The key part of the certification form is:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.  

I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.  

When can the taxpayer make the certification that his conduct was not willful for income tax and FBAR purposes?

Obviously, the taxpayer must know what is meant by willful, so that he can assess whether his conduct was not willful (or "non-willful").  As courts have noted, the word "willful" is a "chameleon" which changes in tone and color according to the Code section involved and the circumstance.  See e.g., former Justice Souter's opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir. 2014), discussed in More On Willfulness (Federal Tax Crimes Blog 6/13/14), here.  But, I think it is clear that, in both the income tax context and the FBAR context, willful means "voluntary intentional violation of a known legal duty."  Readers will recognize this as the Cheek standard.

The IRS discussion of the new Streamlined Procedures approaches the issue from a different direction -- instead of starting with the definition of willfulness and moving to non-willfulness, it states what is non-willfulness without any predicate.  The explanation of non-willfulness is direct and somewhat cryptic:  "Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."  (See the certification forms linked above.)

The IRS does not get into the thorny issue of the role of willful blindness (or similar formulations, such as deliberate ignorance, etc.) and whether willful blindness permits an inference or requires a conclusion of willfulness.  Presumably, though, the definition of non-willfulness as quoted would exclude willful blindness.  Stated otherwise, if willful blindness were involved, the conduct would not be due to negligence, nor to inadvertence, nor to mistake nor to a good faith misunderstanding of the tax law.

I conceptualize the path between willfulness and non-willfulness as a continuum.  The facts of some cases will present themselves on either end of continuum and will be clearly recognized as willful or non-willful.  When the facts present themselves other than at the ends of the continuum, there is a problem.  OK, if they are close to either end, that may not be a big problem.  But how close do the facts need need to be to be at either end before one can comfortably make a decision?  Another metaphor is the gray area between the extremes.  What do you do when you are in the gray area -- in the shadings between white and black?

IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (6/18/14)

The key documents on the changes are:

• IRS Commissioner Koskinen's News Release is here.
• IR-2014-73, June 18, 2014 is here; announces the changes.
• OVDP 2012 (as changed 6/18/14), here.
• Streamline Filing Compliance Process (as changed 6/18/14), here.  This is the description.  There are two types of Streamline filings:  Non-resident and Resident.  The Nonresident program -- referred to as Streamlined Foreign Offshore Procedures -- is described on a web page titled: U.S. Taxpayers Residing Outside the United States, here. The Resident program -- referred to as Streamlined Domestic Offshore Procedures -- is described on a web page titled U.S. Taxpayers Residing in the United States, here.
• Delinquent FBAR Submission Procedures (as changed 6/18/14), here. 
• Delinquent International Information Return Submission Procedures (as changed 6/18/14), here. (This relates to the Forms required for entities, such as CFC's, trusts,etc.)
• IRS OVDP 2014 FAQs, here.  Note particularly par. 1.1 on the changes from the original OVDP 2012.
• Transition Rules FAQs, here.
• Foreign Financial Institutions or Facilitators List (formerly Bank and Promoter List), here.  This list is the basis for the 50% penalty in OVDP 2014 (See FAQ 7.2 in the OVDP 2014 FAQs, here.)  I should note that the description in FAQ 7.2 is not clear as to whether the key cut off date is the date listed on the bank and promoter list or the date of the public disclosure as defined in FAQ 7.2).  Readers should look at the list.  For those who have been watching this area, the institutions should be familiar.

The new procedures apply as follows:

1. Foreign residents (requiring only foreign residence in the 3 year period):  File 3 years of delinquent or amended returns and pay tax and interest.  No penalties (including FBAR or miscellaneous) will be assessed.  Must also complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (i) eligibility for the procedure, (ii) filing of all required FBARs, and (iii) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

2.  Nonforeign residents (Domestic residents):  Must file 3 years of returns and pay tax and interest.  No penalties other than a 5% miscellaneous penalty on foreign financial accounts only will be assessed.  Must complete and Sign the Certification by U.S. Person Residing in the U.S. that (i) eligibility is met; (ii) all FBARs have been filed; (iii) "the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct;" and (iv) that the miscellaneous penalty amount is accurate.

Nonwillful conduct for the purposes of #1 and #2 is:  "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law; 

The taxpayers can be audited under the income tax audit guidelines but will not be automatically audited.

A couple of the material changes to OVDP 2012 are described in par. 1.1 of the FAQs as follows:

• A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
• FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.

I will be back with more later.

Israel Focuses on Offshore Accounts (6/18/14)

I don't watch closely efforts by foreign countries to protect their own tax bases that may be eroded by accounts outside their borders, but I do know generally that tax authorities in other countries are concerned.  It is not just the United States.  Germany and France have made major  moves, for example.

Consider this recent story regarding Israel:  Tax Authority targets foreign bank account holders (Globes 6/12/14), here.  Here are some excerpts:

The Tax Authority has been handed information about thousands of Israelis with foreign accounts. 

"The Tax Authority has a list of Israelis with foreign bank accounts with tens of billions of shekels. They can expect to receive registered letters from the Tax Authority. Figures will be published soon about investigations that will be opened against some of the tens of thousands of Israelis whose names have been made known to the Tax Authority through various leaks. We're talking about turnovers of billions of euros," Tax Authority senior deputy director general for investigations and intelligence Avi Arditi told the panel on black capital at the Institute of CPAs in Israel conference in Eilat on Wednesday. 

As for the Tax Authority's capabilities in uncovering Israelis' money overseas, Arditi said, "In the past it was taboo to talk about people with a foreign bank account. No one knew about it and the chances that the Tax Authority would receive information about it was zero. But things have changed. Countries have grasped the need to share information, and banks are now required to examine the sources of their customers' money. We're in a new era, in which information flows into Israel from abroad, and we know how to deal with sources in Israel that provide us material. This is something new and interesting, and tax cheats should realize it."

The Cost of Tax Havens - An Analysis of Empirical Data (6/16/14)

Jacques Leslie, The True Cost of Hidden Money: A Piketty Protégé’s Theory on Tax Havens (NYT 6/15/14), here.

GABRIEL ZUCMAN is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself? 

Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality. 

Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed. 

* * * * 

Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent. 

Only multinational corporations and people with at least $50 million in financial assets usually have the resources to engage in offshore tax evasion. Since the less wealthy continue paying taxes, the practice deepens wealth inequality. Indeed, newly invigorated efforts in the United States to curb personal tax evasion, codified in the 2010 Foreign Account Tax Compliance Act, have armed the Internal Revenue Service with strong sanctions to levy on foreign banks that fail to disclose accounts held by American residents. This has made it “more difficult for moderately wealthy individuals to dodge taxes,” Mr. Zucman says, while the richest account holders still have more elaborate evasive techniques at their disposal. 

“There’s a profound shift in attitudes that happened in the 1980s,” Mr. Zucman says. “In the ’50s, ’60s and ’70s, taxes were much higher, yet it was not considered normal to try to aggressively minimize your tax bill and even to evade taxes.” He finds it “no coincidence” that the era of widespread tax evasion began in the Reagan era, with the rise of the idea that government is a beast that must be starved. 

Because large-scale tax evasion skews key economics statistics, it hampers officials’ ability to manage the economy or make policy, Mr. Zucman says. It erodes respect for the law, preventing the government from carrying out one of its essential tasks. And it discourages job creation, since it rewards people and corporations for keeping money overseas, instead of investing it domestically.

11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (6/14/14)

In United States v. Carlson, ___ F.3d  ___, 2014 U.S. App. LEXIS 11001 (11th Cir. 6/13/14), here, the issue was the plaintiff's liability for " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701."  Section 6701 is here.  In relevant part, Section 6701 imposes the penalty upon a person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

Section 6701 may be viewed as the civil penalty analog to the tax crime of aiding and assisting, Section 7206(2), here.

One issue on the appeal was the appropriate burden of  proof the Government must bear.  Carlson argued that it was by clear and convincing evidence; the Government argued that it was by a preponderance.  The Court held that the standard of proof is by clear and  convincing evidence.  Here is the Court's discussion:

I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence. 

At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law. 

Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir. 2008) ("The Commissioner has the burden of proving allegations of fraud by clear and convincing evidence."); Korecky v. Comm'r of Internal Revenue, 781 F.3d 1566, 1568 (11th Cir. 1986) ("The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence."); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir. 1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir. 1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.3d 316, 320 (5th Cir. 1956) ("The Commissioner has the burden of proving fraud by clear and convincing evidence."); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5-6 (5th Cir. 1930) ("Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case."). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir. 1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir. 1950) (same);Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir. 1940) ("Fraud cannot be lightly inferred, but must be established by clear and convincing proof."); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir. 1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir. 1931) ("Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.").

More On Willfulness (6/13/14)

I write today to write on a facet of the willfulness requirement.  Most tax crimes in Title 26 require that the person have acted willfully.  In the tax crimes setting, willfulness has a specific meaning which many not apply in other criminal settings where willfulness is a statutory element of the crime.  In the tax setting, willfulness means the intentional volation of a known legal duty -- a very high mens rea requirement.

In United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir. 2014), here, the court addressed the meaning of a statutory willfulness element for a nontax crime.  There, the defendant had been convicted "for knowingly and willfully obstructing the passage of mails under 18 U.S.C. § 1701."  Section 1701 is here.  The defendant was a USPS carrier who discarded some portions of the mail he should have delivered -- "Town Criers," local newspapers featuring advertisements, which post office customers pay to have delivered, although the newspapers typically identify the subscriber simply as "Current Resident" or "Postal Customer."

The cute question at this point is what is wrong with discarding such mailings?  Some people might think he is doing the postal service customer a favor.  But, of course, what he did was wrong.

So, he wanted to argue at trial and on appeal that, even if what he did was wrong, it was not willful and hence meet that element of the crime.

Former Supreme Court Justice Souter, writing the opinion, rejected his argument as follows:

The statute provides that "[w]hoever knowingly and willfully obstructs or retards the passage of the mail . . . shall be fined under this title or imprisoned not more than six months, or both." 18 U.S.C. § 1701. Marshall says first that the magistrate judge and the district court applied the wrong definition of "willfulness" in convicting him under 18 U.S.C. § 1701. The court followed the Second Circuit in United States v. Wooden in taking the position that showing willful action requires proof only that a defendant had an "illegitimate or improper intent" to obstruct deliverance of the mail. 61 F.3d 3, 5 (2d Cir. 1995). Marshall, in contrast, suggests that "willfulness" is shown only when a defendant knew his conduct was unlawful at the time he engaged in it. 

The statutory term "willfully" is a chameleon, what the Supreme Court has called "a word of many meanings whose construction is often dependent on the context in which it appears." Bryan v. United States, 524 U.S. 184, 191 (1998) (quoting Spies v. United States, 317 U.S. 492, 497 (1943)) (internal quotation marks omitted); see also United States v. Ladish Malting Co., 135 F.3d 484, 487 (7th Cir. 1998) ("'Willfully' is . . . notoriously slippery . . . ."). Although this Circuit has never explained willfulness under § 1701, the Supreme Court took up an early version of the statute in United States v. Kirby and read the phrase "'knowingly and wilfully' obstruct or retard the passage of the mail" as applying to "those who know that the acts performed will have that effect, and perform them with the intention that such shall be their operation." 74 U.S. 482, 485-86 (1868). While Kirby, to be sure, has an ancient ring to it, its precedential force is buttressed by the general rule that reenactment of a statute carries congressional approval of phrases with prior judicial construction. See Keene Corp. v. United States, 508 U.S. 200, 212 (1993) ("Since . . . these cases represented settled law when Congress reenacted the [statutory language], we apply the presumption that Congress was aware of these earlier judicial interpretations and, in effect, adopted them."). And Kirby's interpretation has been echoed by other federal courts applying 18 U.S.C. § 1701 in more recent decades, which have read the term "willfully" to require some level of intent greater than "inadverten[ce] or mere[] negligen[ce]." United States v. Johnson, 620 F.2d 413, 415 (4th Cir. 1980); see also Wooden, 61 F.3d at 5 (finding that "an inadvertent or negligent delay of the mail does not violate [§ 1701]"). 

Marshall, to be sure, does not argue that the willfulness requirement of § 1701 requires proof that a defendant was aware of the specific provision violated, as has been held with respect to some statutes in the criminal code. See, e.g., Ratzlaf v. United States, 510 U.S. 135, 149 (1994) (willfully violating financial anti-structuring laws); Cheek v. United States, 498 U.S. 192, 201 (1991) (willful tax evasion); cf. Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 126 (1985) (willfully violating the Age Discrimination in Employment Act). As the Supreme Court has explained it, "highly technical statutes" like the Internal Revenue Code and the currency structuring law present a particular "danger of ensnaring individuals engaged in apparently innocent conduct." Bryan, 524 U.S. at 194. To obviate that risk, their specific intent requirements "carv[e] out . . . exception[s]" to the "general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution." Cheek, 498 U.S. at 199-200. 

France Goes after French Depositors in Swiss Banks and the Swiss Banks Also (6/12/14)

This report has familiar resonances, although the events have been stewing for a while:  Giles Broom, Geneva’s French Ties Fray as Banks Warn Offshore Clients (Bloomberg 6/11/14), here.  Some excerpts:

"Paris prosecutors investigate Switzerland’s largest lender UBS AG (UBSN) and London-based HSBC Holdings Plc over whether they helped clients hide wealth in Swiss accounts.  Already bruised by battles with the U.S., Geneva bankers are pressing French clients to “regularize,” a polite way of saying they must come clean on undeclared funds. Failure to do so will result in account closings, clients were told." 

Banks are “very scared,” said Remi Dhonneur, a Paris-based tax lawyer at Kramer Levin Naftalis & Frankel LLP. “Clients are being kicked out or pushed to regularization.” 

Adding weight to the threat, banks are combing through tens of thousands of accounts to identify potential tax cheats, a caseload that spans three or four generations of wealth deposited offshore by affluent French families, he said. 

French families have at least 250 billion euros ($339 billion) parked in offshore accounts, more than half of which are probably undeclared, according to a Geneva-based banker who asked not to be named, saying the figures were supplied confidentially by a consulting company. 

* * * * 

France is investigating UBS after the country’s banking regulator fined the Swiss lender 10 million euros last year for deficient controls against tax fraud and illegal sales practices. Tax investigators searched the bank’s offices in Paris, Lyon and Strasbourg. 

With HSBC’s private bank, which is suspected of helping 3,000 French customers avoid paying more than 4 billion euros of tax, investigating judges “clearly” want to bring charges, Le Monde said on June 10. The government built its case from a client list of leaked from the bank’s Geneva unit by a former software technician. HSBC declined to comment on the report. 

* * * * 

Bank Initiative 

“I’m dealing at the moment with an enormous number of cases of regularization,” said Nicolas Marguerat, a Paris-based lawyer and academic. “Most clients came to me due to the initiative of the bank, because the bank contacted them six months ago and told them: ’You must regularize. If you haven’t done this by March 31, 2014, we will throw you out and give you a check.’” 

Swiss Banks' Requests to U.S. Depositors for Waivers and Proof of Entry Into OVDP (6/11/14)

As readers of this blog are aware, under the U.S. DOJ program for Swiss banks, Category 2 banks -- those that admit having criminally misbehaved -- can suffer a penalty of from 20% to 50% of the high amount in U.S. depositors accounts after 8/1/08.  The banks can avoid the penalty for each account that the banks can establish to DOJ's satisfaction are U.S. tax compliant.  The language for the requirements to avoid the penalty is:

The determination of the maximum dollar value of the aggregated U.S. Related Accounts may be reduced by the dollar value of each account as to which the Swiss Bank demonstrates, to the satisfaction of the Tax Division, was not an undeclared account, was disclosed by the Swiss Bank to the U.S. Internal Revenue Service, or was disclosed to the U.S. Internal Revenue Service through an announced Offshore Voluntary Disclosure Program or Initiative following notification by the Swiss Bank of such a program or initiative and prior to the execution of the NPA.

Now, at the risk of redundancy, I think it helpful to list the ways the bank can get the reduction:

1.  Showing that the account was not undeclared.  This will be a tough one for many, probably most, accounts since the advantage of Swiss banks to many and maybe most was not to declare the account.

2.  The Swiss bank discloses the information to the IRS.  The information is subject to Swiss secrecy law at this time, although as I noted in an earlier blog today, the IRS may be able eventually to request the information, but that will be after the  window for the penalty mitigation has closed.  This is probably the reason that some Swiss banks are insistently requesting a waiver permitting them to disclose the accounts to the IRS.  So far as I know, there is no legal requirement that the U.S. depositor sign such a waiver.

3.  The U.S. depositor enters the voluntary disclosure initiative (referred to here as OVDP, although it includes related initiatives as well) following notification by the Swiss bank of the initiative.  So far as I  know, there is no legal requirement that the U.S. depositor provide OVDP proof to the DOJ.  And, there is no indication that DOJ will on its own determine whether the U.S. depositor has entered OVDP (perhaps because DOJ does not have access to return information under Section 6103).

I focus on #3, although my comments probably relate to #2 as well (since both have the key feature that the U.S. depositor is not required to do  anything to assist the bank in meeting the requirements).  This Swiss bank penalty mitigation regime shows that there is great value to Swiss Category 2 banks showing proof of U.S. tax compliance via OVDP.  How do they do that?  Obviously, that is up to the banks and the DOJ to work out.  However, Category 2 banks have for some time now asked for proof that the U.S. depositor joined OVDP.

BDO Seidman Personnel Sentenced for Bullshit Tax Shelter Promotion (6/11/14)

The wave of prosecution news from the Tax Shelter storms of the late 1990s and early 2000 is now slowing to a trickle.  Here are the latest:  Patricia Hurtado, Ex-BDO Seidman Executive Bee Gets 16 Months for Fraud (1/9/14), here; and Ex-BDO partner gets 3 months in prison for tax shelter scheme (Reuters 6/10/14), here. These articles report 3 sentencings from the BDO Seidman and Jenkens & Gilchrist promotion of bullshit tax shelters.  Those convicted and their incarceration periods are:

Charles Bee, former vice chairman of BDO - 16 months
Adrian Dicker, former vice chariman of BDO - 10  months
Robert Greisman, former partner in BDO - 3 months

All of these pled and cooperated in other prosecutions, most prominently of Daugerdas, whose trials have been reported on this blog.

Bee got the most serious sentence.  Regarding his misconduct, the Bloomberg article notes (emphasis supplied by JAT):

While Bee pleaded guilty to fraud in 2009 and testified twice against BDO’s former Chief Executive Officer Denis Field, U.S. District Court Judge William Pauley in Manhattan said today he couldn’t overlook Bee’s participation in the biggest tax-shelter fraud in U.S. history.
“Your cooperation was important but your crimes are of unbelievable proportions,” Pauley said today in federal court in Manhattan. “I believe a term of imprisonment is entirely appropriate.”
Pauley said Bee, a certified public accountant, earned at least $23.6 million in fees as a result of the scheme, encouraged others at BDO to break the law and had been one of the leaders of what he called “a rogue group” at the firm. 

“Mr. Bee should have come forward a lot earlier than he did,” Pauley said. “Had he done so, this horrific scheme wouldn’t have gone as far as it did.” 

The judge said that while he found Bee’s testimony to be credible and his cooperation significant, “it doesn’t change the fact that he helped perpetrate one of the largest tax frauds in the history of the United States.” 

Blatant Criminality 

Both defense lawyer Michael Hueston and Assistant U.S. Attorney Nanette Davis today argued that Bee deserved leniency, citing his aid to the government. Davis said federal prosecutors and investigators interviewed 50 to 75 BDO partners about the scheme before Bee agreed to discuss his crimes and said he was the most forthcoming of the cooperators. 

“Bee was the most candid about blatant criminality that went on there,” Davis said. “It was a refreshing change and for that reason, the government moves for a substantial departure” from the potential life term which Bee faced because the fraud scheme was larger than $400 million. 

The judge said Bee knew the tax shelters would have been disallowed by the Internal Revenue Service and had lied during a 2005 deposition in a lawsuit. 

Davis said Bee has forfeited at least three homes, including a residence in Florida worth $3.5 million and a 40-foot trailer.

I have bold-faced the part about the Government's request for downward variance from  the indicated potential life term.  This is a reminder of the benefits of the early plea and cooperation and the judge's substantial Booker discretion.

The judge also ordered $69.4 in restitution against all three.

The tax loss apparently was $1.5 billion.

Reminder: Category 2 Banks Will Serve Up Their U.S. Depositors (6/11/14)

I recently read Stephen Dunn's blog entry, Beware Of Swiss Banks Urging Offshore Voluntary Disclosure To IRS (Forbes 6/8/14), here.  The general caution he gives is to understand the motives of Swiss Banks in requesting that their U.S. depositors enter OVDP.  The Swiss banks are serving their own self-interest by getting U.S. depositors to join OVDP because, provided the Category 2 Swiss banks can show proof of their U.S. depositors having done so, the Swiss banks can avoid the penalty on the account imposed by DOJ's Swiss bank program.  For example, on a $1,000,000 high amount deposit during the applicable period, the Swiss bank can save $200,000 to $500,000 by showing such proof (which, of course, the Swiss bank will have to get from the U.S. depositor, which is another story / blog entry).

The blog reports that one of the inducements made by the bank was that, failing return of the waiver, the account would be treated as a "Non-Consenting U.S. Account" that would start a process of disclosure of aggregate data that will lead to a group request for identities under the Implementing Agreement.  The blog then reports that, because the particular client in issue had closed the Swiss bank account in 2009, the client's deposit information in issue was not subject to the Agreement (which applies only to accounts in existence as of 12/31/13).  The blog entry rightly notes that the Swiss Bank therefore cannot (i) include the particular client's information in the aggregate data required by FATCA and (ii) disclose the client's identify should a request for identity be made (as is likely).

But, that is not the end of the story, which is why I write this blog.  Persons situated similarly to the client discussed in the blog -- i.e., who have closed their Swiss Bank accounts prior to 12/31/13 -- will indeed dodge the disclosure bullet under FATCA and the Implementing Agreement.  But there is another bullet, of similar effect, that they will not be able to dodge.

Under the U.S. DOJ program for Swiss banks, Category 2 banks must provide the following for "all U.S. Related Accounts" (par. 2.D.2):

a. the total number of accounts; and
b. as to each account:
i. the maximum value, in dollars, of each account, during the Applicable Period;
ii. the number of U.S. persons or entities affiliated or potentially affiliated with each account, and further noting the nature of the relationship to the account of each such U.S. person or entity or potential U.S. person or entity (e.g., a financial interest, beneficial interest, ownership, or signature authority, whether directly or indirectly, or other authority);
iii. whether it was held in the name of an individual or an entity;
iv. whether it held U.S. securities at any time during the Applicable Period;
v. the name and function of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known by the Bank to be affiliated with said account at any time during the Applicable Period; and
vi. information concerning the transfer of funds into and out of the account during the Applicable Period on a monthly basis, including (a) whether funds were deposited or withdrawn in cash; (b) whether funds were transferred through an intermediary (including but not limited to an asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other third party functioning in a similar capacity) and the name and function of any such intermediary; (c) identification of any financial institution and domicile of any financial institution that transferred funds into or received funds from the account; and (d) any country to or from which funds were transferred.

Court Holds Online Poker Accounts are FBAR Reportable (6/9/14)

In United States v. Hom, 2014 U.S. Dist. LEXIS 77489 (N.D. CA 2014), here, Hom was an online gambler who held accounts at two online poker companies, PokerStars and PartyPoker.  He used a financial organization, FirePay.com, to facilitate his gambling with the poker companies by transferring money to and from the poker companies.

On September 20, 2011, the IRS assessed defendant with civil penalties under 31 U.S.C. 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. 5314, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. The IRS assessed a $30,000 penalty for 2006, which included a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based solely on defendant's PokerStars account (Hendon Decl., Exh. 5, at 5). Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. 3717. 

The two issues were:  (1) whether the accounts with the three entities were "bank, securities or other financial account[s]" that must be reported on an FBAR; and (2) whether each of the three accounts was in a foreign country  The Court answered both questions yes.

The Court's analysis of the first issue is probably most interesting for readers, so I quote in full:

The second element is whether defendant had a financial interest in, or authority over, a bank, securities, or other financial account in 2006 or 2007. Defendant does not contest in his opposition that he had a financial interest in his online FirePay, PokerStars, and PartyPoker accounts in 2006 and his online PokerStars account in 2007. Rather, defendant argues that those accounts are not a "bank or other financial accounts" for purposes of the applicable statute and regulations. 

While our court of appeals has not yet answered what constitutes "other financial account[s]" under 31 C.F.R. 103.24, the Court of Appeals for the Fourth Circuit found that an account with a financial agency is a financial account under Section 5314. Clines, 958 F.2d at 582. Under Section 5312(a)(1), a "person acting for a person" as a "financial institution" or a person who is "acting in a similar way related to money" is considered a "financial agency." Section 5312(a)(2) lists 26 different types of entities that may qualify as a "financial institution." Based on the breadth of the definition, our court of appeals has held that "the term 'financial institution' is to be given a broad definition." United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986). The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as "commercial bank[s]." Section 5312(a)(2)(B). The Fourth Circuit in Clines found that "[b]y holding funds for third parties and disbursing them at their direction, [the organization at issue] functioned as a bank [under Section 5314]." Clines, 958 F.2d at 582 (emphasis added). 

So too here. Defendant admits that he opened up all three accounts in his name, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts (Hom Dep. at 38, 40, 45-46, 110, 116). As FirePay, PokerStars, and PartyPoker functioned as banks, defendant's online accounts with them are reportable. 

Defendant alternatively argues that his online accounts are not "other accounts" according to the current regulations. The current regulations define a reportable account as including "bank account[s] . . . [which means] a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking." 31 C.F.R. 1010.350. As explained above, FirePay, PokerStars, and PartyPoker function as institutions engaged in the business of banking. Accordingly, defendant's accounts are reportable even under the current regulations.

Hom Represented Himself.

Bank Leumi Moves Toward Resolution of Criminal Conduct in U.S. Branches (6/8/14)

There are reports that Bank Leumi, the Israeli Bank, will pay a 1 Billion NIS (Shekels) fine   E.g.,
Report: Bank Leumi to Pay NIS 1 Billion in Fines to US for Suspected Money Laundering (JewishPress.com 6/8/14), here.  I am told this is just under $300 Million USD.  The conduct penalized involves the activities of U.S. branches (such as the back to back fake loans conducted in the Los Angeles branch).  The reports mention money laundering, but the gravemen of the cases involving those branches have been more focused on tax and FBAR misdeeds.  Of course, money laundering is just a short step away from tax.  Although tax is not a specified unlawful activity, wire and mail fraud is and almost all tax crimes can be escalated to wire and mail fraud, subject to DOJ's directives to charge tax crimes as tax crimes.

I presume that, if Bank Leumi is close to accepting a penalty, there will contemporaneously be a resolution of possible criminal prosecution.  I have no idea what that resolution might be.

Also, Bank Leumi's Swiss subsidiary is one of the remaining banks under criminal investigation and therefore, that will be a second shoe that falls on Bank Leumi.  Of course, Bank Leumi could try to resolve both at the same time.

Tidbits from the IRS on Offshore Account Issues (6/7/14)

I understand from practitioners that the IRS has indicated the following.  This is second hand, so those desiring to implement strategy based on the following might make their own inquiries to the IRS.

1.  Readers may be aware that some or all Swiss Category 2 banks are requesting the U.S. depositor to supply proof of U.S. tax compliance.  That proof can be used to mitigate the Swiss Category 2 bank's penalty in the program with the U.S. DOJ.  In my limited experience with such requests, the banks may ask for various forms of proof (from the IRS preclearance letter into OVDP to the Form 906).  The U.S. depositor is not required to provide that proof to the Swiss bank, of course.*  The question has arisen, however, what if anything to provide the Swiss bank if the request comes after the U.S. depositor has submitted the request for preclearance but has not yet received the IRS letter of preclearance.  I understand that the IRS believes banks will accept the preclearance request letter and perhaps a letter from the taxpayer or the representative to the bank that the preclearance request letter was filed and  has not yet been acted on.  I am sure the bank will make a follow through request for something more definite.

2.  Clients concerned about the interim period between deciding to do something (whether OVDP or streamlined) might make a preclearance letter request for OVDP and then, if streamlined is appropriate, withdraw from OVDP.  The advantage of filing the preclearance where the ultimate choice to do OVDP is not made is that the process of dealing with the issue, having been started with the preclearance letter, should be some protection if the IRS starts an audit later before the alternative strategy is implemented.  If, after filing the preclearance letter, the client decides to pursue another strategy, the client should withdraw by letter advising of the withdrawal submitted before the due date for the intake letter to CI.  The letter should be clear that the client is withdrawing.  (Note, withdrawal is not the same as opting out; hence, unless the client qualifies for and completes streamlined procedure, the client will not have assurance of no criminal prosecution.)  As I received the information, this withdrawal process might work also for later determining to proceed in some other way under 2011-13.  Both the streamlined and the 2011-13, here, routes offer considerable uncertainties, but perhaps these uncertainties may be mitigated by the upcoming changes in the program that Commissioner Koskinen announced were coming.  See IRS Commissioner Koskinen Announces that Changes -- Liberalizations -- Are In the Offing for OVDP 2012 (Federal Tax Crimes Blog 6/4/12), here.

3.  If the client does not withdraw, the case will be processed under OVDP under normal procedures with the right to opt out.

I and readers will appreciate comments and strategies from the readers.

* There seems to be significant controversy in the practitioner community as to whether banks can offer to pay the U.S. depositor as an inducement to provide the proof of U.S. tax compliance and whether U.S. depositors can request such payment as an inducement.  At least one bank's counsel has alleged that a U.S. depositor request for payment violates both U.S. and Swiss law.  I probably will write a blog on that later, but I would appreciate hearing from any reader with their experience in the area of bearing offered compensation or requesting compensation.  Readers can write me at jack@tjtaxlaw.com.  I will maintain confidence for all such information received unless the readers providing the information specifically authorize me to use it in some way.  Thanks.

Zwerner Case Settles Without Decision on Excessive Fines Issue (6/6/14; Updated 6/12/14)

The Zwerner case has settled.  See the case closing document here.  I add the public settlement terms below.  The court's case closing says:  "the parties advised that they have amicably settled this matter."  (Emphasis supplied.)  I assume that the word amicably is a euphemism for the real world where the settlement is equally -- more or less -- painful to both sides, in order to strike a settlement balance.

Most immediately, it leaves several issues unresolved.

1.  The Excessive Fines / Eighth Amendment issue.

2.  The burden of proof issue -- preponderance or clear and convincing.  The judge instructed the jury to apply the preponderance standard.  Critical mass seems to be forming for preponderance, but I assume that was an issue Zwerner was prepared to assert on appeal.  I continue to think it should be clear and convincing, as the IRS itself once had.

3.  The issue of whether the trier of fact can assess the reasonableness of the IRS's exercise of discretion as to where between 0 and 50% the IRS should apply the willful penalty.  I don't think this was presented as an issue in the pretrial skirmishing and trial, but think that it should be an issue.  If the jury had been asked the further question of whether the IRS abused its discretion to assert in the aggregate an amount exceeding the account value, perhaps the jury would have given some relief.  This is not exactly the Excessive Fines issue, but has certain resonances with it.  Of course, this issue -- if it is even a proper issue -- would be one that would be decided by the jury.  The Excessive Fines issue would be decided by a judge.

Addendum 6/12/14:

The Notice of the Settlement is here.  The description of the settlement is short, so I cut and paste them:

Under the terms of the settlement, by September 2, 2014, Zwerner is to fully pay the United States the 50% FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively.

Analytically, this is a substantial concession by the Government.  It is two years of penalties where the jury awarded 3 years (in effect awarded because it found 3 years of willful failures).  Since the jury verdict was not likely to be overturned, one might infer that the substantial concession by the Government recognizes some risk with respect to the Excessive Fines issue.  That is an inference, however, and there may be other factors that caused the Government to reach this settlement.

Will the FBAR Willful Penalty Survive Death (6/6/14)

A frequent commenter on this blog, Global Capitalism (a nom de plume), posted a comment just a short time ago raising the hypothetical issue of whether, given Mr. Zwerner's age (87), the mutli-year aggregate 150+% willful FBAR penalty would not survive his death.  The comment is here.  As it happens, Leslie Book of the Procedurally Taxing blog (the premier tax procedure blog) had just posted today an Death, Taxes and Civil Penalties: Does the Taxpayer’s Death End IRS’s Ability to Collect Penalties? (6/1/14), here.

I strongly encourage readers interested in this issue to read the blog.  It is about other types of penalties, but lays out well the legal background for analyzing penalties that survive and do not survive death.  The blog then ends with the following:

In reading the case though I am mindful of the recent Zwerner decision allowing for a civil penalty for willfully failing to file an FBAR of about $2.2 million on just under $1.7 million of account value. (Coverage of that has been widespread; see for example Robert Woods’ piece in Forbes Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance). Zwerner is 87 years old. I wish no ill-health on him but this issue may be of great importance to his family. While I have not researched this issue, it seems to me that the extent of the FBAR penalties push the scale towards nonsurvivability under Reiserer and Hudson. Woods’ Forbes post notes that the Zwerner court will likely be considering an 8th Amendment challenge based upon the penalties being excessive and disproportionate to the conduct. Even if it withstands constitutional scrutiny, Title 31 FBAR penalties are of a different kind than other penalties that taxpayers face. The excessive penalty and punitive aspect that triggers payment potentially well in excess of the balance in the account will likely in my view contribute to this penalty not surviving death. The Hudson standard is far from clear, however, and I would not be surprised if this issue pops up in FBAR cases.

I have not researched the issue either, but my researches in other areas, including Excessive Fines, gives me some understanding of the issue.  It seems to me that some of the considerations in resolving the survivability / nonsurvivability issue are the same as presented in the Eighth Amendment issue.  If I have more thoughts on that, I will post them, but, for now, in my view Leslie Book's blog posting is the best current introduction to the issue.

The same analysis of determining whether the penalty is really punitive and thus subject to analysis under these tests seems to me to also arise in the context of the burden of proof the Government must meet to obtain judgment on the FBAR assessment.  That issue was presented in Zwerner, and the Court instructed the jury to apply the preponderance of the evidence test.  The issue arise in two prior cases, Williams and McBride, but my recollection is that there were issues in those cases as to whether the courts' application of the penalty was dicta, in the sense that it may not have controlled the outcome of the cases when the other findings and holdings are considered.

DOJ Tax Issues Comments on the DOJ Swiss Bank Initiative (6/5/14)

The Tax Division’s further comments about the Program for Non-Prosecution Agreements or 

Non-Target Letters for Swiss Banks (6/5/14), here. Here are some of the excerpts that I found most interesting:

Maximum aggregate dollar value and penalty mitigation (Program II.H.) Part II.H.1 of the program provides that the Swiss bank will pay as a penalty “for U.S. Related Accounts that existed on Aug. 1, 2008, an amount equal to 20% of the maximum aggregate dollar value of all such accounts during the Applicable Period.” (Emphasis added.) Similar language is found in II.H.2 and II.H.3. For each of these three categories of accounts, the “maximum aggregate dollar value” is calculated at a single date (typically using end-of-month information) when the bank’s book of those U.S. Related Accounts is at its highest point. Additionally, that same date is used for all penalty mitigation calculations, and a reduction in maximum aggregate dollar value will only be permitted for accounts in existence on that date and in the amount that was included in the maximum aggregate dollar value. Although the Program does not require the maximum aggregate dollar value to be verified by an independent examiner, the Tax Division may accept such verification. In the alternative, the Tax Division may request, pursuant to Part II.D of the Program, further explanation or materials relating to the calculation of this figure to ensure that the Swiss bank demonstrates to the satisfaction of the Tax Division that the determination of the maximum aggregate dollar value is correct.   

Alternatively, Category 2 Swiss banks may elect to use a maximum aggregate dollar value definition equal to the aggregate of the maximum dollar value of each U.S. related account at its highest point during the relevant period. In other words, this figure would not be computed at a single date during the relevant period, but the dates at which each U.S. related account was at its maximum value. In these circumstances, penalty mitigation calculations would similarly be based on the highest point of that U.S. related account.   

Identities of third parties involved in structuring, operating, and supervising cross-border business (Program II.D.1). The Program requires a Category 2 Swiss bank to provide, prior to the execution of the non-prosecution agreement, information as to how its cross-border business for U.S. Related Accounts was structured, operated, and supervised, including the names and functions of individuals involved in that activity. Such disclosures are not limited to individuals who are employees or former employees of the Swiss bank. Rather, to the extent that the Swiss bank attracted U.S. Related Accounts through third parties, such as external asset managers, the Program requires that such third parties be identified, and that documents and explanatory material relating to that cross-border business be provided to the Tax Division pursuant to Part II.D.1 of the Program. The Swiss Federal Department of Finance published a Model Order in July 2013 noting that Swiss banks are permitted to disclose the “personal data of (former and current) employees who structured, operated or supervised business relationships within the bank … as well as the personal data of third parties who performed similar functions in connection with such business relationships.” (Emphasis added.)

Identities of relationship manager, client advisor, asset manager, etc. (Program II.D.2.v). The program requires a Category 2 Swiss bank to provide “the name and function of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known by the Bank to be affiliated” with the U.S. Related Account during the Applicable Period.   The Program contains no de minimis number of accounts with which that person must be affiliated before that person is identified. Moreover, the Program requires the identities of such persons or entities located not only in Switzerland, but in any country outside of Switzerland, including the United States.   

Information concerning transfers of funds into and out of the account (Program II.D.2.vi). The Program requires a Category 2 Swiss bank to provide the identities of intermediaries and financial institutions related to the transfers of funds into and out of the U.S. Related Accounts, including the transfer of securities, precious metals, or other account assets. The Swiss bank must also provide the identities of such intermediaries and financial institutions located not only in Switzerland, but in any country outside of Switzerland, including the United States.   

* * * * 

Assistance with treaty requests (Program II.D.4). As soon as is practicable, the Tax Division intends to submit to the Swiss authorities, through the Competent Authority, requests for assistance under Article 26 (Exchange of Information) of the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income signed at Washington, October 2, 1996, together with a Protocol to the Convention. A Category 2 Swiss bank that wishes to extend the time in which it may demonstrate that an account was disclosed to the IRS through an announced Offshore Voluntary Disclosure Program, as described in the following paragraph, must provide information by June 30, 2014, to the satisfaction of the Tax Division, relating to its accounts for which there is a   reasonable suspicion that the U.S. account-holder has engaged in conduct such that Swiss authorities may provide assistance under the 1996 Convention and Protocol. Notwithstanding this June 30, 2014, deadline, the Swiss bank’s obligation to cooperate with the preparation of requests for assistance under the 1996 Convention and Protocol, or such later Convention or Protocol that may enter into force, is a continuing one as described in Part II.D.4 of the Program.  

Extension of deadlines relating to mitigation of penalty amounts (Program II.H). The Program currently requires, in Part II.B.1, Category 2 Swiss banks to be in a position to produce all II.D information and all II.H information no later than June 30, 2014 (assuming that an extension has been given). To the extent that Swiss banks have been advised that the deadline applies only to information referred to in Part II.D.1 of the Program, that advice is incorrect.   

The Tax Division recognizes the difficulty that some Swiss banks have encountered in obtaining proof that an account was not an undeclared account or was timely disclosed by the Swiss bank to the IRS. Therefore, the time in which a Swiss bank may demonstrate to the satisfaction of the Tax Division that an account was not an undeclared account or was disclosed by the Swiss bank to the IRS in the manner required by the Program is extended to July 31, 2014.  

In addition, Swiss banks have requested additional time to demonstrate to the satisfaction of the Tax Division that an account was disclosed to the IRS through an announced Offshore Voluntary Disclosure Program following notification by the Swiss bank of such a program. The Tax Division will extend the time in which a Swiss bank may make this showing from June 30, 2014, to Sept. 15, 2014, on the condition that the bank demonstrates, no later than June 30, 2014, to the satisfaction of the Tax Division, that it has provided assistance with respect to treaty requests as described in the previous section of these comments. 

IRS Commissioner Koskinen Announces that Changes -- Liberalizations -- Are In the Offing for OVDP 2012 (6/4/12)

IRS Commissioner Koskinen's prepared remarks at a speech before the International Business - OECD International Tax Conference (6/3/14), here.

The prepared remarks cover the history of the offshore enforcement initiative since UBS in 2009.  But the remarks acknowledges that the design of the voluntary compliance programs is not as fine-tuned to meet the overall goals of enforcement and fairness as they should be.  Here are the key excerpts (bold face supplied by JAT):

Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don't necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn't involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn't involve the threat of substantial penalties. 

We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.

Swiss Banks Under Criminal Investigation Brace for Costs after Credit Suisse Plea (6/2/14)

In the wake of the Credit Suisse resolution, Swiss banks on the criminal investigation list (14 includng Credit Suisse) are apparently greatly concerned about the costs they will have to incur to resolve their criminal investigations.  Joshua Franklin and Patrick Temple-West, RPT-Swiss banks risk bigger than expected fines in U.S tax case (Reuters 6/2/14), here.  Excerpts from  the article:

Swiss banks under investigation for allegedly aiding U.S. tax evasion face the prospect of bigger fines than they bargained for that could dent their capital and force some to cut dividends. 

* * * * 

Thirteen other private banks were left scrambling to calculate the possible fallout on their own finances of harsher than expected penalties following the three-year investigation by the U.S. Department of Justice (DOJ). 

The exact size of their U.S. operations is not publicly known and some are clearly much smaller than others, making it difficult to use the Credit Suisse fine as a gauge for the others caught in the probe. 

But the uncertain outcome of the investigation and the lack of detail on how the Credit Suisse penalty was calculated has left analysts with little option but to bump up their most pessimistic estimates for future fines. 

Even a penalty exceeding what they have set aside by $200 million would have wiped out about 40 percent of the collective 2013 profits of the three smaller Swiss banks known to be targeted by the probe who publish accounts, according to Reuters calculations. 

The banks all boast capital ratios well above regulatory minimums, but these ratios would fall by between 0.3 and 2.6 percentage points in the event they were each fined $200 million more than their current provisions, the calculations suggest.

The article says that not all of the 13 still under criminal investigations are publicly known.  My recently revised list of the 14 (including Credit Suisse) is here:  List of 14 Swiss Banks Under Criminal Investigation (Federal Tax Crimes Blog 3/9/14), here.  I encourage readers to advise me if there are any inaccuracies on this list.  All of the banks mentioned in the article (not complete list) are on my list.

Banks -- Many Banks -- Are Becoming FATCA Compliant; Good News for U.S. Ex Pats (6/2/14; 6/3/14)

Readers and I have had considerable discussion about the problems of U.S. ex pats obtaining banking services in their country of residence.  See the comments to the following blog: Thoughts on What Swiss and Other Offshore Banks Whose Business Model of Secrecy Is No Longer Viable (Federal Tax Crimes Blog 5/27/14), here.  Many ex pats report encountering resistance from non U.S. financial firms (banks, etc.) to providing their banking services.  I can offer no anecdotal or statistically valid evidence and comment on that issue.  I don't doubt the sincerity of the readers comments and concerns.  (Commenters also report resistance from U.S. financial firms to providing such services to ex pats, but that is not the topic of this blog.)

I have noted that, if there is a need for such services, profit seeking banks will fill that need.  That sounds like an easy thing to say from my vantage point.  But, that is all I have had to offer, other than the notion that banks becoming FATCA compliant will almost sure promote their services to U.S. customers, including ex pats.

In that regard, Reuters has this report today:  Patrick Temple-West, U.S. says 77,000 banks, firms sign up to fight tax evasion (Reuters 6/2/14), here.   In my mind, the title of this article is a bit misleading.  Those banks are not signing up because they want to fight tax evasion.  They are signing up because they want profit.  And, there is more profit to be made by signing up than by not signing up.  (Note: One commenter said that those joining want to avoid loss, but that is another that a profit seeking firm seeks profit.)

Perhaps not all of those will welcome U.S. depositors, but I suspect that a healthy number of them will.  They will be FATCA compliant anyway and the extra compliance required for U.S. depositors will be relatively minor.  So, there may be a transition period where ex pats are facing minor and major inconveniencies in obtain foreign banking services.  But hold on.  The banks will seek profit from you.  If they will not hug and kiss you on sight, they will at least take your deposits and serve your banking needs.

Having said that, if U.S. ex pats desire U.S. brokerage services and advice, I can make a recommendation to them of a U.S. firm willing to make sure that those needs are met, with all the legal niceties attended to.  Please email me at jack@tjtaxlaw.com.  There are some "preclearance" requirements as to amounts and characteristics of the investor.  We can discuss those offline.

JAT Note:  Above is as revised on 6/3/14)

Addendum 6/3/14:

See also Robert W. Wood, IRS Nets Offshore Data From 77,000 Banks, 70 Countries In FATCA Push (Forbes 6/3/14), here.  Not much new here, but he does offer the following links:

• IRS FATCA Foreign Financial Institution (FFI) List Search and Download Tool, here.
• User Guide to the above, here.
• Countries with IGAs in effect, here.