Friday, July 4, 2014

Convicted Politician Did Not Lay a Proper Foundation For Proferred Indirect Testimony of Lack of Intent (7/4/14).

In United States v. Beavers, ___ F.3d ___, 2014 U.S. App. LEXIS 12469 (7th Cir. 2014), here, the defendant was convicted of multiple counts of tax fraud.  The facts are within a range of what might be expected given his profession -- money flowed to him and he did not report or pay tax on it.

The interesting part of the case relates to the key element for tax fraud that the defendant act willfully -- with intent to violate a known legal duty.  How does a defendant unwilling to testify as to his intent -- thus invoking his Fifth Amendment privilege -- introduce indirect evidence of his lack of intent to blunt the Government's indirect proof of his intent?  (Similar issues going to the willfulness element are, for example, reliance on tax practitioner (how can the defendant put his reliance in play without testifying).  Can the defendant effectively mount the "defense" without taking the stand? This issue often comes up in the context of a defense request for a jury instruction on good faith -- an instruction meant to emphasize something inherent in the willfulness element, that if the defendant acted in good faith he did not act willfully.  I offer the following from my Federal Tax Crimes Book (footnotes omitted):
The so-called good faith defense – sometimes the Cheek good faith defense – is technically not a defense.  The Government must prove willfulness.  Willfulness does not exist if the defendant acted in good faith with a belief that the law did not impose the legal obligation he is alleged to have violated.  Does that mean that the Government, in order to prove willfulness, must disprove good faith as to the legal requirement?  Logically, it would and, certainly most of the time, the Government’s proof of willfulness will in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked good faith. 
Defendants who want to emphasize their good faith with the hope that the evidence bearing on good faith will at least dissuade the jury from finding willfulness beyond a reasonable doubt.  Thus, they will want the judge, by separate instruction, to instruct that good faith negates willfulness.  That good faith nuance, while implicit in the general willfulness instruction, is not as explicit as defendants desire.  Generally, courts will give the specific good faith instruction only if the evidence somehow affirmatively puts good faith in play – makes it a real issue for the jury.  How does the defendant do that?  The most direct way is for the defendant to testify as to his or her good faith.  But, in order to do that, the defendant will be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good faith opportunity) are less than the risks of the defendant testifying.  So the defendant will not testify.  Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion.  Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant’s mental state, may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction.
So, basically, the Government must prove intent beyond a reasonable doubt via circumstantial evidence in the absence of the defendant's testimony.  In appropriate cases, the defendant should be able to do so also, provided that he gets to the jury by laying the proper foundation.

With that, let's turn to Beavers.

Evidence of Beaver's Remedial Actions - Filing Amended Returns

After the criminal investigation started, Beavers filed amended returns.  He thus took the risk that the amended returns would prove one element of the crime -- tax due -- while setting up his good faith defense on another element -- willfulness.  That is a dicey move.  Still that is what he did, hoping, I am sure, to disincentivize the IRS from continuing to investigate and then DOJ from prosecuting.  He also paid a loan he might not have otherwise paid and wanted to use the payment as proof that the original transaction was a loan.  He wanted to introduce proof of those remedial actions to negate willfulness.  The district court did not allow the evidence.  The reason for disallowing it and the Court of Appeals' resolution of the appeal on the issue are:
The district court ruled that the evidence would be admissible if Beavers could establish that each remedial action was relevant to his state of mind at the time he filed the original tax returns. Beavers ultimately elected not to testify, and he did not otherwise succeed in establishing the required evidentiary foundation. Thus, the evidence of his remedial actions was not presented at trial. Beavers argues that (1) the evidence of his remedial actions was relevant under Rule 401; (2) the district court's conditional admission impermissibly burdened Beavers' Fifth Amendment right against self-incrimination; and (3) the court's rulings deprived him of his constitutional right to present a meaningful defense. 
First, the district court conditioned the admission of evidence of Beavers' corrective actions upon a showing that these actions had a connection to Beavers' state of mind at the time he filed his incorrect returns. The logic of the ruling was that, in the absence of a foundation establishing this link, the amended tax returns (and evidence of other remedial actions) did not make it more likely that Beavers believed his original returns were accurate when he filed them. 
District judges making relevancy determinations in this type of situation should proceed on a case-by-case basis. Cf. United States v. Tishberg, 854 F.2d 1070, 1073 (7th Cir. 1988) (reasoning, in the sufficiency context, that the defendant's amended return "may demonstrate a good faith effort to correct his previous mistakes," but also noting that the return "does not negate the import of his previous action"). Nevertheless, courts have repeatedly affirmed the exclusion of evidence of remedial action taken after the taxpayer knows he is under investigation. See United States v. McClain, 934 F.2d 822, 834-35 (7th Cir. 1991) (finding "no reason" to disturb the district court's ruling that defendant's 1985 tax return was not probative of his state of mind at the time he filed his 1984 return, given his indictment in the intervening year); United States v. Radtke, 415 F.3d 826, 840-41 (8th Cir. 2005); United States v. Ross, 626 F.2d 77, 81 (9th Cir. 1980); Post v. United States, 407 F.2d 319, 325 (D.C. Cir. 1968); United States v. Stoehr, 196 F.2d 276, 282 (3d Cir. 1952); see also United States v. Philpot, 733 F.3d 734, 748 (7th Cir. 2013) (explaining, in political corruption case, that defendant's remedial "actions after his bonuses were reported in the press shed little or no light on his state of mind two years earlier" when he received those bonuses). A common thread in many of these cases is that subsequent remedial actions may not be probative of the defendant's prior state of mind because such actions are equally consistent with (1) promptly correcting a genuine mistake and (2) trying to cover up a purposeful lie in the hope of avoiding prosecution. Cf. Fed. R. Evid. 407 (barring evidence of subsequent remedial action to prove an admission of fault). 
In any event, the district court did not exclude the evidence entirely—it simply conditioned the evidence's admission on some kind of showing of its relevance to Beavers' state of mind at the time he filed his original returns several years earlier. Beavers did not make this showing. In fact, his theory of defense is at odds with his argument that the remedial evidence was relevant. Beavers' argument in defense (which he maintains on appeal) was that all of the transfers from his campaign committees were loans, not income. Thus, evidence that Beavers declared some of the campaign fund transfers as income on his amended tax returns after he was under investigation has little bearing on whether he considered the transfers to be loans at the time he took the funds. In sum, the district court's sensible approach to the remedial evidence was within its discretion. 
Beavers next argues that the district court's handling of this issue impermissibly burdened his Fifth Amendment right against self-incrimination, see generally Griffin v. California, 380 U.S. 609 (1965), because it forced him either to testify (in order to lay the appropriate foundation) or to forgo the opportunity to get evidence before the jury. Beavers' argument misunderstands the nature of this right, however. Criminal defendants often face difficult choices in weighing the costs and benefits of testifying. And the rules of evidence sometimes prevent defendants from getting their story—or evidence of their state of mind—before the jury in the particular manner they would prefer. Cf. U.S. ex rel. Harris v. Illinois, 457 F.2d 191, 197-98 (7th Cir. 1972) ("The State presently contends, and we agree, that a defendant in a criminal trial may not introduce evidence in his defense without laying a proper foundation therefor."). For instance, the general rule against hearsay, see Fed. R. Evid. 802, would typically prevent a defendant from calling a friend to the stand to relay an exculpatory statement the defendant said to her, in lieu of the defendant testifying himself. Thus, the rule against hearsay may burden the defendant's right to testify in the same way Beavers argues that his right was burdened here, since it puts him to the choice of taking the stand (and exposing himself to potentially damaging cross-examination) or losing the chance to get evidence before the jury. That sort of burden is not impermissible, however; it is simply part of a larger system in which "[t]he accused does not have an unfettered right to offer testimony that is ... inadmissible under standard rules of evidence." Taylor v. Illinois, 484 U.S. 400, 410 (1988). We see no meaningful difference between the hearsay situation and the burden Beavers faced here—both burdens are ordinary, well-established, and permissible. Indeed, we have previously approved the exclusion of purported state-of-mind evidence offered by a defendant where the defendant could have, but did not, supply the requisite foundation of relevance through his own testimony. See United States v. Scott, 660 F.2d 1145, 1165-67 (7th Cir. 1981). Accordingly, we reject Beavers' argument on this score.
Limitations  on Expert So As Not to Produce Indirect Evidence of Lack of Intent

A related issue occurred when the district court limited the testimony of the defendant's expert witness.  Here is the discussion:
We begin with state-of-mind limitations. First, the district court ruled that Gershinzon could not base his expert opinions on what Beavers had told him about his (Beavers') state of mind at the time of the charged offenses. This limitation was proper. Otherwise, Beavers could have gotten highly selective and favorable statements of his before the jury without having to face cross-examination. Later, the district court also ruled that Gershinzon could not testify as to whether he (Gershinzon) believed the 100 checks were loans. The court reasoned that such testimony would violate Rule 704(b) of the Federal Rules of Evidence, which prohibits expert witnesses in a criminal case from opining as to whether the defendant had the mental state necessary for the charged crime. As the judge explained, "[t]he relevant state of mind is whether defendant intended to treat withdrawals from his campaign coffers as income or as loans. The expert cannot state an opinion on this issue." For Gershinzon to have addressed this issue would have been the equivalent of opining on whether Beavers had the "willfulness" necessary for a tax offense. See United States v. Windfelder, 790 F.2d 576, 582 (7th Cir. 1986). We accordingly find no abuse of discretion in this limitation. 
Next, the relevance limitations prohibited Gershinzon from testifying about issues that were not relevant absent testimony or other evidence connecting them to Beavers' state of mind at the time of the charged offenses. For example, the court barred Gershinzon from offering his opinion that Cook County erred by omitting the $1,200 monthly stipend payments to Beavers. As explained above, this testimony was irrelevant absent evidence that Beavers knew of and relied on the county's alleged obligation. Similarly, the defense sought to ask Gershinzon about a form that Beavers received from the pension fund in early 2008, as part of the defense's attempt to show that Beavers' $68,763 pension payment was not income. The court prohibited Gershinzon from testifying about this form because Beavers received it in 2008, so it was irrelevant to Beavers' state of mind in 2007 when he filed his 2006 tax return. The court's relevance limitations were therefore appropriate. (And where Gershinzon's testimony was relevant, the court permitted it. For instance, Gershinzon testified about accounting principles; about the purpose of certain tax forms; about how tax professionals disagree on the proper tax treatment of certain transactions; about the differences between income, loans, and advances; and about which records he would consider in determining whether a transfer was income, a loan, or an advance.) 
We turn now to the court's reliability limitations. Recall, the court's determination as to Gershinzon's reliability ultimately resulted in the court's finding Gershinzon unreliable and instructing the jury to partly disregard Gershinzon's testimony—including, importantly, his opinions as to whether the $68,763 pension payment and the 100 checks were loans or income. 
The court found Gershinzon unreliable for multiple reasons. Crucially, the court found that Gershinzon "[wa]s not careful with his assumptions," and those "assumptions have overtaken at least the minimum neutrality an expert is supposed to have." As noted above, one assumption was that, because many of Gershinzon's clients do not understand their W-2s, it apparently followed that a high-ranking public official (with access to advisors) was in the same position. The court also criticized Gershinzon's assumptions because Gershinzon relied on his conversations with Beavers in forming assumptions and ultimately conclusions about the proper tax treatment of the transactions at issue in this case. For instance, in concluding that the $68,763 pension payment was a loan, Gershinzon relied in substantial part on Beavers' statement to Gershinzon that Beavers considered it a loan. Similarly, in opining that the 100 campaign checks to Beavers were loans and advances, Gershinzon also relied on Beavers' statements to him. Even though the court had instructed Gershinzon not to rely on Beavers' statements, Gershinzon explicitly referenced those statements, indicating to the court that Gershinzon could not get Beavers' statements "out of his [own] mind... . He can't follow the rules." Gershinzon was also unable to point to portions of the tax code to support his assertions about the tax treatment of various payments, including the pension-fund payment. Thus, stripped of Beavers' statements, Gershinzon's most important opinions lacked meaningful support. 
Gershinzon also was unable to answer basic questions about the topic of his testimony. Specifically, during the second  voir dire, the government asked Gershinzon about the basis for his opinion that the City of Chicago should have deducted Beavers' lump-sum pension payment from his gross income for 2006. Gershinzon acknowledged that Beavers' pension payment was not mandatory, but was unable to say whether it was "voluntary," because he could not testify to Beavers' state of mind. The prosecutor clarified that this was not a state-of-mind question; rather, a letter gave Beavers three options, and Beavers selected the option that maximized his pension benefits. Nonetheless, Gershinzon would not say that Beavers' choice was "voluntary." After considerable back-and-forth between the prosecutor and Gershinzon, the court eventually said, "[a] step which is not compelled is a step which is voluntary." 
We "give the district court wide latitude in performing its gate-keeping function and determining both how to measure the reliability of expert testimony and whether the testimony itself is reliable." Bielskis v. Louisville Ladder, Inc., 663 F.3d 887, 894 (7th Cir. 2011). In light of the foregoing analysis—which indicates that Beavers' expert relied on irrelevant considerations, made questionable assumptions, and may have lacked expertise about certain germane subjects (including relevant portions of the tax code)—we find that the district court properly exercised its discretion. Moreover, the court still allowed Gershinzon to testify as to the objective characteristics he would look for in determining whether a particular transfer was income, a loan, or an advance. As a result, Gershinzon's analytical methodology was presented to the jury, even if his particular conclusions were not.


  1. Jack,
    I take from the streamlined guidance that non-financial assets that ordinarily would be included in the OVDP penalty base are not included in the base for the 5% domestic streamlined penalty. For example, foreign rental real estate, the revenues from which were omitted from income, is an asset for determining the highest balance / value for purposes of OVDP. However, I read the steamlined guidance to say that the penalty base only includes "foreign financial assets" as that terms is used for purposes of FBAR and the Form 8938. "For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114 and the instructions for Form 8938." Thoughts welcome.

  2. Just making the point that while in some respects the penalty base for the domestic streamlined program is broader - includes accounts over which the taxpayer has only signature authority - it is also seemingly narrower than in OVDP since nonfinancial assets are excluded. Perhaps relevant for someone in OVDP with rental real estate or capital gains from artwork, the value of which would be part of the OVDP penalty base.

  3. Hi anon5percent. So, if I can comment. I did speak to Eric as I charted the same course for a client. I had already opened a taxpayer advocate case, gotten a case #, and then emailed Nina. I had also spoken to Eric Lopresti. My taxpayer advocate, whom I shall not name, got me a technical advisor to discuss the case of my client. By that time, I had already summarized the case in a 48 page letter based on your letter model of defenses, complete with exhibits. After a series of conference calls with the taxpayer advocate, the technical advisor, the client, and myself, we all came to the conculsion that the Opt Out case was a good one.

    HOWEVER, TAS was not going to issue any TAO, and they said that would not do anything. Only if the client opted out, they would do so.

    Secondly, I did find my conversation with Eric Lopresti to be nonfruiful. He did NOT appreciate the call from me, and told me his time is limited. Whatever. So, I felt that I did not want to bother him, and I continued down the TAS channel. My goal was to see what the worst case scenario was if we Opted Out, in light of th OVDP Examiner, her technical advisor, and her manager, telling me, and my client, INCORRECTLY, and INACCURATELY, that my client was a willful person for not checking the box at the bottom of schedule B, not declaring interest income from his two foreign accounts which stemmed from a foreign inheritance.

    Meanwhile, the SDOP/SFOP came out, and we are now progressing on that path.

    So, while it's good to let Nina, Eric, & Rosty know, I think it's only TAS that can help you, and they too are limited with what they can do. The choices it seems, are much clearer: 1)OVDP, 2) Opt Out, 3)transition to SDOP/SFOP.

    If anyone is going to use TAS, it would likely be to see what the worse case scenario would be if one were to Opt Out, and to see if there are any willful characteristics of one's case if one were to Opt Out, or sign the nonwillful certification in a SDOP/SFOP setting.

  4. Blackseal,

    You don't state when the you (or your client) entered OVDP and for which 8 year period you are reporting for.

    I might have had a similar situation. In my case, my client entered into the OVDP 2012 in May/June of 2012, however, his 2011 income tax return was filed after April 15th 2012. His FBAR for 2011 was ALSO on time. So by default, any return for whose deadline has passed, or for which you have filed a late return, even though it might be for a refund, STILL gets included into the last 8 years of OVDP calculation.

    So instead of 2003-2010, we had to roll forward to 2004-2011, even though the 2011 fbar was filed on time. Thus 2011's balance was included into the penalty calculation. For me, 2010 was STILL the highest year, but nevertheless, I had to double back and do more work for an extra year.

    See this from FAQ 9:

    "The voluntary disclosure period is the most recent eight tax years for which the due date has already passed. Thus, for taxpayers who submit a voluntary disclosure prior to the due date (or properly extended due date) for the 2013 tax year, the disclosure must include each of the tax years 2005 through 2012 in which they have undisclosed OVDP assets. For taxpayers who submit a voluntary disclosure after the due date (or properly extended due date) for 2013, the disclosure must include each of the tax years 2006 through 2013 in which they have undisclosed OVDP assets. For disclosures made in successive years, any additional years for which the due date has passed must be included, but a corresponding number of years at the beginning of the period will be excluded, so that each disclosure includes an eight year period.

    The eight-year voluntary disclosure period does not include fully tax compliant years...."

  5. Tinman, regarding your 5% question, that is ONLY in SDOP. The link you provided is for anyone, either in SDOP, OVDP, SFOP, or just filing late FBARs, to let them know that they hvae to file electronically. When electronically filing those FBARs, per that link you provided, one would mention the reason they are filing the late FBAR (i.e., SDOP participant, OVDP participant, etc.).

    Michael, how does the SDOP have a broader penalty base than the OVDP? Do you mean because of the signatory accounts within SDOP? Rental real estate FMV in OVDP seems to be quite odd, but nevertheless, it's in the program, thus perhaps leading one to believe OVDP's penalty base being broader than what the IRS defines as a foreign financial asset (8938 & FBAR assets).

    But I agree with you. The IRS, it would appear, does not want one who has never filed returns (at least for the last three years), and who lives in the USA for more than 30 days in a year, to go through SDOP, but is allowing nonfilers who live abroad for 330 days in a year, to go through SFOP.

    There is indeed no cherry picking, but it seems there's lots of grouping and layering of people.

  6. Thanks for the info.
    I am sitting on a fence unclear as to what to do.
    I also heard several weeks ago that the IRS office handling my OVDI case had a stack of optouts and they didn't know what to do with them and were waiting for headquarters o tell them what to do with them -- presumably something was afoot.
    I was also told a couple of days ago that there is yet no guidance as to how to handle streamline. This scares me because it seems to be similar to the highly-subjective approach with optouts.
    As to info. coming out about how streamlined is handled; there is still very little info on optouts; the ones mentioned on this blog can be counted with the fingers in one hand; ditto when talking to individual lawyers; the ones they've closed can be counted with the fingers of one (or sometimes two) hands.) So everything is still a black box.

  7. Yes. But there is so much inconsistency in the program and so much left up to each agent or manager's discretion with no printed guidance that I cannot say whether your agent or mine is right.

    I was told that compliant accounts are not in the penalty base, and this is done individually for each year. This makes logical sense for the same reason that if let's say you held a foreign account until 2005, and during that year you closed the account and sent the proceeds to the US, the balance of the account during 2006 forward is zero, and the account would only be in the penalty base through 2005.

    Have you talked to the agent's manager, NOT the tech advisor?

  8. Anon5percent,

    Thanks for your response. I will try to calm down…good recommendation. It is hard! :) :):):):)
    I am getting lost in the blog. Would you mind explaining one more time just how it is that you dealt with TAS? I know I read it somewhere and cannot find it again. You said that since I have a case number that is good news, but the thing is that when I sent the 911 I only sent a one quick page explaining my general situation without much detail. I am wondering how they could make any determinations this way. The case advocate mentioned in passing kind of that the technical advisor was talking bout recommending that I go into the streamlined transition, but again, without much more than my betty general explanation…how can they? Milan Madhani says once you have a case number and technical advisor they can pretty much give you worst case scenario. That is great to know. Should I call my advocate and ask if they need more data? Or should I just go ahead and write my reasonable cause and send to them? Again would you just summarize what you did? Thanks so much!

  9. I can offer a hint of what could have been a different treatment in my case: 2010 was the last year in the range of years for OVDI. For 2010 I was compliant (or at least this is what I intended), being the first year for which I had a chance to get it right after I found out about my FBAR and tax obligations related to foreign accounts and foreign income. It was not very clear (at least for me) what accounts needed to be in the FBAR, but I filled it out to the best of my knowledge. It was important not to miss the 30 June deadline. I knew that in a couple of months I will have the whole OVDI package ready for filing. This meant that I will also have a model, professionally prepared, of how to correctly fill out the FBAR and if necessary, I could amended the FBAR.

    After I received the first Form 906, where the OVDI penalty was calculated based on 2010 as the peak year, I tried to argue that in 2010 I was compliant and therefore the year 2010 should not be part of the penalty base. The agent and manager agreed to check this issue. The response I got was that indeed, I filed the FBAR timely, however the FBAR has to be correct, substantially correct, and mine had big differences. Therefore the year 2010 had to be included in the penalty base. I gave up because the difference between 2010 as the peak year and 2009 as the second high would have been pretty small. But what this shows is that had my 2010 FBAR been significantly correct and had I reported all income for that year (I missed only a small amount of bank interest), they (at least the agent and the manager) would have been willing to exclude that year from the penalty. Or at least this is what I understood.

    I wonder whether you can involve TAS in this issue.

  10. Once a taxpayer submits SDOP papers to IRS, how does he know that the case is done so he can move on with life? I heard there is no acknowledgement from IRS saying case has been accepted into SDOP or not.

  11. RON - do both. I did. The TAS initially asked for all my tax returns. I also provided my reasonable cause arguments and asked what the view was on them. As the case advocate could not evaluate them, he gave them to a technical advisor. The TA's initial opinion was both read to me and sent to me. Milan seems to have been able to get an opinion from from the TA in the TAS. Maybe he can comment on how he did that. Also, why not just ask your case advocate what leads them to recommend SDOP for you? Is it really appropriate given the facts in your reasonable cause arguments?

  12. OVDI/P took 1 to 2 years until Form 906 .... with opt/out even longer. I would guess that you will be looking at something similar. It is fair to say that the IRS will be swamped with NW certifications from SFOP and SDOP over the next couple of month

  13. Looks like Commerzbank and Deutsche are next on the list for the OFAC investigation (although on a much smaller scale than BnP)

  14. Good question. I do not know about this yet. I'm going to call the OVDP hotline later today and hopefully they would have an answer. Does anyone know?

  15. This is the first I have heard of this. OVDP has so many boobie traps and pitfalls, it almost feels like a video game. Participants need a 1 up or extra live or something just to get through it.

    Secondguess, were you able to talk to the technical adviser or manager of your examiner? Just because it's internal policy, does not mean that you should have known about it.

    My experience with TAS, after taking inspiration from anon5percent, was to tell them the whole situation. But TAS it seems, is not prepared to provide anything of value except a worst case scenario in an Opt out or an assessment of the facts in order to better help make one's case in an OVDP setting (assuming you get to open a case with number).

  16. I can comment as to what I have done. I simply submitted the entire reasonable cause letter (48 pages, with exhibits) to the advocate and his technical adviser. The letter also had a detailed summary of all the facts of the situation at hand. Being able to go through that, the technical adviser was able to provide a worse case scenario. The advocate said issuing a TAO would not be possible for them and would not do much good. So I was left with a)knowing the possible worse case scenario, b)and then opting out. During this time period, SDOP & SFOP had just been released.

  17. That's a good point. Blackseal, you should maybe talk to the examiner's manager, and also request a technical adviser from them. Three people can't all say the same thing, especially if there is no mention of that on the FAQs.

  18. Anyone know when the final version of the Foreign Offshore certification will be released? Only the draft is out now, which is somewhat strange because the final version of the domestic certification is out.

    I would think that nobody can actually submit a Foreign Offshore streamlined package until the final certification is out.

  19. If you enter the SFOP/SDOP the returns are processed like any other returns. No news is good news. If the IRS wants more money or wants to audit, they will contact you. Otherwise the submissions will not be acknowledged. That could mean a lot of sleepless nights for people who are worried about the strength of their willfulness arguments. .

  20. Left a message with OVDP hotline. Let's see what they say. Anyone else have an idea?

  21. I am thinking that there would be no examiner assigned. Considering that the 5% penalty fof SDOP persons would be on the year with the highest aggregate dec. 31st balance, there would be no examiner to really sift through that. FBARs would still have the highest value reported. SFOP has NO penalties whatsoever. There are NO faqs devoted to SDOP or SFOP, except the transition FAQs for OVDP participants, and no situational examples for SDOP or SFOP like there were for OVDP participants (example 52, now being deleted of course). So really, probably there would be no need for an examiner I am thinking. Nevertheless, I've left a message for the OVDP hotline to see if they can redirect me to a place where I can get the information which SSD is asking.

  22. The agent and the manager were much more understanding, but when the tech advisor took out of the hat the legal term "substantially correct" about the FBAR, I, as a lay person had no more words... The truth is, that it wouldn't have made much difference in the OVDI penalty. It might have been worth fighting for excluding 2010 in view of a possible opt-out, to have one year less of FBAR penalty. But then, I wanted to concentrate my energy in obtaining the exclusion of the pension funds from the penalty base.

  23. Wanting to share. OVDP participant, talked to examiner about going into streamlined transition. Wanted to know what would happen if my non willful certification were to not be accepted by IRS. Do I automatically go back into OVDP without any other consequences or would I open a Pandora's box to a new investigation and subsequent fraud charges, or FBAR penalties, etc. etc. I explained how my believing myself nonwilfull is not assurances enough given the many nuances and interpretations based on diffract code sections. The agent was very nice. He said he had to ask about that. Everyone is very new, he thought it was an automatic back to the OVDP but after my questions he was going to double check. So, it looks like we are all learning and it is not "safe" exactly out there? Anyone has talked to their examiner in the OVDP about this matter?

  24. Conversation with OVDP examiner on streamlined transition. Just posted this but I am not sure it "sent" - computer went off. Anyway, I wanted to know my examiner's opinion on what would happen if I made a non willful certification and the IRS disagreed. No matter how nonwuilfull I believe I may be, how do I know what the IRS will determine given the shades of "willful-nonwilful" as we have discussed here. Would I be just sent back automatically to the OVDP, or would I have opened myself to further investigation and potential FBAR, fraud, etc. charges. He thought it was an automatic return to the OVDP and nothing else. But upon my questions he decided to find out more. Everyone is new and learning. It is a bit "unsteady" out there? Anyone has asked this question to their OVDP examiner?

  25. RON,

    This is an excellent question. I too received the advice from the OVDP agent that, if they did not agree with the nonwillful certification, the only consequence is that the taxpayer stays in OVDP with the 27 1/2% penalty regime.

    However, the question remains whether the IRS may take more action in a particularly egregious case. I am trying to develop more information, guidance, nuance, etc. on that issue. In the meantime, those in the gray area who are towards the "blackish" end of the spectrum might want to hold off to see if more guidance or anecdotal evidence comes out.

    Jack Townsend

  26. Milan my understanding is that they did not intend to include accounts where there was only signatory authority in the 5% penalty. I will see if I can get confirmation on this point.

  27. Milan, I think it would be appropriate now if you redact all the specific details from your client and share with us the 48 pages of the RC letter as a link so that RON and many others like SSD have a sample and a better understanding were their case fits in.

  28. Yes I agree with you and for arguments sake or to provide balance to what can happen I show readers here the possible dark side of SSDs facts which are quite common and has happened in numerous cases over the last 5 years . Again this is not fear mongering just an attempt to be objective and provide a worst case scenario.
    While taxpayer SSD has timely filed his individual income tax returns for the last ten years, he has withheld all information pertaining to his foreign bank account from the IRS. Specifically, he never disclosed the bank or the interest earned on the account on Schedule B. In fact, he
    consistently checked the “no” box on Schedule B, which asks the taxpayer if he has a foreign bank account. Nor has SSD ever filed an FBAR. Finally SSD as a self filer never sought independent legal advice about how to properly handle the foreign accounts.

    The potential charges could include the following:
    a. Filing a False Tax Return (IRC § 7206(1));
    b. Willful Failure to File an FBAR (31 USC §§ 5314 and 5322(a) and 31 CFR § 1010.350).

    Badges of Fraud:
    The government can argue the following....
    • SSD lied when he signed his return under penalty of perjury that it was true and correct.
    • SSD lied when he checked the box “no” on Schedule B, failing to disclose that he had a foreign bank account.
    • SSD lied when he failed to disclose on Schedule B, the country where his foreign bank account was located.
    • SSD lied when he failed to report on Schedule B that he had interest income from a foreign bank account.
    • SSD knew he was required to file an FBAR by virtue of the fact
    that he had been alerted to the FBAR requirement by the information on Schedule B.
    • SSD intentionally failed to file the FBAR.
    • SSD concealed $ XXX in income producing assets and over $ XXX in unreported income from the IRS by hiding the assets and the income in an undisclosed offshore bank account.

  29. Good point, Suzanne. I advise clients that the only certainty for someone who has noncompliant offshore accounts is to join OVDP and not opt out. The end of that process is (i) a Form 906 closing the matter out and (ii) a certain overall liability calculable in advance.

    I should caveat even my point about the certainty by joining and not opting out. The Form 906 may not be binding in the case of "fraud, malfeasance, or misrepresentation of material fact." A recent Fifth Circuit opinion held that even an innocent misrepresentation of a material fact is sufficient to invoke this provision in a related context. My discussion of that aspect of the case is here.

    Having said that, barring incredible significant misrepresentations (beyond just material misrepresentations), I don't think the IRS will open closed cases.

    Jack Townsend

  30. I am a lawyer but have yet had no specific experience on that issue. However, reading what you quote, I think the text is clear that your interpretation is correct for the FBAR and the income tax.

    Jack Townsend

  31. RajNIL,

    The IRS will have to go through hoops to deny the certification of nonwillfulness. The first is an administrative burden that will require levels of review. But that is totally in the IRS's control. There will be no independent court review of the IRS's determination of nonwillfulness. Nor, since in and of itself, no additional tax dollars will be in issue will there be an internal appeal like the IRS Appeals Office.

    Of course, if the IRS then attempts to assert an FBAR penalty in excess of 0% or 5%, as applicable, or additional tax, penalties and interest beyond the three year period, the will be both the administrative requirements for asserting fraud (needed in most cases for an open statute) or willfulness and these will then include the right to an Appeals hearing. Then, if the taxpayer is not satisfied, the taxpayer can pursue judicial remedies. In the income tax case, the IRS will have to prove fraud in the income tax case (to open the statute and prove the fraud penalty) by clear and convincing evidence. In the FBAR case, the IRS will have to prove willfulness by a standard of preponderance of the evidence. Since fraud and willfulness are the same standard and in an analogous punitive context, I have argued before that the clear and convincing standard in both situations. So far, I have not yet been clear and convincing on that issue.

    Jack Townsend

  32. That is my understanding as well. So, in this respect, the penalty base is the same as OVDP. I did recently post that in one other respect -- where the account was compliant as to one obligation (tax or FBAR) but not compliant as to the other obligation, thus making the streamlined penalty base broader than the OVDP penalty base. See

    Jack Townsend

  33. QD is a bit of a black hole. Persons outside the IRS (taxpayers and practitioners) do not know what the IRS is doing with QDs and, of course, it will be some years before the full statutes of limitations expire if they expire at all. In this regard, keep in mind that, if there were fraud on the original return, the amended return does not affect the unlimited income tax statute of limitations. Of course, there is no unlimited statute for FBARs, so a QD filer would be reasonably assured that 6 years after the latest year of the QD, the FBAR statute will have run and his exposure is zero.

    All of this, however, is subject to the caveat that the QD filings be properly filed, fairly reporting all income, deductions, credit and tax and that the FBAR fairly reports all accounts and amounts. QD filings which do not do that could be criminally prosecuted or could be a basis for refreshing the statute of limitations for an earlier filing.

    Jack Townsend

  34. Jack, why is this not tax fraud ?

    1. Taxpayer did not declare $2.5K p.a of interest income from offshore CDs for the last 10 years.
    2.Total CDs around $500K

    3.With SDOP he tries to amend his last 3 years of tax non compliance but leaves out the other 7 years.
    For me this is fraud plain and simple and if audited (weak NW certification) the taxpayer in question should be looking at the 75% civil fraud penalty for the 7 years outside of SDOP

  35. You raise a good question. Tax fraud is a multi-faceted inquiry, ultimately determined only by the judge or the jury in a case where that is the issue. The IRS could not make a tax fraud -- evasion -- case on those facts alone. It would need more evidence to buttress the 3 items of evidence you set forth. What is his education level? What did he know about the requirement to report global income? That he did not report the income is clear, but what did he know about his legal duty to report it? What is his level of education? Does he have some other infirmities that would cause the IRS not to pursue fraud issues or the DOJ not to authorize prosecution or a jury not convict if prosecuted? Did the softwared he used or the form package he used highlight global reporting and FBARs/ And then there is the relatively low amount of income in the prosecutable years -- at most 6 years but probably only 3 or 4 by the time the Government could prosecute. Say the evasion loss is 4 years time $2.5K -- just $10,000. Would the jury even convict at that level, particularly if there were some good facts in the client's favor? The taxpayer would not be sentenced to jail time and what kind of statement would the Government be making when there are much bigger fish to fry. The Government would be better off spending its investigation and prosecution resources elsewhere.

    Thus, while in some objective sense, the facts you mention may be a strong indication of fraud if those were the only facts. They aren't. And particularly important is the IRS's and DOJ's prosecution priorities and its resources in even asserting civil fraud penalties which it has to prove by clear and convincing evidence.

    That does not mean that the IRS will not pull the plug on streamlined and come out with all guns blazing. It is just to say that one could make a reasonable judgment that the IRS is not likely to so that he or she could, if he or she can get comfortable with the uncertainties in the concept of willfulness, make the certification subject to the risk that he or she may be wrong. Keep in mind that there is no litmus test for willfulness, even though the legal concept may be simply stated -- intentional violation of a known legal duty. Most taxpayers in this situation where a lot of money rides on their "intent" either believe or come to believe that they did not intend to violate any legal duty.

    What they have to assure first, provided they are well counseled, is that they have a plausible case to make for nonwillfulness. Maybe it will ultimately not be winnable if the IRS contests it, but it should be plausible in case the IRS does it, which plausibility is required in or to avoid the certification itself being a crime.

    Jack Townsend

  36. 1.Sorry I should have written tax loss to the government was approx. $2.5 p.a for the last 10/15 years ($30K) not interest income.
    2..Education level > university degree .... IT professional
    3.What did he know about his legal duty to report worldwide income.....
    that question can be answered in so many ways.
    4. Turbo Tax software has updated since 2012 this feature (no automatic NO anymore).

    It is interesting that even if we are talking about TAX CRIMES here on this blog that such tax evasion does not even reach the level of civil fraud. Without FATCA in this specific case the taxpayer would never had an incentive to come into compliance / even if it is now just partially for the last 3 years / this was the perfect tax evasion method (NRI tax exempt CDs in India).

  37. I think since your FBAR for 2013 was filed on time, the previous six years for which the deadline has passed would be 2007-2012, and thus these would be the subject of the FBAR.

    For the tax returns, I think those would be simply 2010 through 2012 (since those deadlines have passed). Once October 15th, passes, then it would roll forward to 2011-2013. I say Oct. 15th, because that is the deadline for the 2013 tax return, and for which you have taken an extension for until that date, as you so mention.

    As for the paragraph which Jack mentions from the certification statement, I can see that being the case had you not taken the extension for your 2013 return, and thus had missed the deadline. Then you potentially would have a 7th year in the SDOP, potentially, since the FBARs would now have to include a year in which the return is now, newly late (2013). I am guessing here.

  38. Hi Suzanne. Thank you for this. Can you please share how did you come by this information? Is there a link anywhere or did you speak to someone? Thanks!

  39. Thanks Jack. I agree. I don't believe I implied, even in the least bit, "money-back-guarantees." Having all the facts of the case, proof of those facts, and understanding the situation as a whole is the best way to have the information necessary to either enter OVDP, SDOP/SFOP, or a QD.

    There are quite aggressive practioners out there, like the law firm in NY which is advocating GF. I can't fathom even doing that. But that's testament to something which that law firm believes, which I also believe which is that some compliance is better than no compliance, even in the face of an audit.

    And no, I would not be paying anyone's tax bill, nor would Jack. But given the circumstances of one's case, if they're not in the least bit willful, like in many of the willful tax crime cases Jack has posted, and given the opportunities for different sets of people to hear one's case at different levels of the IRS, were one to be audited even in the first place, why would one make the decision to enter into an OVDP?

    Regardless of the "chain of events" which would ensue subsequent to an audit, if the facts of the case are good to have done a QD or sign the NW certification within an SDOP/SFOP in the firstplace, then the IRS MUST give a fair amount of weight to someone's RC arguments and good faith conduct, no matter when they were made and done, and especially so in light of the heavy accusations of fraud and willfull conduct. The stakes are high, and no, I'm not a betting man.

  40. Milan. If he filed the 2013 FBAR before June 30 2014 ,then he is safe for 2013. In terms of what years are still open due to the 6 year SOL. I believe 2007 would be closed from a penalty unless he signed an extension.

  41. SVTR I believe you are correct you would be filing FBARS for 2008,2009, 2010, 2011 and 2012.

  42. Jack, please correct me if I am wrong. I appreciate Researcher's question and situation. But here is how I see it. Even if the 'example' taxpayer in Researcher's situation does enter SDOP or a do a QD, with only the last 3 years. this would not necessarily make him a willful violater when he FIRST filed those returns. Like you mention, what is the taxpayer's background, what was the caliber of the software he used asking him the Schedule B checkbox question, and his physical or mental infirmities? In other words, what are his reasonable causes on the ORIGINAL filings, and NOT necessarily during the amendment processing time period from when he would have done the QD or signed the NW certification in SDOP/SFOP?

    Does he CREATE a new set of willful acts by NOT amending those returns OUTSIDE of the SDOP/SFOP? Surely, in a QD, he should of course amend those returns, but does amending only 3 years of returns in SDOP make taint the well? I still can't say yes because the taxpayer's beleif could be that by entering SDOP/SFOP and amending just the last 3 years, he is being lawful & compliant. He has no reason to believe that he should be amending the prior 7 years of returns. If he does, then the IRS has to prove, that he knew that he still had to amend the prior 7 years outside of SDOP/SFOP, however the IRS makes no mention of that on its website for the streamlined procedures.

    This is a dilemma.

  43. Yes. Good one. Please let us know what you find. OVDP hotline has not called me back yet.

  44. Yes, I will do that in due time. Once I have permission from the taxpayer, and Jack, in the next few weeks, I will definitely do that.

  45. Jack has mentioned in his blog post for July 3rd, (this page) that you can edit the form until a valid template is out. I agree, whether it is for SDOP or SFOP. If you're in OVDP, I would let the examiner know you are doing that, or if you are entering directly into SDOP/SFOP, I would attach a note/letter saying you edited the template for your covered years (covered years being separate for the FBAR and the tax return years). Makes sense?

  46. You are still in OVDP even if you get transitionary treatment per FAQ 9 for SDOP/SFOP. If they deny your NW certification, that would be a hint to NOT opt out. You are still in OVDP, and barring major material misrepresentations of what you've already provided within your OVDP, you would be fine.

  47. Milan, Suzanne may want to respond for herself, but that has been my understanding since the new streamlined program kicked in. The IRS will apply their usual methods for determining which returns to audit. Of course, I would suspect a component of the determination will be the certification which will give the IRS a lot of information on the front-end.

    Jack Townsend

  48. That appear to make sense. Thanks Milan/

  49. Now that the Streamlined Procedure has been offered to US residents, my feeling is that taxpayers who do not go through one of the approved routes will be severely punished if detected. I'm currently handling one case where the taxpayer did a quiet disclosure involving a UBS account. I was brought in after the examination was over. It seemed to me that the IRS manager was more intent on imposing the willfulness penalty for not having entered the 2009 OVDI than what the client's knowledge was at the time of noncompliance. She was not happy that the client was adamant that she should not have to enter the OVDI and pay a high penalty because she really did not know about FBARs. Of course, it could just be this particular IRS manager/agent.

  50. Anon, I seem to feel some of your pain. I seem to have drawn the lot of ireful examiners more than once in OVDP as well. Your client had UBS accounts, the client with the "square" examiner had accounts at HSBC. Both HSBC & UBS cooperated with the IRS to release names of account holders. But after being a part of this blog and educating myself on willful nature of tax crimes, the government has to prove willful intent circumstantially, or through willful blindness. The FBAR portion of the IRM actually says, one checkbox left off the Schedule B is NOT enough to prove willfulness.

    Given that, considering the context of the situation where a bank who has been publicly disclosed as having cooperated with the IRS (UBS, HSBC, Wegelin, etc.), has there been evidence which would add to the willful nature of the taxpayer in question? Like, is there any communication between the taxpayer and those banks where he/she is attempting to hide foreign income & assets? My client is truly a minnow, who really was oblivious to the fact of his foreign income or assets, but always timely filed US tax returns with another US based tax practioner for at least a decade, and in the last 6 years he had the foreign assets/income, never discussed the inheritance sitting in a foreign bank account.

    Even if the IRS comes down hard on the QDs, granted they will find them in light of their ever decreasing limited budget and resources, the IRS STILL has to divert resources to PROVE willfulness. I say stack the evidence now, put everything on one side of a white board which shows nonwillfulness, and on the other side which shows willfulness. If it can be used, toss it out. The equivalent of being ready when they do knock on your client's door.

  51. Inherited accounts are not RC or evidence for NW intent !
    Keep in mind the IRS wants to maximize their revenue and if your QD comes to audit they will not even waste 1 sec. on proofing willfulness etc. The Service will use all of the Tittle 26 civil tax penalties and stack them with Title 31 NW penalties this will be a pretty close proxy.

  52. I understand the point about IRM but IRM cannot be relied upon by taxpayers and is not considered law.

    Although the IRS has to prove "willfulness," many taxpayers caught in this unfortunate climate do not necessarily have the resources to fight the determination. Some IRS agents have an attitude of forcing the taxpayers to fight it out.

    In my client's situation, the IRS used the prior CPA's testimony about having supposedly discussed world-wide reporting of "income" versus the actual FBAR form to support a finding of willfulness even though the CPA has said that he normally does not meet directly with clients. This means the CPA has no personal knowledge of what was discussed with the taxpayers. This CPA also testified during the summons interview that many of his clients came to him asking about OVDI but "none" of his clients are in OVDI (doesn't that sound odd?) and that my clients wanted to enter the OVDI but he was too busy to help them.

    The IRS is also using a UBS document signed by my client declining investment in US securities as evidence of willful intent. The UBS Deferred Prosecution Agreement states that UBS had a QI agreement with the IRS and the agreement specified that US taxpayers either had to allow reporting/withholding or decline investment in U.S. securities. It boggles my mind that a legitimate option allowed under the QI agreement with the IRS is somehow now evidence of willful intent not to file an FBAR.


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