Taxpayer Denied Bankruptcy Discharge For BLIPS Related Tax Liability (8/30/14)

11 U.S.C. Section 523(a)(1)(C), here, provides in relevant part that a taxpayer may not be discharged in bankruptcy for a tax debt if one of two circumstance exist:  (i) "with respect to which the debtor made a fraudulent return" or (ii) the debtor "willfully attempted in any manner to evade or defeat such tax."

In In re Vaughn, ___ F.3d ___, 2014 U.S. App. LEXIS 16417 (10th Cir. 2014), here, the Court denied Vaughn a discharge for his tax debt arising from the bullshit tax shelter (the BLIPS variety).  In so doing, the court affirmed the bankruptcy court and the district court below.

It appears that, in denying the discharge, the courts relied principally upon the second basis for denial of discharge -- "willfully attempted in any manner to evade or defeat such tax."  The 10th Circuit found that Vaughn participated in a shaky shelter and then voluntarily depleted his assets during the long period of time before the Government finally assessed the tax liability.  (Readers will recall that substantial periods of time can elapse from  the time an  unreported tax liability arises and when it finally is assessed.)  The taxpayer claimed that his conduct was negligent at best, but not willful as required by the text of the statute, because it was before the IRS assessed the tax.  The 10th Circuit rejected the argument, holding as it had previously held that assessment of the tax is not required for the denial of discharge to apply.

Although the 10th Circuit apparently did not rely upon the first basis -- the taxpayer made a fraudulent return -- it appears from the history of BLIPS that the return was fraudulent because the BLIPS shelter was fraudulent.  I have noted that in another context -- Section 6501(c)(1), here, which has an unlimited statute of limitations "In the case of a false or fraudulent return with the intent to evade tax."  See for the most recent discussion, BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/27/14), here.  There is no textual requirement in Section 6501(c)(1) that the taxpayer make the fraudulent return; the text only requires that the return be fraudulent.  Taxpayers, of course, argue that, despite the lack of a textual requirement that the taxpayer be complicit on the fraud on the return, the text properly interpreted has an implicit requirement that the taxpayer have known the return was fraudulent and thus made a fraudulent return.  The few courts that have addressed the issue are split, with, as of now, the weight of authority that the taxpayer's fraud is not required.

In any event, the bankruptcy provision does seem textually to require the taxpayer's fraud.  Promoter or preparer fraud without the taxpayer's fraud is not sufficient to deny discharge.  So, that is not an issue.  And, as noted, the 10th Circuit seemed to have relied upon the taxpayer's fraud.  Nevertheless, the 10th Circuit did seem to at least advert to the issue of some culpability on Vaughn's part in filing the return claiming the fraudulent benefits of BLIPS (emphasis supplied):

Second, Appellant argues his "reliance on the advice of KPMG, his longtime tax advisor, that the BLIPS transaction was an aggressive but ultimately legitimate tax position might have been at worst unreasonable under the circumstances, making [Appellant] negligent," but not willful. (Appellant's Opening Br. at 23.) Appellant contends that because he innocently, even if unreasonably, relied on KPMG's advice, he cannot be found to have acted willfully. We find this argument unpersuasive under all of the circumstances in this case, particularly in light of the bankruptcy court's finding that Appellant's assertion of innocent reliance was "simply not credible." In re Vaughn, 463 B.R. at 548.

New IRS Internal Guidance on Processing Streamlined Submissions (8/29/14; 7/2/16)

A commenter called attention to an IRS internal procedure guidance with IRM changes dated 8/13/14.  That guidance is numbered WI-21-0814-1244 and titled  Streamline Filing Compliance Procedures for Accounts Management International IMF.  The guidance is here. [JAT Note on 7/2/16:  The IRS has taken down the link.  At least some of the guidance, with some redactions (see below), now appears in IRM 21.8.1.27.2.1  (05-01-2015), Adjusting Streamlined Filing Compliance Domestic Accounts - (Streamlined Domestic Offshore - SDO), here.  I have provided a subsequent blog entry on this issue.  See IRM Guidance on Processing SDOP - On Flagging Returns for Scrutiny and IRM Redactions (Federal Tax Crimes Blog 7/2/16), here.]

I have just looked through the guidance.  I have not studied it closely.  The key point that caught my eye on this review is that there are procedures established for some preliminary vetting of the documents that are filed under the SFOP and SDOP procedures.  I quote some of them and then offer comments.

IRM 21.8.1.27.2.1 Adjusting Streamlined Filing Compliance Domestic Accounts
- (Streamlined Domestic Offshore - SDO) 

3. LB&I will review the submissions for statute considerations. LB&I will complete the "AM Streamline Coversheet" and attach it to the package notating their statute recommendations regarding open statutes and statute extensions.

The IRS must determine if the certification is complete -- a table checklist is provided in paragraph 7.

One thing they check for is an open examination. (See par. 8, table).  [JAT Note on 7/2/16:  This discussion from the guidance as originally published appears to have been redacted in the regulations  21.8.1.27.2.1  (05-01-2015), Adjusting Streamlined Filing Compliance Domestic Accounts - (Streamlined Domestic Offshore - SDO), here, see particularly paragraph 9.F. which apparently is the following paragraph but it is redacted (so I don't know if the guidance has been changed)  I have written a subsequent blog entry on this.  See IRM Guidance on Processing SDOP - On Flagging Returns for Scrutiny and IRM Redactions (Federal Tax Crimes Blog 7/2/16), here.]

9. To complete adjustments on Form 1040X filed under the SDO:  

6. After making the assessment, refer any case with 5 or more foreign information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) by e-mailing the CIS ID number to "*LB&I OVDP Compliance" with an explanation that the case is being forwarded due to 5 or more foreign information returns. Enter CIS notes indicating the case was referred to *LB&I OVDP Compliance "5 or more foreign income statements"  

NOTE: The total of 5 forms is a combination of all years filed. For example submissions containing 3 Forms 5471 for 2011 and 3 Forms 5471 for 2012 would be referred since the total is 6. Submissions with a combination totaling less than 5 would not be referred.

JAT Comment: The latter requirement for forwarding returns with 5 or more information returns is obviously a critical one in terms of trying to anticipate what the IRS might do.  I don't think that less than 5 will mean the taxpayer certifying nonwillfulness has no risk.  The returns could be picked up under the regular IRS procedures which, inter alia, score returns for factors unrelated to offshore accounts.  Then, once an audit starts, the assumption would be that some level of audit of the certification will take place.  But, given the uncertainty in all this process, I personally believe it would be a mistake to make an aggressive certification of nonwillfulness even if the taxpayer can imagine that he understands his audit risk factors.  I don't understand audit risk factors, at least not well enough to take any important action based on the understanding.  The proper way to analyze this is that you should not certify if you are making a false certification or, if you can't calibrate nowillfulness exactly, a certification of nonwillfulness when the facts put you toward the willful end of the spectrum.  That is not legal advice to anyone, for I do not provide legal advice on this blog without specific engagement of my services.  This is just a cautionary concern that I think readers should consider.

Comments Going to Spam Folder (8/27/14)

Over the past couple of weeks, some comments went to the spam folder and I did not catch them until today.  I have reviewed the items in that spam folder and have approved the comments that are helpful to readers.

I will try to be more diligent about reviewing the spam folder and approving the appropriate emails.  Sorry for the inconvenience.

I do not know the algorithms the service provider uses for directing comments to the spam folder, so cannot offer any tips that would prevent that from happening.

Procedurally Taxing Blog on Statutes of Limitations with Respect to Tax Collected on Noncitizen Nonresidents (8/26/14)

Procedurally Taxing, the premier Tax Procedure Blog (in my opinion), has this great post that a number of readers of this blog may be interested in:  Boeri: Not a citizen, never lived or worked in the US? IRS will still keep your money (Procedurally Taxing 8/26/14), here.  Here is the teaser paragraph:

The facts of the case are as follows, and I have lifted much of this from the Federal Circuit Court of Appeals holding.  Mr. Boeri was an Italian citizen who was never a citizen of the United States, never worked in the United States, and never was a resident of the United States. Mr. Boeri was employed by GTE and Verizon for over thirty five years (located in Italy, Brazil, Argentina, and the Dominican Republic).  In 2003, Mr. Boeri accepted a voluntary buy out, and received close to $250,000 in two payments in March and August of 2004.  In those distributions, Verizon withheld around $70,500 in US income tax withholdings, Social Security tax, and Medicare Tax.  There is no dispute that Mr. Boeri was not originally liable for those taxes.  In March of 2009, Mr. Boeri filed non-resident income tax returns for 2004, seeking a refund of the taxes withheld by Verizon…And you can imagine where this was headed.

Click on the  link above for more.  I could not state it better than the author, Stephen Olsen; indeed,  without even trying, I could state it  much worse.

The discussion  is really technical, but for a person who may not be subject to the jurisdiction of the U.S. to tax, the discussion could be very important if there is any way that the IRS ends up with that person's money in the guise of a tax.

This is all to emphasize that statute of limitations to pursue claims -- whether in a tax context or otherwise -- are important.  Valid claims in any context can be cut off by statutes of limitations.  Pay attention.

BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (8/26/14)

I have previously written on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  (For my blogs on the issue, see here.)

Since Allen, the courts addressing the issue have been  sparse, but seemed to accept the validity of Allen's holding that fraud on the return triggers the unlimited statute of limitations even if it was not the taxpayer's fraud.  Allen involved a run of the mine fraudulent preparer, but the more prominent instances where the holding could apply involves the plethora of bullshit / fraudulent tax shelters that were popular with the wealthy in the 1990s and in the early 2000s.  Apparently not anticipating the holding in Allen, the IRS walked away from making adjustments to taxpayers investing in those shelters where it could not find an open statute of limitations under the other rules.  The IRS did try to get some relief by asserting the 6 year statute, but came up short on that in  U.S. v. Home Concrete & Supply, LLC, ___ U.S. ___, 132 S.Ct. 1836 (2012), here.  (See The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (Federal Tax Crimes Blog 4/25/12), here.) Then, the IRS belatedly discovered the implications of Allen.

In BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims rejected Allen and held that the unlimited statute in Section 6501(c)(1) required the taxpayer's fraud.  That holding, of course, warmed the hearts of taxpayers who invested in bullshit / fraudulent tax shelters -- a win on the audit lottery they willing and  joyously played.  For prior discussions of BASR, see Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Crimes Blog 10/3/13), here,  and Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (Federal Tax Crimes Blog 11/14/13; revised 11/16/13), here.

The  Government appealed BASR to the Court of Appeals for the Federal Circuit.  That case is now pending.  But it has been briefed.  I offer today in this blog entry the briefs of the parties and of Amicus Curiae (arguing that the Allen holding is incorrect).  Those briefs are:

• Government Opening Brief, here.
• BASR Answering Brief, here.
• ACTL Amicus Curiae Brief, here.
• Bryan Camp Amicus Curiae Brief, here.
• Government Reply Brief (Responding to BASR Brief and Amicus Brief), here.

I will cut and paste the Summaries of the Arguments in the Briefs:

Criminal Justice Article of U.S. Global Tax Enforcement (8/24/14)

Jay Nanavati, here, and Justin Thornton,  here, have authored an article on the DOJ and IRS offshore tax initiative.  "DOJ and IRS Use 'Carrot 'n Stick' to Enforce Global Tax Laws" , Criminal Justice, Vol. 29, No. 2, Summer 2014, here.  Most readers of this blog probably already know most of the contents of the article, but it is a good succinct summary of the developments.

I will quibble with their premise stated early in the article:  "The OVDP, currently in its third iteration, is the closest thing to a "carrot" that the government has offered taxpayers to induce compliance."  Of course, a command to get right going forward with no penalty for those who do get right into the future would induce a lot of compliance.  But OVDP does have a significant penalty structure.  With that penalty structure, OVDP is a carrot only for those willful actors for whom the penalties -- particular the FBAR penalties -- could be a lot greater.  But, for nonwillful actors for whom the penalties -- particularly the FBAR penalties -- should be a lot less, it  is not a carrot.  The carrot for them is the streamlined procedures, as recently revised, including the streamlined transition procedures for those in OVDP who would have opted out anyway because they were not willful.  This is just a quibble, though.  The article is good.

Another Offshore Account Depositor Guilty Plea (8/20/14)

The USAO SDNY announced, here, another guilty plea for a U.S. person, Bernard Kramer, with hidden offshore accounts in Switzerland and Israel.  The plea is to conspiracy (5 year offense) and tax perjury (3 year offense).  Here is the description of the conduct:

Between approximately 1987 and 2010, KRAMER maintained an undeclared bank account at a Swiss private bank headquartered in Zurich, Switzerland (the “Swiss Bank”). With the assistance of others at the Swiss Bank, KRAMER took steps to conceal the existence of, and his interest in, the undeclared account. KRAMER and certain individuals at the Swiss Bank used the coded phrase “Hot Lips” to refer to KRAMER’s undeclared account at the Swiss Bank. Periodically, KRAMER met with a representative of the Swiss Bank (“Swiss Bank Representative-1”) in the United States to discuss KRAMER’s undeclared account at the Swiss Bank and to review statements related to the account. With the assistance of the Swiss Bank, KRAMER repatriated funds to the United States from his undeclared account in a manner designed to ensure that U.S. authorities did not discover the account, including by requesting and receiving checks from the account in amounts just under $10,000 each. 

In approximately 2008, it became publicly known that the Swiss bank UBS AG (“UBS”) was being investigated by United States authorities for helping U.S. taxpayers maintain undeclared accounts. Around that time, KRAMER chose to maintain his undeclared account at the Swiss Bank after being assured by Swiss Bank Representative-1 that KRAMER’s undeclared account would remain safe at the Swiss Bank despite the UBS investigation. In approximately March of 2010, however, with the assistance of Swiss Bank Representative-1 and others at the Swiss Bank and an Israeli bank headquartered in Ramat Gan, Israel (the “Israeli Bank”), KRAMER transferred the remaining assets in his undeclared account at the Swiss Bank to a new undeclared account at the Israeli Bank. KRAMER maintained the new undeclared account at the Israeli Bank from 2010 to 2012. 

From approximately 1987 through 2012, KRAMER filed false tax returns with the IRS that failed to report his interest in his undeclared accounts at the Swiss Bank and the Israeli Bank, and the income generated in these undeclared accounts, which had a high value of at least $1.1 million.

JAT Comment:  Another bad actor.  This is one of the rare prosecutions which apparently does not involve entities to hide ownership of the accounts.

According to a USA Today report, here:

The Manhattan court filing shows Kramer secretly received periodic disbursements from the unidentified Swiss bank by requesting checks for amounts less than $10,000 — the threshold that requires banks to report transactions to government regulators.

Tidbits on the New Streamlined Procedures (8/16/14)

Virginia Jeker, her blog is here, recently spoke with an IRS representative on the OVDP hotline.  Virginia reports [quoted from her email]:

1)      I asked if clients who were expatriating & needed 5 years of tax compliance could submit the 5 years of returns through Streamlined. I was told YES, they could. I then asked if the T needed to explain that they were expatriating in the cover letter. She said NO… but they could if they wanted to.  She said that IRS will process all years submitted in the Streamlined procedure and she was told this was acceptable. Another practitioner who wrote to the IRS on this Q was just given the same answer yesterday.  This conflicts with what I was told about 2 weeks ago and which was the subject of my tax blog. http://blogs.angloinfo.com/us-tax/2014/08/04/ovdp-hotline-nixes-practical-use-of-new-streamlined-program/. . Has anyone else asked IRS about submitting earlier years in the S/L procedure? If so, please share the info received.

2)      If a Domestic Streamlined case is being submitted there is imposition of the 5% offshore penalty. Technically, the penalty can apply to any account that should have been reported on an FBAR but that was not. This can include for example, children’s accounts over which the parent has signature authority as well as an employer’s account over which the T has signature authority.  IRS just very recently clarified for its personnel that NO penalty will apply to such accounts (or any account for which there was no tax noncompliance).

3)      FBARs in Streamlined– in the case where T has over 25 foreign accounts I asked if they can check the box on the FBAR to simplify reporting or if each account must be separately listed. This is daunting when T has Certificates of Deposit that roll over etc. each year.  She said they can check the box as far as she is aware but she suggests calling FBAR hotline  to confirm this TEL --1 313 234 6146.

U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator (8/7/14)

DOJ has issued a press release, here, titled: U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator in Largest Forfeiture Ever Obtained Through a Kleptocracy Action.  Wikipedia, here, defines kleptocracy (footnotes omitted):

Kleptocracy, alternatively cleptocracy or kleptarchy, (from Greek: κλέπτης - kleptēs, "thief" and κράτος - kratos, "power, rule", hence "rule by thieves") is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often with pretense of honest service. This type of government corruption is often achieved by the embezzlement of state funds.

This blog does not focus, directly or indirectly on kelptocracy issues.  I guess they could be related in some way to U.S. tax noncompliance.  But it is not clear that this one was.

Rather, I post this entry because of the role the U.S. and foreign financial institutions played in assisting the former dictator and his associates in hiding the money.  Hiding the money is what the IRS offshore account initiative for U.S. taxpayers has been all about.  Solutions to the tax issues (for all countries, not just the U.S.) require transparency. Those solutions will make it harder for kleptocrats to hide their ill-gotten gains.  Joe Louis, the famous boxer, is reputed to have said:  "He can run, but he can't hide." We are moving into a brave new world for a whole host of people who have an incentive to hide and will be constrained in doing so.

Of course, the human race is communal.  If not, we would not have a human race today.  Throughout most of our history, wealth was transparent to the community -- maybe not in the sense of finite bottom-line net worth, but the trappings of wealth were physical.  We knew who the guys with wealth were and, in a sense, we knew how wealthy they were.  And we could assess the community's coherence and bonding by how people contributed to the community and were rewarded for doing so.  With secret financial institutions for hiding wealth, we lose that ability to assess and, as a community, demand what is best for the community.

So, as readers who have read this far, will know.  I think transparency is a good thing.  FATCA is a good thing.  And the global initiatives it and the U,S. spotlight on tax havens have spawned are good things.

We are all in this together.

It's So Easy to Say No -- The IRS Often Gets to No for Streamlined Transition Relief in OVDP (8/7/14; 8/11/14)

The feedback I am getting from various sources is that there is a lot of practitioner disenchantment with the Transition to Streamlined by those in OVDP.  The bottom-line is that the IRS is denying the nonwillful certification in far more cases than practitioners thought would be the case.  And, the process of denial is a bit of a black box.  In OVDP cases, the IRS will have a lot of information other than just the certification.  It will have the OVDL intake letter and the various documents in the final package.  So, at least as I understand it, unless the certification in light of the other information does not affirmatively present / prove nonwillfulness, the IRS default response is denial of the Transition relief.  As administered, therefore, it appears that the IRS is only approving the certification in cases where the case for nonwillfulness is clearly made / proved.  Obviously, just the certification and some light statement in support is not going to work in most cases.  (This probably is true only in the Transition cases for persons in OVDP; for persons doing a straight Streamlined, it remains to be clearly how and in what cases the IRS will question the certification.)

The taxpayer can then still opt out.  In the opt out audit, the issue of willfulness / nonwillfulness can be better developed by the taxpayer and the IRS so that the IRS can made a better determination.  Keep in mind that, in that process, at least theoretically, the burden is not on the taxpayer to prove nonwillfulness but on the IRS to prove willfulness.  (I say that, but obviously the IRS can do whatever it wants -- it can assert a willful penalty because it does not like the color of the taxpayer's eyes -- until it has to prove willfulness in court.)

As to the process in getting to no in Transition, apparently the decision is made by a committee.  It is unclear who the committee is, what its delegated authority is, and who the members are.  I have heard in most cases that the decision of the committee is final when announced.  There is no review or appeal of that decision.  However, I have heard of one practitioner being allowed to make a supplemental submission.

Addendum 8/11/14 9:15 am:  I just talked with  an Agent who advised that the current procedure was that the agent and his/her supervisor made the decision on the transition certification, with involvement as necessary by the technical adviser,  I think some readers had so indicated in their comments.  In this regard, Streamlined Transition FAQ 8, here, does provide some role for a central committee in those cases designated for central committee review.  There is no indication which cases will be designated.  Since the examiner and examiner's manager must concur, perhaps there would be a review if they do not.  Or, if the technical adviser did not agree, although I was told that the technical adviser pretty much relies upon the examiner and the manager.

Today's Tax Notes Today has an article with related information.  Andrew Velarde, Practitioners Disagree on Fairness of Lack of OVDP Retroactivity, 2014 TNT 152-2 (8/7/14).  The thrust of the article is on the unfairness of not opening the new Streamlined Program to taxpayers who previously closed out their OVDI/Ps with Form 906.  There are two sides presented.  First, one practitioner, Larry Campagna, suggests that in the past, those who did not opt out likely had indications of willfulness such that opting out would not be a wise choice.  For that category of person, the Streamlined Transition, as administered, would not apply.  Second, one practitioner, Josh Ungerman, argued that many who might have been nonwillful and good opt out candidates did not opt out because of the black box nature of the opt out process.  Basically, they were scared.

Describing the opt out process, the article says:

Under the opt-out system, taxpayers who were arguably non-willful could take such a position with the IRS and be subject only to small penalties if they were successful in their assertion. Last year an IRS official said the average foreign bank account report penalty in opt-out cases was only between $10,000 and $15,000. 

The information reported above is necessarily anecdotal.  I have heard from only a small number of practitioners.  I would appreciate readers comments, particularly sharing their anecdotal experiences to the extent consistent with their representation of their clients and with prudence.

Whistleblower Award for FBAR Penalties? (8/5/14)

In Whistleblower 22231-12W v. Commissioner, T.C. Memo. 2014-157, here, the Tax Court accepted the IRS position that the jurisdictional prerequisite for Tax Court review -- a determination by the IRS WBO -- had not been made and, hence, the Tax Court did not have jurisdiction over a whistleblower claim still pending before the WBO.  The IRS asserted an alternative defense that FBAR penalties are outside the scop of the whistleblower statute, Section 7623(b), here.  The Tax Court deferred ruling on that issue because there had been no determination which is the jurisdictional prerequisite for the Tax Court to do anything  in the matter.

Here are some key excerpts of the opinion:\

At the hearing the Court received testimony from Stephen Whitlock, Director of the Office. He testified about the Office's procedures for processing claims generally and about its handling of the particular claim at issue here. We found his testimony instructive and credible in all respects. 

Petitioner filed Form 211, Application for Award for Original Information, with the Office in November 2010. On the application petitioner asserted that he was cooperating with the Department of Justice and the IRS Criminal Investigation Division in connection with the ongoing investigation of two Swiss bankers. Petitioner alleged that his cooperation with those agencies had led to, and would lead to more, information about these bankers' involvement in tax evasion by U.S. persons having undeclared offshore financial accounts. 

* * * * 

III. Foreign Bank Account Reporting 

In the alternative, respondent contends that this Court lacks jurisdiction because payments under title 31 are outside the scope of section 7623(b)(5)(B) and are therefore outside the scope of our jurisdiction under section 7623(b)(4). Petitioner agrees that this issue is jurisdictional and urges that the Court resolve it. 

Because we have concluded that the Office did not make a "determination" within the meaning of section 7623(b)(4) sufficient to confer jurisdiction on this Court, we need not decide whether FBAR payments are "additional amounts" for purposes of ascertaining whether the monetary threshold in section 7623(b)(5) has been met, or whether that question is a jurisdictional one. See Friedland v. Commissioner, T.C. Memo. 2011-217, 102 T.C.M. (CCH) 247, 249 (not addressing the monetary threshold question when granting respondent's motion to dismiss for lack of jurisdiction).

So, at least for  now, there is no court ruling on the authority of the IRS to make whistleblower awards under Section 7623(b) for information leading to FBAR penalties.  Notwithstanding that, it would seem a streatch for that expanded scope.

Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (8/5/14)

Sam and Charles Wyly (Wikipedia here and here) have previously been subjects of my blogs.  See SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here, and The Big Boys Get Better Treatment in Our Tax System Than Do Minnows (Federal Tax Crimes Blog 1/12/13), here.  There is an update in this Reuters article:  Joseph Ax, Texas tycoons Wylys should pay $750 mln for fraud, SEC tells judge (Reuters 8/4/14), here.  Key excerpts:

Texas tycoon Sam Wyly and his late brother Charles' estate should pay about $750 million in damages for their role in a fraudulent offshore tax scheme, a lawyer for the U.S. Securities and Exchange Commission told a judge in New York on Monday. 

"There was a decision to violate the law here, Your Honor, and that decision was made in part because Sam Wyly knew it would be profitable, even if he were caught," Bridget Fitzpatrick said at the outset of a trial to determine the amount of damages the Wylys must pay after a jury found them liable for fraud in March. 

But lawyers for the Wylys have said in court papers the appropriate penalty is $1.38 million, arguing the SEC's theory of disgorgement is unsupported by the law. 

U.S. District Judge Shira Scheindlin is overseeing the nonjury trial, which is expected to last three days. 

A federal jury found the Wylys liable for a system of offshore trusts in the Isle of Man that netted the brothers $553 million in profits through hidden trades between 1992 and 2004 in companies they controlled. 

* * * * 

On Monday, Fitzpatrick said the SEC should be entitled to collect all unpaid taxes on the scheme's profits, plus interest, because the Wylys' failure to disclose their control of the trusts effectively fooled the government into accepting they owed no taxes. 

But the Wylys' lawyers have argued the SEC cannot step into the shoes of the Internal Revenue Service. 

Fitzpatrick acknowledged the SEC's tax-based theory of disgorgement is "novel" but nevertheless appropriate, given that the trusts were constructed explicitly to gain tax benefits.
The SEC originally sought as much as $1.4 billion, based on every dollar of profit earned through the trusts, but Scheindlin last week barred the agency from pursuing that theory.

Update Article on Swiss Category 2 Banks Efforts to Comply and Mitigate Penalties (8/15/14)

Giles Broom and Carolyn Bandel, Swiss Banks Send U.S. Client Data Before Cascade of Settlements (Bloomberg 8/4/14), here.  Excerpts:

Swiss banks will on the whole meet the deadline for delivering information on offshore accounts to the U.S., improving their chances of settling the cases this year. 

Roiled by the demise of the country’s oldest bank, the lenders are helping the Justice Department build cases against Americans who failed to report money stashed in Switzerland, a $2.3 trillion global hub for cross-border banking. 

As many as 106 banks have entered the department’s program to deliver documents showing how they helped clients hide money from the Internal Revenue Service. Bloomberg News contacted 34 of the lenders, 20 of whom said they will meet today’s deadline. Five others declined to comment, and seven didn’t have clear-cut answers. Two banks said they have dropped out of the program. 

The results indicate that banks with few exceptions will comply with the program’s exacting terms. This would put them in position to pay fines and avoid the fate of Wegelin & Co., a more than 270-year-old bank forced out of business by a U.S. tax probe that led to a guilty plea in 2013. 

* * * * 

Swiss law forbids the transfer of client names to foreign governments, unless requests for information conform to criteria set out in tax treaties. But banks can send other information to complement what the U.S. government gleaned from over 43,000 voluntary disclosures by American taxpayers. 

Category 2 banks must disclose the total number of U.S. accounts since 2008, their highest dollar value, and the employees who managed them, in documents verified by an independent examiner, according to a joint Swiss-U.S. government statement announcing the program last August. 

Account Disclosure 

June 30 was the deadline for turning over information on Americans considered in breach of U.S. tax rules. Today marks the end of the second wave of deliveries and includes documents that show which American clients were compliant. 

Some banks will try to mitigate penalties by providing documents to the Justice Department by Sept. 15 to support their claims that they encouraged clients to disclose accounts to the IRS through its offshore voluntary disclosure program.

Williams Yet Again - Court Bows Deeply to Government Claims of Expansive Discretion for FBAR Willful Penalty (8/4/14)

Readers may recall that I discussed the jury verdict in Zwerner imposing multiple year willful penalties at the max.  Zwerner Jury Verdict -- FBAR Willfulness for 3 Years (5/29/14), here.  I made the following observation:

I will close with one thought that I have not fully researched yet.  It seems to me that the structure of the statute, 31 USC 5321(a)(5), here, is to provide maximum penalties for nonwillful of $10,000 (perhaps per account) and for willful of the greater of $100,000 or 50% on the key date (June 30, as interpreted).  Each of these maximums could apply per year.  The point is that, as the statute is written, the penalty is not required to be at the maximum.  The jury was not asked to review the IRS's assertion of the maximum willful penalty.  Is the IRS's decision to assert the maximum not reviewable?  That just seems odd to me. 

But that also raises the question of what standard the trier -- here the jury -- would apply in determining whether something less than the maximum penalty should apply and, if so, what the lesser penalty should be.  There are of course mitigation guidelines in the IRM, but the IRM is not the law even under relaxed notions of Chevron deference.

The continuing saga in Williams has been brought to a close (unless appeal) with this issue.  United States v. Williams, 2014 U.S. Dist. LEXIS 105666 (ED VA 2014), here.  (The order is cryptic, so I also include the brief (without exhibits) as follows:  Williams  opening brief, here, U.S. opening brief, here, Williams response brief, here, and U.S. response brief, here.)

The Government argued that the statute should be interpreted to give the IRS unreviewable discretion with respect to the penalty up to the maximum permitted by the statute.  Whether no penalty, $1 or the max, the Government's argument was that there was no review.  The Court, at least nominally disagreed, holding that the IRS decision was reviewable.  Williams argued that the standard of review was de novo; the Government argued, on fall back, that the standard was for abuse of discretion.  The Court held that the standard was abuse of discretion.

Here is all the Court had to say on the proper standard:

Although the Government argues that the amount of the penalty assessed may not be considered on remand, this Court does review the penalty amount for abuse of discretion under the "arbitrary and capricious" standard of the Administrative Procedure Act. 5 U.S. § 706. The Court rejects Defendant's contention that the Fourth Circuit's remand for "further proceedings" is an invitation to engage in de novo review of the penalty amount. Although some courts have held in similar contexts that de novo review is appropriate when the issue of a defendant's underlying tax liability is at issue, see, e.g., Dogwood Forest Rest Home, Inc. v. United States, 181 F. Supp. 2d 554, 559-60 (M.D.N.C. 2001) (collecting cases), the Fourth Circuit has already ruled on the issue of Mr. Williams's liability in this case. On remand, it has been established that Williams is eligible for the FBAR penalties, including the penalties for willful violations. Because review of the penalty amount is the only remaining issue in this case, the appropriate standard of review is abuse of discretion. n1
   n1 Although the only other court to have considered the appropriateness of an FBAR penalty amount did not specifically identify a standard of review, it reviewed the penalty with great deference to the judgment of the agency. In United States v. McBride, 908 F. Supp. 2d, 1186, 1214 (D. Utah Nov. 8, 2012), the court affirmed two maximum penalties after determining that they were within the range authorized by Congress. The court did not consider the propriety of the penalty amounts, simply stating that the penalties were authorized by the statute and "[a]ccordingly . . . were proper."

Article on British Deal with Swiss to Flush Out Evades and Lost Revenue -- Not So Good (8/3/14)

In this article, the authors discuss the problems to U.K. in it agreement with the Swiss to flush out tax evaders.  Stephen Castle and Doreen Carvajal, Britain Fails to Find Riches It Expected in Swiss Accounts (NYT 8/1/14), here.

Some excerpts:

When the British tax authorities struck a landmark deal with the Swiss to crack down on tax evasion, they sat back and waited for the cash to flow in. Almost three years later, they are still waiting. 

So far, only about $1.7 billion of the $8.4 billion windfall they once expected has materialized, and sheepish tax authorities now hope to eventually collect just a third of their original estimate.
Instead, the deal struck by Britain, which once seemed a pioneer in combating tax evasion, is emerging as a cautionary tale for a growing number of nations that are feeling the pinch of Europe’s flat economy and are desperate to reap revenues from secret accounts held by the wealthy. The amounts at stake are enormous. In 2012, the British government estimated that Britons had amassed more than 40 billion pounds, or $68.5 billion, in Swiss banks. Some conservative estimates of the amount of money tucked away in tax havens and out of reach of governments worldwide range as high as $21 trillion — more than the gross domestic product of the United States. 

* * * * 

The lesson is that “you cannot rely on a black hole to get income,” according to Pascal Saint-Amans, a tax expert with the Organization for Economic Cooperation and Development, based in Paris. The organization is currently developing standards for a broader international deal. So far 60 jurisdictions and nations, including Switzerland, have committed themselves. But that agreement is not expected to take effect until 2017, and critics are already pointing out loopholes. 

Britain’s deal with Switzerland had plenty of its own. For those who wanted to evade the British tax authorities, the agreement gave ample warning — 16 months — to shift money to other offshore havens or put it into gold, bearer funds, artwork, insurance or safe deposit boxes. 

The 16-month warning was “almost absurd,” said Ian Swales, a Liberal Democrat and member of Britain’s parliamentary Public Accounts Committee. “If you had 100 pounds in your pocket and I told you that in a few weeks I would take a portion of it, then you wouldn’t really keep 100 pounds in your pocket, would you?” he said. 

Other money is hidden in ever more elaborate mazes of offshore trusts and foundations often managed by trustees, usually foreign lawyers, allowing the real beneficiaries to remain secret. 

* * * * 

Another example is the bribery trial in Germany of Bernie Ecclestone, 83, a billionaire and Formula One tycoon considered one of the richest men in Britain. Mr. Ecclestone is accused of bribing a German banker, Gerhard Gribkowsky, with $44 million, for a favorable business deal. His defense is that he lavished the money to prevent the banker from alerting British tax authorities that it was he, and not his former wife, Slavica, who controlled a family trust set up in Liechtenstein, another famous tax haven. 

* * * * 

The British-Swiss deal was always contentious, with critics arguing that it amounted to an amnesty to tax evaders. The German government abandoned efforts to sign a similar agreement with Switzerland. 

Under the deal with Switzerland about 18,000 Britons disclosed their names to the British authorities. Those who did not want to be identified paid a one-time levy of up to 34 percent to settle past taxes. Then last year, the Swiss started deducting a regular “withholding tax” on the interest on behalf of the British authorities. 

But recently, the Swiss sent the British a list of the international jurisdictions that had received money from accounts held by Britons in Switzerland before the deductions could be made. Jason Collins, a tax lawyer with Pinsent Masons in London, said that the likely locations include Singapore and Dubai. Other experts see money shifting to Mauritius, Seychelles, and Hong Kong.