Friday, December 19, 2014

More on the Need for a Pending Proceeding for Tax Obstruction, Section 7212(a) (12/19/14)

I recently blogged on United States v. Miner, 774 F.3d 336 (6th Cir. 2014), here.  The blog entry is Sixth Circuit Holds that § 7212(a)'s Omnibus Clause Requires Knowledge of a Pending Proceeding / Action and Intent to Obstruct (Federal Tax Crimes Blog 12/13/14), here.  In Miner, the Sixth Circuit said that its decision in United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), holding that a pending IRS proceeding was required was the applicable precedent in the Sixth Circuit, despite a case after Kassouf, United States v. Bowman, 173 F.3d 595 (6th Cir. 1999), which stated, suggested or even held otherwise.  The issue has arisen in another case in another circuit with a different outcome at the trial level.

In United States v. Huff, 2014 U.S. Dist. LEXIS 174978 (SDNY 2014), defendant Huff
allegedly defrauded both the Internal Revenue Service ("IRS") and clients of "02HR," a professional employer organization, by directing 02HR to fail to pay to the IRS and to insurance companies $58 million in funds provided to 02HR by clients to cover their tax and insurance obligations.
For that conduct, he was charged with wire fraud, tax evasion and tax obstruction.  I focus on the tax obstruction charge in a single count, Count 7, the same charge involved in Miner, Kassouf and Bowman.  I cut and paste immediately below the Court's entire discussion of the issue:
III. Count Seven 
Count Seven charges Huff with corruptly endeavoring to obstruct and impede the due administration of the tax laws by causing 02HR employees to, inter alia, file false Forms 941, cease filing Forms 941, cease making payments to the IRS, divert funds intended for the IRS, and conceal from 02HR's clients its failure to make payments to the IRS, in violation of 26 U.S.C. § 7212. Indictment ¶ 21. Extrapolating from cases successful prosecutions under Section 7212, Huff argues that a conviction under this provision requires "proof of a scheme [either] to conceal income or to impede an IRS investigation or proceeding, neither of which is alleged in the Indictment." Def's Reply at 18-19. 
Huff is correct that it is difficult to find cases in which defendants have been convicted under Section 7212 without either impeding an IRS proceeding or, more often, concealing their own income. However, the mere lack of cases falling outside this dichotomy does not transform the two precedential patterns into statutory requirements. 
First, courts have found that the "omnibus clause" under which Huff has been charged is, as its title implies, subject to an expansive interpretation. See United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (noting that "the second or 'omnibus' clause is not so limited, and renders criminal 'any other' action which serves to obstruct or impede the due administration of the revenue laws" and that "the plain language of section 7212 does not support [a] narrow interpretation of the statute").
Second, numerous cases support the proposition that the omnibus clause can be used to cover a variety of conduct, including concealing others' income or helping others evade tax payments. See, e.g., United States v. Ohle, 678 F. Supp. 2d 215, 232-33 (S.D.N.Y. 2010 ) (" [A]llegations [] which allege that Ohle participated in a scheme to conceal his own income and the income of others from the IRS[] charge a violation of Section 7212(a) with sufficient specificity.") (emphasis added); United States v. Popkin, 943 F.2d 1535, 1541 (11th Cir. 1991) (affirming violation of § 7212 where defendant attorney created a corporation to help his client disguise the character of illegally earned income and repatriate it); United States v. Floyd, 740 F.3d 22, 32 (1st Cir.) cert. denied sub nom. Dion v. United States, 135 S. Ct. 124 (2014) (calling "the filing of false tax documents . . . .'a quintessential violation of the statute,'" and noting it as an allegation distinct from "concealment of income or other assets from the IRS," which "can [also] form the basis for a violation of the statute"). 
Here, the actions alleged, including directing the filing of false tax returns, misleading clients into believing their tax obligations had been paid, and diverting tax payments in a manner intended to be difficult to trace, though not directed to concealing Huff's own income, seem clearly intended to deprive the IRS of revenue and make it difficult for the IRS to find and collect funds owed, and therefore to impede the administration of the tax laws. Accordingly, Count Seven adequately alleges a violation of Section 7212.


  1. "Hidden," "stashed"? Sounds like these were immigrants who has money before immigration to Aus and just left the money where it was.

  2. There are 49 other states besides New York. I wonder whether banks (not just Leumi) have 49 swords of Damocles hanging over their heads.

  3. I would expect that the purpose of the C&D website is to bring in clients. The Devil of course is in the details, i.e. how "if the foreign requesting authority demonstrates that prior notification would defeat the purpose of the request and its investigation would be thwarted." would be interpreted, and the C&D website brings up this point.
    But I wonder about something. Let's say that Bank X reports that account #123456 has (or had) a balance high enough to meet the treaty request criteria. The bank discloses the account holder's identity and lo and behold the account was declared all along or was declared through OVDP. The IRS already had the info of course, but the DOJ did not. Isn't the bank in hot water for breaking bank secrecy laws? I'm talking primarily Swiss law, but this may break US law in some manner. I think it's significant that the DOJ would not have requested info on account 123456 if it had not been informed by the bank that the account contained a big enough balance (or met other criteria.)

  4. On the second (Miller) article I find this quote troubling: "make it harder for suspected financial criminals to hide behind secrecy rules." Here in the US we have a presumption of innocence until proven guilty and a concept of probable cause. Searches must be based on more than mere suspicion. I also wonder exactly how giving notice would in any way compromise an investigation sice the bank records are already in the possession of a third party (the bank.) This is not a situation in which the "suspect" has the records in his possession and is able to destroy them.

  5. Swiss banker sentenced for violating bank secrecy and providing invented information about accounts:

  6. I agree that C&D is just trying to bring in clients. Most attorney websites try to frighten readers into using their services. In this case their website is wrong because the law has not yet been passed. It may not ever be passed in its current form. Makes you wonder if the people at C&D know what is going on or if they are just lying in an attempt to bring in business.

  7. Andre,

    First, let me say that I appreciate your comments. I hope that they are helpful for readers as well.

    Second, I will let C&D's reputation stand for itself, but will state that, in my mind, the lawyers at C&D are at the top of the practice in this area in competence, ethics and service to clients.

    Third, different lawyers see and present the risks differently. In any public statement such as this, I think most lawyers (myself included) think it would be better to err in favor of encouraging that clients with undeclared accounts seek counsel to individually assess their exposures. Otherwise, the lawyers may lull the unsophisticated person who is at some risk into not thinking he or she is at risk, only to find out that he or she is at risk after it is too late to fix the problem. Now, when you get to individualized advice, the lawyer can fine-tune and deal with nuances that simply can't be addressed in such a public statement. Specifically in the context presented in the article, I suspect that the legislation will pass and readers need to know about it before it passes. In this regard, as you know, the U.S. is set to make a slew of group requests under the treaty and it would not surprise me if the Swiss are set to promptly respond when the legislation is passed, so that, a reader waiting to see if it passes, may have let a critical date pass.

    Fourth, and for a host of other reasons, the Switzerland window is closing for stragglers who have not yet been fully counseled as to their exposures and reached an informed decision whether and how to deal with their exposures. These reminders help. That may be good for lawyers who earn fees, but at the end of the day, it is good for the clients' of the lawyers (at least in most cases,
    where the lawyer is competent and fair).

    Jack Townsend

  8. Jack,
    Thanks for your response and thoughts. I think the C&D statement is misleading because it strongly implies that the law has already been passed(including having an effective date in the past). They could just as easily said "if this law passes in its current form then you better join the OVDP program or bad things will happen to you."
    I don't share your confidence that the law will pass in its current form. The problem is that it violates the sovereignty of Switzerland. I believe that a John Doe summons in the US requires the approval of a judge. Switzerland currently has similar requirement but done in a different way. Here the people who have been selected by the JD summons are given the opportunity to challenge its legality. If the summons is challenged then a judge looks at it. If there is no challenge then the information is transmitted. Obviously, the Swiss Tax Authority is not a judge and is not as concerned with(or qualified to interpret) the Swiss laws concerning privacy. If this law passes in its current form then the possibility exists that the Tax Authority will give blanket approval to all JD summons requests. This could result in 10s or even 100s of thousands of names being handed over including those of many Swiss/dual citizens. This would cause a huge uproar. I suspect many politicians would lose their next election if this were to happen. Perhaps a compromise would be to require a Swiss Judicial review of each JD summons to make sure it is in accordance with Swiss law. I don't think it is reasonable to turn over names just because a US judge says it is ok without having reviewed the summons from a Swiss law perspective. That would subjugate the Swiss law under American law.

  9. Andre, just for clarity, the documents will be sought by treaty request, not a John Doe Summons. Remember that the Tier 2 Swiss banks have or will turn over information about U.S. taxpayers with characteristics but not with identifying numbers. The IRS will use that information to make a treaty request (they call it a group request, but it functions in some ways like a John Doe -type request, relying on the treaty partner to use its internal processes to obtain the information). What I understand the new legislation will do is to prevent notice and opportunity to litigate before the information is turned over -- at least in some cases. So, the Swiss competent authority will process it according to Swiss law without notice if the legislation is passed.

    Jack Townsend

  10. Jack Townsend says: "the documents will be sought by treaty request"

    The problem here is that this treaty was filibustered by Rand Paul and has not even been ratified by the US! What we have recently discovered from the Lois Lerner revelations about IRS politicization and abuse of power is that this will NOT stop the IRS from illegally filing these John Doe summons. Likely Widmer-Schlumf will be further blackmailed by the US into pretending that these IRS summons are somehow legal in Switzerland.

    Furthermore, this debacle also makes obvious how the entire US tax-compliance industrial complex is chomping at the bit to start extracting wealth from these future victims of IRS lawlessness. Every branch, ye every twig, of the US government is actively selling out to lobbyists, revolving door parasites, and subject matter "experts".

  11. Jack,
    Thanks for the clarification. I'm guessing that by doing a treaty/group request the IRS/DOJ will not have to get a judge's signature. In a just society, I think that a person should have the right and opportunity to protect himself from an unlawful violation of their privacy. This law would take away that right.
    What I am wonder is what would the IRS/DOJ use as a reason for asking that the account holders not be notified. Can they say that the account holders should not be notified because they might be successful in litigating/blocking an unlawful treaty request? That argument would basically admit that the request is unlawful.

  12. Andre, your questions are good ones.

    However, I think the either with this legislation or interpretation, the Swiss will move to a system where the U.S. depositor generally is not told of a group request that the response will identify that depositor. Keep in mind that the DOJ Program requiring the group characteristics from which the group requests will be formulated was worked out with the Swiss. The Swiss, I think, will respond and will not want endless numbers of litigation / proceedings in Switzerland. So, since the information and documents are going to get turned over anyway, why not just do it and tell the U.S. depositor after it is done?

    Jack Townsend

    This article(which is obviously very anti FATCA) points out that the IRS intends to also send data about accounts in US banks. A reading of the IRS press release confirms this. This is new news to me. There are a lot of people hiding money in the US. A foreign tax authority has no way, until now, to know what anybody has in a US account.
    It is odd that there is not much reporting about this. Are the US banks ready to honor the potentially huge number of data request that this could generate? Are they required to comply?


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