New IRS FBAR Penalty Guidance (5/29/15; 6/1/15; 6/10/16)

Heather Maloy, Commissioner, LB&I, has issued a memo, dated 5/13/15 titled Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties (SBSE-04-0515-0025 (5/13/15) ), here.  [JAT Note as of 6/10/16: the foregoing link has been been taken down by the IRS, apparently because the key provisions of the guidance have been incorporated into the IRM.  For example, the guidance below that the willful penalty is generally limited to 50% of the high aggregate is now incorporated in IRM 4.26.16.6.5.3  (11-06-2015), subpar. 2, Penalty for Willful FBAR Violations - Calculation, here.  I presume  that the other points of the memo now deleted from the IRS web page are similarly incorporated in the IRM.  See e.g., for the nonwillful penalty calculation, IRM 4.26.16.6.4.1  (11-06-2015), Penalty for Nonwillful Violations - Calculation, here.  Although the IRS took down the memo, another practitioners printed the memorandum and attachments in full on his website and provided a link to the memorandum in pdf format, here, although its importance now is historical only.]

The key points of the original memorandum that I find interesting are:

1.  The FBAR penalty provisions are "only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case."  I think we all knew that, but I am glad the IRS is reminding its agents of that proposition.

2.  Attachment 1 provides procedures

developed to ensure consistency and effectiveness in the administration of FBAR penalties. They will help ensure FBAR penalty determinations are adequately supported and penalties are asserted in a fair and consistent manner. Examiners must continue to use their best judgment when proposing FBAR penalties. They must take into account all the available facts and circumstances of a case. See IRM 4.26.16.4.7, FBAR Penalties -- Examiner Discretion, concerning the use of examiner discretion when proposing FBAR penalties.

3.  The following are from Attachment 1 (bold-face supplied by JAT except for headings):

(2) Penalty Amount for Willful Violations 

For each year for which it is determined that there was a willful violation, examiners must fully develop and adequately document in the examination workpapers their analysis regarding willfulness. The examiner's report should clearly state the years for which it was determined that an FBAR violation was willful. 

For cases involving willful violations over multiple years, examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C) for each year. 

Example: Assume highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. The total penalty amount is $100,000 (50 percent of the $200,000 highest aggregate balance during the years under examination). The total of the highest aggregate balances for all years combined is $350,000. The penalty for 2010 is $14,286 ($50,000/$350,000 x $100,000). The penalty for 2011 is $28,571 ($100,000/$350,000 x $100,000). The penalty for 2012 is $57,143 ($200,000/$350,000 x $100,000). The penalty amounts for each year are subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C).\ 

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner's workpapers must support all willful penalty determinations and document the group manager's approval. 

(3) Penalty Amount for Nonwillful Violations 

Former House Speaker Indicted for Structuring and Lying to Federal Agents (5/29/15; 6/3/15)

Former Speaker of the U.S. House of Representatives J. Dennis Hastert has been indictment for structuring bank withdrawals to evade bank reporting for currency transactions (CTRs) and lying to the FBI.  The DOJ announcement is here; the indictment is here.  Although this is not a tax case, it does involve structuring and lying, two crimes that play out in many tax crimes cases.  There is some considerable irony that the structuring provisions of the Patriot Act, enacted under Hastert's leadership, as the basis for a key count in the indictment.  Daniel Marans, Patriot Act That Dennis Hastert Passed Led To His Indictment (Huffington Post 5/28/15), here.

The underlying problem for Hastert seems to have arisen from misconduct that occurred before he became a U.S. representative.  Later, in 2010, he agreed to pay a person aggrieved by the misconduct "$3.5 million as compensation for the misconduct."  (Indictment, par. 1d.)   He withdrew $1.7 million in cash from various bank accounts, but did so, at least for some withdrawals, in a manner to avoid the bank's reporting of those transactions on Currency Transaction Reports, required for deposits and withdrawals of cash in excess of $10,000.. (Indictment, par. 1f - 1m.).  He was indicted for structuring in violation of   Count Two based on 31 USC § 5324(a)(3), here.  In addition, he is indicted for false statements to agents when questioned about the structuring.  Count One based on 18 USC 1001(a)(2), here.

Addendum 6/3/15 12:50pm:

Legal pundit, Jeffrey Toobin, has this article in the New Yorker on line:  The Legal Logic of the Case Against Hastert (New Yorker 6/2/15), here.  Although he is no longer a prosecutor, relying on punditry for a living instead, Toobin presents the law enforcement case for the charges against former House Speaker Hastert.  He also makes the general argument for when the CTR provisions (both criminal and, in other cases, forfeiture) should be deployed.  As I read it, if it had just been a CTR case, Hastert probably would not have been prosecuted.  He was prosecuted because he lied to the agents when they inquired about the cash withdrawals.  (In this regard, I doubt that he would have been prosecuted if his only lie was that he did not have sex with the guy long ago (shades of Bill Clinton); but, he told a lie going to the very purpose of the CTR provisions and thus having a nexus to legitimate law enforcement priorities.

Basler Reported to Pay $42.1 Million to Settle with Germany Over Undeclared Accounts (5/29/15)

Reuters reports that Basler Kantonalbank wil pay $42.1 million to settle a German probe into undeclared assets.  Katharina Bart, Basler Kantonalbank says to pay 38.6 million euros in German tax probe (Reuters 5/28/15), here.  

Excerpt (bold-face supplied by JAT):

The Basel-based lender is the fourth Swiss bank -- after Credit Suisse, Julius Baer and UBS -- to settle similar probes with German officials, which resolves the matter for both the bank and its employees. 

Basler, one of a host of local government-backed lenders in Switzerland, is still on the hook in a U.S. probe investigating how Swiss banks helped wealthy Americans dodge or cheat on taxes.

Note that the U.S. DOJ program for Swiss banks does not resolve the matter for the bank employees.

Article on Government's Use of Tax Returns at Trial (5/28/15)

Jeremy Temkin, here, has authored an article titled "The Government's Use of Tax Returns at Trial," published in the New York Law Journal, vol. 253 (5/21/15), here.  The following is his summary which, hopefully, will encourage readers to read the article

  

                In criminal cases charging tax evasion and filing false returns, the defendant’s income tax returns for the years at issue constitute essential evidence of the alleged criminal conduct.  But courts have also allowed prosecutors in tax cases to offer the defendant’s returns for uncharged years as Rule 404(b) evidence of his knowledge or intent with respect to the charged conduct.  Eve in narcotics and non-tax fraud cases, courts have allowed prosecutors to offer tax returns filed (or not filed) by a defendant to establish some relevant fact, such as unexplained wealth or conduct at odds with the defense presented to the jury.  Such evidence is especially problematic for defense counsel because the defendant’s failure to report certain items of income will often undermine a claim that the funds in question represented legitimate income.  This article addresses the government’s ability to access the defendant’s tax returns in non-tax cases and its ability to use returns not directly at issue in both tax and non-tax cases.

4 More Swiss Banks Obtain NPAs Under DOJ Program (5/28/15)

In a news release today, here, DOJ Tax announces that the following banks have reached NPAs under the DOJ Swiss Bank Program, here:

• Société Générale Private Banking (Lugano-Svizzera)
• MediBank AG
• LBBW (Schweiz) AG
• Scobag Privatbank AG

The NPAs are available by link in the press release.

Key excerpts (emphasis supplied by JAT):

Société Générale Private Banking (Lugano-Svizzera) SA (SGPB-Lugano) was established in 1974 and is headquartered in Lugano, Switzerland.  Through referrals and pre-existing relationships, SGPB-Lugano accepted, opened and maintained accounts for U.S. taxpayers, and knew that it was likely that certain U.S. taxpayers who maintained accounts there were not complying with their U.S. reporting obligations.  Since Aug. 1, 2008, SGPB-Lugano held and managed approximately 109 U.S.-related accounts, with a peak of assets under management of approximately $139.6 million, and offered a variety of services that it knew assisted U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS), including “hold mail” services and numbered accounts.  Some U.S. taxpayers expressly instructed SGPB-Lugano not to disclose their names to the IRS, to sell their U.S. securities and to not invest in U.S. securities, which would have required disclosure and withholding.  In addition, certain relationship managers actively assisted or otherwise facilitated U.S. taxpayers in establishing and maintaining undeclared accounts in a manner designed to conceal the true ownership or beneficial interest in the accounts, including concealing undeclared accounts by opening and maintaining accounts in the name of non-U.S. entities, including sham entities, having an officer of SGPB-Lugano act as an officer of the sham entities, processing cash withdrawals from accounts being closed and then maintaining the funds in a safe deposit box at the bank and making “transitory” accounts available, thereby allowing multiple accountholders to transfer funds in such a way as to shield the identity and account number of the accountholder.  SGPB-Lugano will pay a penalty of $1.363 million. 

Created in 1979 and headquartered in Zug, Switzerland, MediBank AG (MediBank) provided private banking services to U.S. taxpayers and assisted in the evasion of U.S. tax obligations by opening and maintaining undeclared accounts.  In furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, MediBank failed to comply with its withholding and reporting obligations, providing “hold mail” services and offering numbered accounts, thus reducing the ability of U.S. authorities to learn the identity of the taxpayers.  After it became public that the Department of Justice was investigating UBS, MediBank hired a relationship manager from UBS and permitted some of that person’s U.S. clients to open accounts at MediBank.  Since Aug. 1, 2008, MediBank had 14 U.S. related accounts with assets under management of $8,620,675.  MediBank opened, serviced and profited from accounts for U.S. clients with the knowledge that many likely were not complying with their U.S. tax obligations.  MediBank will pay a penalty of $826,000. 

LBBW (Schweiz) AG (LBBW-Schweiz) was established in Zurich in 1995.  Since August 2008, LBBW-Schweiz held 35 U.S. related accounts with $128,664,130 in assets under management.  After it became public that the department was investigating UBS, LBBW-Schweiz opened accounts from former clients at UBS and Credit Suisse.  Despite its knowledge that U.S. taxpayers had a legal duty to report and pay tax on income earned on their accounts, LLB permitted undeclared accounts to be opened and maintained, and offered a variety of services that would and did assist U.S. clients in the concealment of assets and income from the IRS.  These services included following U.S. accountholders instructions not to invest in U.S. securities and not reporting the accounts to the IRS and agreeing to hold statements and other mail, causing documents regarding the accounts to remain outside the United States.  LBBW-Schweiz will pay a penalty of $34,000. 

Headquartered in Basel, Switzerland, Scobag Privatbank AG (Scobag) was founded in 1968 to provide financial and other services to its founders, and obtained its banking license in 1986.  Since August 2008, Scobag had 13 U.S. related accounts, the maximum dollar value of which was $6,945,700.  Scobag offered a variety of services that it knew could and did assist U.S. clients in the concealment of assets and income from the IRS, including “hold mail” services and numbered accounts.  Scobag will pay a penalty of $9,090. 

In accordance with the terms of the program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

The list of banks subject to the 50% penalty for U.S. taxpayers joining OVDP, called the Foreign Financial Institutions or Facilitators, is here.  As of this writing, the four banks discussed above have not been added.

Addendum 5/29/15 8:00 am:

In the Société Générale Private Banking NPA, here, the following paragraph appears (par. 2, p. 5):

2. Société Générale Private Banking (Lugano-Svizzera) SA agrees to close as soon as practicable, and in no event later than two years from the date of this Agreement, any and all accounts of recalcitrant account holders, as defined in Section 1471(d)(6) of the Internal Revenue Code; has implemented, or will implement, procedures to prevent its employees from assisting recalcitrant account holders to engage in acts of further concealment in connection with closing any account or transferring any funds; and will not open any U.S. Related Accounts except on conditions that ensure that the account will be declared to the United States and will be subject to disclosure by Société Générale Private Banking (Lugano-Svizzera) SA.

The same paragraph appears in the other NPAs.

The point is that these banks are not required to decline U.S. depositors so long as the banks comply with the law.  Some readers have claimed that some banks refuse to serve U.S. customers, perhaps from fear of inadvertent errors that could lead to prosecution (in U.S. law inadvertent errors do not lead to prosecution for tax crimes) or not willing to bear the compliance costs of FATCA.  Those would be business decisions that some banks could conceivably make.  But, since all significant sized banks will become FATCA compliant, the additional cost of servicing U.S. customers would not, from a cost perspective, motivate profit-oriented banks to turn away the business.  So, subject to perhaps some temporary disruptions in service as banks get comfortable with FATCA, it would seem to me that U.S. customers with legitimate foreign banking needs will likely be able to have those needs met.

The FIFA Indictments and Guilty Pleas - the Tax and FBAR Angles (5/28/15)

Yesterday, amidst great fanfare, DOJ announced the indictment of FIFA officials and others.  See press release titled Nine FIFA Officials and Five Corporate Executives Indicted for Racketeering Conspiracy and Corruption, here.  Key excerpts relevant to tax crimes are (bold-face supplied by JAT):

A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer.  The guilty pleas of four individual defendants and two corporate defendants were also unsealed today. 

The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella.  Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses.  The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments. 

* * * * 

The guilty pleas of the four individual and two corporate defendants that were also unsealed today include the guilty pleas of Charles Blazer, the long-serving former general secretary of CONCACAF and former U.S. representative on the FIFA executive committee; José Hawilla, the owner and founder of the Traffic Group, a multinational sports marketing conglomerate headquartered in Brazil; and two of Hawilla’s companies, Traffic Sports International Inc. and Traffic Sports USA Inc., which is based in Florida. 

* * * * 

The Convicted Individuals and Corporations 

* * * * 

On Nov. 25, 2013, the defendant Charles Blazer, the former CONCACAF general secretary and a former FIFA executive committee member, waived indictment and pleaded guilty to a 10-count information charging him with racketeering conspiracy, wire fraud conspiracy, money laundering conspiracy, income tax evasion and failure to file a Report of Foreign Bank and Financial Accounts (FBAR).  Blazer forfeited over $1.9 million at the time of his plea and has agreed to pay a second amount to be determined at the time of sentencing.

Urgent - Bureau of Economic Analysis Forms For Foreign Entities Due as Early as May 29, 2015 (5/27/15)

I have just learned about certain BEA forms due as early as May 29, 2015.

The BEA Web Site for the forms is here.

A good discussion is Joseph Perera and Farley P. Katz, Alert: Benchmark Survey of U.S. Direct Investment Abroad (BE-10 Report) Due May 29, 2015 (Strasburger 5/26/15), here.  The authors make the following introduction which should gather the attention of clients (and their lawyers) who have foreign entities.

All U.S. persons that owned, directly or indirectly, 10% or more of the voting stock of a foreign corporation, or an equivalent interest in an unincorporated foreign business enterprise (e.g. a partnership), at any time during the 2014 fiscal year, are required to file a BE-10 Report. 

The authors also note that there are civil and criminal penalties for failing to file.

Addendum 5/29/15 8:30am:

The filing deadline for "New Filers" has been extended to 6/30/15.  See here.

Switzerland Publishes Certain Identifying Information of Certain Foreign Depositors in Swiss Banks (5/27/15)

When Switzerland makes a decision to turn over bank information of a foreign depositor upon request of a treaty party, the depositor is entitled to invoke procedures under Swiss law to test whether the turn over is appropriate.  This requires that the Swiss authority notify the depositor so that the depositor can invoke the procedure.  But, what to do when the depositor has disappeared from the bank's radar screen and the bank does not know how to contact the depositor?  "In such cases the tax authorities notify the account holder via the government’s online gazette – sometimes giving the full name of the client and in other instances just the initials and date of birth."  See Swiss naming of suspected tax cheats causes waves (Swissinfo 5/25/15), here.

Of course, it is not at all clear just how much relief a foreign depositor would get by invoking such relief.  There have been isolated reports of success, but I suspect that, in this ongoing saga, Switzerland will be less and less inclined to forego the treaty country requests simply because the foreign depositors seeks relief in the Swiss system.  Perhaps more importantly, I wonder whether those U.S. depositors whose names are published will still qualify for the OVDP or Streamlined.  Keep in mind that the issue is whether the Swiss will turn over pursuant to a treaty request, so, at least as to the U.S., the U.S. must have had some type of identifier information to make the request.  Group requests -- or as I call them, John Doe Requests -- made with information from the Category 2 banks would not be specific information of identity, but might be sufficient for the IRS to claim that those depositors were already effectively under audit.

Further, as the Swissinfo article notes:

A change to the Swiss law last year allows the tax authorities to withhold from the account holder the fact that it is cooperating with a foreign jurisdiction. But this applies only under certain circumstances, such as when the requesting country feels the person under investigation may destroy evidence. 

Finally, U.S. depositors should keep in mind in considering invoking procedures to avoid the turn over that they are required to serve the papers also on the Attorney General.  See 18 USC § 3506, here, titled Service of papers filed in opposition to official request by United States to foreign government for criminal evidence.  There is no specific penalty in the statute for violating this obligation to serve the papers, but the failure to do so could be a key component in meeting the elements of the panoply of crimes that might be charged.

Guilty Plea for a U.S. Offshore Account Enabler (5/26/15; 5/27/15)

DOJ Tax has announced, here, a perjury conviction for an Indiana resident, Alexander Krivosuz.  The offense is described cryptically as follows:

According to the indictment, court documents and statements made at the court proceeding, Alexander Krivozus committed perjury by testifying falsely during the course of a federal grand jury investigation of Cleveland resident, Edward Gurary, who ultimately pleaded guilty in March 2011 to one count of filing a false income tax return on which he wilfully failed to report his Swiss bank accounts.  As part of the investigation, bank records indicated that Gurary directed UBS AG to wire funds from his undeclared Swiss bank account, which was held in the name of a nominee Bahamian entity, and requested that confirmations of the transfers be sent to a U.S. fax number in the (317) area code.  The investigation established that the fax number was associated with Krivozus.  He was subpoenaed to testify before the federal grand jury and testified falsely. 

My blog entry on Gurary's plea is even more cryptic: Another Plea for Taxpayer with UBS & Credit Suisse Accounts (Federal Tax Crimes Blog 3/8/11), here.

I tried to pull down the plea agreement from the docket entries on Pacer, but the plea agreement was sealed.  That perhaps explains why the press release is so cryptic.

I was able to pull down the indictment, which is here.  The indictment states the Counts as follows:  False Statements to Law Enforcement (18 USC 1001, Two Counts),  False Declarations Before a Grand Jury (18 USC 1623(a), One Count), and Obstruction of Obstruction of an Official Proceeding (18 USC1512(c)(2), 1 Count).

Addendum 5/27/15 2:00 pm:

Supreme Court Addresses the Wartime Suspension of Limitations Act (5/26/15)

In Kellogg Brown & Root Services, Inc. v. Carter, 575 US 650 (2015), here, a unanimous opinion handed down today, the Supreme Court held that the Wartime Suspension of Limitations Act (19 USC § 3287, "WSLA"), here, did not apply in a case arising under the civil False Claims Act (31 U. S. C. §3729), "FCA"), here.  Both Acts, in their own ways, dealt with fraud in war defense contracts and related frauds.  Although fraud in defense contracts and related frauds was the impetus for both Acts, as I have noted before the WSLA, is rather broad in its textual coverage and read literally includes any fraud crimes against the U.S.  I will devote this blog entry to the WSLA and what the Court said about it in Kellogg.

The WSLA provides in relevant part: that, "When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces" under the War Powers Resolution Act, "the running of any statute of limitations applicable to any offense . . . involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not."  I have previously discussed the possible application of WSLA to tax crimes.  See Is the Criminal Statute of Limitations Suspended under the Wartime Suspension Act? (Federal Tax Crimes Blog 11/20/09), here; and Wartime Suspension of Limitations Act and Tax Fraud (Federal Tax Crimes Blog 6/27/12), here.

In part relevant to the WSLA, the Court in the Kellogg opinion says (Slip Op. 5-6, footnote omitted):

III

The text, structure, and history of the WSLA show that the Act applies only to criminal offenses. 

A

The WSLA’s roots extend back to the time after the end of World War I. Concerned about war-related frauds, Congress in 1921 enacted a statute that extended the statute of limitations for such offenses. The new law provided as follows: “[I]n offenses involving the defrauding or attempts to defraud the United States or any agency thereof . . . and now indictable under any existing statutes, the period of limitations shall be six years.” Act of Nov. 17, 1921, ch. 124, 42 Stat. 220 (emphasis added). Since only crimes are “indictable,” this provision quite clearly was limited to the filing of criminal charges.  

In 1942, after the United States entered World War II, Congress enacted a similar suspension statute. This law, like its predecessor, applied to fraud “offenses . . . now indictable under any existing statutes,” but this time the law suspended “any” “existing statute of limitations” until the fixed date of June 30, 1945. Act of Aug. 24, 1942, ch. 555, 56 Stat. 747–748. 

As that date approached, Congress decided to adopt a suspension statute which would remain in force for the duration of the war. Congress amended the 1942 WSLA in three important ways. First, Congress deleted the phrase “now indictable under any statute,” so that the WSLA was made to apply simply to “any offense against the laws of the United States.” 58 Stat. 667. Second, although previous versions of the WSLA were of definite duration, Congress now suspended the limitations period for the open-ended timeframe of “three years after the termination of hostilities in the present war as proclaimed by the President or by a concurrent resolution of the two Houses of Congress.” Ibid. Third, Congress expanded the statute’s coverage beyond offenses “involving defrauding or attempts to defraud the United States” to include other offenses pertaining to Government contracts and the handling and disposal of Government property. Ibid., and §28, 58 Stat. 781. 

Congress made more changes in 1948. From then until 2008, the WSLA’s relevant language was as follows:  

“When the United States is at war the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not . . . shall be suspended until three years after the termination of hostilities as proclaimed by the President or by a concurrent resolution of Congress.” Act of June 25, 1948, §3287, 62 Stat. 828.
In addition, Congress codified the WSLA in Title 18 of the United States Code, titled “Crimes and Criminal Procedure.” 

Finally, in 2008, Congress once again amended the WSLA, this time in two relevant ways. First, as noted, Congress changed the Act’s triggering event, providing that tolling is available not only “[w]hen the United States is at war,” but also when Congress has enacted a specific authorization for the use of military force. Second, Congress extended the suspension period from three to five years. §855, 122 Stat. 4545.

District Court Cryptically Rejects Defendant's Arguments on Instructions (5/25/15)

Trials are messy and the legal principles deployed are often imprecise.  In United States v. Messier, 2015 U.S. Dist. LEXIS 63741 (D. ME 2015), here, the defendant was tried on Section 7212(a) tax obstruction (Count One), 18 USC 371 Klein tax defraud conspiracy (Count Two), and apparently 5 counts of substantive tax crimes (Counts Three through Seven).  He was convicted on Counts One and Two and acquitted on Counts Three through Seven.  (Although not stated in the opinion, Counts Three through Seven were for Section 7203 failure to file; for reasons apparent from the opinion, although not expressed explicitly, the acquittal was apparently based upon a jury determination that the Government had not proved willfulness a la Cheek beyond a reasonable doubt.)  The following are the portions of the opinion that interested me:

1.  The Tax Obstruction Instruction Properly Excluded a Requirement That the Defendant Must Have Intended to Violate the Criminal Law.

The defendant argued that the Count One Section 7212 instruction should have included a requirement that the defendant have intended to violate the criminal law.  The defendant apparently sought to leverage from the acquittal for lack of willfulness on Counts Three through Seven.  Willfulness, the element of most Title 26 crimes, requires a specific intent to violate a known legal duty.  Section 7212(a) does not include a textual requirement of willfulness.  Accordingly, the district court instructed the jury that conviction required only "the intention of securing an unlawful benefit," citing United States v. Floyd, 740 F.3d 22, 31 (1st Cir. 2014).  In the Order, the Court said cryptically that that is all that is required.

The issue is perhaps more subtle than one would gather from the Order.  See Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (3/30/14), here.

2.  Counts One and Two Did Not Require the Cheek Instruction.

This argument may be a variation of the first, but is presented separately.  The Court's discussion is:

The instructions were not unclear, and properly charged the jury on corrupt endeavor (Count One) and conspiracy to defraud (Count Two) in accordance with First Circuit precedent. So far as Cheek is concerned, the defendant secured a not guilty verdict on Counts Three through Seven, the only counts where I gave a Cheek-related instruction. In other words, he prevailed on this issue. Nothing in the instructions suggests any Cheek issues on Counts One and Two. To the extent that the defendant now is arguing that a Cheek defense applied to those two counts, he failed to make that objection to the jury charge. Moreover, the Cheek defense derives from the specific "willfulness" language in certain provisions of the criminal tax laws, such as 26 U.S.C. § 7203. There is no such "willfulness" requirement in the corrupt endeavor crime, 26 U.S.C. § 7212(a), or in the conspiracy to defraud crime, 18 U.S.C. § 371. Several circuits have held specifically that Cheek is not an available defense to the corrupt endeavor or conspiracy to defraud crimes. United States v. Williamson, 746 F.3d 987, 991-92 (10th Cir. 2014) (regarding 26 U.S.C. § 7212(a)); United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (same); United States v. Damra, 621 F.3d 474, 501 n. 7 (6th Cir. 2010) (regarding 18 U.S.C. § 371); United States v. Derezinski, 945 F.2d 1006, 1012 (8th Cir. 1991) (same).

I refer readers to the blog noted above for further discussion of this issue.   Note that the Kelly case cited by the Court seemed to equate the obstruction charge of intent to seek a lawful benefit with the willfulness requirement of intending to violate a known legal duty.  Kelly at p. 177 (the obstruction instruction was ""was as comprehensive and accurate as if the word 'willfully' was incorporated in the statute.")

IRS Establishes Cybercrimes Unit to Combat Solen ID Tax Fraud (5/25/15)

In its Annual Business Plan for 2014-2017, here, IRS CI announced the following Enforcement Strategy (among others):

Cyber Crimes – Criminal Investigation will continue to develop and expand its Cyber Crimes Unit (CCU) in response to the ongoing threat of internet theft, refund fraud, and virtual financial crimes.  The CCU will identify and pursue tax, money laundering, identity theft, and refund crimes in the virtual world.

In a conference call on early May, IRS CI Chief Richard Weber announced the ceation of "a cybercrimes unit within CI to really focus on some large-scale cybercrime-related cases, specifically focused on identity theft and the impact on tax administration.”  See Michael Cohn, IRS Creates Cybercrime Unit to Battle Identity Theft (Accounting Today 5/11/15), here.  The article further reports:

When Weber arrived at IRS CI three years ago, he estimates the agency was spending less than 3 percent of its time on identity theft cases across the country. “We are now working on a national level an average of 18 percent of our time on ID theft,” he said. “In some areas like Tampa and Miami, Florida, where we have field offices, we’re working close to 50 percent of our time just on identity theft. When the problem first started, we were working on a lot of street-level type cases, where someone might be in their basement or sitting on a beach with a laptop and trying to ping our systems, and quite frankly getting in a lot easier than today. That morphed into more of a data breach issue, where we saw over the last year in particular more data breach identity theft type cases, as well as cases that had some type of international component. That was really when we started to realize that we should pull some of our resources and have a focus on the cybercrime, the ‘Darknet’ issue and really look at this problem specifically as it relates to cybercrime ID theft.” 

Data breaches are occurring at various types of businesses such as payroll companies, department stores and medical facilities. “We’re looking at probably hundreds of millions of records that have been breached from companies across America,” said Weber. 

Personally identifiable information, such as Social Security numbers, account numbers and W-2 information, have been stolen from companies and that information is then used to attack the IRS system, he noted. Hackers are able to use the information they glean from data breaches to get around the various filters that the IRS has set up to detect identity theft. 

So far this year there have been at least 270 data breaches, exposing more than 100 million records, according to Weber. “Those records could potentially be used to hit the IRS system or to impact the tax system,” he said. 

He noted that this February, there was a large-scale data breach at a health insurer, exposing 80 million customer records, including addresses, Social Security numbers and income data, the exact same data that’s needed to file for a tax refund. 

“That is primarily the reason why we want to focus on cyber and the Darknet because of what is happening,” said Weber. “The Darknet, which I describe as the underbelly of the Internet, is really what criminals are using today to commit a host of crimes, not just tax refund fraud, which is why all the law enforcement agencies are trying to work better together on this issue because of what’s out there.” 

On the Darknet, the IRS has seen various connections to international organized crime rings, particularly in Russia and other Eastern European countries. “One particular crime syndicate had amassed over 1 billion user names, passwords and email addresses,” said Weber. “When this is happening on the Darknet, it’s really only going to be used for criminal activity. There’s no legitimate use of this information that exists on the Darknet.” 

* * * * 

IRS CI plans to start the cybercrimes unit with a group of agents in its Washington, D.C., field office that will develop cases and work with other field offices across the country to develop and support cases. 

“We’ll have a specialized group in D.C. and then we’ll have points of contact in every field office working with this group in D.C.,” said Weber. “We’re also working with some of the law enforcement agencies. Then we’ll see where this takes us and the types of cases that we’re going to be able to bring.” 

The IRS currently doesn’t have the budget to hire any new cybercrime experts, but over the years Weber said IRS CI has hired a number of special agents with cyber-technology investigative skills. It is also working with other agencies such as the Secret Service, the FBI, the Justice Department and the Department of Homeland Security that have expertise in these types of investigations. While IRS CI focuses on cases involving tax administration, identity theft and money laundering, other agencies can focus more on the data breach itself.

Recent Round of John Doe Summonses Reported (5/24/15)

I am catching up with some reading over the holiday.  Among the reading is Lee A. Sheppard, IRS Advertises Offshore Compliance Effort, 2015 TNT 86-1 (5/5/15), no link avaiable.  The article is Ms. Sheppard's report of the annual Offshore Alert conference on 5/4/15.  She includes in her report some comments by Bryan Stiernagle, director of the IRS offshore voluntary compliance initiative.  The key excerpt is (bold-face supplied by JAT):

Stiernagle has 16 specialists working on development of John Doe subpoenas to get information on offshore schemes. The IRS recently issued seven John Doe subpoenas to private banks. Stiernagle said that new subpoenas will go to intermediaries and service providers, not just banks, and not just Switzerland. These subpoenas are his unit's main method of operation.

While there is certainly such a thing as a John Doe subpoena (certainly a subpoena that would function like a JDS), I think he was referring to John Doe Summonses, since the IRS does not issue John Doe subpoenas.  The IRS JDS summons power is in Section 7609(f), here. Also, I infer that, if Lee correctly reports that the JDS were issued, that means that the court has already approved them and they have been served on banks within the IRS service power (which might be correspondent banks in the case of private banks, such as Swiss banks with no U.S. presence sufficient to support a JDS).

I don't recall having seen reports of such a large number of recent JDS's.  Here is my list of JDS's (which may certainly be incomplete):

Bank of N.T. Butterfield & Son Ltd.
CIBC FirstCaribbean Int'l Bank
HSBC India
Sovereign Management & Legal
Stanford Group Company
Stanford International Bank
Stanford Trust Company, Ltd.
UBS AG
Zürcher Kantonalbank

So, there apparently are some JDS's that are off my radar screen. I would appreciate hearing from readers as to JDS related to offshore accounts that are not on my list.  Please either leave the information by comment or by email to me at jack@tjtaxlaw.com.  Also, any surrounding information and/or links would be helpful.

The consequence of the JDS is, of course, that, when made public, the financial institutions get on the IRS list of Foreign Financial Institutions or Facilitators, here, which means that the offshore penalty in OVDP is increased from 27 1/2% to 50%.

DOJ Tax Authority to Investigate Tax Crimes Independent of a Grand Jury (5/23/15)

In a recent posting, Seventh Circuit Ducks On Use of IRS Summons for Criminal Investigation (Federal Tax Crimes Blog 5/11/15), here, I discussed  the holding in United States v. Procknow, ___ F.3d ___, 2015 U.S. App. LEXIS 6942 (7th Cir. 2015), here, which held open the possibility that the bright line test in Section 7602(d), here, for when use of the IRS summons must cease does not preclude an earlier point of cessation in the IRS CI investigation.  In the course of that discussion, I included the following as the final paragraph, diverting from the main subject of the blog entry:

I do note that there is an issue lurking in the facts.  In the facts, it appears that the grand jury investigation had been started by the local U.S. Attorney's office without a DOJ referral in effect.  The facts say that, and that is the logical inference from the IRS CI Special Agent's use of the IRS summons.  Apparently, when the IRS CI Special Agent learned of the grand jury investigation, he destroyed the fruits of the summons.  It is not clear how the U.S. attorney would have commenced the investigation of a tax crime without a referral from the IRS or at least some communication from and with the IRS.  Such communications could be problematic under Section 6103(h), here, without a DOJ referral.  Still the facts are so cryptically stated that further development of this issue would be speculation.  I do note that, assuming no violation of § 6103, it would appear that the U.S. Attorney may have been conducting a criminal tax investigation sufficient at least to obtain authorization for a grand jury investigation.  I have been concerned and have written before about the DOJ's authority to conduct such investigations independent of the IRS outside of and before the grand jury investigation is started.  See DOJ Tax Division Criminal Tax Investigation Authority (Federal Tax Crimes Blog 6/5/09; 12/29/14), here; and Even More on DOJ Authority to Investigate Tax Crimes (Federal Tax Crimes Blog 7/20/10), here.  Just this past weekend, I heard an official of IRS CI repeat the mantra that the IRS is the only agency that can investigate tax crimes.  Well, either DOJ / DOJ Tax has that authority or it doesn't.  I don't think that issue has been definitely decided, but until it is, as I note in the blog, some in the public may believe the IRS claim that it is the only agency authorized to investigate tax crimes.  In any event, I suppose, identity theft also probably involves non-tax crimes that the U.S. Attorney could investigate, so that may be the answer in Procknow, but would not be the answer in other cases where DOJ Tax has done such investigations outside the grand jury.

In response to this issue, Robert Horwitz, here, sent me an email, the content of which is [changed only to add links]:

Jack:  I was intrigued about your comment concerning DOJ's ability to investigate tax crimes without apparent authorization from IRS.  I did a little research and think one can make the argument that DOJ and US attorneys have this authority.  I do not know how valid the argument would be. 

IRC sec. 7801(a)(1) provides that “Except as otherwise expressly provided by law, the administration and enforcement of this title shall be performed by or under the supervision of the Secretary of the Treasury.”  While the enforcement of chapter 53, relating to firearms, is delegated to DOJ under 7801(a)(2), here, this is the only express delegation of authority to DOJ to administer and enforce provisions of the IRC.  7801(c) does provide that nothing in sec. 7801 affects the duties, powers or functions of DOJ.   

You have to look to Title 28 for the powers, duties and functions of DOJ.  28 USC 515(a), here, empowers DOJ to “conduct any kind of legal proceeding, civil or criminal, including grand jury proceedings and proceedings before committing magistrates, which United States attorneys are authorized by law to conduct….”  The authority of the US attorney is set out in 28 USC Section 547, here, which provides in pertinent part:

Except as otherwise provided by law, each United States attorney, within his district, shall— 

(1) prosecute for all offenses against the United States; 

***** 

(4) institute and prosecute proceedings for the collection of fines, penalties, and forfeitures incurred for violation of any revenue law, unless satisfied on investigation that justice does not require the proceedings; 

I suppose one could argue that the authority of the US attorney and, therefore, DOJ to “prosecute for all offenses against the United States” includes the independent ability to investigate and prosecute tax crimes, but I could not find any cases dealing with the issue.  What I find intriguing is subsection (4) concerning fines, penalties, etc. for violation for any revenue law.

Robert

I sent Robert the following response:

Article Questioning Effectiveness of U.S. Swiss Bank Initiatives for Past Misdeeds (5/22/15)

The Economist has an article questioning the U.S.'s claimed success for the U.S. offshore account initiatives from UBS forward.  America the not so brave (The Economist 5/23/15), here.

An excerpt:

But the American government has been nowhere near as energetic and effective as it claims. It has been slow to chase tax evaders exposed by data leakers; it has failed to follow promising leads on some of the biggest fish; it has pulled punches with the biggest banks, for fear of destabilising markets; it botched the most prominent prosecution of a Swiss banker to date; and it has treated whistleblowers shoddily.

The article recounts relatively better success by France.

Another excerpt commenting no the Government's claimed success rate:

But that number is misleading because prosecutors only tend to bring cases when the odds of winning are high. Some of their victories have been questionable, such as the case of a 79-year-old who inherited her husband’s Swiss account. She faced six years in jail despite having come forward to confess to $670,000 of unpaid tax. Bemoaning prosecutors’ heavy-handedness, the judge gave her a few seconds of probation and urged her to seek a pardon. 

The biggest case of all—against Raoul Weil, UBS’s global head of private banking—was an embarrassing failure. Mr Weil was extradited to America in 2013 after being arrested in Italy. The main prosecution witness at his trial last November was Martin Liechti, UBS’s former private-banking head in the Americas, who testified that his erstwhile boss was aware as far back as 2002 that thousands of the bank’s accounts did not comply with American tax laws. Defence lawyers accused Mr Liechti, whom the government had promised not to prosecute if he helped in other cases, of lying to save his skin. The prosecution was widely criticised; the jury acquitted Mr Weil after barely an hour of deliberations.

The article also discusses claims of whistleblowers Brad Birkenfeld and Hervé Falciani that suggest that the U.S. is not actively following important leads.  The article then concludes:

Some wonder if America’s punch-pulling might have had something to do with the long tentacles of Swiss banks. They have certainly spent large sums raising their profile in Washington, DC. Credit Suisse, HSBC and UBS have spent $91m since 2002 on lobbying and political contributions in America, according to the Centre for Responsive Politics (see chart). 

Moreover, numerous officials and political figures have close past or present ties to the banks—including the president himself. Mr Obama has a well-publicised friendship with Robert Wolf, who ran UBS’s American operations until 2012. The IRS’s chief counsel, William Wilkins, is a former lobbyist for the Swiss Bankers Association. Eric Holder, the recently departed attorney-general, represented UBS when he worked in a private legal practice; for that reason, he avoided any involvement in the DoJ’s probe of the bank. (The revolving door spins the other way, too: prosecutors often move into private practice on leaving government, working with tax-challenged banks and companies.) 

Officials dismiss any suggestion that such links have affected the government’s response. The DoJ “makes its decisions based on law-enforcement considerations and nothing else,” says Kathryn Keneally, the former head of its tax division.

Another former official argues that America’s efforts to curb tax evasion have been effective, if you consider that the aim is not necessarily to maximise convictions but to scare those hiding money to come forward. The IRS’s voluntary-compliance programme is deemed a success, having brought in $7 billion in back-taxes and penalties from 50,000 individuals. But it is controversial because it allows for anonymous payment and no admission of guilt. 

America’s tax investigators continue to focus mainly on Switzerland, even as the returns on their efforts diminish. The 100-bank programme is bogged down, with only three banks having settled with the DoJ when most were expected to have done so by now. 

One obvious way to make the crackdown more effective would be to broaden it to tax havens that have so far been given an easy ride. Law firms in Panama, for instance, are giant incorporators of shell entities used by tax evaders, and the country has been slow to sign bilateral deals to exchange information on taxes. If federal prosecutors do eventually train their sights on such places, their experience with Switzerland has provided plenty of mistakes from which to learn.

Attorney Suspended from Tax Court Because of Flawed Strategy From Alleged Continuing Criminal Investigation (5/21/15)

Scott Schumacher guest authored this outstanding blog How Not to Get Out of a Tax Court Case (Procedurally Taxing 5/21/15), here.  The order (with attachments) giving rise to Scott's guest blog is here.

Highly summarized, an attorney represented taxpayers, husband and wife, before the Tax Court in a civil case involving some of the same years for which the taxpayer-husband had previously been under criminal investigation.  The case was set for trial.  Then, when the case was called on the date for the trial, the taxpayer-husband was present but his attorney was not.  Taxpayer-husband advised the court that his attorney was not going to appear because his nonappearance was a better strategy, which the taxpayer explained: "he felt like putting me on the stand as a witness would be bad for our case, because of the criminal investigation at the same time."  Of course, the criminal investigation had been terminated by that time, and IRS counsel so assured the Court.  The Court allowed the IRS to put on its case without calling the taxpayer-husband.  The taxpayer-husband then filed a series of motions prepared by the attorney, apparently in furtherance of the strategy.  When the case was called the next day, the attorney again failed to appear but another attorney, the taxpayer's attorney in the terminated criminal investigation, appeared and entered his appearance for the taxpayer.  I will refer to this second attorney as the criminal attorney, although he had entered an appearance in the Tax Court case.  After some consultation, the parties announced that they had reached the terms of a resolution of the case that needed to be documented.  The Court gave the parties 120 days to file the documents.  On or around the 120th day, after the criminal attorney failed to execute the documents, the IRS moved for entry of decision.  Apparently, the taxpayer-husband was not cooperating with the criminal attorney and had then instructed him to withdraw so as to permit the original attorney to handle the case.  The Court denied the motion to withdraw.  The original attorney then filed a motion to withdraw, claiming, inter alia, inability to represent the taxpayers because of the "ongoing criminal investigation for those and other tax years."  The taxpayers continued to claim that the original attorney represented them.  In addition, the taxpayers claimed that they were "prejudiced 'by being denied effective representation during critical cross-examination of Government witnesses and during settlement discussions [handled by the criminal attorney].'"

From all of this, the Tax Court issued a suspension order as follows:

ORDERED that the Court's Order to Show Cause, issued August 12,2014, is hereby made absolute in that under the provisions of Rule 202, Tax Court Rules of Practice and Procedure, Mr. Hammond is forthwith suspended from further practice before the United States Tax Court, until further order of the Court. A practitioner who has been suspended may apply for reinstatement. See Rule 202(1), Tax Court Rules of Practice and Procedure, for reinstatement procedures. It is further

ORDERED that Mr. Hammond's practitioner access to case files maintained·by the Court in electronic form, if any such access was given to him, is hereby revoked. It is further  

ORDERED that, until reinstated, Mr. Hammond is prohibited from holding himself out as a member of the Bar of the United States Tax Court. It is further  

ORDERED that the Court will file orders to withdraw Mr. Hammond as counsel in all pending cases in which he appears as counsel of record. It is further  

ORDERED that Mr. Hammond shall, within 20 days of service of this order upon him, surrender to this Court his certificate of admission to practice before this Court. 

As I said, this is a high level summary, which omits a lot of drama and nuance.  I refer readers to Scott's excellent blog and to the order.

Remaining Swiss Bank Criminal Investigations Likely to Go Into 2016 (5/21/15)

The U.S. Ambassador to Switzerland is reported to have said that the Swiss banks in the criminal investigation (from the original list of 14 and thus ineligible for the U.S. DOJ Swiss Bank program) is likely to go into 2016.  Katherina Barr, Swiss banks in U.S. criminal probe face longer wait -U.S. ambassador (Reuters 5/20/15), here.  For my most recent list of the 14 banks thus ineligible for the program, see List of 14 Swiss Banks Under Criminal Investigation (Federal Tax Crimes Blog 3/9/14), here.

GE Gets Slapped Down Again for its BullShit Tax Shelter (5/20/15)

GE' bullshit tax shelter gets its third loss in the Court of Appeals. TIFD-III-E Inc. v. United States 604 Fed. Appx. 69 (2d Cir. 2015), here. For links my prior blogs see GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (Federal Tax Crimes Blog 4/17/14), here.

Here are key excerpts (emphasis in original):

Upon review of the record and relevant law, we conclude that the District Court incorrectly determined that the 20-percent negligence penalty was inapplicable. In finding that TIFD had a “reasonable basis” for treating the Dutch banks’ interest as equity rather than debt, the District Court relied on various inapposite authorities treating preferred stock as equity for tax purposes. We previously rejected such an analogy to preferred stock as inapt, finding that the Dutch banks’ interests here were “‘overwhelmingly in the nature of a secured lender’s interest.’” TIFD II, 666 F.3d at 849 (quoting TIFD I, 459 F.3d at 231). TIFD has pointed to no authorities treating an interest such as the Dutch banks’ interest—which we previously found had only “illusory or insignificant” indicia of equity—as equity. TIFD I, 459 F.3d at 231. The District Court reasoned that our prior rejection of the analogy to preferred stock did not mean that the analogy was without reasonable basis. But we did not merely reject the analogy on balance; rather, we concluded that the preferred stock authorities invoked by TIFD provided “no support for [its] treatment of the banks’ interest as equity.” TIFD II, 666 F.3d at 849 (emphasis supplied). Accordingly, the District Court’s holding that TIFD had a “reasonable basis” for its return position was error. 

The District Court also incorrectly held that TIFD’s underpayment was not attributable to negligence. TIFD and the District Court argue that TIFD took great pains to create an equity interest and had an economic interest to do so. As we previously found, the Dutch banks’ interests “were designed to have a superficial appearance of equity participation.” TIFD I, 459 F.3d at 227. An attempt to create the appearance of a legitimate tax position is not an attempt in fact to comply with the Internal Revenue Code, and neither TIFD nor the District Court cites any evidence in the record that TIFD made a proper investigation of the correctness of its tax position. Accordingly, TIFD failed to carry its burden to establish the absence of negligence, and the District Court’s finding to the contrary was error. 

The Court of Appeals is much too polite and formal to call GE's gambit bullshit, but I think that the reasoning leaves no doubt that the gambit can be so characterized.

DOJ Tax Testimony to House Oversight Committee (5/20/15)

Caroline Ciraolo, AAG DOJ Tax, has testified in a the House Subcommittee Hearing on Oversight of DOJ Tax.  Her prepared remarks are here.

I offer key excerpts for tax crimes (setting aside Stolen Identity Refund Fraud), and offer limited comments:

To help achieve uniformity in nationwide standards for criminal tax prosecutions, the Tax Division’s criminal prosecutors are broken into 3 sections and authorize almost all grand jury investigations and prosecutions involving violations of the internal revenue laws. The Division authorizes between 1,300 and 1,800 criminal tax investigations annually.  Alone or in conjunction with Assistant United States Attorneys, Tax Division attorneys prosecute these crimes after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged. And all criminal tax appeals are handled by our Criminal Appeals and Tax Enforcement Policy Section. 

JAT Comment:  I don't know what is meant by this sentence:  "The Division authorizes between 1,300 and 1,800 criminal tax investigations annually." I assume they mean that number of matters that are brought before the grand jury.  I have said before that I am not sure DOJ Tax has authority to conduct tax investigations independent of a grand jury.  More importantly, I would have thought that indictments or prosecutions would be the better metric rather than investigations.

Criminal Investigation and Prosecution 

Criminal Trial. In addition to our extensive civil practice, the Tax Division authorizes nearly all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. In most cases, Tax Division prosecutors either conduct or supervise these prosecutions, often in partnership with prosecutors from the United States Attorneys’ Offices. The Division’s criminal goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Tax Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Tax Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Tax Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,800 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a United States Attorney’s Office, by a Tax Division prosecutor, or by a team of prosecutors from both. Tax Division prosecutors also conduct training for IRS criminal investigators and Assistant United States Attorneys, and provide advice to other federal law enforcement personnel, such as the Drug Enforcement Administration (“DEA”) and the Federal Bureau of Investigation (“FBI”). 

 The crimes investigated and prosecuted by the Tax Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means – as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other - used for tax purposes - showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.  

 It is not uncommon for tax crimes to be committed during the course of other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. Tax Division prosecutors work closely with the United States Attorneys' Offices on these issues. In addition, Tax Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. As tax crimes have become more complex and international in scope, so has the workload of Tax Division prosecutors. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net worth taxpayers and tax professionals who sell and implement dubious tax schemes. During FY14 Division prosecutors obtained 121 indictments and 134 convictions (not including the additional criminal tax prosecutions handled exclusively by United States Attorneys’ Offices). The conviction rate for cases brought by Tax Division prosecutors generally exceeds 95%.

Finter Bank Zurich AG Obtains NPA Under DOJ Swiss Bank Program (5/15/15)

DOJ Tax has announced here that Finter Bank Zurich AG has reached agreement under the DOJ Swiss Bank Program.  Here are the key excerpts:

According to the terms of the non-prosecution agreement signed today, Finter agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay a $5.414 million penalty in return for the department’s agreement not to prosecute Finter for tax-related criminal offenses. 

Finter was founded in 1958 in Chiasso, Switzerland, and has a branch office in Lugano, Switzerland.  Since Aug. 1, 2008, Finter has maintained 283 U.S.-related accounts with an aggregate maximum balance of approximately $235 million.  

Since its establishment and continuing through at least October 2011, Finter, through its managers, employees and others, aided and assisted U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income they held in these accounts from the Internal Revenue Service (IRS).  After August 2008, when Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by U.S. tax authorities, Finter accepted accounts from U.S. persons exiting other Swiss banks.  

Finter provided services that allowed U.S. clients to eliminate the paper trail associated with the undeclared assets and income, including “hold mail” services and numbered and coded accounts.  In addition, Finter assisted clients in using sham entities as nominee beneficial owners of undeclared accounts, solicited Forms W-8BEN that falsely stated under penalties of perjury that the sham entities beneficially owned the assets in the undeclared accounts, and provided cash cards and credits cards linked to the undeclared accounts.  

In resolving its criminal liabilities under the program, Finter encouraged U.S. accountholders to come into tax compliance and participate in the IRS Offshore Voluntary Disclosure Program.  While Finter’s U.S. accountholders who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

The agreement may be downloaded here.

The list of banks now subject to the 50% penalty is here.  As of this writing, the list has not been updated to include Finter.

JAT Comments:

1. Finter Bank seems like a relatively small player among Swiss Bank U.S. tax evasion enablers.

2. U.S. taxpayers who were depositors in Finter Bank will now face the higher 50% penalty if they join OVDP after today and do  not opt out.  But, those who join OVDP and opt out (assuming they are nonwillful) are treated as before and can obtain a better result on opt out.  Moreover, if they are nonwillful, the Streamlined procedures are still available.

Tidbits from ABA Tax Section May Meeting (5/13/15)

I attended the ABA Tax Section May Meeting this past week.  I have some items of interest to some readers.

1.  Trust Fund Tax Cases. IRS CI representative emphasized the continuing emphasis on failure to pay over withheld employee tax.  For those with subscriptions to Tax Notes Today, the following article has some detail:  Andrew Velarde, ABA Meeting: Employment Taxes Will Be Focus in Criminal Investigations, 2015 TNT 91-6 (5/12/15).  The representative did say that generally only the egregious cases involving lavish spending by the persons failing to pay over the withheld taxes, but that the public needs to know that even failing to pay over in order to keep the business afloat and employees paid is still a crime.  One practitioner referred to a general understanding among practitioners that, if the withheld tax is used for personal expenditures, that is a criminal problem, but, if used to keep the business going, that was not a criminal problem.  But, the IRS representative said that practitioners perhaps should be cautious about continuing to rely upon the supposed rule because the public and practitioners should not think they have a criminal prosecution pass just because they were trying to keep the business afloat.

2. Virtual Currency.  The IRS said that it is ramping up its enforcement for virtual currency.  The IRS reported in the 2014 CI Annual Business Report, here:

Virtual Currency: During Fiscal Year 2013, Criminal Investigation began pursuing investigations in the new program area of virtual currency. Virtual currency is considered any medium of exchange that operates like a fiat currency but does not have legal tender status in any jurisdiction. As with any money, virtual currency can be used in a wide variety of crimes involving tax fraud, money laundering, and other financial crimes. During Fiscal Year 2014, IRS-CI had a substantial role in the investigation that led to a criminal complaint and shut down of the Silk Road. IRS-CI also played a substantial role in a spinoff investigation related to the Silk Road that led to the criminal complaint and guilty plea of Charlie Shrem. Both of these investigations involved a significant component of virtual currency. 

In Fiscal Year 2015, IRS-CI will continue to focus on financial crimes that involve virtual currency by collaborating with FinCEN and other federal law enforcement agencies to identify the movement of illegal monies utilizing virtual currency. In addition, IRS-CI will continue its collaboration efforts with other Business Operating Divisions (BOD) within IRS to include SB/SE and LBI. IRS-CI will work with the BODs to evaluate the effect of the virtual currency guidance issued by IRS in March 2014 and to investigate those individuals who use virtual currency as a tool to evade taxes.

3.  Suspicious Activity Reports.  Ever wonder what happens with all those suspicious activity reports filed by banks and others?  There is a Suspicious Activity Report Task Force in each judicial district lead by an AUSA and with IRS CI agents assisting the analysis of the reports.

Seventh Circuit Ducks On Use of IRS Summons for Criminal Investigation (5/11/15)

Section 7602(a), here, provides that the IRS may issue administrative summonses "[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability."  The stated purposes seem to be civil in nature.  But, § 7602(b) says that the purposes may include "inquiring into any offense connected with the administration or enforcement of the internal revenue laws.  Section 7602(d) provides that the IRS summons or summons enforcement action may not be issued if the IRS has made a "Justice Department referral."

Subsections (b) and (d) were enacted in 1982 to provide a bright line test to determine when the IRS should not use the IRS summons.  Congress felt the bright line test was needed because of the decision in United States v. LaSalle Nat’l Bank, 437 US 298 (1978), here, which held that even prior to the DOJ referral, the IRS could not enforce the summons after it had institutionally abandoned its civil purpose and was pursuing enforcement solely for criminal purposes.  One would have thought that the 1982 additions of subsections (b) and (d) would have put to rest the issue of whether the IRS could use the IRS summons and seek judicial enforcement for criminal purposes, so long as there was no DOJ referral in effect.

But, in United States v. Michaud, 907 F.2d 750 (7th Cir. 1990) (en banc), here, the Seventh Circuit seemed to say the LaSalle still had life after the 1982 additions (bold face supplied by JAT):

Beyond this "good faith" requirement, the Code has long prohibited enforcement of a Service summons after the matter has been referred to the Justice Department for criminal prosecution. See 26 U.S.C. § 7602(c) and its predecessors. See also Donaldson v. United States, 400 U.S. 517, 532-36, 27 L. Ed. 2d 580, 91 S. Ct. 534 (1971). The Supreme Court, in United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), read § 7602 to include a prohibition against the Service's use of an administrative summonses solely for criminal investigatory purposes. In LaSalle, the Court reviewed a decision of this court in which we held that enforcement can also be denied in certain cases short of a formal referral to the Justice Department: HN5 "The use of an administrative summons solely for criminal purposes is a quintessential example of bad faith." United States v. LaSalle National Bank, 554 F.2d 302, 309 (7th Cir. 1977). The Supreme Court agreed that enforcement can and should be denied when the Service is attempting to exploit its civil investigatory powers as a de facto grand jury: "We shall not countenance delay in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution." LaSalle, 437 U.S. at 316-17. (The Court reversed our decision on the outcome, however, because it found insufficient evidence of such an institutional commitment. Id. at 318-19.) Thus, under § 7602 and LaSalle, a summons issued by the Service after it has referred the matter to the Justice Department, or after it, in an institutional sense, has abandoned any proper civil purpose, should not be enforced. 

In United States v. Procknow, ___ F.3d ___, 2015 U.S. App. LEXIS 6942 (7th Cir. 2015), here, the Seventh Circuit again addressed the issue in an identity theft case.  In Procknow, the facts are skimpy.  A local police officer acting at the request of a probation officer had arrested Procknow and, after what was determined to be a consensual initial search of a hotel room Procknow was using, obtained a search warrant to search the room.  Pursuant to the search warrant, the local police officer seized various items and turned them over to an IRS criminal investigation agent.  The IRS criminal investigation agent then obtained a search warrant for a UPS box.  Some months thereafter, the IRS CI special agent "sent administrative summonses to several financial institutions requesting information about accounts held by Procknow and suspected victims and aliases."  Then, in the following month:

Vadian Bank Obtains NPA Under DOJ Swiss Bank Program (5/8/15)

DOJ announced here that Vadian Bank, here, had entered a nonprosecution agreement.  Here are some excerpts:

According to the terms of the non-prosecution agreement signed today, Vadian agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay a $4.253 million penalty in return for the department’s agreement not to prosecute Vadian for tax-related criminal offenses. 

Vadian has one office and 26 employees.  Prior to 2008, Vadian’s business predominantly consisted of savings accounts, residential mortgage lending and small business loans.  In 2007, Vadian hired a marketing firm to assist with its planned growth into private banking, and focused its efforts on attracting external asset managers.  In 2008, after it became publicly known that UBS was a target of a criminal investigation, Vadian accepted accounts from U.S. persons who were forced out of other Swiss banks.  At this time, Vadian’s management was aware that the U.S. authorities were pursuing Swiss banks that facilitated tax evasion for U.S. accountholders in Switzerland, but was not deterred because Vadian had no U.S. presence.  As a result of its efforts, after August 2008, Vadian attracted cross-border private banking business and increased its U.S. related accounts from two to more than 70, with $76 million in assets under management. 

Through its managers, employees and/or other individuals, Vadian knew or believed that many of its U.S. accountholders were not complying with their U.S. tax obligations, and Vadian would and did assist those clients to conceal assets and income from the IRS.  Vadian’s services included: “hold mail” services; numbered accounts, where the client was known to most bank employees only by a number or code name; opening and maintaining accounts for U.S. taxpayers through non-U.S. entities such as corporations, trusts or foundations; and accepting instructions from U.S.-based accountholders to prevent investments from being made in U.S.-based securities that would require disclosure to U.S. tax authorities.  

In resolving its criminal liabilities under the program, Vadian provided extensive cooperation and encouraged U.S. accountholders to come into compliance.
While Vadian’s U.S. accountholders who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS’s offshore voluntary disclosure programs, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS offshore voluntary disclosure program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of Vadian’s non-prosecution agreement, its noncompliant U.S. accountholders must now pay that 50 percent penalty to the IRS if they wish to enter the IRS’ program. 

In an earlier part of the press release, DOJ said, quoting Caroline Ciraolo:

“Simultaneously, the department has opened investigations of culpable individuals and entities based on information obtained from the Swiss banks in the program, and will pursue and prosecute those engaged or assisting others in evading U.S. tax obligations.”

JAT comment:

1.  Obviously, U.S. depositors in Swiss banks who were willfully noncompliant and who have not yet joined OVDP should seriously consider joining before the banks hit the 50% penalty list.  At least for those banks joining the program, their depositor information will out, although the process may take some time as requests are made under the treaty.
2.  Also, Vadian seems to be a small fry among the Swiss bank players, so the financial cost is relatively light.
3.  But, on the other hand, Vadian's foray serving U.S. taxpayers was a blatant attempt to exploit the U.S. tax evasion opportunity created by UBS's woes.

Sentencing for Failure to Pay Over Trust Fund Taxes (5/6/15)

We have another reminder that DOJ Tax is serious about prosecuting people who fail to pay over trust fund taxes -- the taxes withheld from employees.  DOJ Tax announced here that Kevin Bertram, a former CEO of a wireless technology firm (Distributive Networks LLC), was sentenced to 30 months and ordered to pay restitution of almost $900,000.  Excerpts from the press release are:

According to court documents, Bertram operated Distributive Networks from 2004 through 2010.  Bertram’s company, which was named one of Washington, D.C.’s “Great Places to Work” by Washingtonian magazine in 2007, created technology that allowed cell phone users to participate in contests, download ringtones and receive content such as trivia and horoscopes.  

According to court documents, Distributive Networks provided employee perks, such as free Starbucks coffee and gym memberships, and a 100 percent matching contribution to its employees’ 401(k) plans.  However, Bertram willfully failed to comply with Distributive Networks’ employment tax obligations.  For the quarterly tax periods in late 2007 through mid-2009, Bertram failed to file Distributive Networks’ required quarterly IRS Forms 941 (Employer’s Quarterly Federal Tax Returns) and failed to pay over $927,921.78 in employment taxes due to the IRS.  At the same time that Bertram was failing to pay the IRS income and other taxes withheld from employees’ paychecks, he spent hundreds of thousands of dollars of company funds on sporting event tickets and personal luxury goods.

I am reminded in another context that Enron used to be rated a great place to work.

Amendments to Sentencing Guidelines That May Affect Tax Crimes Sentencings (5/6/15)

I previously discussed a proposed amendment to the Guidelines that will will take affect in November 2015, unless Congress fails to act.  Pinkerton and Sentencing for Jointly Undertaken Activity; Proposed Sentencing Guidelines Amendment (Federal Tax Crimes Blog 4/17/15), here.  I discuss here another proposed amendment wherein the Sentencing Commission proposes to adjust financial levels and thresholds for inflation.  This will affect most prominently for federal tax crimes, the Tax Loss Table in S.G. 2T4.1, the current  version of which is here.

The proposal is presented in the USSC's Amendments to the Sentencing Guidelines (4/30/15), here.  The inflationary adjustments proposals are discussed beginning on p. 12 of the document.  The effect of the inflationary adjustment will be to lower the punishment for a given level of loss.  The revised levels for the tax loss are provided at p. 20 of the document .  For example, the amendment will move the threshold amount for Offense Level 18 from $200,000 to $250,000.  In effect, for defendants with a tax loss between $200,000 and $250,000, this is the equivalent of a reduction of 2 levels.

Over time, the effect of inflation is to increase the seriousness of a given level of financial crime.  The Commission explains in the proposal:

Congress has generally mandated that agencies in the executive branch adjust the civil monetary penalties they impose to account for inflation using the CPI. See 28 U.S.C. § 2461 note (Federal Civil Penalties Inflationary Adjustment Act of 1990). Although the Commission’s work does not involve civil monetary penalties, it does establish appropriate criminal sentences for categories of offenses and offenders, including appropriate amounts for criminal fines. While some of the monetary values in the Chapter Two guidelines have been revised since they were originally established in 1987, none of the tables has been specifically revised to account for inflation.  

Due to inflationary changes, there has been a gradual decrease in the value of the dollar over time. As a result, monetary losses in current offenses reflect, to some degree, a lower degree of harm and culpability than did equivalent amounts when the monetary tables were established or last substantively amended. Similarly, the fine levels recommended by the guidelines are lower in value than when they were last adjusted, and therefore, do not have the same sentencing impact as a similar fine in the past. Based on its analysis and widespread support for inflationary adjustments expressed in public comment, the Commission concluded that aligning the above monetary tables with modern dollar values is an appropriate step at this time.

* * * * 

Adjusting from the last substantive amendment year appropriately accounts for the Commission’s previous work in revising these tables at various times. Although not specifically focused on inflationary issues, previous Commissions engaged in careful examination (and at times, a wholesale rewriting) of the monetary tables and ultimately included monetary and enhancement levels that it considered appropriate at that time. The Commission estimates that this amendment would result in the Bureau of Prisons having approximately 224 additional prison beds available at the end of the first year after implementation, and approximately 956 additional prison beds available at the end of its fifth year of implementation.  

Readers should note, however, that the benefits of adjustments for inflation are not all defendant friendly.  Thus, they increase the fine levels in order to calibrate the effect of inflation.  With regard to the fine level increase,   The Commission explained:

Finally, the amendment adds a special instruction to both §§5E1.2 and 8C2.4 providing that, for offenses committed prior to November 1, 2015, the court shall use the fine provisions that were in effect on November 1, 2014, rather than the fine provisions as amended for inflation. This addition responds to concerns expressed in public comment that changes to the fine tables might create ex post facto problems. It ensures that an offender whose offense level is calculated under the current Guidelines Manual is not subject to the inflated fine provisions if his or her offense was committed prior to November 1, 2015.

Bradley Birkenfeld's Continuing Quest for Vindication and Redemption (5/5/15)

Swissinfo.ch has an article summarizing the substance of Bradley Birkenfeld's interview with Swiss public television channel SRF.  Whistleblower Birkenfeld: “I helped Switzerland” (Swissinfo.ch 5/3/15), here.  Here are some key excerpts:

Birkenfeld claims he was pushed into the action by the discovery of an internal document at UBS which contradicted the working practices that bankers were engaged in. Birkenfeld interpreted the memo as the bank covering its own back against criminal liability without protecting its staff. 

Birkenfeld went to the US authorities “to hold people accountable who were lying to myself, my colleagues, clients and the shareholders of the bank,” he told the Tagesschau programme on Saturday.  

“Hopefully Swiss citizens understand that this isn’t targeted at them, it’s targeted at the wrongdoings at the highest echelons of the bank.” 

* * * * 

During the televised interview, Birkenfeld repeated previous claims that he went to the DoJ only after being rebuffed by UBS’s internal whistleblowing scheme. “As a director of the bank with a CHF10 million signature power, I felt it imperative that I brought it to legal and compliance at the bank and ask for an answer. They buried the investigation, there was no investigation,” he said. 

* * * * 

Birkenfeld, who is currently writing a book about his experiences, denied that he was motivated by a dispute with UBS over bonus payments or by a fear that he was about to be implicated in a US tax investigation into one of his former clients. 

Despite receiving a $104 million (CHF97 million) reward for his whistleblowing activities by the US authorities, Birkenfeld feels aggrieved at spending 30 months in prison for failing to divulge everything he knew about his work with tax dodgers. 

* * * * 

“At some point I think I’ll visit Switzerland to help some of the people who don’t know me, to understand exactly what I did and why I did it,” he told Tagesschau. “I’m sure there will be some folk who are upset and angry, and a lot of people who understand hopefully that this was the right thing to do and that I helped Switzerland." 

 “I certainly hope that the Swiss citizens will finally say: 'We are going to hold [UBS] accountable, we want more transparency'.

JAT comment:  I suppose that the Swiss would think it is a matter of perspective as to whether Birkenfeld helped Switzerland.  I don't think the Swiss will be welcoming him back anytime soon or conferring any national medals or accolades on him.   Still, the situation that Birkenfeld brought to light was a ticking time bomb.  It would have happened even without Birkenfeld, perhaps a few years later.  But the Swiss bankers had gotten so brazen in their activities that little secret was going to out, particularly with the award system in the U.S. tax code.