Matthews' Article on Damage to IRS CI through Budget Cuts (3/28/16)

Mark Matthews, here, a prominent player in the tax crimes area has written this article:  Mark E. Matthews,  IRS Criminal Investigation: A National Asset Being Damaged, 150 Tax Notes 1319 (MAR. 14, 2016), here.  I highly recommend the article by a thoughtful practitioner who has been involved in enforcement and defense.

Mark begins his piece with the critical role that IRS CI plays in the tax system:

CI is the only enforcement agency pursuing investigations of potential criminal violations of the IRC. There are two key aspects of its work from a tax enforcement perspective. First, unlike IRS civil audit activity, CI's cases are public. CI publicizes its cases to send a message far beyond the individual taxpayer being prosecuted -- to more than 300 million taxpayers. The message has two components: (1) the threat to those tempted to cheat that there is a great risk to tax evasion, and (2) the assurance to those paying their fair share that they are not chumps and that those not paying it are not getting a free pass, or are at least risking their liberty. Second, the prospect of incarceration is a principal motivator to those tempted to cheat. If the only sanction for tax violations were civil penalties, many more would play the audit lottery more aggressively, especially as congressional budgets drive the audit rate lower each year. Yet even the slight prospect of a loss of liberty in one of our federal correctional institutions causes many to focus when they sign the perjury jurat on their returns. 

CI is the most dramatic example of the concept of general deterrence. Tax offenses are the one federal felony that every American confronts each year. We are not all tempted to sell drugs; we are not all in the securities industry or in a position to commit an environmental crime. But we all file returns. Therefore, the IRS must maintain a strong compliance message for the country's 300 million taxpayers, and it has -- in recent history, with as few as 1,500 criminal tax prosecutions each year. Even that low number, however, is dropping. That is far below the number of narcotics prosecutions brought by the federal government in attempting to deter a far smaller group of potential violators. Hence, CI needs publicity to achieve even a minimum enforcement presence. 

The CI chief, Richard Weber, recently made the same point in a conversation with the author: "Taxpayers voluntarily comply because they know it is the right thing to do, but they also want those who cheat the government to be held accountable. They want a level playing field. When they see that criminals get away with not paying their fair share, there is a direct impact on the voluntary compliance rate and the confidence in our entire system begins to erode. IRS-CI restores that confidence by ensuring that we all play by the same rules."

Mark then discusses the data on declining enforcement from declining resources.  I will let Mark's discussion speak for itself.  Highly recommended for readers of this blog.

I will close with my own brief thought.  The IRS is a critical agency, no less important to who we imagine ourselves to be as Americans than any other federal agency.  To the extent that there are problems in the IRS (or any other agency), the solution is to fix them which may even require additional budgeting to insure that the agency is functioning fairly and efficiently to meet the needs of the country.  Politicized budget cuts are going to make the IRS serve this country worse.

Guest Blog: IRS FOIA Request Unveils Previously Undisclosed Estate Tax National Policy for Offshore Disclosures (3/28/16)

Pursuant to an IRS Freedom of Information Act (“FOIA”) request, my colleague at Anaford AG, James Gifford, discovered that the IRS for the past several years has had a “national” policy which selectively denies an estate tax deduction for the miscellaneous Title 26 offshore penalty (“MOP”) incurred in Offshore Voluntary Disclosure Program (“OVDP”) cases (see FOIA response from IRS dated March 17, 2016, here).

But first, some background on the issue.

In the OVDP, participants are required to pay in lieu of all other penalties that may apply to the previously undisclosed foreign assets and entities a miscellaneous Title 26 offshore penalty generally equal to 27.5%[1]of the highest aggregate value for those assets during the period covered by the voluntary disclosure.  Inevitably, some OVDP participants include estates.  Ordinarily, administration expenses are deductible from a decedent’s gross estate under I.R.C. § 2053 for purposes of determining the estate tax.  These include administration expenses incurred in the collection of assets, payment of debts, and distribution of property and normally would include the MOP.

However, it appears since at least 2013 and possibly since 2009, the IRS instituted an undisclosed nationwide policy that the MOP is not deductible as an administration expense by an estate except in the limited situation where only the decedent was “cognizant” of the foreign accounts or assets.[2]  According to internal IRS emails obtained under the FOIA request, the IRS national policy states:

If anyone other than the decedent (which would include a surviving spouse, children, siblings, accountant, attorney, or anyone else with a material interest) was cognizant of the existence of the offshore account, and the executor/personal representative failed to disclose the existence of the account (or, did not file a Form 706) by the due date of the return, then we will not allow a reduction to the gross estate for the related OVDI [OVDP] offshore penalty.

Even though the IRS issues voluminous rules and guidance each year, the IRS acknowledged in a Tax Notes article posted on March 28, 2016 (“IRS Inconsistent in Denying Estate Tax Deduction for OVDP Penalty”) that it has not previously published any guidance on this policy.  Thus, it appears the IRS has not followed any public procedures for creating this policy or informed applicants to the OVDP of this policy.  Nor has it issued any notice, bulletin, or any form of rulemaking for communicating and establishing this policy.

TRAC Offerings on IRS and DOJ Criminal Tax Enforcement (3/24/16)

The Transaction Records Access Clearinghouse ("TRAC"), here, has published new statistics on a web page titled "IRS Criminal Enforcement Slides," here.  I discuss some aspects of that data in this blog entry, but I do caveat the saying popularized by Mark Twain (who attributed -- perhaps misattributed -- it to Benjamin Disreali):  "there are lies, damned lies, and statistics."  See Wikipedia, here.

The data reported shows that referrals by the IRS to DOJ Tax peaked in the early 90s at 20 per million of population and are about 9 per million in fy 2015.  (In several years there were slightly lower numbers, but I have not attempted to analyze why that happened.

Of course, as a general proposition, the criminal tax enforcement resources that can be systemically deployed by the various players (IRS, DOJ Tax, Courts, Probation Office, Bureau of Prisons) are small relative to the population and tax revenue overall.  So those limited resources have to be deployed for maximum effect, which is what the players claim.  What that results in is a low number of prosecutions for tax crimes relative to the number of U.S. taxpayers who actually cheat on their taxes.  The message through prosecution and punishment is to show honest taxpayers that something is being done and to discourage the potentially dishonest from misbehaving.

The website links to "TRAC's free IRS criminal enforcement tool," here, which provides more detailed data by judicial district.  I highly recommend TRAC's presentation of data on the data tool page titled "IRS Criminal Enforcement by District."  I have no way of assessing whether the raw data is correct, but I suspect that it is.  The more serious issue, though, is whether the presentation of the data provides a fair picture of what is really happening.  There are a lot of questions that can be asked about the data.  I present here only some of the questions:

1. The Lead Charges for Prosecution are overwhelmingly non Title 26.  That really does not tell us what portion of the charges are tax-related Title 18 charges (such as, most prominently, conspiracy (offense or defraud / Klein conspiracy) related to tax misconduct, but also including §§ 286 and 287, false claims conspiracy and false claims).

2.  More surprisingly are the number of "declinations."  As presented, the declinations are almost 50% (1,633 prosecuted and 1,461 declined).  There may be some year-to-year problems that a single year's data do not explain.  More importantly, I think, would be to have the data limited to the tax crimes as indicated in paragraph 1 (without the other crimes that are not normally considered tax crimes, such as wire fraud or money laundering).

3.  The IRS's fy 2015 statistics, here, may or may not be consistent with TRAC's presentation since they may not be using the same data sets.  The IRS statistics show 3,289 prosecution recommendations and 3,208 indictments, a much lower apparent declination rate (again with the caveat of year to year issues) than TRAC offers.

Interview of Acting Assistant Attorney General Ciraolo on Tax Enforcement (3/23/16)

The New York Law Journal has published this article of an interview of Acting AAG Caroline Ciraolo.  Jeremy H. Temkin, DOJ Tax Division Today: Interview With Acting Assistant Attorney General, 255 NYLJ No. 55 (3/23/16), here.  The interview is a general overview of the Tax Division's work, with particular focus on offshore accounts that have been perhaps its most visible effort over the past few years.  Of course, there is the expected claims of great success on the offshore efforts starting in 2009, with many prosecutions of individuals and financial institutions and much revenue gathered.

I focus in the balance of this blog only on matters that I found particularly interesting.

1.  Regarding follow-through, Ciarolo says that DOJ  and the IRS are following leads they have obtained in the various efforts and are continuing to obtain from various sources "to identify and investigate U.S. accountholders who willfully concealed their foreign accounts and evaded U.S. tax, as well as those entities and individuals, foreign and domestic, that facilitated this criminal conduct."

2.  Category 3 and 4 information:

Finally, Tax Division attorneys and IRS personnel are reviewing the information received from Swiss banks that fall under Category 3 and Category 4 of the program. Category 3 and 4 banks maintain that they did not commit any violations of U.S. law, and seek a non-target letter after providing information required by the program.

I have written before that I am baffled that any Swiss Financial Institution would have proceeded under Category 3 or 4.  See US DOJ Swiss Bank Program Categories 3 and 4 Comments (Federal Tax Crimes Blog 2/4/16; 2/7/16), here.  Certainly, though, the Financial Institutions that did join under Categories 3 or 4 would have expected to have been closely scrutinized.

3.  Countries Other than Switzerland:

IRS Publicizes Success in Prosecuting Identity Theft Refund Fraud (3/22/16)

The IRS continues to struggle with identify theft, even as it has notable successes in prosecutions.  Yesterday, the IRS published a webpage titled:  "IRS’s Top 10 Identity Theft Prosecutions: Criminal Investigation Continues Efforts to Halt Refund Fraud," here.  By announcements such as this, the IRS wants to discourage other would be identity thieves from attempting identity theft and to give some assurance that the IRS's "cops are on the beat."

The IRS's message from the selected 10 examples is that identify theft is serious and draws serious sentencings, with the principals involved receiving over 70 months (some well in excess of 100 months) incarceration (persons with lesser roles receive lesser, but still significant sentences).

In addition to these examples, the web page concludes with a description of the resources deployed for identify theft:

During FY 2015, Criminal Investigation continued to dedicate significant time and resources to bringing down identity thieves attempting to defraud the federal government. 

The nationwide Law Enforcement Assistance Program provides for the disclosure of federal tax return information associated with the accounts of known and suspected victims of identity theft with the express written consent of those victims. There are now more than 1,100 state/local law enforcement agencies from 48 states participating. For FY 2015, more than 6,700 requests were received from state and local law enforcement agencies. 

The Identity Theft Clearinghouse (ITC) continues to develop and refer identity theft refund fraud schemes to Criminal Investigation Field Offices for investigation. Since its inception in FY 2012, it has received over 10,750 individual identity theft leads. These leads involved approximately 1.72 million returns with over $11.4 billion in refunds claimed. 

CI continues to be the lead agency that investigates identity theft and is actively involved in more than 70 multi-regional task forces or working groups including state/local and federal law enforcement agencies solely focusing on identity theft. CI continues to have one of the highest conviction rates in all of federal law enforcement — at 93.2 percent — and is the only federal law enforcement agency with jurisdiction over federal tax crimes. CI is routinely called upon to be the lead financial investigative agency on a wide variety of financial crimes including international tax evasion, identity theft and transnational organized crime.

Ruminations on Inconsistent Verdicts (3/21/16)

Today, I offer an interesting "order" in a tax conspiracy trial ruminating on the broad issue of inconsistent jury verdicts.  The case is United States v. Soderling, 2016 U.S. Dist. LEXIS 35456 (ND Cal. 2016), here.  Because the order is relatively short, I just cut and paste the contents of the order (caption and signature line omitted):

ORDER RE GOVERNMENT'S REQUEST TO AUTHORIZE THE JURY TO REACH INCONSISTENT VERDICTS 

The government charged Jay and Jessica Soderling, husband and wife, with a conspiracy to defraud the United States by preventing the Internal Revenue Service from collecting taxes. At trial, the government contended only that Jay and Jessica conspired with one another; it did not contend that there were unindicted co-conspirators. Shortly after the jury began deliberating, it asked a good question: "Can we find one defendant guilty of conspiracy and not the other?" The government urged the Court to answer "yes." The defendants urged the Court to answer "no." Although the jury has now reached a verdict, the Court files this order to give lawyers and trial judges food for thought in the event this instructional issue comes up again. 

By urging a "yes" answer, the government was asking the Court to tell the jury it could reach inconsistent verdicts. As set forth in the Ninth Circuit Model Criminal Jury Instruction on conspiracy to defraud the United States, a jury may only convict a defendant if the government proves three elements, the first of which is that there was an agreement between two or more people. In this case, the government contended that Jay and Jessica reached the agreement to defraud the United States; the government did not contend that anyone else was party to the agreement. Therefore, the only way the jury could have convicted Jay was to conclude he reached an agreement with Jessica. And the only way the jury could have convicted Jessica was to conclude she reached an agreement with Jay. A verdict acquitting one defendant would necessarily have been inconsistent with a verdict convicting the other defendant. 

In support of its request for an instruction authorizing the jury to reach inconsistent verdicts, the government cited United States v. Powell, 469 U.S. 57 (1984). In Powell, the jury convicted the defendant of several compound felonies, while acquitting her of the predicate felonies.n1 Ms. Powell argued that because these verdicts were necessarily inconsistent, her convictions had to be reversed. The Supreme Court rejected that argument, holding that the inconsistency among the verdicts was not a reason to overturn the convictions. As the Court explained, inconsistent verdicts can be the result of jury nullification — a decision by the jury to show mercy with respect to a particular charge by acquitting the defendant notwithstanding her guilt (and notwithstanding the trial court's instructions). There was no reason, in the Supreme Court's view, to give the defendant an additional benefit from that possible exercise of mercy by reversing her convictions for the other counts charged. Powell, 469 U.S. at 68-69. So long as there was enough evidence to support the charges the jury convicted the defendant of, it did not matter that the jury acquitted her on the other charges. Id. at 67-68. Since Powell, several Ninth Circuit decisions have applied this rationale to cases where a jury acquits all but one alleged conspirator. See, e.g., United States v. Ching Tang Lo, 447 F.3d 1212, 1226 (9th Cir. 2006); United States v. Hughes Aircraft Co., 20 F.3d 974, 977-78 (9th Cir. 1994); United States v. Valles-Valencia, 823 F.2d 381, 381-82 (9th Cir. 1987) modifying 811 F.2d 1232 (9th Cir. 1987) ("As the Supreme Court noted in United States v. Powell, however, inconsistent verdicts can just as easily be the result of jury lenity as a determination of the facts. Thus, the acquittal of all conspirators but one does not necessarily indicate that the jury found no agreement to act." (citations omitted)).
   n1  Specifically, the Powell jury convicted the defendant of using the telephone to facilitate conspiracy to possess with the intent to distribute cocaine, and using the telephone to facilitate possession with the intent to distribute cocaine. But the jury acquitted the same defendant of conspiracy to possess with intent to distribute cocaine, and of possession with intent to distribute cocaine. Powell, 469 U.S. at 59-60. 

It's one thing to say a conviction won't be overturned on appeal merely because it is inconsistent with a co-defendant's acquittal. It's quite another thing to instruct a jury, during trial or during deliberations, that it is authorized to reach inconsistent verdicts in the first place. Inconsistent verdicts are something we tolerate, but that doesn't change the fact that they are legally erroneous. And trial courts are supposed to instruct juries to follow the law; they are not supposed to give juries the green light to disregard the law and reach legally erroneous verdicts. United States v. Christensen, 801 F.3d 970, 1011-12 (9th Cir. 2015) (noting, in the course of affirming a court's dismissal of a juror for cause during deliberations, that "trial courts have the duty to forestall or prevent" jury nullification, id. at 1011 (quoting Merced v. McGrath, 426 F.3d 1079, 1080 (9th Cir. 2005)); accord United States v. Sepulveda, 15 F.3d 1161, 1189-90 (1st Cir. 1993) (approving trial court's statement to the jury, in response to a question about nullification, that it should follow the instructions the court had previously given and should convict if it finds the elements beyond a reasonable doubt). Indeed, the very first of the Ninth Circuit Model Criminal Jury Instructions states: "To the facts as you find them, you will apply the law as I give it to you, whether you agree with the law or not."

Eighth Circuit Affirms Adult Entertainer's Conviction for Tax Perjury and Sentencing for Unreported Income for Sexual Services (3/20/16)

In United States v. Fairchild, ___ F.3d ___, 2016 U.S. App. LEXIS 4858 (8th Cir. 2016), here, the Court opens the drama:

A jury found Veronica J. Fairchild guilty on four counts of making and subscribing a false tax return, in violation of 26 U.S.C. § 7206(1). The district court n1 sentenced Fairchild to 33 months' imprisonment. On appeal, Fairchild argues that (1) insufficient evidence supports the jury's finding that Fairchild knowingly and willfully underreported her income; (2) the district court abused its discretion in failing to instruct the jury that it was required to unanimously agree on which source of income that Fairchild failed to report on her income tax return; and (3) the district court improperly calculated Fairchild's Guidelines range and imposed a substantively unreasonable sentence. We affirm.

Highly summarized, the facts are:  Fairchild was a female adult entertainer who received large sums of money (over $1,000,000) from one of her customers and smaller significant sums from another.  She failed to file timely income tax returns during the years in which she received the income but subsequently filed delinquent tax returns for the years "apparently unaware of the ongoing IRS investigation."  (The delinquent returns were apparently needed in order to obtain financing for a real estate purchase.)  In those delinquent returns, she reported about 1/2 the amount that the two customers had given her and probably most of that was from sources other than the two customers.  Fairchild claimed that the transfers from her two customers to her were gifts rather than compensation for services.

She claimed that when she met with her accountant in 2010 to prepare her tax returns, she decided to claim some of the gifts from Karlen as income to benefit him, so that he did not have to pay the taxes on all of it. To determine her income over the four years, she "decided that any time [she] spent with David [Karlen], anything that could be construed as income or considered a gray area at a thousand dollars an hour." She testified that she spent an average of two times per month with Karlen over the 48-month period, and she estimated that she spent approximately four or five hours with Karlen during each "session." She stated that she also included going out to eat with Karlen as part of the billable time. Fairchild calculated that she had earned "about $120,000 a year" for each of the four years for services that she provided to Karlen. She testified that, at the time that she filed the tax returns, she believed that the money in excess of what she reported as income was "[g]ifts." But Fairchild admitted that "Karlen never used the word 'gift' with [her]."

I am leaving out some of the details from the opinion.  I think most readers can project the general nature of the details or can read the opinion to get them from the court.

1. Sufficiency of the Evidence.

Fairchild and her customers testified differently at trial as to what the payments were for.  There was sufficient evidence that the jury could determine that she underreported her income on the delinquent returns.  The Court then rejected Fairchild's claim that the nature of the payments was sufficiently unclear that she was not willful in underreporting the income.  Arguing lack of proof of willfulness beyond a reasonable doubt is often the only ultimate defense in criminal tax cases.  Here is what the Court says:

Eleventh Circuit Discusses the Plausible Inference of Impropriety In Order to Avoid Summary Enforcement of an IRS Summons (3/20/16)

The IRS summons power is the IRS's principal compulsory investigative tool.  In United States v. Clarke, 573 U.S. ___, ___, 134 S. Ct. 2361 (2014), here, the Supreme Court confirmed that the summons enforcement proceeding brought by the U.S. in a district court case against the noncomplying witness (usually the taxpayer or a party related to the taxpayer) is a summary proceeding where the IRS's prima facie showing is minimal.  In the original Clarke case, the compelled parties alleged improper purposes under Powell in order to obtain an evidentiary hearing in which it could examine IRS witnesses to establish the improper purpose.  At that time, most district courts summarily enforced the summonses with minimal, if any, evidentiary proceedings to explore the compelled parties' bare allegations of impropriety.  The Eleventh Circuit earlier bucked that trend and held that an evidentiary proceeding was required.  The Government obtained certiorari, and the Supreme Court remanded the case for further consideration under the standards it set forth in the opinion (set forth below).  Upon remand, the district court summarily enforced the summonses involved.  The case then went back to the Eleventh Circuit which, on March 15, sustained the district court's summary enforcement of the summons.  United States v. Clarke, ___ F.3d ___, 2016 U.S. App. LEXIS 4728 (11th Cir. 2016), here.  I will cut and paste and comment, as appropriate, on key parts of the Eleventh Circuit's opinion

First, the Court makes the introduction with a succinct summary of the applicable law.

The IRS's authority to investigate is extensive. See United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S. Ct. 1495, 1502 (1984). Under 26 U.S.C. § 7602(a), the IRS may issue a summons for 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 collecting any such liability." See also United States v. Morse, 532 F.3d 1130, 1132 (11th Cir. 2008). 

The summons authority is subject to limitations. Under Powell, the IRS must make a four-part prima facie showing to obtain enforcement of a summons from the district court: that (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the Commissioner's possession," and (4) "the administrative steps required by the Code have been followed." United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 255 (1964). Afterward, "the burden shifts to the party contesting the summons to disprove one of the four elements of the government's prima facie showing or convince the court that enforcement of the summons would constitute an abuse of the court's process." United States v. La Mura, 765 F.2d 974, 979-80 (11th Cir. 1985). However, a court reviewing an enforcement petition "may ask only whether the IRS issued a summons in good faith, and must eschew any broader role of 'oversee[ing] the [IRS's] determinations to investigate.'" Clarke, 573 U.S. at ___, 134 S. Ct. at 2367 (alterations in original) (quoting Powell, 379 U.S. at 56, 85 S. Ct. at 254). 

Under Clarke, a taxpayer is entitled to examine an IRS agent concerning the issuance of a summons only when he can "make a showing of facts that give rise to a plausible inference of improper motive." Id. at ___, 134 S. Ct. at 2368. Examples of an improper purpose to issue a summons include harassment of the taxpayer or "any other purpose reflecting on the good faith of the particular investigation." Powell, 379 U.S. at 58, 85 S. Ct. at 255.

Eighth Circuit Affirms Sophisticated Means Enhancement and Denial of Suppression (3/16/16)

In United States v. Laws, ___ F.3d ___, 2016 U.S. App. LEXIS 4695 (8th Cir. 2016), here, the Court considered an appeal from convictions of four related parties for conspiracy conspiracy to defraud the United States by falsely claiming tax refunds in violation of 18 U.S.C. § 286, here, and making false claims to the IRS in violation of 18 U.S.C. § 287, here.  The Court summarized the scheme as follows:

These charges arose from a scheme in which the defendants filed more than 200 tax returns claiming first-time homebuyer tax credits to which the named taxpayer was not entitled. The tax refunds, including the falsely-claimed credit, were then deposited into one of 17 bank accounts owned or controlled by a member of the Laws family. The total amount of the refunds fraudulently claimed was $1,730,086, and the total amount of the refunds issued was $1,364,171.

On appeal, the defendants made several claims.  I discuss only the claims that I think are noteworthy.

1.  Sophisticated means enhancement.

The crimes of conviction were Title 18 crimes.  Normally, Title 18 crimes related to tax misconduct are sentencing under the tax guidelines.  DOJ Tax's position is that sentencing for the crimes of conviction here should be under the Tax Guidelines.  CTM 22.09 Sentencing Guidelines Considerations, here.  In this case, the defendants  were sentenced under the fraud guidelines in § 2B1.1(b).  There  is no discussion about the appropriate guideline, so it is not clear that the sentence would have been materially different whichever of the guidelines applied.

Like the tax guideline, however, the fraud guideline contains an enhancement for "sophisticated means.  § 2B1.1(b)(10)(C) (fraud), here, & §2T1.1(b)(2) (tax), here.  One of the defendants, Brenda Laws, complained that the sentencing court applied this enhancement.  In the Application Note, sophisticated means is:

(B)    Sophisticated Means Enhancement under Subsection (b)(10)(C).—For purposes of subsection (b)(10)(C), "sophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.  For example, in a tele­marketing scheme, locating the main office of the scheme in one jurisdiction but locating soliciting operations in another jurisdiction ordinarily indicates sophisticated means.  Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts also ordinarily indicates sophisticated means.

The tax sophisticated means Application Note is:

5.      Application of Subsection (b)(2) (Sophisticated Means).—For purposes of subsection (b)(2), "sophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means.

The Court of Appeals sustained the application of the sophisticated means enhancement.  Here is the discussion:

The first sentencing enhancement Laws challenges is the 2-level sophisticated means enhancement under USSG § 2B1.1(b)(10)(C). That enhancement applies when the offense involved "especially complex or especially intricate . . . conduct." USSG § 2B1.1(b)(10)(C), Application Note 9(B) (2013). The relative sophistication of a scheme of fraudulent conduct is "viewed in light of the fraudulent conduct and differentiated, by assessing the intricacy or planning of the conduct, from similar offenses conducted by different defendants." United States v. Hance, 501 F.3d 900, 909 (8th Cir. 2007). Thus, for the enhancement to apply, the government must show that the offense conduct at issue was notably more complex or intricate than the garden-variety version of that offense. Id. The question is not whether the offense is generally considered a sophisticated one—for instance, securities fraud as compared to simple assault. Rather, the question is whether the particular offense conduct was more than usually sophisticated when compared to the offense in its basic form. Id. at 909-11 (holding that renting a post office box under an assumed name and using that box to carry out a fraud scheme was not distinguishable "from the multitude of other mail fraud cases").

Commissioner Koskinen Calls On Congress to Adopt Common Reporting Standard (3/15/16)

A Tax Notes Today article reports that, in a speech to the Tax Executives Institute, IRS Commissioner Koskinen called for Congress to approve the U.S. use of the Common Reporting Standard ("CRS") to replace reporting under FATCA.  William Hoffman, Koskinen Calls on Congress to Approve Common Reporting Standard, 2016 TNT 50-1 (3/15/16) [no link available].  The OECD brief explanation of the Common Reporting Standard with links is here.  The brief explanation is:

The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The TNT article indicates that the reason the IRS has not moved to the standard is that it lacks authority to do so without congressional approval.  The article says:

The IRS asked for the authority to use the CRS in Treasury's green book  2016 TNT 27-25: Treasury Reports explanation of the Obama administration's fiscal 2017 revenue proposals. Fifty "early adopter" jurisdictions have pledged to implement the CRS by January 1, 2016, starting to exchange account information from their financial institutions with their partner jurisdictions in 2017. Almost 100 more jurisdictions signed on to implement the CRS by January 1, 2017, beginning information exchanges in 2018.

Tax Court Holds FBAR Penalty Collected Is Not in the $2,000,000 Threshold for Whistleblower Award under § 7623(b) (3/14/16 & 3/15/16)

In Whistleblower 22716-13W v. Commissioner, 146 T.C. ___, No. 6 (2016), here, the Tax Court that collections of FBAR penalties arising from Whistleblower claims under § 7623(b), here. are not in the $2,000,000 threshold calculation.  Here is the Tax Court's summary of its opinion:

P filed Form 211, Application for Award for Original Information, with the IRS Whistleblower Office with respect to TP1. By guilty plea, TP1 agreed to pay an FBAR civil penalty substantially in excess of $2,000,000 and a small amount of restitution, reflecting unpaid Federal income tax on income derived from Swiss bank accounts.
A whistleblower is eligible for a nondiscretionary award under I.R.C. sec. 7623(b) only “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.” I.R.C. sec. 7623(b)(5)(B). FBAR civil penalties are imposed and collected under 31 U.S.C. sec. 5321 (2006), not under the Internal Revenue Code. R contends that FBAR payments do not constitute “additional amounts” for purposes of ascertaining whether the $2,000,000 threshold has been met. 

1. Held: The term “additional amounts” as used in I.R.C. sec. 7623(b)(5)(B) means the civil penalties set forth in c. 68, subch. A, of the Internal Revenue Code, captioned “Additions to the Tax and Additional Amounts.” 

2. Held, further, FBAR civil penalties are not “additional amounts” within the meaning of I.R.C. sec. 7623(b)(5)(B), and they are not “assessed, collected, * * * [or] paid in the same manner as taxes.” I.R.C. sec. 6665(a)(1). FBAR payments must therefore be excluded in determining whether the $2,000,000 “amount in dispute” requirement has been satisfied.

Note that the key limiting language for the threshold is "tax, penalties, interest, additions to tax, and additional amounts" § 7623(b)(5)(B) may not be limiting for the award base itself in § 7623(b)(1).  In § 7623(b)(1), the award base is:  "collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action."  The issue is whether "including" is illustrative permitting other items fairly characterized as collected proceeds to be included or limiting so that only the items mentioned after including are in the base.  (I am sure there are at least mini-canons of statutory interpretation on that issue but have not researched them.)  The Tax Court said that the argument for interpreting the award base in § 7623(b)(1) more broadly to include related non-Title 26 amounts is "not without force," but deciding the interpretation of the threshold amount did not require it to resolve that issue.

The Court footnoted on page 6 another IRS "defense" that the Court did not decide because of its holding in the case.

   n6 Respondent also advances the broader contention that whistleblower awards are payable only for recoveries under “the internal revenue laws.” See sec. 7623(a)(2). Because FBAR penalties are paid under Title 31, respondent argues that they are not “collected proceeds” under section 7623(b)(1). Since we rule for respondent under the affirmative defense in section 7623(b)(5)(B), we need not address this alternative contention. We note that the IRS Chief Counsel opinion issued during the consideration of petitioner’s case acknowledges one type of payment made outside of Title 26 that does constitute “collected proceeds.” That opinion notes that “[t]he IRS assesses and collects in the same manner as tax any criminal restitution ordered” in a criminal case, and that “any such restitution should be included as ‘collected proceeds’ for purposes of section 7623, even though ordered pursuant to Title 18.” See supra p. 4.

JAT Comment:  The miscellaneous offshore penalty (MOP) in OVDP or Streamlined presumably would be in the whistleblower award base.  But, in most cases, the MOP collection likely would be attributable to the voluntary disclosure and not be deemed attributable to the information the whistleblower provided.  And, in most cases, if the IRS had the whistleblower information before the voluntary disclosure  (which may have prompted the taxpayer to join a voluntary disclosure program with an MOP), the taxpayer presumably would not qualify for the voluntary disclosure program.

On the restitution issue, I think that is a bit of a rabbit trail.  The ordering of restitution for taxes simply permits the IRS to make a summary assessment of the amount of the restitution and to use IRS collection tools to collect that amount.  Thus, that restitution is really in all practical effects within the scope of the provision, particularly once it is assessed.  For prior blog entries on the recent statute for assessing and collecting tax restitution:

• New Statute for Civil Effect of Restitution in Tax Cases (2/11/11), here.
• More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (10/25/13), here.
• The Rub Between Restitution Assessed as a Tax and a Deficiency (12/18/14), here.

Post Conviction Collateral Consequences - Payment of the Tax and CDP Proceedings (3/12/16)

Tax crimes enthusiasts will recall the case of Boulware v. United States, 552 U.S. 421 (2008), here.  The Supreme Court opinion in Boulware reaffirmed some key tax crimes sound bites such as (i) the Spies holding that tax evasion is the capstone of the federal tax crimes regime and (ii) no tax evasion without a "tax deficiency" (really evaded tax due and owing *).  The Supreme Court remanded to the Ninth Circuit to deal with the nettlesome issue of E&P and return of capital.  On remand, Boulware lost in the Ninth Circuit.  United States v. Boulware, 558 F.3d 971 (9th Cir. 2009), here.  (See Boulware Wins the Battle Only to Lose the War (Federal Tax Crimes Blog 3/9/09), here.)

Since that time, Mr. Boulware has popped up again in the case reporters.  E.g., HIE Holdings v. Commissioner, 521 F. App'x 602, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, cert. denied 134 S. Ct. 712 (2013). (HIE is Boulware's company, and his personal case was consolidated on appeal, see Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (Federal Tax Crimes Blog 4/14/13), here.

Just yesterday, Mr. Boulware showed up again in a Collection Due Process ("CDP") case on appeal.  Boulware v. Commissioner, ___ F.3d ___, 2016 U.S. App. LEXIS 4502 (D.C. Cir. 2016), here. The issues in the case are not tax crimes issues per se, but the case does serve as a reminder that there are civil tax consequences that attend criminal tax prosecutions.  I will briefly address the case to illustrate that point.

After HIE Holdings and Boulware lost on the merits in the prior Tax Court case and failed to post bond while appealing, the IRS was permitted assess the tax determined by the Tax Court while the appeal was pending.  § 7485(a)(1).  The IRS did so and moved to collect.  § 7485(a)(1).  Boulware filed a CDP request in issue here.

In the CDP proceeding, the Settlement Officer ("SO") placed the following conditions on an installment payment agreement for Boulware:

First, Boulware would have to agree to pay $29,000 per month, which Martin calculated was his "ability to pay" based upon Boulware's most recent tax returns and other financial documents. Second, Boulware would have to become compliant with all current tax obligations, including his estimated taxes for 2012. Finally, he would have to liquidate various personal assets, including a 401K account and two life insurance policies all together worth approximately $950,000, and put the proceeds toward his deficiency.

Boulware then counteroffered (on counteroffers, see My Cousin Vinny, here)

Tax Obstruction Conviction Permits Inclusion in Tax Loss of Penalties and Interest (3/12/16)

I previously reported on the criminal tax appeal by Rex Black who was convicted of tax obstruction, § 7212(a), here.  Seventh Circuit Reverses Sentence for Improper Calculation of Advisory Guidelines Range (8/21/15), here.  The Seventh Circuit opinion discussed in that blog entry covered several issues, one of which I questioned.  That issue was whether the conviction for obstructing the collection of tax could include penalties and interest within the scope of the financial harm Black intended to inflict on the IRS by his obstructive acts.  The Seventh Circuit held that the calculation could not.  The Government filed for rehearing on that issue.  On March 7, 2016, the Seventh Circuit granted the rehearing, changed its mind on that issue, and produced a new opinion which it substituted for the old one.  See United States v. Black, ___ F.3d ___ (7th Cir.), here.

Here is the complete discussion:

In its order, the district court stated "[t]he loss Black intended the IRS to suffer had Black's offense been successfully completed included the loss of the penalties and interest Black owed the IRS, as well as the taxes he owed." It included a footnote in its order that stated, 

Even though Black's criminal statute of conviction was 26 U.S.C. § 7212(a) not [ §§ ] 7201 or 7203, the evidence at trial established beyond a reasonable doubt that the object of Black's criminal conduct in committing the offenses . . . was to defraud the IRS by willfully failing to pay and willfully evading his payment of his debt obligations to the IRS, which included the penalties and interest, as well as the taxes that Black owed to the IRS. 

The district court included penalties and interest in the tax loss calculation and did so because Black's conduct was similar to conduct criminalized by § 7201 and § 7203. 

Black argues that the tax loss calculation under U.S.S.G. § 2T1.1 should not include penalties and interest as part of the tax loss calculation. He specifically argues that penalties and interest should not be included in the tax loss calculation because he was not charged or convicted of willful evasion under 26 U.S.C. § 7201 or willful failure to pay under § 7203. 

The government argues that the issue of whether Black's tax loss calculation included penalties and interest is not properly before the court because the district court based the tax loss amount on the face value of the fraudulent checks, not the amount of taxes Black owed. As stated above, the face value of the checks was not the correct tax loss. Moreover, the record establishes that the district court included penalties and interest in its tax loss calculation. 

The general rule is that the tax loss calculation "does not include interest or penalties." U.S.S.G. § 2T1.1 cmt. n.1. There is a narrow exception to this general rule for "willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203." Id. To determine whether penalties and interest should be included in the tax loss calculation, we must determine to which types of cases the exception applies. 

Relying on U.S.S.G. § 1B1.3 cmt. n.6 and United States v. Thomas, 635 F.3d 13 (1st Cir. 2011), the government argues that U.S.S.G. § 2T1.1 cmt. n.1 does not limit the inclusion of penalties and interest to defendants convicted of willful evasion of payment under § 7201 or willful failure to pay under § 7203. It further argues that penalties and interest should be included in the tax loss calculation "in any case where defendant's conduct -- offense, relevant, or stipulated, as admitted in a plea agreement, proven at trial, or established by a preponderance of the evidence at sentencing -- constituted willful evasion of payment, as defined by 26 U.S.C. § 7201, or willful failure to pay, as defined by 26 U.S.C. § 7203."

Revised Streamlined Certification Forms 14653 SFOP and 14654 (SDOP) (3/11/6)

In February, the IRS revised the Foreign and Domestic certifications (Forms 14653, here, and 14654, here, respectively) in February 2016.  I set forth the principal revisions below:  (In my browser, the links doe not permit actually viewing the form, but it can be downloaded or saved and should work fine with a pdf program.)

The Non-Resident Certification form 14653 (Feb 2016) now includes:

1. A chart asking the filer to declare for each year whether they were out of the country for at least 330 days
2. If the  person is not a citizen or lawful permanent resident, the calculations for the application of the substantial presence test under section 7701(b)(3) for 5 years (the 3 years in return covered period and the two previous years).
3. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story.  
4. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

The Resident Certification Form 14654 (Feb 2016) now includes:

1. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story. 
2. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

If I missed any key differences, please let me know either by comment or email.

DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16)

I have previously posted on certain comments at a recent Federal Bar Conference.  See Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16), here, and Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. A significant portion of the  AAG's prepared remarks related to criminal enforcement initiatives for prosecutions under § 7202, Willful failure to collect or pay over tax, here.  This is the criminal analog to the trust fund recovery penalty, § 6672, Failure to collect and pay over tax, or attempt to evade or defeat tax, here.  The article is Matthew R. Madara,  DOJ Seeking to Change Employment Tax Sentencing Guideline, 2016 TNT 45-8 (3/8/16) [no link available].

Key points and extrapolations from the article are:

1.  As DOJ Tax has made clear both in pronouncements and prosecutions, it is very serious about § 7202 prosecutions.

2.  DOJ Tax is seeking to amend the Sentencing Guidelines statement in the background to the § 7202 Guideline, §2T1.6.Failing to Collect or Truthfully Account for and Pay Over Tax, here, that "The offense is a felony that is infrequently prosecuted."  Specifically, DOJ Tax wants the vestige reference to infrequently dropped (which would probably mean dropping out all after felony).  The proposed amendments are here, with the proposal on § 7202 at pp. 3-4 which says in pertinent part:

The Background commentary to §2T1.6 states that “[t]he offense is a felony that is infrequently prosecuted.” The Department of Justice in its annual letter to the Commission has proposed that the “infrequently prosecuted” statement should be deleted. The Department points out that while that statement may have been accurate when the relevant commentary was originally written (in 1987), the number of prosecutions under section 7202 have since increased substantially. The use of §2T1.6 increased from three cases in 2002 to 46 cases in 2014. See United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2002), at http://www.ussc.gov/research-and-publications/federal-sentencingstatistics/guideline-application-requencies/guideline-application-frequencies-2002; United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2014), at http://www.ussc.gov/sites/default/files/pdf/research-andpublications/federal-sentencing-statistics/guideline-applicationfrequencies/2014/Use_of_SOC_Guideline_Based.pdf

3.  Besides being inaccurate because of the increase in § 7202 prosecutions, the statement is being deployed by defense lawyers to minimize the gravity of the offense in sentencings.  I would not think, however, that sentencing judges are much swayed by that genre of argument.

4.  As to characteristics of failure to withhold and pay over cases that are prosecutors, a DOJ Tax attorney said that DOJ Tax is particularly looking for cases where the responsible parties have lied to the IRS.  (As I has said often on the blog, criminal tax cases, like many or most white collar crimes cases, are principally about the lie, in one form or another.)  The lie is what will help make the substantial burden to prove willfulness beyond a reasonable doubt.

5.  Proving willfulness -- and thus obtaining conviction -- is relatively straightfoward despite the criminal burden of proof.  If the employer -- with the action of the responsible person -- has withheld from the wages, any defense by the responsible person with regard to failing to pay over "falls by the wayside."

AICPA Recommends Changes to OVDP and SFCP (3/10/16 & 3/11/16)

On March 9, 2016, the AICPA (American Institute of Certified Public Accountants) sent the IRS recommendations on the OVDP and SFCP.  The letter with the recommendations is here.  The recommendations as summarized in the letter are:

For the 2014 Offshore Voluntary Disclosure Program, we recommend that the IRS: 

1) Restore the previous practice of not requiring an upfront payment of the miscellaneous offshore penalty by taxpayers.
2) Apply the 50% miscellaneous “Super” penalty only to accounts held at institutions listed on the Foreign Financial Facilitators List.
3) Allow the waiver of the passive foreign investment company (PFIC) computations for small account cases. 

For the Streamlined Filing Compliance Procedures, we recommend that the IRS: 

1) Modify the penalty base to include only those assets associated with tax non-compliance.
2) Expand the Streamlined Filing Compliance Procedures to include certain classes of nonwillful individuals who are currently ineligible for either the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP).
3) Provide additional guidance in the SFOP and SDOP filing instructions to taxpayers on the specific factors the IRS will consider in judging whether their non-compliance was willful.

See the letter for more detail.  I think the recommendations generally are good ones I am concerned but some of them come a little late in the implementation of these programs to be adopted after many cases have already been processed.

Addendum 3/11/16:  I am advised that the AICPA comments overlap somewhat prior recommendations by the American Bar Association in October 2015, here.

DOJ Is Moving Past Switzerland to Prosecute Financial Institutions - 2 Cayman Banks Plead Guilty (3/8/16 & 3/14/16))

In this press release titled First Conviction of Non-Swiss Financial Institution For Tax Evasion Conspiracy, here, DOJ Tax announces the guilty please of two Cayman banks -- 

Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), two Cayman Island affiliates of Cayman National Corporation, which provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States (U.S. taxpayers).

Readers should note the DOJ Tax's choice of the word "First" in the title.  I think there is a suggesion that there will be a second, third, etc., over time.  Here are some excerpts (emphasis supplied by JAT):

“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.” 

* * * * 

From at least 2001 through 2011, CNS and CNT, which are both located in Grand Cayman and organized under the laws of the Cayman Islands, assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts).  CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT.  Specifically, and among other things, in furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes: 

CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts (collectively, structures), thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.
CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities. 

 CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.

 After learning about the investigation of Swiss bank UBS AG (UBS), in or about 2008, for assisting U.S. taxpayers to evade their U.S. tax obligations, CNS and CNT continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012. 

The sham Caymanian structures that CNT set up for U.S. taxpayer-clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. taxpayer-clients; managed companies, for which CNT ostensibly provided direction and management services, but which in truth were shell companies that served only to hold the assets of the U.S. taxpayer-clients; and registered office companies, which were shell companies for which CNT simply supplied a Caymanian mailing address.  CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. taxpayer-clients to trade in U.S. securities, without requiring them to submit Form W-9s, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities.  CNS and CNT agreed to maintain these structures for U.S. taxpayer-clients after many of them expressed concern that their accounts would be detected by the IRS.

Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16)

I recently blogged on the prepared comments for Caroline Ciraolo, Acting Assistant Attorney General, for a recent tax conference.  Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here.  Tax Notes Today has an article summarizing her remarks and Bryan Skarlatos, a prominent private practitioner in the offshore account practice, at the conference.  Nathan J. Richman, International Tax Enforcement Efforts Include Civil Tools, 2016 TNT 45-7 (3/8/16) [no link available].  I will highlight the key comments, as reported, that I think may be of interest to readers of this blog.

1.  Ciraolo and Bryan Skarlatos questioned whether foreign account holders can remain nonwillful about foreign account reporting obligations at this stage.  The article quotes from her prepared comments (linked above) as follows:

After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received. 

JAT Comment:  Obviously, it will be getting harder and harder to claim nonwillfulness as time moves on.  Skarlatos' point, I think, was that the practitioner must perform his due diligence to question whether clients coming in this late can really certify their nonwillfulness.  See paragraph 2, below.

2.  Ciraolo called out as having a weak case for nonwillful in streamlined submissions situations involving (1) accounts moving from category 1 banks to category 2 banks and then to a new foreign country and (2) accounts with nominee entities.  JAT Note:  Those are the obvious cases.  Those cases should always have proceeded in OVDP without opt out, from the inception in 2009.  Still, I suspect that there will be situations even into the future that, with due diligence, a professional may be able to advise a client that streamlined is appropriate.

U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16)

David Voreacos, Is Singapore the Next Switzerland for U.S. Tax Crackdown? (BloombergBusiness 3/3/16), here.  Excerpts:

The Internal Revenue Service is seeking to force UBS Group AG to turn over records on an account in Singapore held by a U.S. citizen, potentially opening a new front against offshore tax evasion beyond Switzerland. 

The IRS last month asked a federal judge in Miami to force UBS, the largest Swiss bank, to produce documents on Ching-Ye Hsiaw, who lives in China. The judge on Wednesday told UBS to show up in court on March 31 to explain why it has refused to supply the account records. 

* * * * 

Singapore will lift banking confidentiality when foreign authorities ask it to do so and when the law is used to shield criminal activities, according to a person with direct knowledge of the city-state’s bank-regulation framework who asked not to be named because of an ongoing court case. [JAT NOTE:  See ¶ 7 in my comments below.]

* * * * 

Singapore Secrecy 

The U.S. has focused largely on Switzerland in recent years as it has fought offshore tax evasion. More than 80 Swiss banks, including UBS and Credit Suisse Group AG, have agreed to pay a total of $5 billion or so in penalties and fines. The question is where the IRS and the Justice Department will turn next as they sift through a trove of data gathered from Swiss banks and from more than 50,000 U.S. taxpayers who disclosed their accounts to avoid prosecution. 

The Hsiaw case provides some clues. IRS agents served a summons on UBS in 2013 for records of his account in Singapore from 2001 to 2011. The bank said it couldn’t produce them because Singapore’s bank secrecy laws prevent disclosure without permission from Hsiaw, which he hasn’t provided, according to a court filing. 

“Even if Singapore’s bank secrecy laws, as UBS contends, precludes disclosure of the summoned bank records relating or pertaining to Hsiaw’s Singapore account(s), international comity requires that the records be disclosed,” IRS revenue agent James Oertel said in the filing.

The case is United States v. UBS AG (SD FL. 16-mc-20653)..

Documents and JAT Comments Added 3/6/16 11:15am:

D.C. Circuit Opinion in Sprawling NonTax Case (3/4/16)

My automated daily searches picked up this opinion, United States v. McGill, 2016 U.S. App. LEXIS 3734 (DC Cir. 2016), here.  It is not a tax crimes case.  Rather, it involved charges arising from an alleged conspiracy "to run a large-scale and violent narcotics-distribution" business. Here is the part pick up by the automated searches:

Finally, while the Alfreds, Simmons, and McGill object to evidence of their failure to pay taxes during the course of the conspiracy, "[i]t is well settled that in narcotics prosecutions, a defendant's possession and expenditure of large sums of money, as well as his or her failure to file tax returns, are relevant to establish that the defendant lacked a legitimate source of income and that, in all probability, the reason for the failure to report this income is due to the defendant's participation in illegal activities." United States v. Briscoe, 896 F.2d 1476, 1500 (7th Cir. 1990); see also United States v. Chandler, 326 F.3d 210, 215 (3d Cir. 2003) (same). 

That rationale holds true here. Simmons, McGill, and Ronald Alfred all suggested that they were operating a business or otherwise supporting themselves through legitimate means. Their failure to pay taxes thus was relevant to show that they were in fact getting income from illicit activities like drug trafficking that they assuredly did not want to report to the IRS. With respect to James Alfred, he failed to object to the tax-filing evidence in district court, and the court's failure to sua sponte exclude that evidence of his lack of a licit income source while in the drug conspiracy was not plain error. See United States v. Spriggs, 102 F.3d 1245, 1257 (D.C. Cir. 1996) ("Because appellants did not make a timely objection to [admitting evidence], we review its admission for plain error.").

I will let that reasoning stand for what it is.  Of course, if the inference sought is correct, the defendants could have been charged with a tax crime -- at least failure to file, § 7203.

Several other things about the case struck me.

1. The opinion is 178 pages long in the pdf format.  That is not your ordinary opinion.  The case was argued in February 2015, so there was a long time to produce the 178 pages (and of course, the judges and their clerks were working on other cases during the period).

2. Perhaps related to the first, the opinion is "per curiam."  Per curiam may mean a number of things, but one thing it does mean is that no single judge claimed authorship.  Perhaps it was a collaborative effort of the judges and the law clerks.

3. The opinion (at least parts of it) is an interesting read.  Readers who want to dig in might look at the following  which are the parts that particularly interested me (Paragraph numbers are the courts and page numbers supplied by me are to the pdf copy).

I. Removal of Juror  (pp. 4 - 28), regarding the removal of a rogue juror.

Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16)

DOJ Tax has posted here the Acting AAG Tax's remarks at the Federal Bar Association Tax Law Conference.  I copy here the discussion related to tax crimes:

On the criminal side, the Tax Division is charged with authorizing the investigation and prosecution of offenses arising under the internal revenue laws and, in doing so, setting criminal tax policy nationwide.  

With nearly 150 million returns filed each year and only about 1,800 investigations and prosecutions authorized, smart case selection is critical for effective deterrence.  Our criminal cases involve traditional tax crimes – tax evasion; preparing and filing false and fraudulent returns; failing to file; evasion of payment; failing to collect, account for and deposit employment tax; and conspiring to defraud the IRS.  Our criminal attorneys also prosecute ever increasing stolen identity refund fraud crimes, either alone or in conjunction with Assistant U.S. Attorneys. 

I would like to take a few moments to highlight our efforts with respect to two areas: employment tax and offshore enforcement. 

Civil and Criminal Employment Tax Enforcement 

Since January 2015, the Tax Division has sharpened its focus on civil and criminal employment tax enforcement.  As most of you know, these cases involve employers who fail to collect, account for, and deposit tax withheld from employee wages.  These withholdings represent 70 percent of all revenue collected by the IRS, and as of September 2015, more than $59 billion of tax reported on Forms 941 remained unpaid.  These employers are literally stealing money, knowing that their employees will receive full credit for those amounts when they file their returns.  The employers gain an unfair advantage over their competitors and the U.S. Treasury is left holding the bag. 

We are working very closely with IRS Field Collection, IRS Criminal Investigation (IRS-CI) and IRS Criminal Tax Counsel to address this problem.  We are training IRS personnel to identify and refer cases involving firm indicia of fraud to IRS-CI for criminal investigation and those cases warranting injunctive action to the Tax Division.  We are also training our civil tax attorneys to pursue injunctions and our criminal enforcement attorneys to investigate and prosecute criminal employment tax offenses 

We have designated a Senior Litigation Counsel in our Civil Trial Sections, Noreene Stehlik, and an Assistant Chief in the Southern Criminal Enforcement Section, Caryn Finley, as our points of contact for civil and criminal employment tax matters.  With every criminal case referred to the U.S. Attorneys’ Offices, we provide this contact information and, for those districts that would like additional resources, we offer litigation assistance with new referrals and for cases in the pipeline.

In September 2015, the Tax Division updated the employment tax chapter of our Criminal Tax Manual and the division is working on a centralized database of criminal employment tax resources for department prosecutors.  We also have a new page on our website dedicated to civil and criminal employment tax enforcement, listing criminal prosecutions and civil injunctions entered in the last two years.  [JAT Note:  the web page is here, providing separate links to the civil and criminal enforcement efforts.]

Finally, we are waging a public campaign in an effort to educate employers and their representatives about the serious nature of employment tax violations.  We are sending the message that we will hold employers accountable through civil litigation and criminal prosecutions.  

Civil and Criminal Offshore Enforcement

Proposed FinCEN Rulemaking for Rules on FBAR Reporting for Financial Professionals (3/4/16)

FinCen has released proposal revisions to rules for FBAR reporting for financial professionals.  The press release is here and the proposed changes are here. As summarized in the press release:

The NPRM [Notice of Proposed Rulemaking] proposes to:

• Remove the provisions that limit the information reported with respect to situations when a filer has 25 or more foreign financial accounts, and instead require all U.S. persons obligated to file an FBAR to report detailed account information on all foreign financial accounts for which they are required to file an FBAR.
• Amend the FBAR regulation by eliminating the requirement for officers and employees of institutions to report on institutional accounts for which they have signature authority, but no financial interest, due solely to their employment, so long as their employer has an FBAR filing obligation.
• Require institutions to maintain a list of all officers and employees with signature authority over those same accounts; this list would be made available to FinCEN and law enforcement upon request.

Those interested in this subject having access to Tax Notes Today might want to read the TNT article:  Andrew Velarde, FBAR Changes Try to Balance Compliance Burden, Enforcement , 2016 TNT 42-3 (3/3/16).  I don't have permission to post it here.  I don't plan address the changes further because of demands on my time and my belief that this area of the broader subject is not of particular interest to the mainstream readership of this blog.

Yet Another Appeals Court Enforcement of Summons for FBAR Required Foreign Bank Account Records (3/4/16)

In United States v. Chen, 2016 U.S. App. LEXIS ____ (1st Cir. 2016), here, the First Circuit enforced an FBAR required records summons, following the unbroken line of cases in the other circuits.  The opinion is well researched and well-written.  Because this holding is now routine in the circuits, I offer only certain items from the opinion that caught my interest.

1. One of the judges on the panel was former Supreme Court Justice David Souter.  He did not write the opinion.

2. In the statement of facts, the Court notes that, in its petition to enforce, the agent's supporting affidavit advised that:

"[t]here is no 'Justice Department referral[ ]' . . . in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination." n1
   n1 This statement meant that the taxpayers were not then referred for criminal prosecution by the Department of Justice. "A Justice Department referral is in effect with respect to any person if -- (i) the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of the internal revenue laws, or (ii) any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person." 26 U.S.C. § 7602(d)(2)(A).

The Court returns to this key fact later in the opinion:

Additionally, the IRS may not issue a summons "with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1). The government here submitted an affidavit executed by the IRS revenue agent stating that the summons was issued for the purpose of determining the 2008 tax liability of Chen and Ng, and that the IRS had not referred Chen or Ng to the Department of Justice for criminal prosecution. The agent acknowledged that the government had some documents pointing to the existence of Chen's foreign bank accounts, but not enough documents to know whether there was underpayment of taxes. this key fact later in the opinion: