Another Offshore Account Indictment (7/30/16)

The USAO SDNY announced yesterday here that a prominent New York Art Consultant, Lacy Doyle, has been indicted for one count each tax obstruction, 7212(a), and tax perjury (7206(2)), both being 3 year maximum felonies with a resulting aggregate maximum sentence of 6 years.  The indictment was handed down earlier but unsealed with the announcement of the arrest yesterday.  The indictment is here  Key excerpts from the press release:

As alleged in the Indictment unsealed today in Manhattan federal court: 

DOYLE, assisted by others – including Beda Singenberger, a Swiss citizen who ran a financial advisory firm – established and maintained undeclared bank accounts in Switzerland to hide those accounts from the IRS.  DOYLE used a sham entity to conceal from the IRS her ownership of some of the undeclared accounts and deliberately failed to report the accounts and the income generated in the accounts to the IRS. 

In 2003, DOYLE’s father died and secretly left an inheritance of over $4 million to DOYLE.  DOYLE, who was appointed the executor of her father’s estate, made court filings falsely stating under penalty of perjury that the total value of her father’s estate was under $1 million when, in truth and fact, it was more than four times that amount.
Thereafter, in 2006, DOYLE, with Singenberger’s assistance, opened an undeclared Swiss bank account for the purpose of depositing the secret inheritance from her father.  The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal DOYLE’s ownership.  As of December 31, 2008, the account held assets valued at approximately $3,548,380. 

In 2010, the sham foundation controlled by DOYLE was re-domiciled from Lichtenstein to Panama.  As of May 31, 2010, the sham foundation maintained assets of at least approximately $3,151,961.37. 

For each of the calendar years from 2004 through 2009, DOYLE willfully failed to report on her tax returns her interest in the undeclared accounts and the income generated in those accounts.  For each of these years, Doyle also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS, as the law required her to do. 

Singenberger was charged on July 21, 2011, with conspiring with U.S. taxpayers and others to defraud the United States, evade U.S. income taxes, and file false U.S. tax returns.  He remains at large.

JAT Comments:

1.  Beda Singenberger who has appeared several times in blog entries, here.  He was a Swiss enabler through a financial advisory firm.  The indictment alleges (par. 29):  "Between in or about 2007 and in or about 2010, Singenberger provided to one of his U.S. taxpayer clients a document (the "Singenberger Client List") containing significant details regarding clients and prospective clients who were U.S. taxpayers (including LACY DOYLE, the defendant) [List of details omitted].  (Par. 29.)  For a previous blog discussing the list , see:  U.S. Using a Client List of Indicted Swiss Banker/Enabler (3/14/13), here.  Presumably since Singenberger is still at large, the DOJ's access to the list came from the U.S. taxpayer.

2.  As with virtually all of the prosecutions, entities were involved and great lengths taken to hide the assets.

3.  Note that the allegations are that Doyle failed to report the account interest on income tax return and failed to file FBARs for the years 2004 through 2009. (See also indictment pars. 43 ff.)  It is not clear what happened in the later years.  The indictment says (par. 15) that Doyle continued obstructive activities "through in or about 2012."

4.  The banks involved are Credit Suisse and 4 other foreign banks pseudonymed serially (Indictment pars. 10-14):  Foreign Bank A (UK bank with headquarters in London), Foreign Bank B (Swiss Bank with headquarters in Basel), Foreign Bank C (Luxembourg bank, with headquarters in Strassen), and Foreign Bank D (Swiss Bank with headquarters in Zurich).

Ninth Circuit Affirms Conviction for Tax Misconduct Related to Failure to Honor Levy and Potential Bankruptcy Discharge (7/27/16)

In United States v. Wanland, ___ F.3d ___, 2016 U.S. App. LEXIS 13661 (9th Cir. 2016), here, the Ninth Circuit panel rejected two of the taxpayer's argument's to reverse his convictions for "tax related charges, including tax evasion."  In a companion unpublished opinion, here, the panel rejected other of his arguments for reversal.  I deal here with only the published precedential decision.

The Ninth Circuit staff provides a summary that is not part of the opinion but is usually a useful guide the opinion.  Here is that summary:

The panel affirmed the district court in all respects in a case in which the defendant was convicted of tax related charges, including tax evasion. 

The panel held that neither the district court nor the jury erred in concluding that the defendant's monthly income from his law practice qualified as "salary or wages" under 26 U.S.C. § 6331(e), and therefore rejected the defendant's contention that the government could not prove concealment of property subject to a levy, as required for conviction under 26 U.S.C. § 7206(4). 

Rejecting the defendant's contention that the district court erred in dismissing the levy counts because they exceeded the three-year statute of limitations, the panel held that the six-year statute of limitations of 26 U.S.C. § 6531(1), covering tax offenses "involving the defrauding or attempting to defraud" the government, applies to prosecutions under § 7206(4). 

The panel held that the district court properly rejected the defendant's argument that res judicata precludes the government from pursuing a criminal action concerning his debts that were already discharged in bankruptcy. The panel held res judicata cannot apply because the IRS in a bankruptcy action and the United States government in a criminal action are not in privity.

1. The partner draws.

JAT introduction to partnership taxation.  Technically, partner draws from a partnership are not income or even salaries or wages unless they are guaranteed payments.  Rather, for income tax purposes, the draws are treated as advances against the partner's capital account which, if the partnership makes money is increased by partnership income allocated and taxable to the partner.  So, from a tax accounting perspective, the draws are not income. But, given the relationship between draws and capital accounts, the partner's income must ultimately produce income consistent with partner draws in excess of capital contribution.

Wanland's charges did not relate to the taxable income of the partnership or his allocable share but to whether an IRS levy on the partnership that required the partnership to turn over "wages and salary" covered the partnership draws.  If the levy did cover the draws, then Wanland's failure to advise the partnership of the levy was an act that violated § 7206(4), here, for failure to honor a levy.  The partnership made regularly payments allocated to draw, aggregating $1,8 million.

Consistent with other cases, the panel affirmed the district court in adopting a practical approach indicating that the levy did cover the draws which were in every practical sense like salary or wages to be subject as such to levy.

Swiss FTA to Pass HSBC U.S. Depositor Information to IRS Under Treaty (7/27/16; 7/28/16)

Reuters reports that the Swiss Federal Tax Administration announced that it will respond to an IRS treaty request for information on U.S. depositors meeting certain characteristics.  John Miller, Swiss to pass information on HSBC accounts to U.S. tax agency (Reuters 7/26/16), here.  The request appears to be a group request (or what I call a John Doe Treaty request) whereby the U.S. depositors are not named (indeed, the IRS in most cases would not know their names) but certain characteristics of material potential U.S. tax noncompliance are suggested.  As reported:

The Swiss government said it made the announcement about its plans on Tuesday to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the U.S. Internal Revenue Service (IRS). 

The move comes after the IRS asked Swiss tax authorities in April for assistance on HSBC Private Bank (Suisse) SA accounts held by Swiss-registered "domiciliary companies" with U.S. beneficial owners between 2002 and 2014. 

The Swiss Federal Tax Administration said the IRS targeted HSBC accounts "where there is evidence that the U.S. beneficial owner exercised control, directly or indirectly, over the account in violation of corporate governance ... by withdrawing funds from the account for personal use." 

HSBC said it was cooperating. 

"Following an information request in April 2016 from U.S. authorities to the Swiss Federal Tax Administration (SFTA), the bank has provided certain files, mostly related to former clients, to the SFTA," said Lonnie Frisby, a spokesman for HSBC's Swiss private bank. "The Swiss authorities may forward part or all of this information to U.S. authorities in accordance with applicable laws and treaties. Anyone subject to this request has been notified." 

* * * * 

A spokesman for Switzerland's tax agency in Berne declined on Tuesday to say how many HSBC accounts were involved in the IRS request, citing Swiss privacy laws.

The article does note the SFTA appeals process for U.S. depositors to try to divert or derail the turnover of information.  Good luck on that.

Addendum 7/28/16 8:00am:

As noted by a commenter below (David), the actual announcement can be reviewed here.  The announcement, in pdf format, is in German for the first three pages and in English for the following pages.

Then, another commenter named Bert has the parameters for the request.  I will cut and paste them from the pdf document linked above (bold-face supplied by JAT):

Russian interest in U.S. Federal Tax Crimes or At Least Federal Tax Crimes Blog (6/26/16)

There has been a significant increase in interest from Russia (at least according to the Blogspot's Pageviews by Countries).  Here are the "alltime" statistics by country (stopping at Russia which is in the all time 7th position,  with the U.S. in first as one would expect:

All Time
1. United States 3,392,345
2. France 485,097
3. Canada 316,032
4. United Kingdom 307,456
5. Germany 218,954
6. Ukraine 112,237
7. Russia 92,393

So, turning to more recent time frames, here are the results (providing just Russia and U.S. in the first and second spots):

Last 24 hours:
1. Russia 3,462
2. United States 2,102

Last week:
1. Russia 16,280
2. United States 14,214

Last month
1. United States 61,568
2. Russia 20,081

So, it would appear that the last week was the biggie on an absolute and relative scale -- drawing 16,280 Russian pageviews out of 20,081 for the entire month and moving Russia to the first spot for the last week.

I wonder if this is related in any way to the reports that Russia -- perhaps orchestrated by Putin -- hacked the Democratic National Committee emails.

And beyond the political interest, I suppose it could involve politics in Russia.  It has been reported as a result of the Panama Papers that friends of Putin have done well in the Russia economy and have hidden much of their wealth offshore (offshore by reference to Russia).  I thought neither of those revelations particularly noteworthy and thus did not spend much time on it.  Perhaps that is the issue.

Now, as the title to this blog suggests, I don't know whether viewers in Russia are interested in U.S. Federal tax crimes generally or in my rather boring presentation of anecdotes related to federal tax crimes in this Federal Tax Crimes Blog.

Now, as to which FTCB pages they may have been looking at, I am not aware of whether there is a way to tell.  I did note that, for the past week,  the leading page visited was Comments by IRS Personnel on New Streamlined and OVDP Procedures (Federal Tax Crimes Blog 6/21/14), here, but that page only got 877 pageviews.  I don't see any correlation there, but I really have not tried to dig into that issue.

Now, from the statistics and other facts or fact substitutes above, I will now put on my Republican hat and draw some speculations (which I will try to identify).  I speculate that the uptick in hits (an apt word) from Russia is at Putin's direction.  I suspect that Putin's directions are based on his desire to help Trump.  And, I speculate that if questioned specifically about that giving those directions, he will deny it.  And, from that denial, I infer that he is a liar.

Ninth Circuit Rejects Argument that Offshore Gambling Accounts Are Banks for FBAR Purposes (6/26/16)

I previously blogged a district court holding that accounts related to online poker playing were FBAR reportable.  See United States v. Hom, 2014 U.S. Dist. LEXIS 77489 (N.D. CA 2014), here; and Court Holds Online Poker Accounts are FBAR Reportable (Federal Tax Crimes Blog 6/9/14), here.  Today, the Ninth Circuit affirmed the lower holding that one account -- the FirePay account -- was reportable, but reversed the lower court holding that the other two -- PokerStars and PartyPoker -- were not.  United States v. Hom, 2016 U.S. App. LEXIS 13269 (9th Cir. 2016), here.

In the Ninth Circuit, the issue turned  on whether the accounts were foreign financial accounts, which turned upon whether the organizations were financial institutions.  FirePay was a financial institution, the Ninth Circuit held, because it met the definition of money transmitter.  The other two were not money transmitters or otherwise financial institutions as defined.  The Ninth Circuit rejected the Government's argument that they should be treated as banks (a type of financial institution requiring an FBAR) because they functioned as banks, applying the plain meaning of the term bank to exclude these services.

Two caveats about the opinion.  First, the panel described it as nonprecedential under Ninth Circuit rules.  Second, the Government made an argument -- which the Court declined to consider because too late (see p. 4 fn. 1) -- that PokerStars and PartyPoker were casinos, another category of financial institution which, if foreign, requires FBARs for accounts.

With those caveats, this is a nice victory for the taxpayer and, while not precedential in the Ninth Circuit, does offer hope that others may avoid expansive definitions of foreign financial institutions requiring FBAR reporting.

District Court Rejects Complaint Denying Full Streamlined Relief for OVDP Participants (7/26/16)

The District Court for the District of Columbia has rejected taxpayers' attempt to force the IRS to admit them into the full Streamlined Procedures rather than the Streamlined Transition Treatment in OVDP 2012.  Maze v. IRS, 2016 U.S. Dist. LEXIS 96471 (D. D.C. 2016), here.  The fight, as it usually is, is about money, but seasoned by the risk of criminal prosecution theoretically looming in the background (relief from which is the common inducement to join any IRS voluntary disclosure program).  In order to follow the money, I first have to review key features of the programs in question:

The common features of the various iterations of the IRS offshore voluntary disclosure programs (referred to here collectively as OVDP) have been:  (i) filing delinquent or amended income tax returns for 8 years, (ii) payment of income tax penalties (20% accuracy related penalty for amended returns or the delinquency penalties (up to 45+%) for delinquent returns), (iii) filing 8 years of delinquent or amended FBARs, and (iv) a Title 26 Miscellaneous Offshore Penalty ("MOP") based upon a percentage -- currently 27 1/2% (increasing to 50% if a bad bank is involved) -- of the highest balance in the offshore accounts for the 8 year period.  The inducement was that, with completion of the OVDP process via a closing agreement, the IRS will not refer the taxpayer to DOJ Tax for criminal prosecution.  A taxpayer joining OVDP who thought the OVDP civil penalty structure was too high under the circumstances could opt out and be subject to a regular IRS audit that covered both income tax and FBAR noncompliance.  Usually, taxpayers who were relatively innocent -- i.e., nonwillful -- with respect to income tax and FBAR noncompliance might want to either forego joining OVDP altogether or joining OVDP and opting out.  If they were relatively innocent -- nonwillful -- the results of the audit would often be much better than the OVDP civil penalty regime, except possibly if certain other returns or forms (such as for foreign corporations or trusts) were not filed.  But the "typical" U.S. taxpayer would only have foreign accounts with no foreign entities to muddy the water with other penalties that might apply and could, in any event, probably avoid those penalties with true nonwillfulness.  The risk of opting out was that the taxpayer has miscalibrated as to his nonwillfulness.

In 2014, the IRS substantially amended its Streamlined Filing Compliance Procedures.  As I understand it, the design of the revision was to catch relatively innocent taxpayers -- those who could certify nonwillfulness and provide a supporting narrative -- who would otherwise choose not to join OVDP or, if they joined OVDP, would opt out.  The Streamlined tax and penalty regime was calibrated to impose, roughly, the result they might obtain upon audit (either audit if they did not join OVDP or audit after opt out if they did join OVDP).  The key to this procedure with substantially less financial cost than OVDP was that the taxpayer must certify that his income tax and FBAR noncompliance was nonwillful and provide a narrative supporting the certification.  Based upon that certification and narrative, the procedure requires 3 years of amended returns or, in the case of foreign resident taxpayers, delinquent returns during the period (a domestic taxpayer does not qualify if he filed no return in the key 3 year period) and 6 years for delinquent or amended FBARs (although the narrative make take some explaining about bank accounts omitted from original FBARs).  The income tax and interest is due for the three years; there is no accuracy related or other income tax penalties.  The MOP will be 0% for the foreign resident taxpayer and 5% for the domestic resident, based upon the high year-end balance in the 6 year period.  The Streamlined Procedure does not result in a closing agreement, the taxpayer can be audited (although as an initial step such an audit might focus on the validity of the certification and narrative), and the taxpayer is given no assurance that he will not be criminally prosecuted.  (I have recently noted that DOJ Tax has noised about potential criminal prosecutions for improper certifications and narratives, as well as the underlying conduct.)

Tax Court Again Rejects Collateral Estoppel For Some Deficiency and Civil Fraud Penalty Where No Tax is Due (7/24/16)

I recently blogged on the case of Senyszyn v. Commissioner, 146 T.C. ___, No. 9 (2016), here, referred to as Senyszyn II to distinguish from the first opinion in the case in 2013, where the Tax Court declined the IRS's invitation to apply the doctrine of equitable estoppel arising from the taxpayer's conviction for tax evasion.  See Tax Evasion Conviction Does Not Compel a Finding of Deficiency Where There is No Deficiency (Federal Tax Crimes Blog 4/2/16), here.  An element fo the crime of tax evasion to which the taxpayer pled is tax evaded (some courts say it must only be some tax evaded; others say substantial tax evaded, although the substantial modifier is not a textual element of the crime).  Accordingly, the taxpayer's plea to tax evasion included a stipulation that he willfully failed to report income of $252,726 which, in most cases would mean a tax evaded, indeed a substantial tax evaded.  In the ensuing tax case involving the year, however, the evidence demonstrated that there was no evaded tax.  The IRS nevertheless urged that the Tax Court should find some minimal amount of tax evaded pursuant to the plea agreement as to that element of the crime.  The Tax Court declined to imposed collateral estoppel against the evidence it had before it.

The IRS was not pleased.  Conjuring the horrors that might result, the IRS asked for reconsideration, urging that collateral estoppel was mandatory rather than equitable subject to the court's discretion. The Tax Court (Judge Halpern) again rejected the position.  Senyszyn v. Commissioner, T.C. Memo. 2016-137, here.  The Court has a good history of the proceedings before the Tax Court, with the first opinion in 2013 and not, apparently, the last just last week.

Judge Halpern then explained the IRS' motion for reconsideration:

In that motion, respondent alleges that, in Senyszyn II, we "did not properly apply the standard for collateral estoppel." In particular, respondent argues that our claim of "broad discretion in the application of collateral  estoppel" was a substantial error of law because it "contradicts previous holdings of the Court of Appeals for the Third Circuit, the court to which any appeal in this case would lie." Finally, respondent alleges that proper application of the standard for collateral estoppel would result in "a substantial tax deficiency for petitioners." According to respondent, that Court of Appeals allows trial courts discretion in the application of collateral estoppel only when the doctrine is asserted by a claimant who was not a party to the prior litigation (i.e., cases of "non-mutual" collateral estoppel). By contrast, in cases involving "mutual" collateral estoppel, in which the doctrine is asserted by a party to the prior litigation, courts must apply the doctrine whenever the legal conditions to its application are met.

The Tax Court noted that the IRS' argument that collateral estoppel does not permit judicial discretion in its application was based on thin authority (Jean Alexander Cosmetics, Inc. v. L'Oreal USA Inc., 458 F.3d 244 (3d Cir. 2006), and in the discussion section of the opinion demonstrates that that case is not sufficient authority on the facts in the case.  Moreover,

Respondent also suggests we "consider the breadth of * * * [our] opinion." He worries that the discretion we have claimed in the application of collateral estoppel might encourage "many more challenges to clear-cut cases" that will "waste judicial resources and the resources of the parties, thereby frustrating the entire purpose of collateral estoppel." He also professes concern that our Opinion "might be used to challenge prior criminal convictions." Finally, respondent suggests that applying collateral estoppel would "save[] the Court from having to confront the question of a requirement to arbitrarily determine some 'substantial tax deficiency' in order to afford the District Court the comity to which it is due, in a case where this Court's factual analysis shows there really is no deficiency at all." "The better course", respondent recommends, "is to accept via collateral estoppel the liability to which Mr. Senyszyn stipulated in his guilty plea as a minimum deficiency."

Good Eleventh Circuit Analysis on the Meaning of Defraud in the Mail and Wire Fraud Statutes (7/22/16)

We have often discussed the word "defraud" as used in the federal criminal statutes.  To summarize the discussion, the word defraud as meant in most federal criminal statutes means, in my words, deceiving to take away something of value from victim.  However, in the federal criminal conspiracy statute, 18 USC § 371, here, which criminalizes in part pertinent a conspiracy "to defraud the United States," the word defraud, as interpreted, can mean a conspiracy to impair or impede the lawful function of a federal agency (such as most prominently for this blog, the IRS); the conspiracy need not have as its object the taking of money or value.  Now, there is a lot of nuance behind that general statement of the difference between defraud as used in the mail and wire fraud statutes and as used in the general conspiracy statute.  A good introduction, however, is provided by the Second Circuit in United States v. Coplan, 703 F.3d 46, 78 (2d Cir.2012), here, cert. denied, ––– U.S. ––––, 134 S.Ct. 71, 187 L.Ed.2d 29 (2013); I have discussed the issue in several blogs, I point readers now only to the one initially discussing Coplan, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; more detail on my thoughts on the difference is in John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here.

In terms of the interests of this blog, the other key criminal statutes using the word "defraud" are the mail and wire fraud statutes which each criminal a "scheme or artifice to defraud."  18 USC §§ 1341, here; and 1343, here.  In United States v. Takhalov, ___ F.3d ___, 2016 U.S. App. LEXIS 12664 (11th Cir. 2016), here, in a colorful opinion, the panel applied the traditional interpretation of the word defraud.  The opinion has a short introduction that telescopes its reasoning:

The wire-fraud statute, 18 U.S.C. § 1343 does not enact as federal law the Ninth Commandment given to Moses on Sinai. n1 § 1343 forbids only schemes to defraud, not schemes to do other wicked things, e.g., schemes to lie, trick, or otherwise deceive. The difference, of course, is that deceiving does not always involve harming another person; defrauding does. That a defendant merely "induce[d] [the victim] to enter into [a] transaction" that he otherwise would have avoided is therefore "insufficient" to show wire fraud. See United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987).
   n1 See Exodus 20:16 ("Thou shalt not bear false witness against thy neighbor.") (KJV).

Here, the defendants feared that the jury might convict them of wire fraud based on "fraudulent inducements" alone. Hence they asked the district court to give the jurors the following instruction: that they must acquit if they found that the defendants had tricked the victims into entering a transaction but nevertheless gave the victims exactly what they asked for and charged them exactly what they agreed to pay. The district court refused to give that instruction, and the jury ultimately convicted the defendants of wire fraud and other crimes, most of which were predicated on the wire-fraud convictions. The question presented in this appeal is whether the district court abused its discretion when it refused to give the requested instruction.

Bottom line, the Eleventh Circuit panel held, over the Government's objection, that the requested instruction was indeed a correct instruction on the law and that the court had abused its discretion in refusing to give the requested instruction.  Criminal law enthusiasts will recall that it is not error to refuse a correct instruction where the point is adequately covered in other instructions (e.g., the general willfulness instruction in tax cases covers the concept of good faith) and, in any event, it may not be reversible error if error it be.

The relevant facts were that the defendants were owners of clubs that used what are called "Bar Girls" or "B-girls" to entice unsuspecting male customers into their bars.  Those girls did not disclose to the customers their relationship with the bar.  Defendants did not contest those facts.  But, they urged, that merely enticing unsuspecting and uninformed customers into the bar was not sufficient to meet the definition of defraud.  More would be required, they urged, in order to make a case that the conduct rose to the level of the word defraud in the statute.  Now, there was evidence that, after the customers entered the bar some conduct occurred which might meet the definition of defraud, but the defendants did contest whether they knew that such conduct occurred.  Since they contested that conduct and their knowledge of the conduct, they urged, the Government had to prove those facts beyond a reasonable doubt and, more importantly, they urged, they were entitled to an instruction to the jury that, if all the Government proved beyond a reasonable doubt was that they knew that the girls were deceiving the customers to enter the bar, that conduct did not establish that they intended to defraud the customers and they should be acquitted.  (In stating the defendants' claims, the panel does note an analogous episode from the classic movie Casablanca, noting that the defendant's defense was "what one might call the Casablanca defense, arguing that they were 'shocked, shocked' to learn that fraud was taking place within their South-Beach versions of Rick's Café Américain.n2 [citing in fn2 "See generally Casablanca (Warner Brothers 1942) ("Rick: How can you close [up my bar]? On what grounds? Captain Renault: I'm shocked, shocked to find that gambling is going on in here! Croupier: Your winnings, sir.")").

Important Second Circuit Decision on Custody Requirement for Miranda Warnings (7/20/16)

The Supreme Court held long ago that, before statements of persons questioned while in custody can be used at a criminal trial where the person questioned is a defendant, the person must be given warnings that have come to be called Miranda warnings.   Miranda v. Arizona, 384 U.S. 436, 444 (1966).  These warnings are statements of the person's right to remain counsel and request counsel before the interview continues.  The key issue is what is "custody," and that has been the principal battle ground ever since.  (A related issue unique to the administrative agency, particularly tax, arises where agencies conduct both civil and criminal investigations and an agent conducting a civil investigation may really be conducting a de facto criminal investigation in which he misleads the target of the investigation as to the criminal nature of the investigation.  For the Federal Tax Crimes blogs discussing some aspect of this issue, see here.)

The Second Circuit recently addressed the custody issue in a nontax investigation.  United States v. Faux, ___ F.3d ___, 2016 U.S. App. LEXIS 12577 (2d Cir. July 8, 2016), here, reversing United States v. Faux, 94 F. Supp. 3d 258 (D CN 2015), here.  The Second Circuit panel's decision is important potentially applicable in some criminal tax investigations.

The decision commences with a good overall summary:

The United States appeals from an order suppressing statements made by defendant Danielle Faux during a two‐hour interview that was conducted in her home while a search warrant was being executed.  The underlying allegation is that Faux fraudulently submitted bills for physical therapy sessions (which would be insurable) that were in fact (uninsured) sessions with personal trainers. The United States District Court for the District of Connecticut (Underhill, J.) ruled that the circumstances of the interview amounted to a custodial interrogation and that the statements must be suppressed because Miranda warnings were not given.  It can hardly be denied that the conditions of the interview exerted coercive pressure on Faux: armed law enforcement personnel entered her home at dawn, her vacation plans were abruptly canceled, and she was accompanied by an agent when she moved about her home; however, the circumstances did not rise to the level of a “custodial interrogation,” which is defined narrowly in our case law as circumstances akin to formal arrest.  The Government stepped right up to the limits of constitutionally permissible conduct and, based on the facts accepted by the district court, just managed to toe the line.  Accordingly, we vacate the order of the district court and remand for further proceedings not inconsistent with this opinion.

Also, similarly helpful as a summary is the conclusion (pp. 20-21 of the slip opinion:

III 

Under our precedents, the circumstances of Faux’s interrogation militate against a finding of custody.  Faux was questioned in the familiar surroundings of her home.  See FNU LNU, 653 F.3d at 153.  She was seated at her own dining room table.  See Beckwith v. United States, 425 U.S. 341, 342 (1976).  She was not handcuffed during the interrogation and was not arrested at its conclusion.  See Newton, 369 F.3d at 663.  The agents did not display their weapons or otherwise threaten or use any physical force.  See Badmus, 325 F.3d at 136. n8  Faux claims the agents “held her arm” as they escorted her to her dining room for the interview; but the agents denied this, the district court made no finding one way or the other, and the gesture is not described as being forceful.  In short, there is no evidence that physical force was used, or threatened.
   n8  This distinguishes our case from the “police‐dominated environment” that led to a custody finding by the Ninth Circuit in Craighead.  There, the agents unholstered their weapons in the presence of the defendant several times.  539 F.3d at 1084‐88.  The interrogation took place in a “back storage room” where the door was closed behind the defendant and one of the armed officers stood blocking the door, silently.  Id.  There is no indication in this case that any of the agents physically imposed themselves to prevent Faux from leaving the dining room; in fact, she was permitted to move throughout the house, albeit accompanied by an agent. 

On this record, and given our precedents, it must be concluded that Faux was not in custody.  True, the two‐hour interview was conducted while officers swarmed about her home.  But she was told 20 minutes into the interview that she was not under arrest; she was never told that she was not free to leave; she did not seek to end the encounter, or to leave the house, or to join her husband; the tone of the questioning was largely conversational; there is no indication that the agents raised their voices, showed firearms, or made threats.  Her movements were monitored but not restricted, certainly not to the degree of a person under formal arrest.  She was thus never “completely at the mercy of” the agents in her home.   

Faux’s statements should not have been suppressed, because no Miranda warnings were necessary.

Second and Ninth Circuit Opinions on Email Issues (7/14/16; 7/15/17)

Emails can be the mother lode in criminal prosecutions.  Two Courts of Appeals in the last two days issued major decisions in cases involving emails and privacy.

In Microsoft Corp v. United States, ____ F.2d ___,  2016 U.S. App. LEXIS 12926 (2d Cir. 7/14/16), here, the Second Circuit panel offered the following opening case summary:

Microsoft Corporation appeals from orders of the United States District Court for the Southern District of New York (1) denying Microsoft’s motion to quash a warrant (“Warrant”) issued under the Stored Communications Act, 18 U.S.C. §§ 2701 et seq., to the extent that the orders required Microsoft to produce the contents of a customer’s e‐mail account stored on a server located outside the United States, and (2) holding Microsoft in civil contempt of court for its failure to comply with the Warrant.  We conclude that § 2703 of the Stored Communications Act does not authorize courts to issue and enforce against U.S.‐based service providers warrants for the seizure of customer e‐mail content that is stored exclusively on foreign servers.

For earlier blogs on the the Microsoft Case and the Stored Communications Act, see

• The Stored Communications Act and Emails: An Overview, Federal Tax Crimes Blog 4/25/15), here.
• Peter D. Hardy, and Carolyn H Kendall, Guest Blog on Stored Communications Act Reach to Cloud Storage Outside the U.S., Federal Tax Crimes Blog 4/25/15), here.

In In re Grand Jury Subpoena,JK-15-029, ___ F.3d ___, 2016 U.S. App. LEXIS 12860 (9th Cir. 7/13/16), here, the Ninth Circuit's staff summary of the opinion is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader. 

Grand Jury Subpoena 

The panel reversed the district court’s order declining to quash a grand jury subpoena seeking a broad range of information from the State of Oregon as part of a federal investigation into activities of former Governor John Kitzhaber, and remanded. 

For several years before Kitzhaber left office, copies of his personal emails were archived on Oregon’s computer servers. The panel agreed with Kitzhaber, an intervenor, that he had a reasonable expectation of privacy in much of his personal email (although the Fourth Amendment’s protection does not extend to any use of a personal email account to conduct public business), and that the subpoena in this case — which is not even minimally tailored to the government’s investigatory goals – is unreasonable and invalid. The panel held that Kitzhaber may not assert the attorney-client privilege for his communications, including communications regarding potential conflicts of interest and ethics violations, with the State of Oregon’s attorneys. The panel explained that whatever privilege may protect those communications belongs to the State of Oregon, not to Kitzhaber as an individual officeholder in his personal capacity. 

The panel remanded with instructions to quash the present subpoena in its entirety. The panel declined to address in the first instance issues likely to arise concerning the means of segregating and producing the material requested by a subpoena tailored in accordance with this opinion.

When I have more time (perhaps early next week), I will supplement this blog entry.

Addendum 7/15/16 3:00 pm:

Chutzpah - Swiss Banker Moans that Switzerland Is Not Protecting Swiss Banks From Their Raids for Foreign Governments (7/12/16; 7/13/16)

I don't know what more I can say about reports such as this one:  Tom Miles, UBS chief says Swiss government is leaving banks exposed (Reuters 7/10/16), here.  Just a few excerpts, though:

Switzerland's politicians have done too little to protect the country's banks from demands for data from foreign governments, UBS (UBSG.S) Chief Executive Sergio Ermotti said in an interview published by the SonntagsZeitung newspaper on Sunday. 

Since the financial crisis, cash-strapped governments around the world have clamped down on tax evasion, with authorities investigating Swiss banks in Germany, France and the United States. 

But Switzerland's attempts to negotiate with other governments have not provided legal certainty or closed the book on issues of the past, Ermotti said. 

"This is unacceptable and opens the door for a new offensive against Swiss banks," he told the paper, adding that the government had been too ready to hand over customer data and that it is perhaps too late to get a better deal after years of negotiations. 

* * * * 

Last week UBS said it had been ordered by Switzerland's tax agency to provide France with tax information and it expected other countries to file similar requests. 

The request related to current and former French-domiciled clients and was based on data from 2006 and 2008, the bank said. 

Switzerland's tradition of banking secrecy has helped to make it the world's biggest offshore financial center, with more than $2 trillion in foreign wealth kept with the country's banks. 

In 2014 French authorities placed UBS under formal examination over whether it had helped clients to avoid tax and investigating judges ordered the bank to provide bail of 1.1 billion euros ($1.22 billion).

JAT Further Comment:  The Swiss Government was an enabler of this genre of Swiss banking activity.  Simply put, the Swiss banks could not have behaved as they did without the wall of secrecy established by the Swiss Government which certainly, over the years, knew (or was willfully blind to such knowledge) that the Swiss banks were enabling U.S. taxpayers and other countries' taxpayers evade tax.  In many ways its actions over the years could be viewed as a actions of a co-conspirator.  But, there is the old saying that there is no honor among thieves.  So, the Swiss bankers could not have reasonably expected that the Swiss Government would protect them when the Swiss Government determined that it was not in its interest to further protect them.

Simon Redux - Ineffective Assistance of Counsel After All Else Fails (7/11/16)

A frequent venue for Monday morning quarterbacking in a criminal setting is the proceeding under 28 USC § 2255, here, which is a modern descendant of the common law writ of habeas corpus.  Setting aside procedural requirements, the § 2255 remedy is available

(a) A prisoner in custody under sentence of a court established by Act of Congress claiming the right to be released upon the ground that the sentence was imposed in violation of the Constitution or laws of the United States, or that the court was without jurisdiction to impose such sentence, or that the sentence was in excess of the maximum authorized by law, or is otherwise subject to collateral attack, may move the court which imposed the sentence to vacate, set aside or correct the sentence.

A common claim in a § 2255 proceeding is that the prisoner's attorney rendered ineffective assistance of counsel at the criminal trial leading to incarceration.

James A. Simon, a person about whom I have devoted several blog entries during his trial and appeal, used § 2255 for such Monday morning quarterbacking on the basis of claimed ineffective assistance of counsel.  Although mentioned in a number of blogs, prior to this blog, the last significant entry was Simon's Last Hurrah / Fizzle? (Federal Tax Crimes Blog 8/16/13), here.  This blog discusses his most recent case, a § 2255 proceeding.  United States v. Simon, 2016 U.S. Dist. LEXIS 86584 (ND IN 2016), here.

Prefatory to getting into the decision, I just state at the out set that I think it is a well-written and reasoned decision.  The author is Robert L. Miller (Wikipedia entry here), who handled the trial and thus was uniquely situated to observe the effectiveness of defense counsel and the effect of any counsel errors on the outcome of the case.  Plus, from my reading of the decisions he has written, particularly in the Simon trajectory through the end of the criminal trial, he seems to be a smart and good judge.

Now to dig into the details.  The opinion is long, 51 pages.  I cover only the highlights related to tax and FBAR in this blog entry.  He was also convicted of mail fraud charges and made § 2255 claims for those convictions, but I do not address them here.  He also made the claim about that the trial attorney erred in not having Simon testify at trial, a quintessential type of judgment call.  I do not address that claim here.  

I start out first with an excerpt where Judge Miller summarizes background:

Mr. Simon was a certified accountant, professor of accounting, and entrepreneur with interests in several businesses and entities. One of those ventures was JAS Partners, a domestic limited partnership in which Mr. Simon and his wife each had a one percent partnership stake and the Cook Islands-based Simon Family Trust owned the other 98 percent. Another of Mr. Simon's ventures was Elekta Ltd., a corporation chiefly owned by Mr. Simon's retired sisters but entrusted wholly to Mr. Simon's management. Elekta owned nineteen percent of a third venture that Mr. Simon managed, JS Elekta. JS Elekta in turn owned 75 percent of a fourth business, Ichua Company, also managed by Mr. Simon. Of those four businesses over which Mr. Simon had signature authority, three — Elekta, JS Elekta, and Ichua — were foreign entities possessing foreign bank accounts. 

This case is about money that Mr. Simon paid to himself from those four entities and from another domestic venture, William R. Simon Farms. Between 2003 and 2006, Mr. Simon (or his immediate family members) received about $1.8 million combined from the businesses, which Mr. Simon spent on personal and family expenses and recorded as loans in his personal financial records. No promissory notes existed for these purported loans, and Mr. Simon paid no interest to the companies that made them. He repaid a small portion of the principal to JAS Partners after becoming aware of the government's investigation into his finances. He reported none of this money as income on his tax returns. In 2005 Mr. Simon paid less than $400 in taxes, and in each of the other three years between 2003 and 2006 he paid no taxes at all and claimed a refund. None of the tax returns disclosed that Mr. Simon had interests in or control over foreign bank accounts. Mr. Simon prepared and filed these tax returns himself. 

During these years, Mr. Simon filled out need-based financial aid applications for the private schools his children attended. On these applications, he reported that he had no or very little income, suffered large debts or losses, spent no money on clubs or vacations, had only a few thousand dollars of assets, was in a precarious financial situation due to business failures and litigation, and had enough money to keep him "afloat but barely." These representations were all false: Mr. Simon had the payments from his businesses, spent lavishly on several expensive club memberships, and could afford vacations to Europe and Disney World in addition to a comfortable lifestyle for himself and his family. Based solely on these applications and the tax forms Mr. Simon submitted, the schools gave the Simon family a total of $120,000 in need-based financial aid. Mr. Simon also filled out federal "FAFSA" financial aid applications for one of his daughters to attend college. As he did on his private financial aid applications, Mr. Simon reported minimal gross income and assets on the FAFSA application.
In November 2007, IRS agents searched Mr. Simon's house pursuant to a warrant. Mr. Simon hired attorneys soon after that and began preparing a defense to possible charges. His attorneys hired a team of investigators and conducted their own investigation into Mr. Simon's finances, including interviewing the people already interviewed by government agents. Mr. Simon's defense team also met with prosecutors to discuss the probable charges, to guide their planning of colorable defenses. 

In April 2010, Mr. Simon was charged in a 23-count indictment. Counts 1-4 alleged that Mr. Simon filed false tax returns for the years 2003-2006. The tax returns were allegedly false in that they underreported income, and in that they didn't check the "yes" box of Line 7a on Schedule B to IRS Form 1040. The question associated with Line 7a asked whether Mr. Simon had any interest in or authority over foreign accounts. Counts 5-8 charged Mr. Simon with failing to file forms called Reports of Foreign Bank and Financial Account, or "FBARs," for the years 2004-2007. FBARs concern foreign financial accounts, and a person is required to file them if he or she has an interest in or signature authority over foreign accounts worth more than $10,000. Counts 9-19 charged Mr. Simon with mail fraud related to the need-based financial aid applications he made to the private schools his children attended. Those counts alleged that Mr. Simon underreported his income on the forms, and that the tax returns he attached were fraudulent for the same reasons as alleged in counts 1-4. Counts 20-23 charged Mr. Simon with federal financial aid fraud based on the FAFSA forms he filled out on his daughter's behalf. The FAFSA application required Mr. Simon to include information from his tax returns; if the tax returns were false (as alleged in counts 1-4), the aid applications were fraudulent as well. 

Third Circuit Affirming Conviction Despite Brady Violation (7/8/16)

Some cases and their permutations seem to drag on for a long time.  Back in 2011, I wrote a blog entry titled Third Circuit Opinion for Conviction of Offshore Trust Players (Federal Tax Crimes Blog 11/21/11), here.  As I said then,

Basically, the defendants marketed offshore trust schemes intended to fraudulently evade U.S. tax for the clients entering the schemes. The defendants were charged with several of the various tax crimes that the Government can trot out for such schemes.

Actually the schemes went beyond just offshore trusts, but they were all sham arrangements.  The defendants were connected with a group known as Commonwealth Trust Company ("CTC") which sold variously styled entity arrangements including trusts to evade U.S. tax.  In my earlier posting, some of the promoters were convicted and their convictions were affirmed.  For the tale of one such convicted -- Wayne Rebuck -- see his blog entries titled Rebuck and Commonwealth Trust Company, here, where he recounts his conviction and various penances.

In addition to the promoters of the arrangements, some of the taxpayers buying these arrangements were convicted.  One of the notable taxpayers involved was Wesley Snipes.  See Wesley Snipes Conviction and Sentence Affirmed (Federal Tax Crimes Blog 7/17/10), here.  (For the connection of Snipes to CTC, see Raid led to IRS tax fraud inquiry (The Morning Call 12/7/06), here.)  One more taxpayer's conviction was recently affirmed by the Third Circuit.  United States v. Bitterman, 2016 U.S. App. LEXIS 11875 (3rd Cir. 2016) (nonprecedential), here.  The Third Circuit summarized:

In December 2009, Chester, Craig, C. Grant, and Curtis Bitterman were indicted for conspiracy to defraud the United States in violation of 18 U.S.C. § 371. The Government alleged that the Bittermans conspired to conceal their income and assets from the IRS. Briefly, the conspiracy consisted of moving the family business and personal assets into trust products bought from the Commonwealth Trust Company.1 The Bittermans then acted as "managers" of the trusts but continued to benefit from trust property. Craig Bitterman was separately charged with obstruction of justice in violation of 18 U.S.C. § 1503 in connection with his response to a grand jury subpoena.
   n1 Commonwealth Trust Company was a target of a separate criminal investigation, resulting in the conviction of its founder and several of its employees. 

After a jury trial in October 2010, the Bittermans were convicted on all counts. They filed post-trial motions arguing, among other things, that an evidentiary error at trial and the Government's failure to turn over certain evidence compelled a new trial or dismissal of the indictment. The District Court denied the post-trial motions in April 2015 and sentenced the Bittermans three months later. Only Craig Bitterman has appealed.

The only issue I found particularly interesting was the Brady issue Bitterman raised.  The Court found that there was a Brady violation but found that the violation did not require reversal because not material to his defense or not likely to have produced a different jury verdict.  Here are the excerpts of that discussion (bold-face supplied by JAT, with one footnote omitted):

Bitterman next argues that the Government deprived him of a fair trial by failing to turn over favorable evidence in a timely way. Before trial, the Government produced to Bitterman approximately one million pages of discovery materials. The Government also made available for inspection at the IRS offices in Philadelphia 70 boxes of documents seized pursuant to search warrants executed during the investigation of Commonwealth Trust Company. Neither Bitterman nor his counsel inspected the boxes before trial. After trial, Bitterman discovered that the Government had failed to turn over 13 CDs containing roughly 100,000 pages of discovery materials produced during the prosecution of Commonwealth's founder and key employees. Bitterman filed a post-trial motion alleging a Brady violation based on the Government having failed to turn over discovery from the Commonwealth prosecution and having misled Bitterman about the relevance of the 70 boxes of seized documents. The District Court held an evidentiary hearing in August 2011. 

Under Brady v. Maryland, 373 U.S. 83, 87, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963), the Government has an obligation to disclose "evidence favorable to an accused" so long as it is "material either to guilt or to punishment." "To establish a due process violation under Brady . . . 'a defendant must show that: (1) evidence was suppressed; (2) the suppressed evidence was favorable to the defense; and (3) the suppressed evidence was material either to guilt or to punishment.'" United States v. Pelullo, 399 F.3d 197, 209 (3d Cir. 2005) (quoting United States v. Dixon, 132 F.3d 192, 199 (5th Cir. 1997)). 

We agree with the District Court that the Government failed to turn over, and thus suppressed, the 13 CDs from the Commonwealth prosecution. The Government claims that diligent defense counsel would have uncovered the CDs before trial, but the diligence of defense counsel is largely irrelevant to the Government's Brady obligation. See Banks v. Dretke, 540 U.S. 668, 695, 124 S. Ct. 1256, 157 L. Ed. 2d 1166 (2004) (defendants are not required to "scavenge for hints of undisclosed Brady material when the prosecution represents that all such material has been disclosed"). We also agree with the District Court that the Government did not suppress the 70 boxes at the IRS offices because it made the boxes available for inspection and did not mislead Bitterman or his counsel about their potential value to the defense. See Pelullo, 399 F.3d at 212-13. 

Report of DOJ Interest in Prosecuting Improper Streamlined Certifications (6/8/16)

As best I can tell, the Streamlined Disclosure Programs -- SFOP and SDOP -- have been a great success for the IRS and have offered a relatively easy resolution for taxpayers.  Relative is in contrast to OVDP.  But the key feature of the Streamlined Programs is that the taxpayer certify to that the tax and FBAR noncompliance in the covered period was nonwillful and provide a narrative explanation to support the certification of nonwillfulness.  The certification and narrative are made under oath with penalties of perjury.  The Progams, however, offer no certainty and allow the IRS to conduct civil and criminal investigations focused first upon whether the taxpayer has made a proper certification with supporting narrative and then, if the certification and narrative are not correct the civil and criminal investigations can look at any conduct within an applicable statute of limitations.

Bloomberg reports that there may be some IRS and DOJ activity on this front based principally on the reams of information DOJ is receiving from Swiss Banks under the DOJ Swiss Bank Program and other sources.  The following are excerpts from David Voreacos, America’s Offshore Tax Cheats Are Feeling the Heat Once Again (Bloomberg 7/1/16), here.

We’re “taking all of that data and scrubbing it for leads,” Nanette Davis, a trial attorney in the Justice Department’s tax division, said at the New York University Tax Controversy Forum last week. The effort has been fruitful already, she said. With some taxpayers, “we say ‘we could indict this case tomorrow,”’ said Davis, who is overseeing the review. 

The risk of being scrutinized falls on those taxpayers who came forward under the government’s so-called streamlined program. Those living in the U.S. paid penalties of 5 percent of their undisclosed offshore assets, while overseas residents paid none.
Another 54,000 Americans took a more arduous route in voluntarily disclosing their offshore accounts to the IRS since 2009, including their dealings with bankers and advisers. They were hit with penalties of as much as 27.5 percent of their assets, in addition to the total of $8 billion in back taxes and other penalties. But the government agreed to never prosecute these taxpayers over the disclosures. 

Lawyers Critical 

Some tax lawyers were critical of Davis’s warnings about possible prosecutions.
Those statements might have “a chilling effect” on people considering using the streamlined program, said tax attorney Barbara Kaplan, of Greenberg Traurig LLP. That “undermines the IRS interest in bringing as many people as possible” into tax compliance, she said. 

But attorney Jeremy Temkin said it’s been clear to tax advisers for the last year that the Justice Department might prosecute people who lied in their declarations. His advice: Clients should disclose any bad facts to the IRS. 

“It is important to present both the positive and negative facts and let the IRS decide,” said Temkin of Morvillo Abramowitz Grand Iason & Anello PC. 

IRS trial attorney John C. McDougal suggested at the conference that the review of the streamlined submissions isn’t as dire as Davis made it sound because they’re being looked at in the same way as other tax returns. The IRS has begun formal examinations in some of the cases, he said. 

Still, the threats to taxpayers who lied may be mounting as more financial institutions step forward. Davis said offshore entities not yet under investigation are voluntarily approaching the U.S. to cooperate. 

“We’re getting spreadsheets with U.S. client names, account numbers, details, entity names, account balances,” she said. “It’s a little bit of a dangerous time if you are an offshore account holder and have not gotten right, because there’s just been an avalanche of information that’s come to the department and the IRS.”

JAT Comments:  I think the "chilling effect" comment may be lawyer hyperbole.  The requirement that the certification and narrative be made under oath with penalty of perjury has its own chilling effect, and that is simply a requirement of the program.  I think that most -- at least many -- practitioners below that the certification with a robust narrative that is factually accurate and balanced with the good and bad facts (with the bad facts presented in the best light possible) will not create a problem with the certification and narrative.  The IRS will not prosecute the improper conclusion of nonwillfulness if the narrative fairly presents the good and bad facts. The IRS may simply determine that the narrative as presented does not support the certification of nonwillfulness but there should not be a prosecution based on the certification and narrative.  The problem, of course, is that if the narrative and the facts after investigation do not support the certification, the taxpayer does not get the benefit of the Streamlined Program and its implicit promise to taxpayers that the past is past.  The past is then open to any appropriate IRS enforcement efforts -- civil or criminal -- for which the statute of limitations is still open.

One of the problems is that, at least for the more aggressive taxpayers, time is not on their side.  Many taxpayers playing the offshore account game learned of the IRS push in this area shortly after the IRS resolved the UBS matter with great fanfare and publicity in 2009.  Yet they held back from the initial OVDP, and often moved the offshore deposits from one Swiss bank to another or to tax haven banks outside Switzerland.  Many of those taxpayers who have not joined an IRS disclosure program will be on the DOJ and IRS radar screen because of these Swiss bank disclosures.  At a minimum, those taxpayers should have come into tax and FBAR noncompliance for the years after they became aware of the DOJ and IRS initiatives, even if they did not join OVDP.  I called this a go-forward compliance.  However, many of them held out without even go-forward compliance, hoping they would not be discovered.  Then, when the more robust Streamlined Programs were announced in 2014, they saw an opportunity to resolve the past simply by claiming nonwillfulness and providing a supporting narrative that may not accurately present a balanced picture of the truth, again hoping that they would not be discovered.  For those taxpayers who were aware of the IRS initiatives in years before 2014, however, and particularly those who attempted in the covered years to hide their ownership of foreign accounts, the certification in the Streamlined Programs will expose them to civil and criminal investigation.  I had heard of Nanette Davis' statements at the conference.  I think she is a straight-shooter, and it does appear that there will be some prosecutions.

Now, John McDougal does moderate Ms. Davis' gloom and doom scenario a bit.  I think that is just to say that only the most aggressive certifications and narratives will be audited, the likely first step in any prosecution.  Most Streamlined cases will have not further activity by the IRS.  But some will.  Therein lies the problem for those taxpayers with improper certifications..

Tenth Circuit Case on Sentencing Guidelines Tax Loss as Object of the Offense (7/3/16)

In United States v. Sing, 2016 U.S. App. LEXIS 12110 (10th Cir. 2016), unpublished, here, the Tenth Circuit affirmed an appeal questioning the calculation of the tax loss, the principal driver of the Sentencing Guidelines for tax crimes.  SG § 2.1.1(c)(1), here, provides:

(1)       If the offense involved tax evasion or a fraudulent or false return, statement, or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed).

The Background provides:

Background:  This guideline relies most heavily on the amount of loss that was the object of the offense. Tax offenses, in and of themselves, are serious offenses; however, a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics. Furthermore, as the potential benefit from the offense increases, the sanction necessary to deter also increases.

The key concept in the foregoing is the "object of the offense."  The guidelines use the term "object of the offense" in other nontax provisions.  E.g., § 2P1.2 ("If the object of the offense was the distribution of a controlled substance")  Further, the Guidelines use the term object in apparent reference to object of the offense.  E.g., 2S1.1 Commentary ¶ 3(c) ("sole object of that conspiracy).  (It is interesting, in this regard, that the other major financial crime provision, §2B1.1, here, dealing with larceny, embezzlement, other forms of theft, etc., uses the simpler concept of "loss" rather "loss that was the object of the offense.")

In any event, the Tenth Circuit seemed to be troubled enough to comment on its view that the formulation in the tax guideline -- "loss that was the object of the offense" -- did not fit neatly into the Model Penal Code ("MPC") provisions of mens rea.  The Tenth Circuit said:

Ms. Sing and Mr. Timmerman argue that the district court's tax loss estimate is fatally flawed and that this error infected the whole of the sentencing process. It's not entirely clear from the text of § 2T1.1(c)(1) what mens rea the government must prove with respect to a tax loss. Rather than employing [4]  the standard and rigorous mens rea categories discussed in the Model Penal Code or much of contemporary criminal law, the guidelines say the government must show the loss amount was the "object of the [defendants'] offense (i.e., the loss that would have resulted had the offense been successfully completed)." And you might well wonder whether, translated into the more helpful heuristics of the Model Penal Code, this means the government must show the defendant intended, knew of, or perhaps was recklessly indifferent to or negligent about the amount of loss the government would have suffered "had the offense been successfully completed." But, as the defendants concede, they, the government, and the district court in this case have all proceeded on the assumption that to qualify as the "object of the offense" the loss in question must have been intended. See United States v. Manatau, 647 F.3d 1048, 1048 (10th Cir. 2011). And that much, they say, the government failed to prove in this case.

So, the Tenth Circuit raised the concern but did not develop the issue or resolve it.  Although the comment is somewhat cryptic, I have tried to develop it as best I could.  Bottom-line, thought, I agree that the intended loss is the concept.

The Court does not cite the provision in the MPC to which it refers.  I will provide here some background  to the MPC and the apparent provision to which the Tenth Circuit referred.

The MPC is a model code developed by the American Law Institute "to stimulate and assist legislatures in making an effort to update and standardize the penal law of the United States of America."  See Wikipedia entry on Model Penal Code, here.  The MPC offers some fundamental concepts, including, in § 2.02, the General Requirements of Culpability.  See the reprinting by Professor Vernelia R. Randall, here.  In relevant part, the "Minimum Requirements of Culpability" for a criminal offense is that the person "acted purposely, knowingly, recklessly or negligently, as the law may require, with respect to each material element of the offense."  MPC § 2.02(1).  Each of the types of culpability are further defined in MPC § 202(1).  The Sentencing Guidelines term "object of the offense" seems to be an intent concept, as the parties agreed in Sing and thus fit within the concepts of "purposely" and "knowingly" in the MPC.  Hence, the sentencing court and the parties agreement that intent was required for the tax loss in the object of the conspiracy resolved any issue as to the concept in the Sentencing Guidelines.

In this regard, since the reference is to the object of the offense, like the offense conspiracy, it probably imports the mens rea element of the offense (including relevant conduct).  Tax crimes are specific intent crimes.  See Cheek v. United States, 498 U.S. 192 (1991) (the statutory element of willfulness in most Title 26 tax crimes requires specific intent to violate a known legal duty).  Hence, the mens rea element seems to be the same as the underlying offense -- the Cheek willfulness.

Another concept defined in the MPC for some types of culpability is "recklessly."  See MPC § 2.02(c).  A question presented by the Cheek willfulness element is whether willful blindness (or a related concept of reckless conduct) is a nonstatutory expansion of the specific intent concept in the "willfully" element for tax crimes or, instead, merely permits a jury to infer the specific intent from finding conduct that might be characterized as reckless.  I will just link below some of the blogs in which I discuss the issue.

• Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here, discussing the concepts in the criminal context.
• More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (Federal Tax Crimes Blog 7/22/14), here, discussing the concepts in the civil willfulness context.

IRM Guidance on Processing SDOP - On Flagging Returns for Scrutiny and IRM Redactions (7/2/16)

In a prior posting in 2014, I discussed some internal guidance on the IRS web site for processing Streamlined Submissions.  New IRS Internal Guidance on Processing Streamlined Submissions (8/29/14; 8/30/14), here.  A reader of the Blog, Andrew Jones, here, advised me that the IRS has taken down the link to the guidance and incorporated some of the guidance, with some modifications, in IRM 21.8.1.27.2.1  (05-01-2015), Adjusting Streamlined Filing Compliance Domestic Accounts - (Streamlined Domestic Offshore - SDO), here.  I have revised that prior blog entry to so indicate.

Andrew also noted that a key part of the guidance as I had posted it in 2014 related to flagging the presence of "5 or more information returns" in SDOP submissions appears to have been redacted in IRM 21.8.1.27.2.1 (linked above). but Andrew recounts his sleuthing on this issue and significance of the redaction as follows:

I was spending some time working up some advice for a client re: the "5 or more information returns" metric imposed on Streamlined Domestic filings (maybe SFOP too).  I was stumped for some time because I couldn't find that language that you cited at http://federaltaxcrimes.blogspot.com/2014/08/new-irs-internal-guidance-on-processing.html.   

When I visited the IRS' posting of the IRM (https://www.irs.gov/irm/part21/irm_21-008-001r-cont03.html), that phrase was nowhere to be found.

I was finally able to discover that the IRS has redacted this detail (you'll find the === notations obscuring the original text, right below the line, "Allow the adjustment notices to generate and serve as the closing correspondence."  That position in the IRM is exactly where your blog post cited, and the May 1, 2015 date of the section posting to the IRM is also after the posting date of your blog entry which mentioned that language. 

I'd tend to think that anything which the IRS decides - after the fact - to redact, is probably of some significance.  In that case, you seemed to feel (and I definitely agreed) that this was an important insight into how/why Streamlined filings are or are not accepted as filed.  In the context of what is otherwise a largely 'black box' process, the IRS' efforts to hide their rules-of-thumb is particularly valuable.

Thanks to Andrew for calling it to my attention so that I can pass it on to readers of this blog.