Court Denies Suppression and Exclusion Despite Odd Facts Regarding Third Party Recordkeeper Summons (2/28/17)

I write today about what seems to me to be a significant failure on the part of an IRS CI agent with respect to a third party recordkeeper summons.  In United States v. Galloway, 2017 U.S. Dist. LEXIS 26362 (ED CA 2017), here, the Court denied motions to suppress or exclude certain evidence obtained by CI agents by summons to Galloway's CPA.

On April 9, 2009, two CI agents  (they usually travel in pairs for the type of activity I describe) showed up unannounced at Galloway's place of business.  Often the first notice a taxpayer has of a pending CI investigation is when the CI agents show up to see if he will submit to an interview.  But Galloway apparently was well-counseled or otherwise savvy enough not to appear when requested and had an employee advise the agents to talk to his lawyer.  The CI agents thus, having lost the element of surprise, felt it was important to secure the files of the taxpayer's former CPA who had represented him in the audit from which the CI investigation apparently arose.  So, they dashed out in handwriting a summons to the CPA and forthwith delivered it to the CPA at his office.  Such summonses -- in this case, third party a recordkeeper summons -- cannot require the summonsed party to deliver the summonsed documents immediately.

Now, for some background.  The IRS is authorized to issue summonses in IRS criminal and civil investigations.  Generally, the notice must be served on the summonsed party and notice given to the taxpayer within 3 days of that service.  Further, the return on the service (production of the documents) must not be required until 23 the issuance of the summons in order to permit the taxpayer to bring a proceeding to quash the summons.  § 7609(a), here.  The notice is not required if the summons is served by a CI agent, except that notice is required if the summons is to a third party recordkeeper.  § 7609(c)(2)(E)(ii).  The summons to a third party recordkeeper is called a third party recordkeeper summons.  Third party recordkeepers include financial institutions, consumer reporting agencies, attorneys, and "accountants."  § 7603(b)(2), here.  The CPA in Galloway clearly fell within the scope of the third party recordkeeper definition and the summons was thus a third party recordkeeper summons.  So, the summons was required to be served on Galloway, in time to permit him to pursue the proceeding to quash the summons.

I noted above that the summons was served on the CPA on April 9, 2009.  The opinion says that the CIA agents interviewed the CPA on June 22, 2010, 439 days after service of the summons.  During that interview, the CPA showed the CI agents some Quickbook records in his file.  The question is whether the CI Agent took delivery of documents earlier than the June 22, 2010 intreview.  In a footnote (Slip Op. p. 13,  fn. 14), the Court says:  "despite the fact that the records in question were obtained by the IRS in 2009," so I think this means that the documents were obtained in the normal course after the summons was served on the CPA.

The brouhaha in the case surrounded the original issuance of the summons.  It is unusual to issue a summons "on the fly" so to speak as was done in that case.  Indeed, the CI agent had only issued one such handwritten summons in his entire career.  Then, when the defense team began inquiring into the summons, the IRS file copy could not be located.  Further, there is no mention in the decision that the taxpayer had been served a copy of the third party recordkeeper summons.  (The decision does not mention the third party recordkeeper summons (except in a parenthetical explaining a case and, perhaps by inference, from § 7609 and § 7603).)  But, the CI agent advised the Government attorney (bold-face supplied by JAT):

Agent Applegate stated he would have sent a copy of the summons to Galloway after serving it on Livsey [the CPA]. (Id. at 5.) He also would have given a copy of the summons to Galloway's attorney after he received a power of attorney signed by Galloway and his attorney. (Id.) Agent Applegate said he would have written a due date on the summons for at least twenty-three days after the date of service to allow Galloway an opportunity to quash the summons. (Id.) Applegate kept all of the summonses issued in the case in a folder in his office. (Id.) However, at the time of the interview, a copy of the summons issued to Livsey could not be found in this paperwork.

Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (2/28/17)

I previously reported on the decision in United States v. Marinello, ___ F.3d ___,  United States v. Marinello, 839 F.3d 209, 218 (2d Cir. 2016), here.  See Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  On February 15, 2017, the Court denied en banc review after an active judge requested that the judges be polled on the issue.  See United States v. Marinello (2d Cir. 2017), here.  I write because of the strong dissent to denial of en banc review authored by Judge Dennis Jacobs and joined by Judge Jose Cabranes.

Judge Jacobs starts:

I respectfully dissent from the denial of rehearing in banc. The panel weighed in on the wrong side of a circuit split, affirmed a criminal conviction based on the most vague of residual clauses, and in so doing has cleared a garden path for prosecutorial abuse.

Just a reminder for the background.  Many of the crimes that are deployed for tax violations have very specific elements for conviction.  Think tax evasion, tax perjury and failure to file which require specific elements, including willfulness which is the voluntary intentional violation of a known legal duty.  Some of the crimes deployed in the fight against tax misbehavior, however, are much loosier-goosier.  Section 7212(a), here, was charged as one count.  Section 7212(a) is the problem (although, as I note below, the same problem inheres in the Klein conspiracy).  Judge Jacobs nails it in the next paragraphs:

Marinello was convicted at trial on nine counts. Eight of them (for willful failure to file tax returns) raise no issue. The single problematic count is for violating the "omnibus clause" of the criminal portion of the Internal Revenue Code, which makes it a felony to "in any other way corruptly . . . obstruct[] or impede[], or endeavor[] to obstruct or impede, the due administration of this title." 26 U.S.C. § 7212(a). Yes: "this title" is the entire corpus of the Internal Revenue Code -- a slow read in 27 volumes of the United States Code Annotated.  

The government charged that Marinello violated the omnibus clause in eight different ways. And the district court instructed the jury that it was enough for conviction that Marinello violated the statute in any single one of those several ways -- and that the jurors did not need to agree among themselves as to which. 

Among the acts listed in the jury charge as violating the omnibus clause are: 

• “failing to maintain corporate books and records for Express Courier [his small business]”;
• “failing to provide [his] accountant with complete and accurate information related to [his] personal income and the income of Express Courier”;
• “destroying, shredding and discarding business records of Express Courier”;
• “cashing business checks received by Express Courier for services rendered”; and
• “paying employees of Express Courier with cash.” 

839 F.3d at 213 (internal brackets omitted). If this is the law, nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant. 

After conviction on all counts, Marinello moved for a new trial on the ground, inter alia, that the omnibus clause applied only to knowing obstruction of an ongoing IRS investigation, not to every possible impediment to the administration of any of the uncountable provisions of the Internal Revenue Code; and that he therefore should have been acquitted because there was no evidence that he was aware of an IRS investigation. 

The district court rejected the argument and the panel affirmed, holding: "under section 7212(a), 'the due administration of this title' is not limited to a pending IRS investigation or proceeding of which the defendant had knowledge." 839 F.3d at 223. Accordingly, the law in the Second Circuit today is that it is a felony to "corruptly" take (or try to take) any of the actions listed above -- or to take or try to take any other action that impedes the "due administration" of the Internal Revenue Code. 

The Sixth Circuit, alert to the sweep of criminalizable conduct, held that the omnibus clause was limited to cases in which the defendant knew of a pending IRS action. United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Miner, 774 F.3d 336, 342-45 (6th Cir. 2014). The Sixth Circuit's view is now distinctly in the minority, and the panel's opinion here signs on to the emerging consensus of error in the circuit courts.

FBAR Due Date Reminder - April 18, 2017 Extended to October 16, 2017 (2/26/17)

A reader posted a reminder under another blog entry that the due date for the FBAR report, FinCEN 114, here, is now due April 15 for the prior year's report.  When the filing date falls on a weekend day or on a holiday, the filing date is the next succeeding business day (a weekday that is not a holiday).  Accordingly, the due date for the 2016 year is April 18, 2017 (per the IRS web site here).  And, FinCen is providing an automatic extension (no filing required to obtain the extension) until October 15 (which, for the 2016 report, will be October 16, 2017, because October 15 is a Sunday).

Here is my discussion in the current draft for the next revision (due August 2017) of my Federal Tax Procedure Book (note that the footnote numbers are not the ones that will be in the final text)):

The FBAR was historically required to be filed on June 30 for the prior year.  In 2015, Congress changed the filing date to April 15 (contemporaneously with the individual income tax return due date for calendar year taxpayers, which can be the next succeeding business day if April 15 falls on a weekend or holiday) with the ability to obtain a 6-month extension to October 15 (also contemporaneous with the extended due date for individual income tax returns and also extended to the next succeeding business day if October 15 falls on a weekend or holiday). n1 Under the current instructions, FinCEN grants an automatic extension from April 15 to October 15; the automatic extension applies without any action on the filer’s part other than not filing by the original due date.  n2
   n1 § 2006(b)(11), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41).  The effective date of this FBAR filing provision is the filing year 2016 (i.e., the 2016 FBAR is due April 15, 2017 (actually, on the next succeeding business day), subject to the automatic extension to October 15, 2017 noted in the text).
   n2 FinCEN web page, titled New Due Date for FBARs (12/16/16), viewed 2/1/17, providing in relevant part after noting the statutory due date of April 15 (emphasis supplied):
To implement the statute with minimal burden to the public and FinCEN, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.  (Please note: The due date for FBAR filings for foreign financial accounts maintained during calendar year 2016 is April 18, 2017, consistent with the Federal income tax due date.)
One might even say that, as thus formulated, the real filing due date is October 15.

Some helpful web pages (including the one mentioned in fn. 2 above are:

• New Due Date for Filing FinCEN Form 114 -- 12-JAN-2017, here.
• Individuals Filing the Report of Foreign Bank and Financial Accounts (FBAR), here.
• BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114), here.

Further on Contempt Sanctions for Failure to Produce Foreign Documents (2/20/17)

I previously blogged on a case In re Various Grand Jury Subpoenas, 2017 U.S. Dist. LEXIS 9697 (SD NY 2017), involving contempt sanctions for failing to produce foreign bank and entity documents allegedly in the control of the person subject to the grand jury subpoena.  See Contempt Sanctions Continued in GJ Subpoena for Required Records (Federal Tax Crimes Blog 1/25/17), here.  On February 13, 2017, Judge Pauley issued a further order staying the effective date for the contempt sanction of $1,000 per day to comment from February 14, 2017 to March 20, 2017 to permit the subpoenaed party additional time to arrange with the foreign entities and coordinate with the Government to produce the documents.  The key documents for this new opinion are:=

• The order, here.
• The motion was filed but apparently the memo in support was filed under seal; the motion was just the bare motion, so I don't link it.
• The United States response, here.

The subpoenaed person sought to purge the contempt order previously issued by showing that she had complied with the compulsion in the subpoena by requesting that the Swiss banks produce the records directly to the Government.  One of the banks notified the person that, under Swiss law, it could not produce the documents to the Government.  But, the Government urged, whether or not that was true, with the right form of request (requesting production to her rather than the Government), the banks could produce the documents to the person and she could then provide them to the Government.  Judge Pauley gave the additional time to make sure that she had the time necessary to get the documents, but he makes clear that the Government will not wait forever -- hence the March 20, 2017 date.

Some Lessons from the Big Data from Panama Papers and Tax Haven Secrecy (2/13/17)

Readers of this blog interested in offshore tax havens may want to read this law review article:  Arthur J. Cockfield, Big Data and Tax Haven Secrecy, 18 Fla. Tax Rev. 483 (2016), here.  The author, a professor of law at Queens University (Canada), dives into a subset of the Panama Papers data and draws some conclusion as to the offshore account secrecy offered by so-called tax havens, both for persons avoiding taxes but also for persons avoiding scrutiny of large sums of illegal cash and assets.

THE ABSTRACT:

While there is now significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering, and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the Author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. A transaction cost perspective assists in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in nondemocratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.

INTRODUCTION (FOOTNOTES OMITTED):

On April 3, 2013, the International Consortium for Investigative Journalists (ICIJ) announced that it had obtained the world's largest financial data leak. The leak included over 2.5 million documents detailing the tax haven financial dealings of over 70,000 taxpayers and over 120,000 offshore corporations and trusts. This leak had been investigated by over eighty-six journalists in forty-two countries prior to its public revelation, forming what is likely the most comprehensive global journalist collaboration in history. For the first time, the secret world of tax havens was revealed in great detail. 

The "big data" derived from the ICIJ financial data leak provided journalists and selected researchers, including this Author, with the opportunity to understand how individuals use tax havens to criminally evade taxes, launder illegal earnings, and finance cross-border terrorism (collectively, "global financial crime"). This Article provides a taxonomy of offshore tax evasion efforts derived from the Author's study and analysis of the data leak, with the ultimate aim of providing insights into the incentive and information problems that make it difficult to inhibit global financial crime. 

While there is now a significant literature in law, politics, economics, and other disciplines that examine tax havens and offshore tax evasion, there is little information on what tax haven intermediaries--offshore service providers such as finance and trust companies--actually do to facilitate offshore evasion.  The gap in the writings can be largely explained by the secretive nature of tax haven activities that shielded them from outside scrutiny. For example, the ICIJ financial data leak revealed that offshore service providers were often not complying with international "know your customer" standards, which creates information problems that significantly raise transaction costs for law enforcement authorities with respect to enforcing tax and criminal laws governing offshore tax evasion and other global financial crime.  

A less explored idea is that the secret world dramatically lowers transaction costs for criminals engaged in these offshore activities--the secrecy effectively reduces certain risks facing tax evaders, international drug launderers, and financiers of global terrorism. A transaction cost perspective can assist with understanding the incentive and information problems revealed by the ICIJ financial data leak. The approach emphasizes the ways that offshore service providers take advantage of information problems to facilitate global financial crime. 

The ICIJ financial data leak also provides evidence of capital flight from non- or quasi-democratic countries to wealthier democracies such as the United States and other Organization for Economic Cooperation and Development (OECD) nations; it reveals how a small portion of ruling elites in countries such as China use tax haven intermediaries as conduits to invest their monies in stable democracies. The capital-importing countries hence benefit from trillions of dollars of inward foreign direct and portfolio investment, a significant portion of which would not likely take place in the absence of tax haven secrecy.  

This environment provides a moral hazard for the capital-importing countries, as the current regime in many ways benefits their economies at the expense of the capital-exporting countries. Tax havens, non-democratic states, and even wealthy democracies all face political incentives to pursue the status quo of tax haven secrecy. This Article shows that, even in a world of perfect information, until political incentives change it will be difficult to make any real progress to inhibit global financial crime. 

Whistleblower Claims Swiss Bank IHAG did not Come Clean with DOJ as Category 2 Bank Receiving an NPA (2/11/17)

Finews.com reports (based on a Tax Notes report) that 

A whistleblower reported a Swiss private bank to U.S. prosecutors for violating an offshore settlement, it has emerged. Among his accusations: a Zurich-based bank shielded a gigantic precious emerald from the prying eyes of tax officials. Has IHAG [Private Bank] got a new problem on its hands?

Katherina Bart, Whistleblower Alleges Swiss Bank Cheated in U.S Tax Pact (Finews.com 2/8/17), here.

Other excerpts:

He [Rolf Schnellmann]  is the most recent in a series of Swiss private banking whistleblowers including former UBS banker Bradley Birkenfeld, ex-Julius Baer banker Rudolf Elmer, and Herve Falciani, who stole data from HSBC private bank when he worked at the Geneva-based institute as an information technology specialist.  

* * * * 

Schnellmann came forward as an informant to U.S. justice officials several months before IHAG reached a settlement in the U.S. for helping wealthy Americans cheat on their taxes. The bank, founded in 1949 by a wealthy weapons manufacturer and art collector, agreed in 2015 to pay a nearly a $7.5 million penalty to to avoid prosecution for its wrong-doings with U.S. clients. 

The bank voiced confidence that it is out of the woods. 

* * * * 

$870 Million Emerald 

A cursory read of Schnellmann's accusations, summarized in letters to U.S. officials through a lawyer, appear to at least partly jibe with the bank's own admissions to U.S. prosecutors.  

IHAG admitted to using several steps, including with the help of third parties, to strip assets of any sign they belonged to U.S. taxpayers. 

The gist of Schnellmann's accusations is that IHAG's deception went further: for example, he maintains that IHAG also set up a fund structure to hide beneficial ownership – the true account holder. 

Schnellmann also accuses a Zurich private bank of safekeeping an emerald valued at $870 million for a client who has since died. This claim appears far-fetched: the world's most expensive emerald gemstone, the Bahia Emerald, is valued at $400 million – a 341-kilogram schist. 

U.S. Revisits IHAG? 

The Department of Justice, or DoJ, must determine if Schnellmann's accusations are compelling enough to warrant revisiting IHAG's non-prosecution agreement. The DoJ didn't comment to finews.com. 

Horsky is Sentenced for Major Offshore Accounts (2/11/17; 2/12/17)

DOJ Tax announced here the sentence for Dan Horsky.  I previously blogged about him here:  Former Business Professor Pleads Guilty to Tax Related Crimes; In Addition, Will Pay $100 Million FBAR Penalty (Federal Tax Crimes Blog 11/4/16; 11/9/16), here; see also Credit Suisse Being Investigated for Omitting at Least One Large Account (Federal Tax Crimes Blog 11/22/16), here.

The sentence was 7 months.  Given the sentencing factors indicated in the press release (excerpted immediately below) and set forth in the parties' sentencing memoranda (linked below), that is a phenomenal result.  I discuss the guidelines sentence below in this blog.  The 7 month sentence is way below guidelines.  For reasons that may be apparent from the discussion below, that appears to be a very good result for Horsky, given what the objective factors indicate.  However, I understand that there were sealed documents that bore upon sentencing so we may not be able to fully understand the sentence.

Key excerpts from the press release:

According to documents filed with the court and statements made during the sentencing hearing, Dan Horsky, 71, formerly of Rochester, New York, is a citizen of the United States, the United Kingdom and Israel who served for more than 30 years as a professor of business administration at a university located in New York. Beginning in approximately 1995, Horsky invested in numerous start-up companies, virtually all of which failed. One investment in a business referred to as Company A, however, succeeded spectacularly. In 2000, Horsky transferred his investments into a nominee account in the name of “Horsky Holdings” at an offshore bank in Zurich, Switzerland (the “Swiss Bank”) to conceal his financial transactions and accounts from the IRS and the U.S. Treasury Department. 

In 2008, Horsky received approximately $80 million in proceeds from selling Company A’s stock. Horsky filed a fraudulent 2008 tax return that underreported his income by more than $40 million and disclosed only approximately $7 million of his gain from the sale. The Swiss Bank opened multiple accounts for Horsky to assist him in concealing his assets: including one small account for which Horsky admitted that he was a U.S. citizen and resident and another much larger account for which he claimed he was an Israeli citizen and resident. Horsky took some of his gains from selling Company A’s stock and invested in Company B’s stock. By 2015, Horsky’s offshore holdings hidden from the IRS exceeded $220 million. 

Horsky directed the activities in his Horsky Holdings’ account and the other accounts he maintained at the Swiss Bank, despite the fact that he made no effort to conceal that he was a U.S. resident. In 2012, Horsky arranged for an individual referred to as Person A to take nominal control over his accounts at the Swiss Bank because the bank was closing accounts controlled by U.S. persons. The Swiss Bank later helped Person A relinquish that individual’s U.S. citizenship, in part to ensure that Horsky’s control over the offshore accounts would not be reported to the IRS. In 2014, Person A filed a false Form 8854 (Initial Annual Expatriation Statement) with the IRS that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years. 

Horsky’s tax evasion scheme ended in 2015 when IRS special agents confronted him at home regarding his concealment of his foreign financial accounts. 

Horsky willfully filed fraudulent federal income tax returns that failed to report his income from, and beneficial interest in and control over, his foreign financial accounts. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed fraudulent 2012 and 2013 FBARs. In total, in a 15-year tax evasion scheme, Horsky evaded more than $18 million in income and gift tax liabilities. 

I have not yet obtained any documents that may have been filed and posted to Pacer from yesterday.  I did gather some of the documents earlier in the week.  They are:

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, 130 Fed.Cl. 286 (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.

DOJ Tax Summary of Its Activities Update through December 2016 (2/11/17)

I link here a Tax Division Summary of Civil Tax Matters - Highlights (Updated through December 16, 2016).  The 30-page document contains briefly summarizes DOJ Tax activity (decisions, court filings, etc.), mostly I think in 2016.  Readers should note that the pdf file is bookmarked to help moving around to the topics and is also searchable.

The topics covered are:

A. Summons Enforcement
B. John Doe Summonses
C. Foreign Account Tax Compliance Act.
C. Supreme Court Activity  (Outline Level C appears twice)
D. Tax Shelter Litigation
1. STARS Shelters
2. DAD Shelters.
3. Son-of-BOSS Shelters
E. Offshore-Related Activities.
1. Summons Enforcement.
2. FBAR Issues
Recent collection cases filed:
Decisions:
F. APA Challenges to IRS or Department of Treasury Actions
G. Injunction Litigation
1. Return Preparers and Tax Shelter Promoters
2. Pyramiding Injunctions
H. Other Significant Matters
1. Affordable Care Act-Related Cases.
2. Railroad Retirement Act
3. Bankruptcy Issues.
4. § 1603 of the American Recovery and Reinvestment Tax Act.
5. Miscellaneous

JAT Comment:  I was already aware of most of the case decisions reported, but most of the other case activity (such as cases started) was new to me.  For example, among the recent FBAR collection suits filed is with respect to Ashvin Desai.  I had previously reported on the criminal conviction of Ashvin Desai.  See HSBC India Client Sentenced Ever So Lightly Given Facts and Trial Conviction Rather than Plea (7/12/14), here.  The new DOJ Tax document describes the civil suit filing against Desai as follows (pp. 12-13):

United States v. Ashvin Desai (N.D. Cal.) – On June 20, 2016, we filed suit seeking a judgment against Ashvin Desai for his willful failure to file Reports of Foreign Bank and Financial Accounts (FBARs) for 2007, 2008, and 2009. During those years Desai had a financial interest in, and signatory or other authority over four accounts maintained at Hong Kong and Shanghai Banking Corporation Limited (HSBC) India. Millions of dollars flowed into these accounts. Desai failed to file FBARs for the accounts, did not report the income earned in the accounts on this Form 1040 returns for 2007-2009, and indicated on Schedule B of those returns that he did not have an interest in or signatory or other authority over a financial account in a foreign country. The IRS assessed more than $14 million in penalties under 31 U.S.C. § 5321 against Desai for willfully failing to file the FBARs. With accruals, Desai’s total debt exceeds $16 million. In October 2013, a jury found Desai guilty of three counts of failing to file an FBAR for 2007 through 2009. It also found him guilty of three counts of attempting to evade or defeat tax in violation of I.R.C. § 7201 and two counts of aiding in the preparation of false tax returns for his two adult children in violation of I.R.C.§ 7206(2).

Many other previously unknown FBAR collection actions are reported, as well.

One other comment:  The report (p. 17) identifies a case filing on March 18, 2016 as follows:  United States v. Shoaleh Yermian (C.D. Cal.) for an FBAR penalty amount of $32,142.79.  I was surprised by the low amount for which DOJ Tax will spend significant resources to pursue (including further collection activity if judgment is given).

Tax Court Holds that 6662A Penalty on Reportable Transaction Understatement Does Not Violate the Eighth Amendment Excessive Fine Clause (2/8/17)

Today, I post on Thompsom v. Commissioner, 148 T.C. ___, No. 3 (2017), here, in which the Tax Court held (i) based on a contemporaneous case, that the President's limited removal power for Tax Court Judges does not violate the Constitution and (ii) the penalty in § 6662A, here, penalty on reportable transaction understatements does not violate the Eight Amendment's Excessive Fines Clause.  I focus this blog entry only on the Excessive Fines Issue because that issue has arisen in prior blogs, particularly with respect to the FBAR willful penalty (see blogs listed and linked at the end of this blog).

The Court describes the Section 6662A penalty as follows:

Section 6662A(a) imposes a penalty on any reportable transaction understatement. If a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement under section 6662A, the penalty is imposed at a rate of 30%, and there are no available defenses. Secs. 6662A(c), 6664(d)(2). However, if a taxpayer sufficiently discloses the details of the transaction, the penalty rate is 20% of the amount of the reportable transaction understatement. Sec. 6662A(a). In this latter instance, a taxpayer may be able to avoid the penalty under section 6662A if he or she shows reasonable cause and good faith, as well as that there is or was substantial authority for a position he or she took on a tax return, and the taxpayer reasonably believed that such treatment was more likely than not the proper treatment of the transaction in question.  Sec. 6664(d)(1) and (2).

The Court then describes the Eight Amendment's Excessive fines clause as follows (case citations omitted):

The Eighth Amendment to the United States Constitution provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” “The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” Austin v. United States, 509 U.S. 602, 609-610 (1993) (emphasis in Austin) (quoting Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 265 (1989)). 

In a case discussing application of the Double Jeopardy Clause to a State tax on possession of illegal drugs, the Supreme Court stated: “Criminal fines, civil penalties, civil forfeitures, and taxes all share certain features: They generate government revenues, impose fiscal burdens on individuals, and deter certain behavior. All of these sanctions are subject to constitutional constraints.” Dep’t of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 778 (1994). At the same time, the Supreme Court recognized that taxes are typically motivated by revenue raising rather than punitive purposes. Id. at 779-780. “[N]either a high rate of taxation nor an obvious deterrent purpose automatically marks * * * [a] tax as a form of punishment.” Id. at 780. Nevertheless, “at some point, an exaction labeled as a tax approaches punishment, and our task is to determine * * * [when it] crosses that line.” Id.

Court Denies FBAR Penalty Relief Under APA, Requiring Alternative Paths to Remedy (2/3/17)

In Kentera v. United States, 2017 U.S. Dist. LEXIS 12450 (ED WI 2017), here, the Court dismissed the complaint filed by two persons, husband and wife, seeking review of the FBAR nonwillful penalties asserted by the IRS pursuant to an audit after they withdrew from OVDI.  The Kenteras had not paid any of the FBAR penalties, so sought declaratory judgment pursuant to the APA.

In addition to the Order, linked above, the following documents might be interesting to readers of this blog:

• Complaint, here.
• Joint Rule 27(f) Report (related to discovery), here.
• U.S. Motion to Dismiss, here.
• Memorandum in Support of U.S. Motion to Dismiss, here.
• Kenteras' Opposition to U.S. Motion to Dismiss, here.
• U.S. Reply to Kenteras' Opposition, here.

I cut and paste the facts underlying the order as presented in the Order:

2. RELEVANT FACTS 

The relevant facts are drawn from Plaintiffs' complaint. The Bank Secrecy Act ("BSA"), 31 U.S.C. § 5311 et seq., requires U.S. citizens to keep records and file reports when they "mak[e] a transaction or maintai[n] a relation with a foreign financial agency." 31 U.S.C. § 5314(a). The report must be made in an FBAR, which is IRS Form TD F 90-22.1. The FBAR must be filed on or before June 30 of the year following the calendar year for which the report is made. If the individual fails to comply with the requirements of Section 5314, the BSA provides that civil penalties may be imposed. Id. § 5321(a)(5). For non-willful violations, the penalty cannot exceed $10,000. Id. § 5321(a)(5)(B)(I). 

In 1984, Plaintiff Milo Kentera inherited money located in a foreign bank account at Banque Cantonale de Geneve ("BCGE"). He added his wife's name to the BCGE account shortly thereafter. The balance in the account increased dramatically in 2007 due to the sale of Milo Kentera's parents' property in Montenegro, certain proceeds of which were distributed to Milo and deposited in the BCGE account. 

Plaintiffs have consistently disclosed the BCGE account on their federal income tax returns since 1984. However, in 2006 their accountant failed to prepare or file an FBAR in connection with their federal income tax return. Their accountant for tax years 2007, 2008, and 2009 made the same error, despite having information from which he could have discovered the existence of the BCGE account. In 2010, a third accountant acknowledged the existence of the BCGE account in Plaintiffs' return, but again seems to have failed to prepare or file an FBAR. 

In February 2011, the IRS announced a federal amnesty program for taxpayers with foreign bank accounts—the 2011 Offshore Voluntary Disclosure Initiative ("OVDI"). To participate, taxpayers were required to amend their tax returns and file FBARs for tax years 2003-2010. OVDI participants were required to pay all delinquent taxes, interest, and penalties, and, under this program, taxpayers were subject to a 25% penalty on the highest aggregate account balance on their previously undisclosed accounts during those years. 

In around September 2011, Plaintiffs applied to the OVDI program. They amended their tax returns for 2006-2010 to include omitted income and filed completed FBARs for 2005-2010. In August 2013, the IRS provided Plaintiffs with a Form 906, Closing Agreement on Final Determination Covering Specific Matters (the "Closing Agreement"). The Closing Agreement provided, in relevant part, that Plaintiffs would be liable under the tax code for a miscellaneous penalty of $90,092. Plaintiffs withdrew from the OVDI program the next month. 

After Plaintiffs withdrew from the program, IRS agent Kimberly Nguyen ("Nguyen"), who works in Milwaukee, examined the matter and recommended that Plaintiffs be assessed non-willful FBAR penalties pursuant to 31 U.S.C. § 5321(a)(5). The amounts of the penalties were as follows: 

(1)Lois Kentera: $500 for calendar year 2006; and $2,500 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $10,500; and 

(2) Milo Kentera: $500 for calendar year 2006; and $10,000 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $40,500. 

Switzerland Seeks Information on Hidden Deposits In Other Countries, Including Liechtenstein (2/3/17)

Joshua Franklin, Famed tax haven Switzerland chases hidden cash (Reuters 2/2/17), here.

Excerpts:

Switzerland, a perennial target for governments pursuing tax evaders, is finding out what it is like to chase down hidden cash. 

The Swiss finance ministry said on Thursday it had reached a deal with Liechtenstein to exchange tax information, potentially helping to uncover billions of dollars in undeclared assets kept by Swiss citizens in neighboring Liechtenstein. 

"These assets will be declared and the person has the chance either to repatriate the assets to Switzerland, or he will be taxed and he keeps his money in Liechtenstein," said Joerg Gasser, head of the State Secretariat for International Financial Matters, a branch of the finance ministry. 

* * * * 

The situation is a role reversal for Switzerland, whose strict bank secrecy laws for years had made the wealthy Alpine country a haven for hidden money. 

* * * * 

The Swiss-Liechtenstein agreement is under a global tax sharing initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD). 

Under the OECD's Automatic Exchange of Information (AEI), banks pass on information to local tax agencies, which in turn share it with foreign counterparts.

Cabinet adds countries to tax data exchange (Swissinfo 2/2/17), here.

Excerpts (bold-face supplied by JAT):

The Swiss government says it intends to begin automatic exchanges of tax data with 20 additional countries in 2019. 

Switzerland already has agreed to such exchanges – based on international standards aimed at ensuring that taxpayers pay the right amount of tax to the right jurisdiction – with 38 nations and territories starting in 2018. 

Now, the Swiss finance department will begin consulting with 20 more countries to set up the exchanges starting in 2019, the cabinet said in a statement on Thursday. 

The new countries to be added are China, Indonesia, Russia, Saudi Arabia, Liechtenstein, Colombia, Malaysia, the United Arab Emirates, Montserrat, Aruba, Curacao, Belize, Costa Rica, Antigua and Barbuda, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, the Cook Islands and the Marshall Islands. 

Should the Indictment Be Submitted to the Jury In Determining Guilt or Innocence? (2/1/17)

In United States v. Larkin, 2017 U.S. Dist. LEXIS 10362 (D NV 2017), here, the Magistrate Judge denied a defendant's motion to strike surplusage related to a single count tax evasion indictment.  The indictment, the second superseding indictment, is here.

Larkin was charged with tax evasion, § 7201, here, of Trust Fund Recovery Penalties assessed against her under § 6672, here.  (While I have not researched the issue, I presume that the reason evading the TFRP can be tax evasion is that § 6671(a), here, provides that the TFRP is "assessed and collected in the same manner as taxes" and "any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.")

By way of background, tax evasion is usually -- in my experience -- charged in an indictment without elaboration of the facts.  See, for example, the DOJ CTM form indictments in the DOJ Criminal Tax Manual ("CTM"), here.  by way of example,

26 U.S.C. § 7201
GOVERNMENT PROPOSED Jury Inst. No. 26.7201-1 

Tax Evasion –The Nature of the Offense Charged 

 Count ___ of the indictment charges that on or about the ___ day of _______,
20___, in the __________ District of _________, Defendant _________ willfully
attempted to evade and defeat a substantial income tax which was due [in addition to any
income tax declared on the defendant’s tax return] [in addition to any income tax the
defendant paid]. 

GOVERNMENT PROPOSED JURY INST. NO. 26.7201-3 

The Essential Elements Of Attempt To Evade Or Defeat A Tax 

 To establish the offense of attempting to evade and defeat a tax, the government is
required to prove beyond a reasonable doubt the following three elements: 

First, a substantial income tax was due and owing from the defendant in addition to that
declared in his [her] income tax return; 

Second, [after _______,]1 the defendant made an affirmative attempt, in any manner, to
evade or defeat an income tax, and 

Third, the defendant willfully attempted to evade and defeat the tax. 

The burden is always upon the prosecution to prove beyond a reasonable doubt every
essential element of the crime charged; the law never imposes upon a defendant in a
criminal case the burden or duty of calling any witnesses or producing any evidence.

Some of the other forms have more language to discuss the elements of the crime, such as willfulness.  But, generally, the indictments are straight-forward allegations of the elements without detail, even for example the specific affirmative acts of evasion.  By contrast, indictments of tax conspiracies are often embellished with much of the background of the conspiracy and the overt acts of the conspiracy, often presenting a sinister story indeed.

In Larkin, the indictment went substantially beyond the bare bones suggested in the DOJ CTM.  The actual indictment is linked above, but the Magistrate Judge covers the salient points in the opinion as follows:

Update on Passport Revocation, Denial or Limitation for Seriously Delinquent Tax Debts (2/1/17)

A new article has good information on the state of § 7345, here, dealing with potential State Department denial, revocation or limitation of use of the U.S. passport. Jim Buttonow, Ten things you need to know about passport restrictions on delinquent taxpayers (TaxProToday 1/31/17), here.  I previously wrote on the subject, New Transportation Bill, FAST, Adds Some Tax Provisions (Federal Tax Crimes Blog 12/7/15; 2/27/16), here, but I strongly recommend the TaxProToday article.

I offer some excerpts for new information since my blog, but encourage readers to read the entire article:

4. What will happen to the person who owes seriously delinquent tax debt? 

Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department. 

* * * * 

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions? 

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS. 

Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).
Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer. 

7. Can taxpayers appeal their seriously delinquent tax debt certification? 

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.
Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent. 

For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement. 

8. What if taxpayers don’t think they owe the tax?

IRS LB&I "Campaigns" to Focus on OVDP Declines-Withdrawals, Among Other Issues (2/1/17)

The IRS has announced that LB&I "is taking a new approach to tax compliance, with a series of 13 campaigns aimed at cracking down on tax evasion."  Michael Cohn, IRS rolls out new compliance campaigns for large businesses and international taxpayers (AccountingToday 1/31/17), here.  The campaigns are directed to several issues of tax compliance that the IRS will focus on.  The article lists them all, but the one particularly relevant to the subjects previously covered on Federal Tax Crimes Blog is:

• OVDP Declines-Withdrawals Campaign 

The Offshore Voluntary Disclosure Program allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. The campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. The IRS will address continued noncompliance through a variety of treatment streams including examination.

The article has the other categories, so interested readers should go there.

The article notes in concluding:

These campaigns represent the first wave of LB&I's issue-based compliance work. The IRS said more campaigns will continue to be identified, approved and launched in the coming months. 

JAT Comment:  I am not sure what this adds to the current process.  I had only two OVDP submissions that were  not completed -- one denied and one withdrawn.  Both were audited with good results -- in the denied case, ended up with same result as OVDP (which is what we wanted in the first place) and the other got a great result (which we anticipated in withdrawing).  So my limited anecdotal experience is that the IRS was attending to this category anyway.  But, perhaps the IRS had fallen behind or some were slipping through the cracks.