Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17)

By order dated 6/27/17, here, the Supreme Court granted certiorari in Marinello v. United States (Sup. Ct. Dkt. No. 16-1144).   The panel opinion of the Second Circuit is United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), here (official) and here (Casetext).  The denial of petition for rehearing en banc is here.  (Note  that the denial of petition for rehearing en banc has a great dissent by Judge Jacobs (see my blog entry below).)

• The petition is here.  The petition states the issue as:

Section 7212(a) of the Internal Revenue Code includes the following provision:

Whoever corruptly or by force … endeavors to intimidate or impede any officer … of the United States acting in an official capacity under this title, or in any other way corruptly or by force … endeavors to obstruct or impede[] the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both . . . . 

26 U.S.C. § 7212(a) (emphasis added). 

The question presented is whether § 7212(a)’s residual clause, italicized above, requires that there was a pending IRS action or proceeding, such as an investigation or audit, of which the defendant was aware when he engaged in the purportedly obstructive conduct

• The Government's Brief in Opposition is here.  The Government states the issue as:

Whether a conviction under 26 U.S.C. 7212(a) for corruptly endeavoring to obstruct or impede the due administration of the tax laws requires proof that the defendant acted with knowledge of a pending Internal Revenue Service action.

• The petitioner's reply is here.

• The Amicus Brief of the American College of Tax Counsel in favor of granting the petition is here.
• The Amicus Brief for the Cause of Action Institute and the NACDL is here.

• The docket entries are here.
• The Scotusblog page for the case (with docket entries) is here.

My previous blogs on Marinello or prominently mentioning Marinello are:

• Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.
• Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (Federal Tax Crimes Blog 2/28/17), here.
• Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.

JAT Comments:

1.  Although there is a circuit split, the one case creating the split -- Kassouf in the Sixth Circuit -- has been so narrowed by subsequent cases in the Sixth Circuit that I am a bit surprised the Court would take the case.  Nevertheless, although narrowing Kassouf, the Sixth Circuit has not overturned it, thereby causing the split to linger.

2.  Given the limited number of tax cases accepted for certiorari, this probably does not bode well for Daugerdas' Petition.  See Daugerdas Grasps for the Supreme Court (Federal Tax Crimes Blog 6/26/17), here.

3.  I am not sure that a Government loss would do anything other than encourage it to charge the pattern affected as a defraud / Klein conspiracy.  See Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (Federal Tax Crimes Blog 4/13/17), here.  The CTM used to say that tax obstruction under § 7212(a) was a one-person defraud / Klein conspiracy.  For most significant tax crimes, there will be at least one person close enough to be a co-conspirator, since only a slight connection is required.  See Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (Federal Tax Crimes Blog 6/20/17), here.  This calls to mind Judge Easterbrook's famous lament that "prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge."  United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990).  Another sound-bite from  Judge Learned Hand:  conspiracy is "the darling of the modern prosecutor's nursery."  Harrison v. United States, 7 F.2d 259, 263 (2d Cir. 1925).  And, even where a conspiracy cannot be charged because there really is a lone-wolf actor, almost invariably there will be an investigation of some sort in most of the cases that have been charged as tax obstruction.  So, only a smaller subset of cases will be affected, and undoubtedly some other charge can be made -- for example, evasion with the obstructive acts being treated as affirmative acts of evasion.

Requirements for the Reasonable Cause to Avoid the FBAR Nonwillful Penalty (6/26/17)

The statutory text for the nonwillful penalty says that the penalty does not apply if the violation "was due to reasonable cause" (reasonable cause prong) and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported" (reporting prong)  31 U.S.C. § 5321(a)(5)(B)(ii), here.  In the case of a failure to report (either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report properly is, of course, the act that causes the filer/non-filer to be at risk for the penalty in the first place.  Surely, if that means that proper FBAR reporting in the first instance, the issue of the nonwillful penalty never arises and a supposed reasonable cause escape is meaningless.  What does this mean?

Prior to November 2015, the IRM sensibly provided that meaning with respect to failure to file the FBAR as follows: "This means that the examiner must receive the delinquent FBARs from the non-filer in order to avoid application of the non-willfulness penalty.” IRM 4.26, 16.4.4.2 (07-01-2008), Non-Willfulness Penalty.  Basically, as stated, this permitted a delinquent filing of the FBAR during the audit that might lead to the penalty, then permitting the reasonable cause defense if it applied.

This specific language has been eliminated from the IRM by changes made in November 2015.  The IRM currently says for the reporting component that “The person files any delinquent FBARs and properly reports the previously unreported account.”  IRM 4.26.16.6.4 (11-06-2015), Penalty for Nonwillful FBAR Violations, here.  Like the statute, the description of the reporting prong is not as clear as it should be.  Does it mean that the person must file delinquent FBARs and, on those delinquent FBARs properly report the previously unreported account?  The use of present tense verbs might suggest that.  If that is what it means, the change to the IRM would not appear to be material and the taxpayer perfects his right to claim reasonable cause by filing delinquent FBARs.  However, the statutory text uses past tense for the reporting prong -- that the amount "was properly reported."  The Government now takes the position that the "reporting prong" requires the taxpayer to have made the U.S. aware of the account by proper reporting of the account on Form 1040 (citing legislative history to that effect).  See Jarnagin v. United States (Fed. Cl. No. 15-1534 T).  (The Government does note, in the alternative, that, even if filing a delinquent FBAR reporting the account(s) could alone solve the problem, the Jarnagans have not done so; I will not speculate as to the reason for this failure which would best situate their reasonable cause defense.)  The reply brief in the case was filed June 16, 2017, so presumably when the decision on the parties' cross-motions is rendered, we will have more learning on this issue and perhaps even more questions.

In the meantime, I offer the following:

• U.S. Motion for Summary Judgment, here.
• Jarnagin's Answer and Cross-Motion, here.
• U.S. Reply and Answer to Cross-Motion, here.
• Docket Entries as of today, here.

Daugerdas Grasps for the Supreme Court (6/26/17)

Paul Daugerdas, a prominent topic of this blog since he was the king of bullshit tax shelters, was convicted and his conviction affirmed on appeal.  I reported on the much of his trial and appeal.  The blogs mentioning Daugerdas are here and the blog on the appeal is Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.

On 3/20/17 Daugerdas filed a petition for writ of certiorari.  The petition for the writ is here.  According to the docket entries, here:

Mar 20 2017 Petition for a writ of certiorari filed. (Response due April 21, 2017)
Mar 31 2017 Waiver of right of respondent United States to respond filed.
Apr 5 2017 DISTRIBUTED for Conference of April 21, 2017.
Apr 17 2017 Response Requested . (Due May 17, 2017)
* * * *
Jun 23 2017 Brief of respondent United States in opposition filed.

The Government's brief in opposition is here.

Now, what to make of all this?  The starting point is the issue presented.

Daugerdas prefaces his statement of the issue with a summary of facts apparently believed necessary to understand the issue.  The Government does not agree with some of the nuances in the facts, so just keep that in mind.  So, I cut and paste the preface and the issue Daugerdas presents:

Petitioner Paul Daugerdas, a tax attorney, was tried by a jury for a “scheme to defraud” and obstruct the Internal Revenue Service (“IRS”) for the design, marketing and implementation of fraudulent financial tax shelters. At trial and during summations, the government presented two separate “schemes”: the first alleged that Daugerdas intentionally orchestrated a massive tax shelter fraud causing losses in excess of $1.6 billion by advising hundreds of clients to report tax losses based on financial transactions that lacked “economic substance”; the second scheme alleged that he conspired with other members of his law firm to intentionally backdate financial transactions on three or four client tax returns to fraudulently reduce their taxes owed, causing losses of approximately $2.2 million. During summations, the government urged the jury to convict Daugerdas of conspiracy, mail fraud, obstruction and relevant tax evasion counts based on the $2.2 million scheme. The jury agreed, acquitting him on six other tax evasion counts unrelated to the $2.2 million scheme. The government then asked the district court to sentence Daugerdas based on the greater $1.6 billion tax shelter scheme. As a result, the district court sentenced him to 180 months, as opposed to the 41–51 month Guidelines range for the backdating scheme, despite the government’s contrary argument to the jury and the jury’s ultimate verdict. 

The question presented is: 

Whether Petitioner’s sentence violated his rights under the Sixth Amendment and the Due Process Clause of the Fifth Amendment when a judge imposed a sentence based on an alleged greater “offense” than the government urged the jury to convict at trial, and after the jury convicted based on the lesser “offense” presented to them during the government’s summation?

In its brief in opposition, the Government goes straight to the issue (without engaging on predicate facts or even believing a statement of facts is necessary to the issue as it presents the issue):

Whether petitioner’s sentence was substantively unreasonable on the ground that the district court imposed a sentence based on judicial fact-finding regarding conduct of which petitioner was acquitted by the jury.

Basically, the issue is whether conduct in counts for which the jury acquitted can be considered in the tax loss calculation (or can be considered at all) in sentencing.  I thought that issue was long since settled and not particularly controversial which, I presume, is why the Government initially waived its right to respond.

Interested readers of this blog can pore over the submissions as their time and interests permit.  I just make the following quick comments about the Government's brief (after far less than a detailed study):

Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (6/20/17)

In United States v. Rodrigues, 2017 U.S. App. LEXIS 10556 (9th Cir. 2017) (unpublished), here, the Ninth Circuit affirmed Rodriguez's "convictions for (1) conspiracy to defraud the United States by impairing and impeding the Internal Revenue Service ("IRS"), in violation of 18 U.S.C. § 371; (2) mail fraud, in violation of 18 U.S.C. § 1341; and (3) aiding in the preparation of materially false income tax returns, in violation of 26 U.S.C. § 7206(2)."  Rodrigues' scam was National
Audit Defense Network's sale of Tax Break 2000.  The opinion is short and fairly straight-forward.

I address only one issue.  The Court said:

2. Although Rodrigues does not dispute that NADN's sale of Tax Break constituted a conspiracy to defraud the United States, he argues that the government failed to meet its burden of proving that he became a member of this conspiracy. "Once the existence of a conspiracy is established, evidence establishing beyond a reasonable doubt a connection of a defendant with the conspiracy, even though the connection is slight, is sufficient to convict him with knowing participation." United States v. Lane, 765 F.2d 1376, 1381 (9th Cir. 1985).

The highlighted sentence reminded me of the now discredited formulation of what is known as the "slight evidence" rule.  Here is a problematic example:  "Once a  conspiracy  is established, even slight evidence connecting a defendant to the  conspiracy  may be sufficient to prove the defendant's involvement." United States v. Pullman, 187 F.3d 816, 820 (8th Cir. 1999); see also United States v. Wright, 215 F.3d 1020, 1028 (9th Cir. 2000).  The proper statement of the rule would include the requirement included in the 9th Circuit quote that the defendant's connection be proved beyond a reasonable doubt.   In  other words, the connection may even be marginal or not central, but the connection and the conspiracy still must be proved beyond a reasonable doubt.  See The "Slight Evidence" and Similar Formulations for Connection to a Conspiracy (Federal Tax Crimes Blog 2/19/11), here.

I note that the current version of the DOJ CTM says (23.05[2] Proof of Membership, here):

Although the government must prove that a defendant was a member of a conspiracy, this requirement may be satisfied by a showing of even a "slight connection" to the conspiracy, so long as the connection is proven beyond a reasonable doubt. [citations omitted]

Submissions in Advance of Sentencing for Former Tax Court Judge Kroupa (6/20/17; 6/22/17)

I provide an update that Kroupa received a sentence of 34 months and her husband received a sentence of 24 months.  See here.  I will have more comment in a new blog when I have examined the underlying documents and more reports.  The USAO press release is here; the summary from the press release is:

DIANE L. KROUPA, 61

Minnetonka, Minn.

Convicted:Conspiracy to Defraud the United States, 1 count Sentenced:34 months in prisonThree years of supervised release$457,104 joint restitution

ROBERT E. FACKLER, 63
Minnetonka, Minn.

Convicted:Obstruction of an IRS audit, 1 count Sentenced:24 months in prisonOne year of supervised release$457,104 joint restitution

At the Procedurally Taxing Blog, Keith Fogg has a very good update on the sentencing process for former U.S. Tax Court Judge Diane Kroupa.  Sentencing Fight in Former Judge Kroupa’s Criminal Case (Procedurally Taxing Blog 6/20/17), here.  As I read the docket entries, here, the sentencing is set for June 22, 2017 at 10 am.  Keith provides links to the Government submission, here , and to Kroupa's submission,here.  I will  post again when I get information about the sentencing.

JAT comments:

1.  Kroupa's submission calculates the Guidelines range at 30 to 37 months based on the following:

Ms. Kroupa pled guilty to conspiracy to defraud the United States beginning in or before 2004 and continuing at least through in or about 2012, in violation of 18 U.S.C. § 371. Pursuant to the plea agreement, the base offense level is 18. A 2-level increase applies for abuse of position of public trust. An additional 2-level increase applies for obstruction to justice. The Government recommends a 3-level reduction for acceptance of responsibility. Based on the total offense level of 19 and a criminal history category of I, the guideline range of imprisonment is 30 to 37 months. Ms. Kroupa asks the Court to vary from the Sentencing Guidelines for a sentence of 20 months.

2.  The Government defers recommending a sentence until it has reviewed Kroupa's submissions.  The docket entries do not reflect that the Government has yet made its recommendation.

3.  As one would expect, Kroupa's submission plays up the factors that could cause a sentencing judge to make a variance.  There is considerable discussion of a long history of psychological and emotional issues.  This is, of course, standard fare in appealing to the considerable variance discretion that a sentencing judge has under 18 USC § 3553(a) and United States v. Booker, 543 U.S. 220  (2005).  Some other interesting points in the submission are:

On June 14, 2014, she retired as a Tax Court Judge due to a permanent disability. Attached are her letter and the letter of Dr. Pak supporting her resignation due to a permanent disability. All this took place after the search warrants were executed and it became apparent Ms. Kroupa was a target of the criminal investigation. This understandably caused extreme and additional stress. It exacerbated her long-standing psychological and emotional issues for which she has sought treatment.

* * * *

Tax Court Denies Claim in Offshore Account Case with Very Unusual Facts Because the Information Did Not Produce Collected Proceeds (6/16/17)

In Awad v. Commissioner, T.C. Memo 2017-108, here, a whistleblower case, the following is the key time line:

Date	Event
11/18/2008	Awad files WB claim (Form 211) identifying husband and wife (TH and TW, respectively) and their three adult children as owners of undisclosed foreign bank account.
2/?/2009	WBO assigns to LB&I
	LB&I Agent reviews returns and decides to accept as filed based on insufficient information
8/?/2009	TH dies.
1/?/2010	TW and children file "voluntary disclosures pertaining to a previously undisclosed account at the same foreign bank" Awad had disclosed.to WBO
??/??/2010	SB/SE opens exam incident to voluntary disclosure
7/?/2010	LB&I returns the case to WBO (although a year after LB&I made decision not to pursue)
9/?/2010	WBO discovers SB/SE exam and forwards information to SB/SE for possible use in examination
??/??/2010	SB/SE Agent interviews Awad by telephone; Awad provides additional information
??/??/2010	SB/SE advises WBO that the information did not assist in the audit
8/??/2011	IRS enters closing agreement on the voluntary disclosure requiring tax, penalties (including MOP) in excess of $2M for TW and estate
9/??/2013	WBO learns of estate tax exam for TPH and refers information to SB/SE Estate and Gift Tax
1/28/2014	WBO denies award.

There are some significant, scantily explained, time lapses in the foregoing, but they are not relevant to the outcome because the examining agents involved in LB&I and SB/SE all attested that the Form 211 information did not contribute to the ultimate outcome -- the acceptance of the TH Estate and TW's voluntary disclosure.  After all, for collection, the information does have to contribute to collected proceeds to permit a WB award.

The thing that is curious to me is that there were no procedures to flag the matter when the WBO first assigned it to LB&I so that, after that date, the taxpayers could not qualify for voluntary disclosure.  It is true that the procedure assumes disqualification only after the IRS has flagged the taxpayer for audit.  (I have had one client thus disqualified even though the IRS had never notified him of the audit.)  I understand that LB&I had not yet decided to audit, but it seems to me that there should be some way to disqualify once WBO decides the information has sufficient gravitas to refer to Examination, at least while it is in that status.  Just my view.

Court Dismisses Government Complaint for FBAR Willful Penalty with Leave to Amend for Failure to Allege Facts Supporting Willfulness (6/12/17; 6/26/17)

UPDATE 6/26/17:  On 6/23/17, DOJ Tax filed an amended complaint, here.  I have not studied the complaint in detail, but my quick review suggests that it does address the judge's concerns or confusions.  Note particularly that civil tax cases for the years involved were resolved with the taxpayer agreeing to the civil fraud penalty with the base including, in part, earnings on the offshore accounts.  While this may not be preclusive on the issue of FBAR willfulness, it is certainly not neutral.

We have this unusual order dismissing the Government case seeking to reduce the FBAR assessment to judgment in United States v. Pomerantz (6/8/17 WD WA 2:16cv00689), here.  The Complaint in the case is here; the docket entries as of today are here.  The judge dismissed with leave to amend because the Government failed to plead facts from which a fair inference could be drawn that the defendant acted willfully in failing to file the FBAR.  The Court also denied Pomerantz' motion to dismiss for improper venue and his motion to transfer the case to the District of Columbia.  The latter holdings are unexceptional.  However, under the notice pleading environment, it would be the rare case that would be dismissed for failure to state a claim, so I will just provide excerpts from the opinion on that issue.

The FBAR willful penalty requires, well, willfulness.  If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.  The Government did allege willfulness but ---

[I]n order to state a claim to reduce a civil penalty to a judgment, the Government must allege sufficient facts to support a reasonable inference that (1) the government assessed a civil penalty, and (2) the penalty was valid. To adequately allege that the penalty was valid, the Government must allege facts supporting each element of the underlying penalty. 

* * * *  

The Government alleges that Mr. Pomerantz’s failure to timely file FBAR Forms “was willful within the meaning of 31 U.S.C. § 5321(a)(5),” implying that Mr. Pomerantz had either constructive or actual knowledge of the reporting duty. (Id. ¶¶ 23, 37, 45.) However, these allegations are precisely the “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements” that are insufficient to state a claim. Iqbal, 556 U.S. 662, 678, (2009) (citing Twombly, 550 U.S. at 555). They do not plausibly support the inference that Mr. Pomerantz knew of the reporting duty. Instead, the Government must allege sufficient facts to plausibly support the inference that Mr. Pomerantz knew—actually or  constructively—of the reporting requirement. United States v. Williams, 489 F. App’x 655, 659 (4th Cir. 2012). 

i. Actual Knowledge 

Actual knowledge of the duty to report may be inferred from a course of conduct that demonstrates a conscious attempt to conceal the failure to report. See United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (citing Spies v. United States, 317 U.S. 492, 499 (1943)). The Government alleges that the company Mr. Pomerantz used to open the Swiss accounts—Chafford Limited—“conducted no active business, but was a shell entity used to hold and manage [Mr.] Pomerantz’ personal investments.” (Compl. ¶¶ 6-7.) 

Similar allegations, combined with the taxpayer’s failure to pursue knowledge of further reporting requirements, sufficiently supported a finding of “willfulness” in Sturman. See 951 F.2d at 1476-77. The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report. 

However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl. ¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC Accounts. (See id.) The court declines to infer from Mr. Pomerantz’s creation of the Chafford Limited Accounts knowledge of the duty to file FBAR Forms for the CIBC Accounts. The Government has not provided the court with any authority in which a court inferred from obfuscating conduct with no connection to a particular account an intent to evade a reporting obligation for that account, and the court finds such an inference implausible. (See generally Resp.) Thus, with regard to the CIBC Accounts, the Government makes only speculative and conclusory allegations regarding Mr. Pomerantz’s actual knowledge. 

ii. Constructive Knowledge 

Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge. Id. The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.) 

However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See
Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d
at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents). 

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report. 

Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful. The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts. Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

JAT Comments:

Prepared Testimony of Acting Assistant Attorney General to House Judiciary Subcommittee (6/11/17)

I offer the prepared testimony of David A. Hubbert Acting Assistant Attorney General, DOJ Tax, before the House Judiciary Committee Subcommittee on Regulatory Reform, Commercial & Antitrust Law at a Hearing on Oversight of the Tax Division, here.  The video of the hearing is here.  The minute marks for Hubbert's comments are:  1:08:53 - 1:13:21 (reading from opening statement) and 1:27:00 - 1:28:08  (on SIRF), a light day.

EXCERPTS RELATED TO DOJ TAX'S CRIMINAL TAX ENFORCEMENT

To help achieve uniformity in nationwide standards for criminal tax prosecutions, the Division’s criminal prosecutors are broken into three geographic sections and authorize almost all grand jury investigations and prosecutions involving violations of the internal revenue laws nationwide. The Division authorizes between 1,300 and 1,600 criminal tax investigations annually. These crimes are prosecuted by Division attorneys or Assistant U.S. Attorneys, either working alone or in partnership with Division attorneys, after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged. Our Criminal Appeals and Tax Enforcement Policy Section handles all appeals from cases assigned to Division prosecutors, as well as selected cases assigned to the Offices of the U.S. Attorneys. 

Criminal Investigation and Prosecution

Criminal Trial. In addition to our extensive civil practice, the Division authorizes all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. The Division’s criminal enforcement goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,600 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a U.S. Attorney’s Office, by a Division prosecutor, or by a team of prosecutors from both offices. Division prosecutors also conduct training for IRS criminal investigators and Assistant U.S. Attorneys, and provide advice to other federal law enforcement personnel, such as the Drug Enforcement Administration and the FBI. 

The crimes investigated and prosecuted by the Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means – as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other – used for tax purposes – showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.
It is also not uncommon for tax crimes to be committed during the course of other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. Division prosecutors work closely with the U.S. Attorneys’ Offices on these issues. 

As tax crimes have become more complex and international in scope, so has the workload of Division prosecutors. Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net-worth taxpayers and tax professionals who sell and implement dubious tax schemes. For FY16, Division prosecutors obtained 131 indictments and 145 convictions (not including the additional criminal tax prosecutions handled exclusively by U.S. Attorneys’ Offices). The conviction rate for cases brought by Division prosecutors generally exceeds 95 percent.
Criminal Appeals. The Division’s Criminal Appeals and Tax Enforcement Policy Section (CATEPS) handles appeals in criminal tax cases prosecuted by Division prosecutors, as well as some appeals from criminal tax cases handled by U.S. Attorneys’ Offices. The appellate-level review provided by CATEPS attorneys plays a vital role in promoting the fair, correct, and uniform enforcement of federal tax law. CATEPS is also charged with developing criminal tax enforcement policy and provides technical guidance on issues, including the sentencing guidelines and restitution in tax cases. CATEPS’s international team serves as a resource to Division attorneys and IRS agents on international matters arising in civil and criminal cases and provides information and technical expertise on matters involving international tax information agreements and treaties. 

It is apparent from this brief overview that Division attorneys are involved in every facet of federal tax enforcement. I would like to take a moment to highlight six areas of enforcement that are among our highest enforcement priorities – abusive tax shelters, abusive promotions, offshore tax evasion, employment tax enforcement, stolen identity refund fraud, and tax defiers. 

Abusive Tax Shelters

On Chevron and Lenity (6/6/17; 6/7/17)

Note:  I made a mistake in the text toward the end of this blog.  The mistake involved Regs. 1.6662-3(b)(2).  On 6/7/17, I corrected the mistake on 6/7/17 by revising the blog below and the the linked full text with footnotes.  Apologies to readers.

I am in the process of revising my Federal Tax Procedure Book in  anticipation of the next edition in August 2017.  I have spent inordinate amounts of time on Chevron and the APA.  In the process, I added one section dealing with lenity and Chevron.  I thought I would post that section here because the text (absent the footnotes) is relatively short and on topic for the Federal Tax Crimes Blog.  For those who can't live without footnotes (or question whether I can support the statements in the text), I offer the text with footnotes here.

By way of introduction, Chevron and its progeny hold that agency regulations adopting a reasonable interpretation of ambiguous statutory text will control, even if the interpretation is not the only reasonable interpretation or even the best reasonable interpretation.  That is a greatly simplified statement of the rule, but it should work for this posting.  The application of Chevron is usually viewed as adopting requiring two steps.  I offer the following from the text of the book (without the footnotes):

• The First Step – often called Step One – inquires whether the meaning of the statute is unambiguous?  (Other synonyms for unambiguous used in this First Step are plain and clear; one does not get past Step One if the text is unambiguous, is plain or is clear; I will generally use the word unambiguous but readers should be alert to the synonyms plain and clear used by other authors, some of whom I quote.)  If so, the regulation is irrelevant because the unambiguous meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the unambiguous meaning is invalid.
• The Second Step – often called Step Two – reached only if the text is determined to be ambiguous in Step One is whether the agency interpretation is unreasonable? Under this Second Step reached if the text is ambiguous, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”; so that, in Step Two, deference is given if the agency interpretation is reasonable and is not given if the agency interpretation is unreasonable.). In other words, the agency may choose between or among reasonable interpretations within the scope of the statutory ambiguity (sometimes referred to as the Chevron space). Some have argued that, in practice, the Chevron two-step inquiry is often conflated into a single inquiry – deference is given if the regulation is reasonable without first doing the Step One drill; but, at least in my observation, Courts will pay homage to Step One before determining reasonableness which is the Step Two inquiry.  This Step Two reasonableness analysis appears to be the same or at least coextensive with the APA requirement that the agency have engaged in reasoned decision-making so as to avoid being characterized as arbitrary and capricious, an inquiry short-handed to State Farm named for the leading case.

I would appreciate comments from readers, particularly challenging what I say or offering corrections to substance, presentation or syntax.  You can offer such comments either by comment here or by email to me (jack@tjtaxlaw.com).

Here is the text without footnotes:

(8) Chevron, the Rule of Lenity and Criminal and Civil Penalties.

“The rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them.”  This sounds like a Chevron Step One inquiry for criminal laws, albeit through another interpretive technique.  Lenity requires that the ambiguous statute be interpreted in the defendant’s favor;  Chevron, if applicable, would require that the ambiguous criminal statute must be interpreted as the agency interprets it in regulations unless the interpretation is unreasonable.  Now, I think that everyone would agree that the agency cannot interpret an ambiguous criminal statute in a way adverse to a criminal defendant.  Lenity trumps Chevron.  For example, in the tax area, the IRS could not by a regulation interpret the willfulness element of tax crimes different from the definition developed by the Supreme Court – intent to violate a known legal duty. Thus, it appears that, in tax crimes requiring willfulness or some equivalent of willfulness, the rule of lenity, if it applied, and the willfulness element fully or substantially overlap to assure that a defendant cannot be convicted if the criminal statute is ambiguous.

The finer question is whether an agency could, by regulation interpret a substantive provision that it administers which could then cause a violation of a criminal statute.  Focusing on that crimes with a willfulness element, if the substantive law is not clear (i.e., ambiguous), the taxpayer cannot have intended to violate that law and thus cannot be guilty of a crime requiring willfulness – intent to violate a known and knowable legal duty.  For that reason, the Government only prosecutes where the substantive legal duty allegedly violated is clear (unambiguous).  Here too, the rule of lenity and the criminal tax willfulness element of intent to violate a known and knowable legal duty overlap and assure ambiguous substantive tax provisions are not the basis for criminal prosecution.  The question then is whether facially ambiguous statutory text can be made unambiguous by an agency regulation entitled to Chevron deference and thus form the basis for a criminal tax prosecution which requires intent to violate a known and knowable legal duty.  For example, the IRS can adopt a regulation interpreting a substantive tax provision, such as § 162 for trade or business expenses, and that interpretation will be entitled to Chevron deference within the Chevron space.  If the regulations’ interpretation resolving the statutory ambiguity is entitled to Chevron deference, does that interpretation then set the legal duty that could give rise to a tax willfulness crime if the taxpayer intentionally violates the law as thus interpreted?  I think the answer to that question is yes, but doubt that the interpretive choice even if applicable retroactively for civil tax purposes would be retroactive for criminal tax purposes.  There are many permutations of this issue that I have just not thought through yet, but this should give a sense of the issues involved.

The Whistleblower Behind Caterpillar Tax Commotion (6/2/17)

I wrote before on the execution of a search warrant on Catepillar' Headquarters.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here.  I concluded that discussion with the following speculation:

I will raise one possibility, though, and I caution that this is entirely speculation.  I wonder whether her report could have been submitted along with a whistleblower claim?  I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed.  But, I certainly have no idea whether that is the case.

Bloomberg reports that a whistleblower claim is behind the Caterpillar commotion.  Bryan Gurley, David Voraceos and Joe Deaux, The Whistleblower Behind Caterpillar's Massive Tax Headache Could Make $600 Million (BloombergBusinessweek 6/1/17), here.

The article identifies the whistleblower as Daniel Schlicksup, a Caterpillar accountant, and summarizes his saga from company curmudgeon trying to get the attention of superiors on the matter to finally whistleblower.  A very good read.

Schlicksup's journey is consistent with my experience with whistleblowers or persons considering becoming whistleblowers.  All too often the company is just not interested in listening before the problems get out of hand.  The wizards in the company buttressed by their outside professional enablers will not listen to naysayers, and often the internal mechanisms to elevate problems can be thwarted by power structures in the firm.  That is not the way it is supposed to work, particularly for public companies, but unfortunately that is the way it sometimes works.

Now, for a brief review of the tax whistleblower possibilities.  Section 7623(b), here, allows whistleblower awards of from 15% to 30% of collected proceeds from the whistleblower information.  In this case, the collected proceeds would include the tax, the interest on the tax, any penalty (either 20% or 40% accuracy related penalty under § 6662, here, or the 75% civil fraud penalty under § 6663) and interest on the penalty, here).  The article says that the underlying tax bill may be $2 billion and apparently derives a $600 million potential reward based on the maximum award of 30% of that amount.  Of course, the amount of the reward between 15% and 30% is discretionary (although subject to review by the Tax Court), but my experience suggests that an award in this case would probably be at least 22.5% (splitting the difference for a rough and ready solution).  And, of course, if the $2 billion amount does not include interest or penalties, then the reward base would be increased.  In any event, assuming the same $2 billion base, even a 15% reward of $300 million would be sweet.

For more discussion of the whistleblower reward program, see Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[4][a][iv] Informants (including whistleblowers seeking rewards) (Thomsen Reuters 2015) (online edition).  (Note, I am the principal author of that Chapter of the Saltzman and Book text).