Deliberate Ignorance Instruction Previously Rejected Allowed Based on Defense Closing Argument (8/31/17)

In United States v. Walter-Eze, ___ F.3d ___, 2017 U.S. App. LEXIS 16269 (9th Cir. 2017), here, the defendant appealed her convictions for conspiracy to commit health care fraud in violation of 18 U.S.C. § 1349, health care fraud in violation of 18 U.S.C. § 1347; and conspiracy to pay and receive health care kickbacks in violation of 18 U.S.C. § 371. There were no tax counts; tax is not mentioned in the opinion.  However, I have previously discussed the deliberate ignorance jury instruction device which feature prominently in the case.  (The deliberate ignorance concept goes by other terms such as willful ignorance and conscious avoidance; I use deliberate ignorance here because that is the term used by the court in the opinion.)  An issue with such jury instructions that I have previously discussed on this blog is whether the instruction allows the jury to convict without actually finding the knowledge required by the criminal statute or simple permits the jury to infer, in light of all the evidence, that the defendant had the knowledge.  This case does not speak to that issue, but it is interesting because of the way the deliberate ignorance instructions was presented to the jury.

The criminal charges were based on the following facts state by the Court:

III. Evidence at Trial 

At trial, witnesses called by the government testified to a five-year scheme run by Walter-Eze through her company Ezcor-9000 ("Ezcor") to fraudulently bill Medicare and Medi-Cal for durable medical equipment ("DME") provided to patients who had no need for the devices.n2 Recruiters would be paid kickbacks to find patients and doctors would be paid for prescriptions. Among the witnesses called were Wilmer Guzman and Elder Aguilar, workers for Walter-Eze, who explained the illegal kickback scheme and the provision of the DME; Dr. Edna Calaustro, who was paid by Ezcor to write prescriptions for unnecessary devices; and several beneficiaries (or their relatives) whose receipt of unnecessary devices served as the predicates for each of the substantive claims in Counts 2 through 6 of the indictment. The federal and state investigators who worked on the Ezcor case also testified.
   n2 Medi-Cal is California's Medicaid program serving low-income individuals, which will reimburse the DME supplier up to 20 percent of the maximum allowable amount after Medicare pays.

  Walter-Eze testified in her own defense. No other witnesses were called by the defense. 

The majority of the government's evidence at trial pertained to one type of DME in particular—power wheelchairs—for which Medicare paid a particularly high rate of reimbursement and which, in order to be prescribed, required doctors to determine that their patients had such limited mobility that they lacked the ability to perform activities of daily living in the home. Over 50% of the $3,432,776 of claims that Walter-Eze submitted to Medicare and Medi-Cal through Ezcor were for these high-value power wheelchairs and wheelchair accessories. The fraudulent claims were not limited to these items, but included additional DME, such as hospital beds and knee and back braces, which accounted for an additional 33% of Ezcor's business. Walter-Eze would pay recruiters such as Guzman kickbacks for each prescription that they brought in to Ezcor; the kickback amount would vary based on the reimbursement value of the piece of DME. Accordingly, the highest kickbacks were paid for power wheelchair prescriptions, followed by hospital beds, and knee and back braces. From January 2007 through early March 2012, Ezcor submitted $3,432,776 in reimbursement claims to Medicare and was paid $1,866,261. During this same period, Ezcor submitted claims to Medi-Cal totaling $89,011 and was paid $73,269. 

Walter-Eze denied that she paid kickbacks to recruiters, instead characterizing them as commissions paid to independent contractors. She also denied paying any money to Dr. Calaustro for prescriptions.

The facts relevant to the jury instruction are:

HMRC Enlists Financial and Other Professionals to Warn UK Citizen Clients About Offshore Accounts (8/23/17)

Camilla Hodgson, 'Life-changing consequences:' HMRC warns on risks of hiding wealth offshore in new crackdown (Business Insider Date not indicates but I believe today or yesterday), here.

Excerpts:

The UK tax collector is sending letters warning of the "potentially life-changing consequences" of failing to disclose offshore-held wealth, as part of a drive to prevent people skirting tax rules. 

Millions of UK taxpayers are being sent the warning via their financial institutions and advisers. 

These institutions have been given until the end of August to explain to all clients the risks of failing to declare offshore-held money and assets. 

* * * * 

Under new transparency rules, however, information sharing between more than 100 countries will allow HMRC to crack down on individuals who are trying to evade tax they should be paying, the warning said: "The world is becoming more transparent." 

Overseas institutions such as banks and insurers, it goes on, have already begun supplying such data to help HMRC "identify the minority who are not paying what they owe." 

It urges people to "come to us before we come to you," and encourages reporting any undeclared taxable assets via a "worldwide disclosure facility." Although this will result in penalty charges of up to 200% of what is unpaid, penalties are due to rise further from September 2018. 

Since it would entail a huge amount of work for financial institutions to check which of their customers may have offshore-held assets, the warning is being sent out to most customers. However, it includes an assurance that those whose tax affairs are up to date and complete need not take any action.

Agostino & Associates Article on Executor Risks for Decedent's Foreign Accounts (8/21/17)

Frank Agostino and Nicholas Karp, Protecting the Executor Who Becomes Aware of Undisclosed Foreign Accounts, Agostino & Associates Monthly Journal of Tax Controversy (August 2017), here

The introduction:

An executor administering an estate with undisclosed foreign accounts is exposed to substantial risks that may not be apparent. The following discussion is intended for executors and administrators who wish to understand and avoid those risks.

The authors identify the following as "Superficially attractive but risky advice sometimes given by accounting firms:"

The accounting firm advises the executor to:
• Report current year foreign income and file the current year FBAR, reasoning that the executor has signature authority over the foreign account for the current year, but no responsibility for prior years.
• Not file any prior year amended returns or FBARs, reasoning that the executor should not speculate as to the willfulness of the decedent.
• Distribute the proceeds of the foreign accounts to the beneficiaries without taking any position as to whether they are required to file IRS Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. An executor has no obligation to give tax advice to beneficiaries: it is the beneficiaries’ responsibility to determine their obligation to file IRS Forms 3520.
Lastly, the accounting firm advises against hiring a lawyer. The taxpayer is dead: who can the Government prosecute? 

From there, the authors identify the problems and risks.  For example, the authors quickly identify a criminal risk for the executor:

The most dangerous (and perhaps surprising) hazard is the potential for the executor to unwittingly commit a federal crime. 18 U.S.C. § 4 makes it a crime (“misprision”) if a person, “having knowledge of the actual commission of a felony ... conceals and does not as soon as possible make known the same...” Tax evasion is a felony (26 U.S.C. § 7201). Courts have consistently held that misprision requires, “an affirmative act of concealment.” Failing to disclose tax evasion can be considered concealing the theft of money from the United States. Concealing stolen money has been held to be an affirmative act upon which a charge of misprison (sic) may be based. The executor will, under the facts, have all the information needed to conclude that the decedent’s returns understated tax liability and money is due the United States. If it is eventually determined that the decedent’s non-filing was willful, a prosecutor could well reason that the executor’s choice not to amend the returns was tantamount to concealing money stolen from the United States. Moreover, should any returns associated with the estate subsequently be examined, any lapse in providing information about the foreign accounts could implicate the executor in concealment. In either of these situations, if the Government can show the executor had reason to know the decedent’s delinquencies were willful, the Government will have the elements needed to charge the executor with misprision.

And it goes on from there to include civil risks.

Sixth Circuit Rejects Frontal Assault on FATCA, IGAs and FBAR Requirements (8/20/17)

The Sixth Circuit on Friday rejected a frontal assault on FATCA, Intergovernmental Agreements and FBAR requirements.  Crawford v. United States Dept. of Treasury, ___ F.3d ___, 2017 U.S. App. LEXIS 15648 (6th Cir. 2017), here.  All but one of the plaintiffs were various U.S. taxpayers who claimed, in effect, the real potential for injury by having their foreign account information shared with the U.S. Government or being forced to share it by FBARs.  One of the plaintiffs was Senator Rand Paul, in his official capacity as member of the United States Senate, who likes to strut to gum up governmental works.  The issue was a legal concept called standing.  They failed the standing requirement.

The Court summarized the standing concept as (case citations omitted):

Federal courts have constitutional authority to decide only "cases" and "controversies." U.S. Const. art. III § 2. The requirement of standing is "rooted in the traditional understanding of a case or controversy."  To bring suit, Plaintiffs must have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues" before the court.  

The "irreducible constitutional minimum" of standing is that for each claim, each plaintiff must allege an actual or imminent injury that is traceable to the defendant and redressable by the court. 

That at least is the starting point for the court's more nuanced analysis.

Bottom line, the Court concludes as follows:

FATCA imposes far-reaching reporting obligations on individuals and financial institutions, which, like many government regulations, undoubtedly exact monetary and other costs of compliance. The IGAs, to be sure, are part of an unprecedented scheme of international tax enforcement. And the FBAR Willfulness Penalty, if it were to be imposed, is admittedly steep: it could theoretically bring a $100,000 fine for failure to report a foreign account with a balance of $10,000.01. 

None of these considerations, however, help these Plaintiffs at this time to clear the initial jurisdictional hurdle of standing. 

Accordingly, we AFFIRM the judgment of the district court, and we DENY as moot Defendants' motion to strike.

Swiss Asset Manager and DOJ Enter Nonprosecution Agreement (8/15/17 8/18/17)

DOJ Tax and USAO SDNY announced here  and here that it has reached a nonprosecution agreement ("NPA") with Prime Partners SA (“Prime Partners”), a Swiss asset management firm,  The plea agreement and attached Statement of Facts ("SOF") are here.

The cost to Prime Partners is $5 million, consisting of $4.32 million in forfeiture (representing a portion of the gross revenue it earned with respect to the undeclared accounts for 2001-2010) and $0.068 million in restitution to the IRS (representing the approximate unpaid taxes from Prime Partners' clients).  Key excerpts from the press release are:

As part of the NPA, Prime Partners admitted various facts concerning its wrongful conduct and the remedial measures that it took to cease that conduct. Specifically, Prime Partners admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of Prime Partners in order to evade their U.S. tax obligations, in violation of U.S. law. Prime Partners acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by, among other things: (i) creating sham entities, which had no business purpose, that served as the nominal account holders for the accounts; (ii) advising U.S. taxpayer-clients not to retain their account statements, to call Prime Partners collect from pay phones, and to destroy any faxes they received from Prime Partners; (iii) providing U.S. taxpayer-clients with prepaid debit cards, which were funded with money from the clients’ undeclared accounts; and (iv) facilitating cash transfers in the United States between U.S. taxpayer-clients with undeclared accounts. 

The NPA recognizes that, in early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes. The NPA further recognizes the extraordinary cooperation of Prime Partners, including its voluntary production of approximately 175 client files for non-compliant U.S. taxpayers, which included the identities of those U.S. taxpayers.

This NPA is not part of the Swiss Bank Program.  So the question one must ask is why did DOJ even do this?  Well, the press release sets forth DOJ Tax's public explanation in the press release:

The U.S. Attorney’s Office entered into the NPA based on factors including:

• Prime Partners’ voluntary and extraordinary cooperation, including its voluntary production of account files containing the identities of U.S. taxpayer-clients;
• Prime Partners’ voluntary implementation of various remedial measures beginning in or around early 2009, before the investigation of its conduct began;
• Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
• Prime Partners’ representation – based on an investigation by outside counsel, the results of which have been reviewed by the U.S. Attorney’s Office and the Tax Division – that the misconduct under investigation did not, and does not, extend beyond that described in the Statement of Facts.

The NPA requires Prime Partners to continue to cooperate with the United States for at least three years from the date of the agreement. In the event that Prime Partners violates the NPA, the U.S. Attorney’s Office may prosecute Prime Partners.

Addendum 8/18/17 10:30 am:

Indictment of Taxpayers for Evasion of Payment and Structuring Cash Withdrawals (8/14/17)

DOJ Tax announced here the indictment of two Virginia taxpayers -- husband and wife -- for evasion of payment, § 7201, and conspiracy to structure bank deposits to avoid the reporting requirements.

This is a pretty straight-forward, unexceptional indictment for Count One, evasion of payment.  They owed the tax, they reported the tax liabilities on their returns, the IRS assessed the tax as reported, and they took various actions affirmative acts to evade payment (transfer or assets to kin, signing and filing false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and withdrawing cash from bank accounts (the actions asserted in the structuring conspiracy charge as the overt acts of the conspiracy)).

The structuring conspiracy charge is also unexceptional except for how sparse it is.  The overt acts of the conspiracy are the many cash withdrawals of less than $10,000.  These overt acts are presented in a spreadsheet table.  Often the overt acts of a conspiracy go on ad nauseum to conjure up the defendants as evil actors.  Here, by contrast, these overt acts are simply the list of cash withdrawals during a six month period in 2015.  That is all that is required to have the indictment pass muster as presenting fair notice to the defendants.  If the case goes to trial, however, I would expect the Government to enter into evidence additional acts that could reasonably be described as overt acts of the conspiracy and am surprised that the Government did not lard up the indictment to paint a more sinister picture than presented by the list of withdrawals.

One technical quibble. The indictment refers to the tax liability as "self-assessed."  There is no such concept as a self-assessed tax.  The taxpayer reports -- self-reports, if you will -- tax liability on a return; the IRS assesses the tax liability accordingly.  Section 6201(a)(1) ("The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title").  The act of assessment is  the recording by the IRS of the liability (whether self-reported or not) on the books of the IRS as an assessment.  As I note in my tax procedure book:

Our tax system is described as a “self-assessment” system.  This means that the taxpayer reports the amount of the tax obligation via a tax return.  The IRS must assess the tax reported on the return.  § 6201(a)(1). The taxes thus reported are often referred to colloquially as “self-assessed” which is probably a fair characterization since the statutory requirement that the IRS assess the amount reported is mandatory, making the IRS’s formal assessment a ministerial act.  

And then, elsewhere in the book later, I use the short-hand self-assessed or some variation.

Court Sustains $10,000 Per Year § 6038(b) Penalty for Form 5471 Noncompliance for Taxpayer Who Withdrew from 2009 OVDP (8/9/17)

In Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017), here, Dewees, a U.S. citizen residing in Canada, was fined $120,000 -- $10,000 per years for From 5471 noncompliance.  After assessment of that penalty, Dewees declined to pay.  He lived in Canada and apparently felt he was outside the IRS's ability to compel  payment.  Pursuant to the U.S. Canada tax treaty, however, the U.S. enlisted the Canadian tax authority to withhold a Canadian tax refund due Dewees.  At that point, Dewees paid the penalty and brought this suit to have his payments refunded on various constitutional grounds -- Eighth Amendment, Due Process and Equal Protection.  On motion of the U.S., the court dismissed the complaint.

I link the following documents:

• Complaint, here.
• U.S. Motion, here.
• Dewees' Opposition, here.
• U.S. reply, here.
• Docket Entries as of 8/9/17, here.

The key timeline that I derive from the opinion and the foregoing documents are:

1. Dewees successfully joined OVDP in 2009.  The 2009 iteration of OVDP had the following requirements:  (i) filing income tax returns for 6 years; (ii) paying income tax, 20% accuracy related penalty, and interest on both; (iii) filing FBARs for 6 years; (iii) paying an IRS penalty now called a miscellaneous offshore penalty in lieu of all other penalties, including the FBAR penalty and Form 5471 penalties.

2. It is not clear from what I saw (I did not study the documents carefully for nuance) whether Dewees completed the package including the Forms 1040 or 1040X, the 5471s, and the FBARs.  It appears that there was some commotion between the IRS and Dewees as to whether he had submitted all information.

3.  On May 26, 2010, the IRS notified Dewees that he would be "terminated from the OVDP for failure to furnish the requested 1040s and FBAR forms (for the years 2003-2008).

4.  "In June 2010, the filings requested in the correspondence dated May 19, 2010 were resent."

5.  On October 28, 2010, a $252,480 penalty assessment was made against Dewees.  Dewees alleges that the penalty assessment was "relating to FBAR non-compliance."  The Government states that it was assessed "under the terms of the OVDP."  If the Government's statement is correct, the penalty assessment was the MOP assessment in lieu of all penalties other than the income tax penalty; in Dewees case, the MOP penalty would have been in lieu of the FBAR penalty and the Form 5471 penalty.  [JAT comment:  a question I have is how the MOP could have moved to assessment without the taxpayer having signed a closing agreement inside the OVDP penalty structure, but I could not find the answer to that question.]

6.  "On November 19, 2010 the penalty assessed is reduced to $185,862, as some accounts had been double counted by the IRS."

7.  "On January 13, 2011 Mr. Dewees receives notification that he is at risk of being terminated from the OVDP program because of his failure to pay the assessed penalty."

8.  "On June 9, 2011, Mr. Dewees received a letter from Mr. Harrington [IRS Agent] requesting confirmation of his intent to no longer participate in the OVDP."

9.  "On June 16, 2011 Mr. Dewees confirms his withdrawal from the OVDP based on the excessive amount of penalties owing. The penalties were removed from his account."  [JAT comment:  this would be consistent with the penalties being MOP rather than FBAR because the MOP could not be assessed unless he completed OVDP without opting out or being removed.]

10.  "On September 20, 2011 Mr. Dewees receives a letter from Mr. Harrington dated September 9, 2011, imposing a new $120,000 of penalties for the late filing of Form 5471. The letter indicates that reasonable cause for failure to file will be considered."  [JAT Comment:  This is consistent with Dewees being removed from OVDP because he would have lost his Form 5471 penalty protection.]

11.  Now, if the taxpayer truly were removed from OVDP, he should have been subject to risk of assessment of FBAR penalties.  From what I have seen, it is not clear that FBAR penalties were imposed.  I infer from the IRS's imposition of maximum Form 5471 penalties that the IRS did not think he was a nonwillful actor, but still there is no indication what, if anything, happened on the FBAR penalties.

USSC Practitioners Advisory Group Recommendations on Sentencing Commission Priorities (8/8/17)

The Practitioners Advisory Group ("PAG"), here, A Standing Advisory Group of the United States Sentencing Commission ("USSC"), here, has written a letter, here, to the Chair of the USSC commenting on the USSC's proposed 2017-2018 priorities.  There is no priority relating to tax and thus no comments related to tax.  However, the PAG does recommend one priority that is in a general category that tax defense attorneys should pay close attention to -- Examination of Collateral Consequences.  I have written on collateral consequences in Chapter 12: Criminal Penalties and the Investigation Function, of Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶ 12.06 Collateral Consequences.

The PAG addresses a subset of the general subject, particularly related to the duties and priorities of the USSC.  The discussion is very good, so I cut and paste relevant excerpts:

I. PAG Proposed Priority- Examination of Collateral Consequences 

As in prior years, the PAG urges the Commission to consider as a proposed priority the examination of the impact of the collateral consequences of convictions. Collateral consequences - the legal penalties and restrictions that take effect automatically without regard to whether they are included in the court's judgment - are frequently the most important aspect of punishment from a defendant's perspective. Convicted individuals face reduced employment and housing opportunities, legal barriers to occupational and business licensure, driver's license suspensions, voting restrictions, and many other collateral consequences that make successful reentry more difficult. Some states still have full or partial bans on welfare and food stamps for people who have felony drug convictions. Such limitations can have a crippling effect on the individual, who may have to support a family, yet is unable to rely on any of these important programs.
In a number of recent cases, federal courts have imposed more lenient sentences in consideration of the severe collateral consequences a defendant would experience. In other cases, courts have sought creative ways to relieve defendants from the effect of collateral consequences long after the court's sentence has been fully served.
We briefly describe below the ways in which collateral consequences affect the work of sentencing courts. The PAG urges the Commission to take this matter under advisement and to consider scheduling hearings on this issue. 

1. Understanding Collateral Consequences and Ensuring that a Defendant has been Notified about Them 

In general, the constitutional obligation of advisement is defense counsel's under the Sixth Amendment, not the court's. The one situation in which judicial advisement is required under the Federal Rules of Criminal Procedure is where a defendant considering a guilty plea is not a citizen. n82 That said, a federal court is permitted to inform itself about the collateral consequences that may apply in a particular case in order to decide whether to take such consequences into account when fashioning a sentence. The court may ask the probation office, which is part of the judicial branch, for information about collateral consequences, and probation ought to be informed about collateral consequences in any event so that it can assist defendants with reentry and reintegration. Similarly, the court may ask defense counsel for reassurance that counsel has advised the defendant about applicable collateral consequences before accepting a guilty plea or imposing a sentence, if only as a prophylactic measure to guard against subsequent claims of ineffective assistance. n83
   n82 See Fed. R. Crim. P. 11(b)(l)(O).
   n83 Just last month, the Supreme Court reaffirmed a defense lawyer's obligation to warn defendants about immigration consequences of conviction. See US. v. Jae Lee, 137 S. Ct. 1958 (20 17). In state courts, the judicial advisement obligation may be more robust, both under the state constitution and applicable court rule, such as where sex offender registration or firearms dispossession may result from conviction. However, such notice has generally not been required in the federal system. Case law developments, notably in the past few years since the Supreme Court's decision in Padilla v. Kentucky, 559 U.S. 356 (2010), are described in Chapters 4 and 8 of Love, Roberts and Klingele, COLLATERAL CONSEQUENCES OF CRJMlNAL CONVICTION: LAW POLICY AND PRACTICE (West/NACDL, 2016 ed.). 

While judicial notice about collateral consequences may not be mandated in the federal system outside the immigration context, either by counsel or court, such notice has been recognized as sound practice by the major national law reform and professional organizations of lawyers. n84 The Model Penal Code gives the sentencing commission responsibility for collecting collateral consequences and providing guidance to sentencing courts relating to their consideration of collateral consequences at and after sentencing. 85 The PAG believes that the Commission could usefully consider what if any role it might play in this regard.
   n84 The Uniform Law Commission and the American Law Institute have both proposed that sentencing courts should ensure that a defendant has been informed about collateral consequences that might affect willingness to plead, and at sentencing. See Model Penal Code: Sentencing,§ 6x.04(1); Uniform Collateral Consequences of Conviction Act§§ 5, 6 (2010). The ABA Standards for Criminal Justice also impose this requirement. See Collateral Sanctions and Discretionary Disqualification of Convicted Persons, Standards 19-2.3, 19-2.4(b) (2003).
   n85 See Model Penal Code: Sentencing § 6x.02.

2017 Editions to Townsend on Federal Tax Procedure Available for Download (8/8/17)

My 2017 editions of my Federal Tax Procedure Book are now posted on SSRN and available for download as follows:

• Federal Tax Procedure (2017 Student Ed.), 2017. Available at SSRN: https://ssrn.com/abstract=3011373
• Federal Tax Procedure (Practitioner Ed. 2017), 2017. Available at SSRN: https://ssrn.com/abstract=3011403

I offer these for all to use.  I originally prepared this for students in my Federal Tax Procedure class at the University of Houston Law School.  I have now retired from teaching that class (last semester was Fall 2015).  But, I keep these editions up with annual publications in August.  I have tried to include in the text the substantive materials for a law school class in tax procedure.  The Practitioner Edition is the same as the Student Edition except that it contains footnotes that, I hope in most cases, support or expand on what is in the text, with some flights of fancy.  The Student Edition strips out the footnotes so that students do not get bogged down in minutia and irrelevances.

I would appreciate hearing from readers about things that need correction or improvement (either in substance or presentation).  I am constantly revising the editions in advance of the next publication (August 2018) and readers can materially help in making that next edition better.

Also, I will be posting material updates, corrections and other matters related to both Editions on my Federal Tax Procedure Blog.

Tax Practitioners' Advice to Clients About the Audit Profile/Risk (8/7/17)

I thought readers might be interested in this recent article:  Michael B. Lang and Jay A. Soled, Disclosing Audit Risk to Taxpayers, 36 Va. Tax Rev. 423 (2017) (no link available).  The issue is whether tax professionals may advise clients as to their audit profile -- risk of audit.  There has been some confusion among practitioners about that issue because of the prohibition on considering risk of audit in assessing the merits of a tax return position.  The following is from the Highlight for the article:

When taxpayers file their tax returns, they are often worried about the prospect of an Internal Revenue Service (Service) audit. To date, the position of the Service and of professional organizations has been that tax return preparers cannot take into account audit risk in evaluating the merits of a return position. Some practitioners have broadly - and incorrectly - interpreted this regulation as a mandate against talking about audit risk with their clients. Taxpayers therefore often make their own assessment of their audit risk, relying on information sources such as the Internet and tax return preparation software. Given the uncertain reliability of such sources, it is appropriate to encourage more communication between tax return preparers and taxpayers on the subject of audit risk. 

This article argues that the Treasury Department and professional organizations should make it clear that tax return preparers may make full disclosure of Service audit risks to the extent this information is known. While this information cannot be used to evaluate the substantive merit of a particular tax return position, readily dispensing it would be emblematic of a transparent tax system and satisfy taxpayers' quest to more fully understand the tax return filing process. As such, the availability of Service audit risk information would be a marked improvement over the existing status quo.

Some key excerpts from the article (pp. 430-433 & 445-446, footnotes omitted):

III. Why Audit Risk Disclosure Makes Sense Today 

Outside the realm of calibrating potential penalty exposure, nothing in the Code, regulations, or professional standards precludes candid conversations on the topic of audit risk. Nevertheless, the myth of a universal prohibition of Service audit risk disclosure endures, making some tax professionals hesitate to provide audit risk projections. Aside from the myth itself, sometimes tax preparers' hesitancy reflects their lack of knowledge of the audit risk; in other instances, tax practitioners fear that aggressive clients might take untenable positions on their returns if they knew the unlikelihood of an audit. 

Notwithstanding this reluctance to disclose audit risk, legal and accounting ethical standards require the free flow of information between practitioners and their clients. n28 Cultural, technological, and social developments have also changed the tax preparation field, bolstering support for the proposition that tax practitioners should disclose audit risk to their clients. These developments, explored below, are threefold: (A) the availability of audit risk information, (B) more rigorous tax return submission and practice standards, and (C) more prevalent professional malpractice litigation. 

A. Ready Availability of Audit Risk Information 

Whether or not the tax profession or the Service cares to admit it, the availability of tax audit risk information is ubiquitous. Individuals can commonly find this information through the Internet and tax preparation software.  

As the Internet has evolved, it has become the primary source of information for many people, particularly the nation's youth. Within milliseconds, entry of a query can retrieve thousands of relevant documents that are directly on point. For example, a Google search of the phrase "IRS audit risk" delivers numerous articles on the topic. Some of the articles are informative; other articles are even interactive, allowing viewers to enter information and, in response, get individualized feedback based upon their personal circumstances. 

Another source of audit risk disclosure is tax software preparation packages such as TurboTax and H&R Block. These tax software preparation packages are widely used by the general public. In addition to helping taxpayers compute their tax liabilities, they all appear to offer another service: upon completion of the tax return preparation process, they assess Service audit risk and present this information to the taxpayer. For example, upon tax return completion, TurboTax sets forth a range from dark green to bright red with an indicator arrow; depending upon the data entered, this arrow will appear somewhere along this range, indicating the taxpayer's supposed audit risk.  

Whether the audit risk information that the Internet and tax software companies provide is accurate is an entirely different issue. Years ago, the Service developed computer algorithms, the Discriminant Function System, which produced a DIF score for a tax return. The DIF score is used to determine whether the tax return should be audited. To date, the Service has kept this information a closely guarded agency secret. The lack of  public accessibility to this vital information means that whatever is published on the Internet or presented to tax preparation software users is suspect, based entirely upon conjecture and speculation, rather than the Service's actual guidelines.

Taxpayer Successfully Shows NonPossession and Control to Avoid Summons and Successfully in Most Part Asserted Fifth Amendment (8/5/17; 8/20/17)

In United States v. Lui, 2017 U.S. Dist. LEXIS 119953 (N.D. Cal. 2017), here, the court granted in part and denied in part the IRS petition to enforce the summons to the taxpayer.  The time line of events pieced together from the opinion and the parties' key submissions (Liu's amended memo here, the Gov't's response here,and Lui's Sur-reply here) is:

• 9/??/13 IRS starts audit for 2010 year
• 1/29/14 IRS issues IDR 001 requesting "copies of all delinquent FBARs"
• 2/11/4 "Lui submitted FBAR filings for years 2008, 2009, 2010, 2011 and 2012." [There is some commotion as to whether the 2012 FBAR had been timely filed]
• 7/8/14 first summons issue for testimony
• 8/4/14 Lui responds to summons and invokes Fifth Amendment in Q&A.
• 8/??/14 IRS expands audit to include 2005-2009 and 2011-2012
• 7/29/15 IRS issues second summons for documents related to offshore activity, related to foreign entities.
• 8/10/15 IRS issued IDR 13 and an Foreign Document Request ("FDR" pursuant to 26 U.S.C. § 982. The FDR, with IDR 13, sought records from foreign companies. Id.  [JAT Note, the opinion mentions the FDR but says almost nothing about why that is an issue, since it was not part of the summons enforcement proceeding except as background.]
• 10/14/16 Lui produces some documents but not others.  In his submission, the allegation is made that "Lui fully and timely responded to the IDRs, the FDR, and the both summonses, except that Lui could not provide all documents related to Netfinity and WG. " As to the FDR, "Lui provided certain documents pursuant to the FDR that were not in his possession or control, specifically the limited documents his family in Hong Kong chose to provide him in response to his requests."
• 2/26/16 IRS petitions to enforce summons (I think it may be both summonses)
• 3/16/16 Court approves summons on prima facie basis and issues Lui show cause order
• At some point apparently in 2016, Lui served on Government request for admissions and for documents.
• 12/15/16 Hearing on show cause order
• 7/31/17 Order Issued

Decisions as to Document Production

Lui's defense to the petition to enforce was that he had produced the documents he could but that he did not have possession or control or ability to obtain the documents.  The Court hold that the summonsed party asserting this defense must make a credible showing of lack of possession and control as of the date the summons was issued.  As to what the summonsed party must show, the Court adopted the sliding scale test of United States v. Malhas, 2015 U.S. Dist. LEXIS 151990, 2015 WL 6955496, at *4, which it describes as "the more the Government's evidence suggests the defendant possesses the documents at issue, the heavier the defendant's burden to successfully demonstrate that he does not."  Based on that Court's application of the Malhas test, the Court holds that (one footnote omitted):

The Court adopts the sliding scale test from Malhas, but reaches a different result, because the facts here are markedly different than in Malhas. For one thing, Lui presents far more than his own affidavit to support his argument of non-possession. ECF No. 82 at 21-24. Lui argues he does not have possession of the requested documents  because the non-produced records were either beyond his control or no longer existed as of July 29, 2015, the date of the IRS document summons. ECF No. 82 at 14-17, 21-24. On July 26, 2014, Lui resigned as a director of Netfinity and any related records were transferred out of his possession, custody, care and control to the custody of his siblings. ECF No. 82 at 15, citing ECF No. 24-2 at 154; ECF No. 24-6 at 63-71. Lui argues that "[c]oncurrently," the 2002 Trust assets were distributed among Lui's siblings, and "all shares in Netfinity and WG were transferred to Lui's" siblings." Id. Lui contends that "[u]pon distribution of the assets, the 2002 Trust dissolved because it no longer held any assets." ECF No. 82 at 15 (citing ECF No. 23 at 7). Lui presents numerous exhibits that show Lui had limited power over the trust that held Netfinity shares, ECF No. 24-2 at 17-18, 12, 73, 77, 75, 79; ECF No. 22-2 at 3-7; that the interests in Netfinity and WG were transferred to Lui's siblings at their request, ECF No. 24-2 at 38-41, 19, 35, 105,107-112; that the documents sought are now in the possession of Lui's siblings, ECF No. 24-2 at 63-71, 154; ECF No. 22-2 at 3-7; and that Lui was never a beneficial owner, [*11]  ECF No. 24-2 at 14-16. Moreover, Lui has attached advisory letters from law firms within the foreign jurisdictions, explaining that non-beneficial owners have no legal right to compel production of the documents. ECF No. 21-5 at 3-7. Therefore, Lui argues, he has no enforceable legal right to obtain the records. ECF No. 82 at 15. Lastly, Lui presents evidence that he did not receive a dividend from Galaxy during the audit period, ECF No. 24-2 at 81-82, and asserts he is not the beneficial owner of the Netfinity shares, ECF No. 88 at 4. 

The Government offers little direct evidence to the contrary. It primarily relies on a 2005 SEC filing that lists Lui as the owner of Netfinity. ECF No. 33-1. In addition, the Government also asks the Court to consider the suspicious timing of events by which the shares of Netfinity were distributed out of Lui's control and to his siblings, ECF No. 84 at 10, as well as Lui's lack of documentation surrounding the transfer of the Netfinity stock to his siblings. Id. at 8. 

These circumstances, though suspicious, are insufficient to demonstrate that Lui possesses or has the capacity to obtain the challenged documents. Although Lui may have been on notice of the IRS' investigation into his foreign assets because of the FDR or the testimonial summons in 2014, Lui's duty to retain these documents was not fixed until July 29, 2015, the date of the document summons. n4 The Court finds that the suspicious timing alone is not enough to overcome the plethora of evidence that Lui has offered to show that he did not possess, control, or have custody of the documents at issue which the IRS sought in its July 29, 2015 document summons as of that date. The Court cannot compel Lui to produce documents that he does not have in his possession or control.
   n4 The Government argues the relevant summons date was July 8, 2014 because it placed Lui "on notice that the IRS was examining his foreign interests." ECF No. 84 at 8. The obligation to retain documents does not begin until the actual document summons is issued. See Asay, 614 F.2d at 660. 

Nonetheless, although Lui has succeeded in demonstrating that he does not possess documents directly related to the Netfinity or WG assets, he has not met his burden of showing that he has no documents related to the transfer of those assets. As the Government argues, "[i]t is difficult to believe that such a significant purchase and transfer of stock would be unaccompanied by correspondence or at least emails maintained by the transferor." ECF No. 84 at 8. In the IRS' initial summons, it included "letters of wishes, letters of intent, orders of instructions and other similar documents expressing the founder's or beneficiary's wishes or instructions regarding the entity." ECF No. 1-3 at 7. Lui has not included any emails or other correspondence with regard to the transfer of the Netfinity stock. He has, however, been able to provide declarations from his siblings corroborating the fact that he no longer has access to Netfinity documents. ECF No. 83-1, 83-2, 83-3, 83-4, 83-5, 83-6, 83-7, 83-8, 83-9, 83-10, 83-11. Therefore, Lui is ordered to turn over any additional correspondence or other records in his possession regarding the transfers, or to submit a declaration under penalty of perjury that no such documents exist and that none existed as of July 29, 2015. Such declaration must be filed by August 11, 2017.

Decisions as to Testimonial Summons