Court of Federal Claims Holds that Not Reading The Schedule B Foreign Account False Answer Justifies FBAR Willful Penalty (12/28/18)

In Kimble v. United States, 2018 U.S. Claims LEXIS 1761(CFC 2018), here, the Court of Federal Claims (Judge Braden) drank the Government's kool aid on FBAR willful penalties, holding Kimble liable for the maximum willful penalty.  (The drank the kool aid analogy may be a little strong for some uses of the term, see Urban Dictionary, here.)

I won't recount the facts but, suffice it to say, they were not good facts for Kimble.  Some of the facts are recounted in the excerpts from the legal discussion below.

Key holdings:

1.  Kimble was reckless sufficient to invoke the FBAR civil willful penalty.  Here are the key excerpts (bold-face supplied by JAT):

The relevant stipulated facts in this case are as follows: 

• Plaintiff did not disclose the existence of the UBS account to her accountant until approximately 2010. Stip. ¶ 43.
• Plaintiff never asked her accountant how to properly report foreign investment income. Stip. ¶ 44.
• Plaintiff did not review her individual income tax returns for accuracy for tax years 2003 through 2008. Stip. ¶ 46.
• Plaintiff answered “No” to Question 7(a) on her 2007 income tax return, falsely representing under penalty of perjury, that she had no foreign bank accounts. Stip. ¶ 48. 

In the court’s judgment, stipulations ¶¶ 46 and 48 together evidence conduct by Plaintiff, as a co-owner of the UBS account that exhibited a “reckless disregard” of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a FBAR. See Godfrey, 748 F.2d at 1577; see also Norman v. United States, 138 Fed. Cl. 189, 194 (Fed. Cl. 2018) (determining that a taxpayer, Mindy Norman, was “put on inquiry notice of the FBAR requirement when she signed her tax return”) (internal quotations omitted), appeal docketed, No. 18-2408 (Fed. Cir. Sept. 18, 2018); see also Jarnagin, 134 Fed. Cl. at 378 (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”) (citations omitted). n23 Although Plaintiff had no legal duty to disclose information to her accountant or to ask her accountant about IRS reporting requirements, these additional undisputed facts do not affect the court’s determination that Plaintiff’s conduct in this case was “willful.”
   n23 A May 23, 2018 Memorandum the IRS Office of Chief Counsel distributed to IRS program managers states that, “[t]he standard for willfulness under 31 U.S.C. § 5321(a)(5)(C) is the civil willfulness standard, and includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.” Burden of Proof and Standard for Willfulness Under 31 U.S.C. § 5321(a)(5)(C), PMTA-2018-13, at 1 (May 23, 2018). For a comprehensive discussion of how other federal courts have construed whether a FBAR violation is “willful,” see Hale E. Sheppard, “What Constitutes A ‘Willful’ FBAR Violation?,” 129 J. TAX’N 24 (Nov. 2018) (collecting cases). 

For these reasons, the court has determined, viewing the evidence in the light most favorable to Plaintiff, that there is no genuine issue of material fact that Plaintiff violated 31 U.S.C. § 5314 and that her conduct was “willful.” See 31 U.S.C. § 5321(a)(5) (2004); see also RCFC 56.

Practitioners should note that this rather cryptic holding seems to put at risk all taxpayers who on the Forms 1040 checked "No" in the foreign account box on Schedule B.  Of course, Kimble's facts beyond that Schedule B check mark were consistent with the willful penalty but as the Court posited its conclusion perhaps the "No" answer only would suffice.

2.  The Court rejected the Colliot and Wadhan holding s that the willful penalty was limited to $100,000 because the FBAR regulations had not been revised.  The Court held that the IRS could impose the willful penalty in the maximum amounts allowed by the statute.

JAT Comments:

Article on Ethics Issues in Referring Clients to Foreign Aggressive Tax Planners/Enablers (12/27/18)

Tax Crimes enthusiasts may be interested in this law review article:  Heather M. Field, Offshoring Tax Ethics: The Panama Papers, Seeking Refuge From Tax, and Tax Lawyer Referrals,, St. Louis U L.J.  62 St. Louis U. L.J. 35 (2017), here.  Excerpts (footnotes omitted):

Despite the investigative research and scholarly analyses of the Panama Papers, many questions remain, including: How did U.S. clients get to the Panamanian law firm of Mossack Fonseca? What were the ethical responsibilities of the individuals (particularly lawyers) who connected these U.S. clients with MF, especially in cases where the U.S. clients sought offshore assistance in order to avoid or evade U.S. taxes? And what, if anything, should individuals in similar situations do differently in the future? 

This Essay starts to answer these questions, and in doing so, fills a gap in the literature. Existing literature on lawyer referrals is relatively limited and generally focuses on referral fees, lawyer referral services, and malpractice actions for negligent referral. And while there is literature about professional responsibility in cross-border matters, discussions of referrals to foreign counsel are relatively brief and tend to focus on malpractice risk for negligent referral or on aiding and abetting the unlicensed practice of law. This Essay considers a specific, and previously unaddressed, type of cross-border referral—one for clients seeking help with offshore tax avoidance or evasion. This situation raises different ethical concerns and implicates tax-specific penalty provisions and standards of conduct. 

This Essay argues that, although the rules governing ethical tax practice generally do not prevent a U.S. lawyer from referring a client to a firm like MF for potentially aggressive tax planning, a lawyer who does so without very careful reflection “passes the buck” for ethical tax practice onto the next lawyer. Rather than expatriating responsibility for the tax practice ethics of representing the client, each lawyer should internalize more of that responsibility and should not blithely provide referrals. 

This Essay proceeds by describing what the Panama Papers reveal about client referrals to MF, after which the Essay briefly explains how the general ethical rules, tax-specific standards of practice, tax penalty provisions, and other constraints apply to a U.S. lawyer making a referral to a firm like MF. The Essay then argues that lawyers should adhere to higher standards when considering such referrals.

* * * * 

CONCLUSION 

Tax Court Case Shows That the IRS Burden to Prove Fraud by Clear and Convincing Evidence Is Formidable Indeed (12/17/18)

In Matthews v. Commissioner, T.C. Memo. 2018-212, here, the taxpayer represented himself "pro se" to contest a deficiency with a year that was open based on the IRS determination of civil fraud.  The taxpayer prevailed because, the Court (Judge Vasquez) concluded, the IRS had not proved civil fraud by clear and convincing evidence, despite some acknowledged bad acts, including  lying to the agents, along the way.  The story is interesting because it shows just formidable the clear and convincing standard is.

The civil tax years in the Tax Court case were 2007 & 2008.  Previously, Matthews was originally indicted for tax evasion under section 7201 and subscribing to a false return under § 7206(1) for tax years 2004 through 2008.  A new prosecutor abandoned the tax evasion charges in a superseding indictment that charged (i) § 7206(1), tax perjury, for 2004 through 2008 and (ii) impeding the lawful function of the IRS, 7212(a) (tax obstruction).  Matthews was convicted of all charges, sentenced to a 27-month prison term, and the conviction was affirmed on appeal.  United States v. Mathews, 761 F.3d 891 (8th Cir. 2014), here.

According to a footnote (p. 17 fn 8), "SA Williams testified that the new prosecutor believed the sec. 7206(1) charges would make for a “cleaner case” than the sec. 7201 charges. As discussed infra, sec. 7206(1) does not require the Government to prove that the defendant intended to evade tax."  Note  to students and practitioners, this easier case to prove criminally beyond a reasonable doubt is often the reason that DOJ Tax foregoes a tax evasion charge ab initio, but one would have thought that DOJ Tax would have made the decision earlier.  Still, some prosecutors, particularly a new one on the block, could see the case differently and convince DOJ Tax to permit the "lesser charge" of tax perjury under § 7206(1).  (And, to close that loop, I have even had local prosecutors (AUSAs) with some gravitas with DOJ Tax convince DOJ Tax to forego criminal charges previously authorized based on their different assessments of the case.)

In the ensuing civil examination, the IRS determined that Matthews had unreported income and, based on the assertion of fraud, opened the statute of limitations and asserted the civil fraud penalty.  Matthews petitioned for redetermination to contest the fraud determination.  If successful, Matthews would owe no tax because the assessment statute of limitations had expired.

The fraud issue required that the IRS prove fraud by clear and convincing evidence.  The Court held that the IRS had failed to do so.  The Court held:

1.  Based on assessment of Matthews' credibility, the Court determined (pp. 22-31) that the IRS had failed to established fraud by clear and convincing evidence.  The aspect of the case turned upon credibility determinations.  I enclose below extended excerpts related to this credibility determination.

2.  The Court held (30-31) that the Section 7206(1) conviction was not issue preclusive on fraud.  This is a standard holding.

3.  Matthews was not bound to stipulations of fraudulent intent because contrary to record (pp. 31-33.)

Here are key quotes of interest to tax crimes practitioners who must be concerned with civil liabilities.

Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (12/21/18; 1/10/19)

In Bedrosian v. United States, 912 F.3d 144 (3rd Cir. 2018), CA3 here and GS here, the Court held:  

1. On the threshold issue of the district court's jurisdiction, the Court questioned whether the district court had jurisdiction under the Little Tucker Act, 28 U.S.C. § 1346(a)(2).  That concern was mooted because the court concluded that it was a tax claim under 28 U.S.C. § 1346(a)(1).  Tax claims are, at least facially, subject to the Flora full payment rule.  Bedrosian did not make full payment hoping that the Little Tucker Act avoided that requirement.  So, since this was a tax refund action, according to the Court's concern, Flora required full payment.  But, according to the Court, the district court did have jurisdiction over the Government's counterclaim.  So, the district court had some jurisdiction and, as a result, the Court of Appeals had jurisdiction to consider the merits of the appeal.

2. On the merits, the Court held that, for the FBAR penalty, the Government must satisfy the civil willfulness standard, which includes both knowing and reckless conduct.  The Court thus was consistent with the consensus of the previously decided cases.  The Court said that willfulness, as interpreted, required both a subjective and objective inquiry.

3.  The Court remanded because the Court was not certain that the district court's finding of nonwillfulness considered the objective aspect of willfulness.

I have previously posted on the lower court Bedrosian trajectory (reverse chronological order):

• Big Win for Taxpayer/Filer in FBAR Willful Penalty Case (Federal Tax Crimes Blog 9/21/17; 9/23/17), here. 
• Order on Motion In Limine and Trial Briefs in Case Involving FBAR Willful Penalty (Federal Tax Crimes Blog 9/11/17), here.
• Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (Federal Tax Crimes Blog 4/13/17), here.

JAT Comments (added 12/22/18):

Articles on Potential Tax Crimes in the Trump Hush Money Payments (11/20/18)

Brian Galle, a tax professor at Georgetown Law School, has this article:  Trump’s Bookkeeper: How Prosecutors Could Easily Prove Tax Crimes for Hush Money Reimbursements (Just Security 12/18/18), here.

Brian's article links this article by Martin Sheil, former Supervisory Special Agent IRS Criminal Investigation:  Did Trump Organization Executives Cook the Books?–Tax Crimes Explained under Federal and State Law (Just Security 12/18/18), here.

Both are good reading, although written for readers who are not tax crimes specialists (who do need to reminded from time to time about Cheek).

Here is a good excerpt from Brian's article:

In my view, Trump’s key defense to the campaign finance charge would focus on his purpose in making the payments. There’s a strong circumstantial case to be made that candidate Trump knew secret mistress payoffs could be crimes: he tweeted about the John Edwards prosecution for the same general sort of conduct, and was broadcast saying he had talked to lawyers after reading about that case. So his best shot is to say simply that he paid not to influence the election, but instead for personal reasons, such as to avoid hurting his wife. The timing, in October of 2016, makes that argument challenging, but he might say that he knew the timing would drive press coverage that would be especially hurtful or that it was his accusers who dictated the timing. 

But down that road lies tax fraud. The problem is that if the payments were indeed personal, they were not deductible business expenses. In all likelihood, when Weisselberg created an account entry listing the payments as “legal expenses” for the Trump Organization, that entry resulted in those costs being deducted from the Organization’s income (as with many things Trump, it would of course be useful to see the tax returns themselves). Although Trump probably no longer signs the Organization’s tax returns, and so likely did not himself lie on the 2016 return, he could be guilty of conspiring with others to fraudulently reduce the Organization’s taxes. The payments likely also should have been taxed to Trump personally as de facto distributions of profits; whether they are reported as such on his personal tax returns is also an interesting question for investigators. 

Just as with the campaign offenses, mental state is critical to tax offenses, and so it is here that Weisselberg will be critical. Ignorance of the law actually is an excuse for tax crimes. Because the tax code is so complex, taxpayers can’t be convicted of most tax offenses unless they undertake a “voluntary, intentional violation of a known legal duty.” Cheek v. U.S., 498 U.S. 192, 201 (1991). Proving that defendants actually knew what they were doing was wrong is the most challenging part of almost any tax prosecution.

Does the Statute of Limitations Affect the Issue of Whether a President Can be Indicted During His Presidency? (12/13/18; 12/17./18)

Tax crimes and other federal crimes, all statutory, have statutes of limitations.  Section 6531, here, is the statute of limitations for tax crimes.  Generally, where there might be some impediment to discovery or prosecution of a tax crime, arguments can be made that the statute of limitations should be tolled or suspended.  (That is also true of civil remedies as well.)  And, frequently, the statutes do provide for such tolling in some specifically identified cases.  For example, the general six year statute of limitations for tax crimes is 6 years (per § 6531), but the flush language provides:

The time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code, shall not be taken as any part of the time limited by law for the commencement of such proceedings. (The preceding sentence shall also be deemed an amendment to section 3748(a) of the Internal Revenue Code of 1939, and shall apply in lieu of the sentence in section 3748(a) which relates to the time during which a person committing an offense is absent from the district wherein the same is committed, except that such amendment shall apply only if the period of limitations under section 3748 would, without the application of such amendment, expire more than 3 years after the date of enactment of this title, and except that such period shall not, with the application of this amendment, expire prior to the date which is 3 years after the date of enactment of this title.) Where a complaint is instituted before a commissioner of the United States within the period above limited, the time shall be extended until the date which is 9 months after the date of the making of the complaint before the commissioner of the United States. For the purpose of determining the periods of limitation on criminal prosecutions, the rules of section 6513 shall be applicable.

The issue of tolling is currently a topic in today's political environment where there are various claims bandied about that a sitting President cannot or should not be indicted.  I point readers to this article:  Jed Shugerman, The Single Fatal Flaw in the Legal Argument Against Indicting a Sitting President (Slate 10/11/18), here.  The by-line is:  Should a president be above the law because of the statute of limitations?

Let's use a tax crimes example.  Say that the Government (Mueller, the IRS, DOJ Tax etc.) has evidence that Trump committed tax crimes for the tax years 2012-2015 (2015 is the last year where a return was filed before he became President).  Assuming that he filed his tax years timely on extension for those years, the statute of limitations related to those filings would expire annually starting on October 15, 2019.  If President Trump cannot be indicted while President, the statute as the text of the law is worded would expire on those crimes starting on October 15, 2019.  Even if he is a one-term President, the statute would expire on some of those years before he leaves office (unless he leaves prematurely).  Moreover, if he is a two term President and does not leave prematurely, the statute of limitations on all of those years will expire.  Can that be?

Mr. Shugerman's article suggest that, although federal crimes are generally not tolled without an express statute for tolling (which there is not in this  case), there is a concept called "equitable tolling" that might apply.  I think that the potential of equitable tolling in this case is doubtful, particularly where it has never been established that the President could not be indicted while in office.

It seems to me that the proper course to set up even the possibility for equitable tolling would be to indict the President (perhaps under seal) and, if President Trump wants to fight whether he can be indicted, let the parties fight to final resolution (also perhaps under seal) whether the President can be indicted.  This would all occur during his presidency and the matter will be resolved.  If he can be indicted, there might be policy reasons to let the indictment remain under seal under he leaves office.  But, if he can't be indicted, the indictment would be dismissed and the issue of equitable tolling would be set up.

Tax Court Holds that an Aider and Abetter of Tax Evasion Assessed Tax for Another's Tax May Be Assessed under § 6201(a)(4) (12/13/18)

In Bontrager v. Commissioner, 151 T.C. ___, No. 12 (2018), here and here, the Court held that a taxpayer convicted of tax evasion as an aider and abetter of his father's tax evasion and ordered to pay restitution of a portion of his father's evaded tax liability can be assessed the restitution amount under § 6201(a)(4), here.  Readers will recall that § 6201(a)(4) and related provisions were enacted in 2010 to (i) permit the IRS to assess tax restitution immediately without going through the predicate step of notice of deficiency and Tax Court proceeding and (ii) make assessment preclusive.

Section 6201(a)(4)(A) provides in relevant part:

The Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.

Judge Lauber does a straightforward job of working to his conclusion.

JAT Comments:

FBAR Collection Suit Against Person Convicted of Willfully Failing to File FBAR (12/11/18)

I have previously written on the criminal conviction of Arvind Ahuja.  See Prominent Neurosurgeon Convicted for Offshore Accounts (Federal Tax Crimes Blog 8/23/12), here. On December 7, 2018, the Government filed an FBAR willful penalty collection suit for a single willful penalty for the year 2009 in the amount of $4,662,540.50.  United States v. Ahuja (E.D. Wisc. Dkt. No. 18-cv-01934).  The Complaint is here (from Court Listener).  As of today, no answer has been filed.

Key excerpts:

On Willfulness:

15. On his IRS Form 1040 for 2009, Ahuha checked “no” on that part of Schedule B requiring him to disclose his interest in foreign bank accounts.  

16. In August of 2008 and on subsequent dates, Ahuja’s accountant informed Ahuja of his obligation to report his interest in any foreign financial accounts. Ahuja knew or should have known he had a duty to report his interest in the foreign financial accounts. 

* * * *  

23. On August 22, 2012, Ahuja was found guilty by a jury in this district for, among other charges, his willful failure to submit a Report of Foreign Bank and Financial Accounts and filing a false income tax return for the year  ending December 31, 2009 in the case of United States v. Arvind Ahuja, Crim. No. 2:11-cr-00135-CNC (E.D. Wisc.). 

 On the FBAR penalty assessment and amount due:

19. On July 12, 2017, a delegate of the Secretary of the Treasury timely made an assessment in the amount of $4,622,540.50, under 31 U.S.C. § 5321, against the defendant, Arvind Ahuja, for his willful failure to submit a FBAR for the year ending December 31, 2009, and assessed both a late-payment penalty of $63,069.19, under 31 U.S.C. § 3717(e)(2) and 31 C.F.R. § 5.5(a), plus interest. The amount assessed under 31 U.S.C. § 5321 is commonly known as a “FBAR Penalty.” The FBAR Penalty assessed is 50% of the account balance on the day of the FBAR violation.  

* * * * 

22. With interest and other statutory accruals, the amount due with respect to the assessment described above is, as of September 19, 2018, $5,007,288.38. The United States is entitled to judgment in its favor and against Ahuja in this amount, plus statutory additions including interest according to law.

JAT Comments: 

District Court Rejects Motion to Dismiss Based on Colliot and Wadhan Because Each Year Willful Penalty Less than $100,000 (12/10/18)

In United States v. Shinday, 2018 U.S. Dist. LEXIS 205372 (C.D. Cal. 2018), an FBAR collection suit, the defendants (husband and wife) had foreign accounts at UBS and at State Bank of India. I excerpt some of the history of the accounts below.  The Government assessed multi-year willful penalties against the husband and five single year $10,000 nonwillful penalties against the wife.  The Government is suing to obtain judgment on the assessments.  The defendants moved to dismiss, and the Government opposed.  (The motion to dismiss is here and the opposition is here.) The Court denied the motion (here with Court Listener copy here; the Docket Entries on Court Listener here permit some of the documents to be downloaded).  ).

Key excerpts (don't tell the full story but enough that, I think, readers will get the key points):

The government alleges that in 2002, UBS prepared a memorandum indicating that defendants asked UBS whether Nila’s brother could withdraw $50,000 of defendants’ funds from UBS’s London branch without it being reported. Id. 

* * * * 

In 2008, UBS again notified defendants of new laws applying to U.S. citizens with foreign bank accounts, and recommended that defendants close their UBS account. Id. ¶ 23. Defendants soon after transferred the funds in their UBS account to their accounts at the State Bank of India (“SBI”), a bank in India, and eventually closed their UBS account. Id. 

The government alleges that before defendants closed their UBS account, defendants’ UBS account had year-end balances of $350,019 in 2005, $361,819 in 2006, $420,893 in 2007, and $15,003 in 2008. Id. ¶ 9. Defendants also had “as many as twenty-nine and as few as seven fixed deposit accounts at the State Bank of India[,]” from the years 2005 to 2011. Id. ¶ 10. Defendants’ SBI accounts had aggregate year-end balances of $444,035 in 2005, $669,729 in 2006, $258,079 in 2007, $306,647 in 2008, $411,502 in 2009, $216,530 in 2010, and $362,506 in 2011. 

* * * * 

C. Defendants’ Failure to Disclose their UBS and SBI Accounts 

Defendants filed joint federal income tax returns for the 2005 to 2011 tax years, utilizing a certified public accountant to file those returns. Id. ¶ 25. The returns included a Schedule B, Interest and Dividends, which, inter alia, requires defendants to (1) report domestic or foreign interest or dividends, and (2) state whether they have  a financial account in a foreign country. Id. ¶¶ 26–27. Defendants did not report the interest or dividends associated with their UBS and SBI accounts for 2005 to 2010. Id. ¶ 26. They checked a box on the Schedule B form for their 2005 to 2010 tax returns indicating that they did not have foreign accounts during those years. Id. ¶ 27. Defendants signed those returns, under penalty of perjury. Id. 

For defendants’ 2011 tax return, defendants disclosed their SBI accounts, but failed to do so in a timely manner. Id. ¶ 29. The IRS then audited defendants’ 2005 to 2011 tax returns. During the audit, defendants ultimately disclosed two Canadian investment accounts, as well as the UBS and SBI accounts. Id. ¶ 30. 

D. IRS Penalty Assessments against Defendants 

The government alleges that the IRS thereafter assessed penalties against defendants based on their UBS and SBI accounts. Id. ¶¶ 31–32. The government claims that on or around August 23, 2016, the IRS assessed non-willful FBAR penalties against Nila for the tax years 2007 to 2011. Id. ¶ 31. Each penalty was $10,000, totaling $50,000. Id. The government alleges that on or about August 23, 2016, the IRS also assessed willful FBAR penalties against Money for the tax years 2007 to 2011. Id. ¶ 32. The aggregate amount of the penalty was $257,888, which represents 25% of the combined 2006 year-end balance of defendants’ UBS and SBI accounts, equaling $1,031,548. Id. This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011. Id. 

* * * * 

As the government argues, the facts of Colliot and Wadhan are thus inapposite to this case because the five penalties assessed against Money are individually all less than $100,000. Compl. ¶ 32; Opp’n at 3. Although in the aggregate the penalties against Money total $257,888, the yearly, individual penalties are each approximately $51,578. Id. Each time Money allegedly willfully failed to timely file an FBAR, the IRS assessed a penalty. Compl. ¶ 32. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from defendants’ failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011. Id. This is within the bounds of 31 C.F.R. § 1010.820(g) (“For any willful violation committed . . . the Secretary may assess upon any person, a civil penalty . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.”) (emphasis added). n1 
   n1 In addition to arguing that its penalties do not violate 31 C.F.R. § 1010.820’s $100,000 cap, the government also argues that 31 C.F.R. § 1010.820 was invalidated by the 2004 amendment to Section 5321. Opp’n at 5, 9 (citing Norman, 138 Fed. Cl. at 195 – 96 (involving Mindy Norman, finding that the $100,000 penalty cap established by 31 C.F.R. § 1010.820 is invalid because “Congress clearly raised the maximum civil money penalty in § 5321 to the greater of $100,000 or one half of the balance of the account”)). In essence, the government argues that even if the $100,000 penalty cap applied in the aggregate, the amendment in Section 5321 would permit the government to apply a penalty in excess of
$100,000. The Court need not reach this issue, however. Irrespective of whether Section 5321 invalidates the Department of Treasury’s implementing regulations, there was no year in which Money was penalized for more than $100,000.

JAT Comments:

USAO SDNY Sentencing Memo for Michael Cohen for Tax and Other Crimes (12/9/18)

The USAO SDNY sentencing memo for Michael Cohen, former attorney for President Donald J. Trump (identified in the memo as "Individual-1"), is linked, here, and excerpted in the following:  Paul Caron, Michael Cohen And Theories Of Deterrence In Tax Evasion Cases (TaxProf Blog 12/7/18), here.

The TaxProf Blog excerpts are good. 

For the benefit of readers, I would flesh out the quote from U.S.S.G. Ch. 2, Part T, intro. Cmt. here.  Here is the entire commentary:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

There is a lot for tax crimes fans to unpack in that short statement.  I will not try to do that here.

I point to some cases where courts have referred to this commentary:

U.S. v. Engle, 592 F.3d 495, 501-2 (4th Cir. 2010), here.

As the government notes, the policy statements issued by the Sentencing Commission make it clear that the Commission views tax evasion as a serious crime and believes that, under the pre-Guidelines practice, too many probationary sentences were imposed for tax crimes. See U.S.S.G. Ch. 1, Pt. A, introductory cmt. 4(d) (1998) ("Under pre-guidelines sentencing practice, courts sentenced to probation an inappropriately high percentage of offenders guilty of certain economic crimes, such as theft, tax evasion, antitrust offenses, insider trading, fraud, and embezzlement, that in the Commission's view are `serious.'"). The policy statements also reflect the Commission's view that general deterrence — that is, deterring those other than the defendant from committing the crime — should be a primary consideration when sentencing in tax cases. As the Commission has explained, 

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators. 

U.S.S.G. Ch. 2, Pt. T, introductory cmt. (1998). The policy statements likewise make it clear that the Commission believes that there must be a real risk of actual incarceration for the Guidelines to have a significant deterrent effect in tax evasion cases. The Guidelines therefore 

classify as serious many offenses for which probation was frequently given and provide for at least a short period of imprisonment in such cases. The Commission concluded that the definite prospect of prison, even though the term may be short, will serve as a significant deterrent, particularly when compared with pre-guidelines practice where probation, not prison, was the norm. 

Id. at Ch. 1, Pt. A, introductory cmt. 4(d) (1998) (emphasis added). Given the nature and number of tax evasion offenses as compared to the relatively infrequent prosecution of those offenses, we believe that the Commission's focus on incarceration as a means of third-party deterrence is wise. The vast majority of such crimes go unpunished, if not undetected. Without a real possibility of imprisonment, there would be little incentive for a wavering would-be evader to choose the straight-and-narrow over the wayward path.

United States v. Snipes, 611 F.3d 855, 872 (11th Cir. 2010), here:

Haaretz Article On New DOJ Entity Prosecution Policies and Isreali Banks (12/5/18)

A couple of days ago I wrote on new DOJ entity prosecution policies announced by DAG Rod Rosenstein.  New DOJ Policies for Prosecution of Entities and the Individuals Within Them Most Responsible (Federal Tax Crimes Blog 11/30/18), here.  Following through on that item with respect to offshore banks and their principal individual actors (officers, agents and other individual partners in crime), Haaretz has this article:  Michael Rochvarger, Bad News for Israeli Bankers: The U.S. Has a New Policy on Corporate Crime (Haaretz 12/5/18), here.  In the context of foreign banks and their individual actors that means that, although corporations and other juridical entities, cannot be jailed, individuals can, particularly those who are principal actors in the scheme.  Of course, with respect to principal individual actors for foreign entities (such as Swiss and Isreali banks), effectively prosecuting the principal individual actors can be a problem, but one that is sometimes not surmountable.  For example, Raoul Weil of UBS was extradited to the U.S. and tried, albeit with acquittal.  See On Foreign Enabler Indictments, Sealed Indictments and INTERPOL Red Alerts (Federal Tax Crimes Blog 6/29/16), here.  And, as I noted yesterday, principal individual actors for entities involved with the Panama Papers fiasco were indicted and extradited to the U.S.  Enablers and Taxpayer Related to Panama Papers Disclosures Indicted (Federal Tax Crimes Blog 11/5/18), here.

Here are some excerpts from the Haaretz article (bold-face supplied by JAT):

The main message Rosenstein relayed was that agreements would be difficult to reach unless the executives involved are required to personally pay fines and even be forced to resign if they are still in their jobs. 

“It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing,” he said 

But Rosenstein went on to say: “The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes. So we revised our policy to make clear that absent extrao rdinary circumstances, a corporate resolution should not protect individuals from criminal liability. 

Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.” 

Among Israeli bankers, the new policy is most relevant to Eldad Fresher, the CEO of Mizrahi since 2013. Before and during the year the alleged tax violations occurred, he was chairman of the bank’s Swiss unit and head of its financial division, responsible for international activities. Dan Lubasch, Mizrahi Switzerland’s CEO since 2011, may also be affected. 

Most of the senior Hapoalim executives connected with the alleged affair have left the bank, but a number of middle managers who remained now find themselves in the Justice Department’s crosshairs. 

Of the three Israeli banks that have been investigated, only Bank Leumi has settled — agreeing to pay a $400 million penalty four years ago. That, however, may not be a good barometer for what Hapoalim will have to pay, on top of the threat that individual executives will also face penalties. 

In August, the Justice Department offered Mizrahi — Israel’s third-largest bank, but much smaller than Leumi and Hapoalim — a settlement that included a $342 million fine. 

Mizrahi rejected it, but also opted to set aside another $116.5 million in its second-quarter financial report, in expectation of a future penalty. Until then, its provisions had amounted to just $162 million. Meantime, the two sides are negotiating. 

At Hapoalim, the provisions connected with the probe have reached $365 million, with total costs, including legal fees, of 2 billion shekels ($540 million). It’s not clear when the bank will settle with U.S. authorities.

Enablers and Taxpayer Related to Panama Papers Disclosures Indicted (12/4/18)

USAO SDNY announced charges against enablers related to the law firm involved in the Panama Papers Investigation:  Four Defendants Charged In Panama Papers Investigation: Indictment Unsealed Today Charges Four Defendants for Their Roles Global Law Firm’s Decades-Long Scheme to Defraud the United States in Panamanian-Based (OSAO SDNY 12/4/18), here.  The indictment is here.  The defendants are:

• Dirk Brauer, an investment manager for Mossfon Asset Management, S.A., an asset management company closely affiliated with Mossack Fonseca, who was arrested in Paris, France, on November 15, 2018;
• Ramses Owens (aka Ramses Owens Saad), a Panamanian attorney who worked for Mossack Fonseca and who remains at large.
• Richard Gaffey, a U.S.-based accountant, who was arrested in Massachusetts, this morning.
• Harald Joachim von der Goltz (also identified as Client-2 in the indictment), a former U.S. resident and taxpayer, who was arrested in London, United Kingdom, on December 3, 2018

Key excerpts from the press release:

[The Government] announced today the unsealing of an indictment charging RAMSES OWENS, DIRK BRAUER, RICHARD GAFFEY, and HARALD JOACHIM VON DER GOLTZ, with wire fraud, tax fraud, money laundering, and other offenses in connection with their roles in a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (“Mossack Fonseca”), a Panamanian-based global law firm, and related entities. 

* * * * 

According to the Indictment, which was unsealed today in Manhattan federal court:
From 2000 through 2017, OWENS and BRAUER conspired with others to help U.S. taxpayer clients of Mossack Fonseca conceal assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful, and dishonest means.  To conceal their clients’ assets and income from the IRS, OWENS and BRAUER worked to establish and manage opaque offshore trusts and undeclared bank accounts on behalf of U.S. taxpayers who were clients of Mossack Fonseca.  OWENS and BRAUER marketed, created, and serviced sham foundations and shell companies formed under the laws of countries such as Panama, Hong Kong, and the British Virgin Islands, to conceal from the IRS and others the ownership by U.S. taxpayers of accounts established at overseas banks, as well as the income generated in those accounts.  As structured by Mossack Fonseca, the sham foundations typically “owned” the shell companies that nominally held the undeclared assets on behalf of the U.S. taxpayer clients of Mossack Fonseca.  The names of Mossack Fonseca’s clients generally did not appear anywhere on the incorporation paperwork for the sham foundations or related shell companies, although the clients in fact beneficially owned, and had complete access to, the assets of those sham entities and accounts. 

In furtherance of the scheme, and in exchange for additional fees, OWENS and BRAUER provided support to clients who had purchased the sham foundations and related shell companies by providing corporate meeting minutes, resolutions, mail forwarding, and signature services.  Moreover, OWENS and BRAUER purposefully established the bank accounts in locations with strict bank secrecy laws, which impeded the ability of the United States to obtain bank records for the accounts.  OWENS and BRAUER also instructed U.S. taxpayer clients of Mossack Fonseca about how to repatriate funds to the United States from their offshore bank accounts in a manner designed to keep the undeclared bank accounts concealed.  Among other things, OWENS and BRAUER instructed clients to use debit cards and fictitious sales to repatriate their funds covertly. 

VON DER GOLTZ was one of Mossack Fonseca’s U.S. taxpayer clients.  At all relevant times, VON DER GOLTZ was a U.S. resident and was subject to U.S. tax laws, which required him to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts.  VON DER GOLTZ evaded his tax reporting obligations by setting up a series of shell companies and bank accounts, and hiding his beneficial ownership of the shell companies and bank accounts from the IRS.  These shell companies and bank accounts made investments totaling tens of millions of dollars.  VON DER GOLTZ was assisted in this scheme by OWENS and by GAFFEY, a partner at a U.S.-based accounting firm.  In furtherance of VON DER GOLTZ’s fraudulent scheme, VON DER GOLTZ, GAFFEY, and OWENS falsely claimed that VON DER GOLTZ’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and – unlike VON DER GOLTZ – was not a U.S. taxpayer.  

GAFFEY, in addition to assisting VON DER GOLTZ evade U.S. income taxes and reporting requirements, also worked closely with OWENS to help another U.S. taxpayer client (“Client-1”) of Mossack Fonseca defraud the IRS.  Client-1 maintained a series of offshore bank accounts, which Mossack Fonseca helped Client-1 conceal from the IRS for years.  The indictment further alleges that upon the advice of OWENS and GAFFEY, Client-1 covertly repatriated approximately $3 million of Client-1’s offshore money to the United States by falsely stating on Client-1’s federal tax return that the money represented proceeds from the sale of a company.  After Client-1 repatriated approximately $3 million in this manner, approximately $1 million still remained in Client-1’s offshore account, the existence of which remained hidden from the IRS.   

A chart outlining the charges against each defendant is below. * * * *

Supreme Court Case on Double Jeopardy that Might Affect States' Ability to Prosecute Tax Crimes After Federal Jeopardy (12/3/18; 12/6/18)

I picked up this in yesterday's Washington Post:  Robert Barnes, Supreme Court to consider case that could affect potential Manafort prosecutions (WAPO 12/2/18), here.  The  opening is )bold face supplied by JAT):

The Supreme Court next week takes up the case of a small-time Alabama felon, Terance Gamble, who complains that his convictions by state and federal prosecutors for the same gun possession crime violate constitutional protections against double jeopardy.
But likely to be watching the proceedings closely will be those concerned about a big-time felon, Republican consultant and former Trump campaign chairman Paul Manafort, who was prosecuted by special counsel Robert S. Mueller III for tax fraud. 

With President Trump keeping alive prospects that he might pardon Manafort, Gamble v. United States might be redubbed Manafort v. Mueller, joked Thomas C. Goldstein, an attorney who regularly argues before the Supreme Court.

The outcome in the case could affect nascent plans by states to prosecute Manafort under their own tax evasion laws — New York, in particular, has expressed interest — should Trump pardon Manafort on his federal convictions. 

The double jeopardy clause of the Constitution’s Fifth Amendment prohibits more than one prosecution or punishment for the same offense. But the Supreme Court since the 1850s has made an exception, allowing successive prosecutions and punishments if one is brought by state prosecutors and the other by the federal government. (One early case from that time involved counterfeiting; another was prosecution of someone harboring a fugitive slave.) 

In Gamble, the court is reconsidering these precedents. Almost none of the briefs filed in the case speculate on how a presidential pardon of a federal conviction would affect prosecutors at the state level should the so-called separate sovereigns doctrine be renounced.

New DOJ Policies for Prosecution of Entities and the Individuals Within Them Most Responsible (11/30/18)

Deputy Attorney General Rod Rosenstein announced yesterday important changes to Government policy on prosecuting corporations and individuals yesterday at a conference on the FCPA.  See DOJ announcement here.  I include below the key excerpts (lengthy) explaining the policy:

Under our revised policy, pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation. 

It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing. Corporate-level resolutions also allow us to reward effective compliance programs and penalize companies that condone or ignore wrongdoing. 

But the deterrent impact on the individual people responsible for wrongdoing is sometimes attenuated in corporate prosecutions. Corporate cases often penalize innocent employees and shareholders without effectively punishing the human beings responsible for making corrupt decisions.  

The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes.  So we revised our policy to make clear that absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability. 

Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.  

In response to concerns raised about the inefficiency of requiring companies to identify every employee involved regardless of relative culpability, however, we now make clear that investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted. 

We want to focus on the individuals who play significant roles in setting a company on a course of criminal conduct.  We want to know who authorized the misconduct, and what they knew about it. 

The notion that companies should be required to locate and report to the government every person involved in alleged misconduct in any way, regardless of their role, may sound reasonable. In fact, my own initial reaction was that it seemed like a great idea. But consider cases in which the government alleges that routine activities of many employees of a large corporation were part of an illegal scheme. 

When the government alleges violations that involved activities throughout the company over a long period of time, it is not practical to require the company to identify every employee who played any role in the conduct. That is particularly challenging when the company and the government want to resolve the matter even though they disagree about the scope of the misconduct. In fact, we learned that the policy was not strictly enforced in some cases because it would have impeded resolutions and wasted resources. Our policies need to work in the real world of limited investigative resources. 

Companies that want to cooperate in exchange for credit are encouraged to have full and frank discussions with prosecutors about how to gather the relevant facts.  If we find that a company is not operating in good faith to identify individuals who were substantially involved in or responsible for wrongdoing, we will not award any cooperation credit.  

New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (11/29/18; 11/30/18)

I link the IRS's new guidance on voluntary disclosure.  Memorandum from Kristen B. Wielobob, Deputy Commissioner for Services and Enforcement, re Voluntary Disclosure Practice (LB&I-09-1118-014 dated 11/20/18), here.  The memorandum is short (5 pages) and straight-forward.  I encourage all practitioners and affected taxpayers to read it carefully.

I will try to summarize what I think are the key points on my initial reading.

1.  The guidance applies to all voluntary disclosures, whether offshore or otherwise, received after 9/28/18.  Readers will recall that that date was the conclusion of the IRS's OVDP 2014, the program (with predecessors) that applied to offshore voluntary disclosures.  But, remember that this guidance applies to all voluntary disclosures.

2.  Voluntary disclosures are for the bad actors -- those with potential criminal exposure.  Here is the relevant paragraph:

The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.

For those without criminal exposure, as with OVDP, the IRS has other procedures, including filing amended returns (that may be qualified amended returns avoiding the accuracy related penalties) and the special procedures for correcting offshore filings outside OVDP.

3.  The practice covers tax and tax-related criminal acts, so tax-related FBAR violations are included.

4.  Voluntary disclosure starts with the taxpayer submitting to CI a preclearance request under "a forthcoming revision of Form 14457." The current version of Form 14457, titled Offshore Voluntary Disclosure Letter, is here. "IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility."  IRM 9.5.11.9 is here.

5.  Upon acceptance, the taxpayer is notified and the case then processed for civil examination (going through LB&I Austin).  The case will be transferred to the appropriate civil division for examination. All voluntary disclosures will follow "standard examination procedures," requiring that examiners develop the case with its usual information gathering tools.

6.  The civil resolution framework (apparently inspired by OVDP and its various iterations) is (this is just cut and paste because the actual wording is so important):

a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
i. In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
ii. In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.
iii. With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods). 

b) Taxpayers must submit all required returns and reports for the disclosure period. 

c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
i. Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
ii. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
iv. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
v. A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
vi. Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
vii. Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals. 

d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases. 

JAT Comments (added 11/30/18 at 12:30pm):

Use or Abuse of Joint Defense Agreements: Which Is It for Manafort and Trump? (11/28/18)

I have previously written on joint defense agreements, both generally and in relationship to the special counsel investigation.  I collect the more pertinent prior blog entries related to Trump at the end of this blog entry.  I post this blog today because of the startling developments where Manafort's lawyers shared the information from Manafort's supposed / feigned cooperation with Trump's lawyers, a truly startling development.

I offer an excellent opinion piece: Ken White, Why Did Manafort Cooperate With Trump Over Mueller? (NYT 11/28/18), here.  Mr. White is (per the bio on the bottom):  "a former federal prosecutor, is a criminal defense lawyer and First Amendment litigator at Brown White & Osborn in Los Angeles, and a host of 'All the President’s Lawyers,' on radio station KCRW."  I have worked extensively and written on joint defense agreements and believe that Mr. White's discussion is spot on.  Highly recommended.

Here are the pertinent prior blogs (in reverse chronological order):

• All the President's Joint Defense Agreements (Federal Tax Crimes Blog 10/8/18), here.
• On Trump, Manafort and Joint Defense Agreements (Federal Tax Crimes Blog 9/14/18; 9/15/18), here.
• More On Joint Defense Agreements (Federal Tax Crimes Blog 5/15/18), here.
• On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.

As an aside, the biggest case in which I was involved with was a case that spawned many great opinions, but the principal opinion in the case was United States v. Stein, 541 F.3d 130 (2d Cir. 2008), here (notice how many lawyers were for the defendants in the case).  I was quite familiar with JDAs before the Stein case, but dealt with JDAs in great nuance in that case.  The fun fact of particular interest in the case was that the prosecution team included Kevin Downing of DOJ Tax Division (where I used to work) at the trial level.  Kevin Downing is Manafort's lawyer (his picture is prominently displayed in the linked article.)  Let's just say that he was not an easy guy for me to deal with then.  Still, he is smart and very aggressive.  Of course, for those taking the trouble to read the opinion, the prosecution's aggressiveness resulted in 13 defendants in the sprawling tax evasion case having their prosecutions dismissed for prosecutorial abuse.

Another Offshore Account Plea to One Count of Tax Perjury (11/15/18)

DOJ Tax announced here the plea agreement for tax perjury by Israel Birman, a Bank Leumi account holder.  Key excerpts:

According to court documents, between 2006 and 2014, Israel Birman held offshore bank accounts in Israel at Bank Leumi and Israel Discount Bank.  The accounts had balances over $10,000 each year, which required the filing of Reports of Foreign Bank and Financial Accounts (FBARs) with the Department of the Treasury. In 2013, Israel Birman’s bank accounts at Israel Discount Bank had a total value of over $3.4 million. Israel Birman did not file FBARs for 2006-2014. Israel Birman instructed Bank Leumi to hold bank mail from delivery to the United States, and obtained access to his offshore funds through the use of “back-to-back” loans from Bank Leumi USA collateralized by his undeclared Bank Leumi offshore funds. In 2009 and 2010, Israel Birman earned taxable interest income on his Bank Leumi bank accounts totaling over $187,000. He failed to report that interest income on his 2009 and 2010 federal tax returns. 

* * * * 

In December 2014, Bank Leumi entered into a deferred prosecution agreementafter the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers to prepare and present false tax returns by hiding income and assets in offshore bank accounts in Israel and other locations around the world. Under the terms of the deferred prosecution agreement, Bank Leumi paid the United States a total of $270 million and continues to cooperate with respect to civil and criminal tax investigations. 

* * * * 

As part of the plea agreement, Israel Birman has agreed to pay a civil penalty of not less than $1,709,883, representing fifty percent of the balance in his Israel Discount Bank account in 2013.

Defense to Evasion of Payment by Fictitious Instruments--the IRS "Monetized" and Holds the Proceeds in a Secret Fund (11/28/18)

In United States v. Nix, Case No. 2:17-CR-105-RSL (W.D. Wash. Nov. 21, 2018), here, a jury found Nix guilty of nine counts of attempted evasion of payment of taxes for the tax years 1998 and 2000-2007, four counts of attempted evasion of assessment of taxes for the tax years 2010-2013, eleven counts of presentation of fictitious financial obligations, and one count of corrupt interference with the administration of the Internal Revenue Code."  The defendant moved to vacate the judgment and grant a new trial.

Here is the part I found interesting (cleaned up):

At trial, the government introduced as evidence eleven money orders, purporting to be payments for defendant's tax debt, that were mailed to the Internal Revenue Service ("IRS") on defendant's behalf ("the Money Orders"). William C. Kerr, an "expert on financial fraud and fictitious instruments," was called as one of the government's witnesses. Mr. Kerr testified that the Money Orders were fictitious. Defendant also admitted that  they were fictitious.  

Defendant filed a motion for a new trial on September 12, 2018. This is based on allegedly newly discovered evidence that shows that the Money Orders were not fictitious, as they have been monetized by the government and deposited in various financial funds. Defendant claims that, after the trial, he was "able to find a confidential source [who] [had] appropriate access to the necessary banking screens and ... was willing to research the instruments and provide such research data... under a private trust agreement that include[d] strict confidentiality and non-disclosure of the confidential source." This source allegedly used "the instrument numbers and personal identifying information of [defendant] to search the banking system..." and locate the Money Orders. Defendant also submitted a "Notice of and Assignment of Claim in Subrogation and Demand for Deposition of Charges," purporting to assign to the government all of his alleged property interests in these financial funds.

JAT Comments:  None.

The Difference Between § 7206(2) Aiding and Assisting and 18 USC § 2(a) Aiding and Abetting (11/22/18)

I speak in this blog entry on one of my pet peeves in federal tax crimes practice.  One of the principal tax crimes is § 7206(2), here, provides that a person is guilty of a three-year felony if the person --

(2) Aid or assistance  Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.

This is often referred to as the substantive tax crime of "aiding and assisting."  One person acting alone can be guilty of this crime and does not require another actor guilty of some crime.

This aiding and assisting tax crime is not the same as aiding and abetting under 18 USC § 2(a), here, which provides

§ 2. Principals
(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.

I focus on the second part dealing with aiding and abetting.  The first part merely states the common law that the person committing the substantive offense is punishable as a principal.  Of course, that person is a principal.

Aiding and abetting is not itself a substantive crime but simply makes someone who is not otherwise a principal of a substantive crime a deemed principal of the crime by virtue of aiding and abetting.  One person alone cannot be guilty of Title 18's aiding and abetting crime without some criminal conduct of another.   (I address the concepts that can make person guilty of a crime that he or she did not otherwise commit in my article John A. Townsend, Theories of Criminal Liability for Tax Evasion (5/15/12), SSRN https://ssrn.com/abstract=2060496.)

So, what brings this topic up now?  Back in July, DOJ Tax announced here a conviction with the following opening paragraph:

A jury in the Northern District of California convicted a San Francisco area Certified Public Accountant late yesterday of three counts of aiding and abetting the filing of a false tax return, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and Acting U.S. Attorney Alex G. Tse for the Northern District of California.

Yet Another Offshore Account Plea (11/19/18)

DOJ Tax announced, here, another plea deal today.  The defendant is Teymour Khoubian.  Key excerpts:

According to the plea agreement and related court documents, Teymour Khoubian pleaded guilty to filing false tax returns for tax years 2009 and 2010 that failed to report foreign financial accounts in Germany and Israel, and failed to report income earned on those accounts. Between 2005 and 2012, Khoubian jointly owned multiple accounts at Bank Leumi in Israel with his mother that held between $15 million and $20 million. Additionally, since at least 2005, Khoubian also owned a foreign account at Commerzbank AG in Germany. Despite his ownership interest in these accounts and a legal requirement to declare all offshore accounts containing $10,000 or more, Khoubian prepared false tax returns for tax years 2005 through 2011 that did not fully disclose his foreign accounts, nor report all the interest income earned on those accounts. For instance, Khoubian’s Bank Leumi accounts generated interest income in excess of $4 million between 2005 and 2010, none of which was reported to the Internal Revenue Service (IRS).  The total tax loss associated with the Bank Leumi accounts is approximately $ 1.2 million.  

At least since 2009, Khoubian was aware of the IRS’s Offshore Voluntary Disclosure Program (the OVDP).  The OVDP allowed U.S. taxpayers to voluntarily disclose their previously unreported foreign accounts and pay a reduced penalty to resolve their civil liability for not declaring foreign accounts to U.S. authorities. During 2011 and 2012, Bank Leumi requested that Khoubian sign a Form W-9 for U.S. tax reporting purposes. In an August 13, 2012, recorded telephone conversation with a banker at Bank Leumi, Khoubian stated that the reason he did not want to sign a Form W-9, was "because you have to pay half of it." 

In 2012 and 2014, Khoubian knowingly made multiple false statements to IRS special agents investigating his foreign accounts, including falsely stating that the Bank Leumi accounts were not in his name, that he did not own a bank account in Germany from 2005 to 2010, that he closed his German bank account and moved all of that money to the United States, and that none of the money in his German bank account was moved to Israel.     

As part of the plea agreement, Khoubian agreed to the entry of a civil judgment against him for an FBAR penalty in the amount of $7,686,004.  Khoubian further agreed to pay an additional $612,310 in restitution to the IRS.   

Documents related to the plea are:

1.  The plea agreement, here.
2.  The docket entries as of today, here.

JAT Comments:

Multi-Country Joint Chiefs of Global Tax Enforcement Targeting Enablers (11/15/18)

This article has more information on an a multi-country initiative with other countries to target enablers of tax evasion.  Tom Wilson, U.S. and four allies target tax-dodge specialists (Reuters 11/15/18), here.  The initiative is called the Joint Chiefs of Global Tax Enforcement (J5).  See IRS web site here:

According to the IRS web site:

The Joint Chiefs of Global Tax Enforcement (known as the J5) are committed to combatting transnational tax crime through increased enforcement collaboration. We will work together to gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials. 

The J5 comprises the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Fiscale Inlichtingen-en Opsporingsdienst (FIOD), HM Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI). 

We are convinced that offshore structures and financial instruments, where used to commit tax crime and money laundering, are detrimental to the economic, fiscal, and social interests of our countries. We will work together to investigate those who enable transnational  tax crime and money laundering and those who benefit from it. We will also collaborate internationally to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime and to make the most of data and technology.

Now back to the Reuters article, quoting Dan Fort:

“You investigate and you see where the money goes - inevitably it leads you to many levels, many different individuals and many different facilitators,” he said, with the IRS looking at the role of at community banks and smaller financial firms some money launderers may use. 

The J5 has said previously said that Britain’s tax enforcement agency, Her Majesty’s Revenue and Customs, has launched criminal investigations on more than 200 individuals and firms that make money by facilitating tax evasion. 

Cryptocurrencies are a key part of the J5’s work, Fort said, citing the risk that such coins are used in the United States to avoid capital gains taxes. Digital money can be used to transfer funds to people without the need for foreign bank accounts, he added.
The IRS is looking at the involvement of cryptocurrency exchanges and financial firms in withdrawals of digital money, and their conversion to government backed “fiat” currencies.\ 

“One of the ways to track cryptocurrencies, focused on when the actual cryptocurrency enters the system - folks want their money, and when it comes out is what we are focused on,” Fort said.

Picky nuance:  The IRS page linked above says that the Joint Chiefs are "combatting" transnational tax crimes.  That made me wonder if the word should be "combatting" or "combating."  My Google search quickly produced this discussion on word reference titled "combatting or combating," here, which linked to this offering in Dictionary.com, here:

combat
verb (used with object), com·bat·ed, com·bat·ing or (especially British) com·bat·ted, com·bat·ting.

Sure enough, my word processor spell-check flagged the double t version.

So there you have it.

New LB&I Compliance Campaigns Related to Offshore Matters (11/11/18)

The IRS has announced that new "compliance campaigns" related to offshore matters.  See IRS web page titled "IRS Announces the Identification and Selection of Five Large Business and International Compliance Campaigns," here.  The IRS describes its compliance campaigns as:

LB&I is moving toward issue-based examinations and a compliance campaign process in which the organization decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach makes use of IRS knowledge and deploys the right resources to address those issues. 

The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback. LB&I is investing the time and resources necessary to build well-run and well-planned compliance campaigns.

The new offshore related campaigns are:

• Offshore Service Providers

Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The focus of this campaign is to address U.S. taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets, generally, for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.

• FATCA filing accuracy.  

FATCA Filing Accuracy
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.

• 1120-F Delinquent Returns Campaign

Practice Area: Cross Border Activities
Lead Executive: Orrin Byrd, director of Field Operations (East)
The objective of the Delinquent Returns Campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
Form 1120-F must be filed on a timely basis and in a true and accurate manner for a foreign corporation to claim deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. The filing deadline may be waived, in situations based on the facts and circumstances, where the foreign corporation establishes to the satisfaction of the commissioner that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F per Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 dated 2/1/2018 established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.

The full list of compliance campaigns is here.  The ones that might be of particular interest to readers of this blog are:

Offshore Account Enabler Post Conviction Motions for Acquittal and New Trial Denied; Issue on Reliance of Counsel (11/11/18; 11/15/18)

I have previously blogged on the indictment and conviction of Michael Little, a lawyer and an offshore account enabler.  I list the prior blogs at the end of this blog entry.  In an Opinion and Order dated November 1, 2018, the district court denied Little's motion for acquittal and alternative motion for new trial.  United States v. Little, 2018 U.S. Dist. LEXIS 187643 (S.D. N.Y. 2018), here.

The opinion is straight-forward. The only thing that caught my attention was this (Slip Op. p. 10):

Essentially, he [little] argues that the evidence was insufficient with respect to the third element—willfullness—because the government failed to disprove his advice of counsel defense. This claim is meritless. An advice of counsel defense is an affirmative defense. As such, the burden is on the defendant to prove the elements of the defense, not on the government to disprove the defense. A successful advice of counsel defense requires the defendant to prove that he (1) honestly and in good faith sought the advice of counsel, (2) fully and honestly laid all the facts before his counsel, and (3) honestly and in good faith followed his counsel's advice, believing it to be correct and intending that his acts be lawful. United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir. 2012).

I think the court errs in saying that the advice of counsel defense is an affirmative defense requiring that the defendant bear the burden of proof.  The defendant does bear a threshold burden on the issue, like a burden of production, to put the reliance on counsel defense in play.  But the Government's burden of proof beyond a reasonable doubt is to prove willfulness and that requires the Government to disprove good faith (including reliance on counsel) when that "defense" has properly been put in play in the case.

Here is the relevant excerpt from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015) (disclosure, I am the principal draftsman of Chapter 12):

¶ 12.05[2][b][ii] Blame others —tax professionals. 

A defendant will frequently assert that he or she lacked willfulness because he or she relied upon a tax professional. This is a Cheek argument in that the government failed to meet its burden to prove willfulness rather than a defense per se. The government thus has to show that the defendant did not rely upon the tax professional in order to show willfulness. n524 But, as in Cheek, the defendant has to put the “defense” in play by introducing some evidence of reliance on the tax professional. n525 Once the defendant does that, n526 it is then the government's burden to show that the defendant acted willfully, which means negating the taxpayer's claimed reliance. 

If the defendant does put the reliance defense in play, the following is a typical instruction that the government will request to advise the jury of what it must consider with respect to the defense: 

A good faith reliance upon the advice of a qualified tax accountant is also a complete defense to the charges because such a reliance is inconsistent with the intent required to commit these crimes. In order for the defendant to rely on the advice of a qualified tax accountant in good faith, the defendant must (1) make full and complete disclosure of all tax-related information, (2) to a qualified tax accountant, (3) actually rely upon and follow the advice that was provided, (4) without reason to believe that the advice was not correct. n527

Court Holds that the Trust Fund Recovery Penalty is a Tax For Purposes of Tax Evasion, § 7201 (11/10/18)

In United States v. Prelogar, 2018 U.S. Dist. LEXIS 188305 (D. Mo. 2018), here), the Court rejected the defendant's argument to dismiss the following count of tax evasion, § 7201 that defendant:  "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America."  The first thing to note is that two types of evasion are alleged -- one for the TFRP and the other for income tax.  I focus here on the allegation of tax evasion for the TFRP.

Defendant's argument was simple.  Tax evasion requires a tax to be evaded (or, in the language of the statute attempted to be evaded).  The TFRP, as stated in § 6672, is a "penalty" rather than a tax.  Therefore a person evading the TFRP is not evading tax and thus outside the scope of tax evasion.

The Court rejects the defendant's argument as follows:

Count I charges that Defendant "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America" in violation of 26 U.S.C. § 7201. Defendant argues that § 7201 does not apply to him because the TFRP owed is a penalty and not a tax. In support of this argument, Defendant quotes Section 7201, which prohibits the willful evasion of "any tax imposed by this title or the payment thereof." Id. (emphasis added). Initially, the Court notes that Defendant's argument does not justify dismissal of Count I because Count I alleges that Defendant attempted to evade the payment of both taxes and penalties. At best, Defendant's argument would justify only limiting the scope of Count I. Regardless, the Court does not agree with Defendant that § 7201 applies only to evasion of the tax itself. Section 7201 makes it unlawful to attempt "to evade or defeat any tax", and § 6671(a) states that "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." 26 U.S.C. § 6671(a). As explained in the Report, a "plain reading of Section 6671(a) leads to the inescapable conclusion that a reference to 'tax imposed' in a statute under the Internal Revenue Code [Title 26] must be deemed to include a 'penalty' provided in the subchapter [Subchapter B: Accessible Penalties]." Therefore, Defendant's arguments with respect to Count I are rejected. 

In Defendant's objections to the Report, he argues that the Fifth Circuit supports his claim that a penalty is not a tax for the purposes of § 7201. (Doc. 68, p. 3.)1 In United States v. Wright, 211 F.3d 233 (5th Cir. 2000), the Fifth Circuit addressed whether petitioners could be prosecuted for tax evasion if they owed only interest and penalties. Wright, 211 F.3d at 236-37. The Court based its analysis by relying on Sansone v. United States, 380 U.S. 343 (1965), where the Supreme Court observed that a conviction under § 7201 requires proof of a "tax deficiency." The Fifth Circuit then relied on the tax code's definition of "tax deficiency" - which does not include a tax penalty — to conclude that a conviction under § 7201 cannot be predicated on the willful evasion of a tax penalty. Id. at 236 & n. 3-4 (citing 26 U.S.C. §§ 6211, 6601(e)). The Court declines to follow Wright for several reasons. First, Wright does not discuss § 6671. Second, the phrase "tax deficiency" does not appear in § 7201, so the more limiting definition of "tax deficiency" (as opposed to the definition of "tax" found in § 6671) is inapplicable. Third, the issue in Sansone involved the circumstances under which a person charged with felony tax evasion is entitled to a lesser-included offense instruction for the misdemeanor of willful failure to pay a tax. Thus, it does not appear that when Sansone said the elements of § 7201 included a "tax deficiency," it meant to use the technical definition of the phrase as found elsewhere in the tax code. For these reasons, the Court denies Defendant's arguments with respect to Count I.

Second Circuit Offers Excellent Discussion of Accomplice and Conspirator Pinkerton Liability and Exception (11/16/18)

I have previously written on a tax iteration of the use of what I call derivative criminal liability -- i.e., not liability as a principal of the substantive offense but liability as an accomplice (aider or abettor) or a conspirator (Pinkerton liability).  John A. Townsend, Theories of Criminal Liability for Tax Evasion (May 15, 2012), available at SSRN: http://ssrn.com/abstract=2060496.  Basically, my concern was that by charging in the pleading that a defendant was a principal of the crime, an aider and abettor or causer of the crime, and a co-conspirator liable under Pinkerton, the Government was getting an advantage in the jury charge that overstated its case.  At least in the context of tax evasion, liability for the substantive offense for nontaxpayers (return preparers or abusive shelter promoters) incorporated the other potential liabilities and, if the defendant was not liable for the substantive offense, he was not liable for the other nominal offenses.  By charging the jury on all three, the impression could be given to the jury that if he was not guilty of one or two, he still could be convicted of the third.

I write today on a recent Second Circuit decision that, although not a tax case, addresses some of these derivative liability theories so ubiquitous in white collar crimes generally.  In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), here, the Court address a related issue in the context of the FCPA.  The Court framed the issue as follows:

In this case, we are asked to decide whether the government may employ theories of conspiracy or complicity to charge a defendant with violating the Foreign Corrupt Practices Act ("FCPA"), even if he is not in the category of persons directly covered by the statute. 

* * * *  

The central question of the appeal is whether Hoskins, a foreign national who never set foot in the United States or worked for an American company during the alleged scheme, may be held liable, under a conspiracy or complicity theory, for violating FCPA provisions targeting American persons and companies and their agents, officers, directors, employees, and shareholders, and persons physically present within the United States. In other words, can a person be guilty as an accomplice or a co-conspirator for an FCPA crime that he or she is incapable of committing as a principal?

I will now offer substantial "cleaned up" quotes (see my discussion of the cleaned up technique here), with most footnotes omitted:

U.S. Sentencing Commission Quick Facts for Tax Fraud Offenses for fye 2017 (11/05/18)

I offer the U.S. Sentencing Commision's "Quick Facts" on key characteristics for sentencing for "Tax Fraud Offenses for fiscal year 2017.  The pdf is available from the Sentencing Commission's web site here.  I could not find a way to make legible copies of the pages on this blog page.

The facts (mostly statistics) are for offenders sentenced under Sections 2T1.1 land 2T1.4 of the Guidelines Manual which are the tax guidelines.  The 2018 Guidelines Manual is here.  Readers should remember that, previously the Government would assert sentencing for FBAR violations under the tax guidelines. but the Government had a change of mind on the appropriate sentencing for FBAR violations.  See Offshore Account Defendant Sentence with Court Accepting Government's New Position on Guidelines Calculations (1/25/18), here; Questions About New DOJ Tax Policy on FBAR Sentencing Guidelines (12/11/17), here; More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17), here. Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (10/27/17), here.

Certain key items for fiscal year 2017 are:

• There were 584 tax fraud offenders sentenced, who accounted for 0.9% of all offenders sentenced under the guidelines.  These seem low compared to the IRS statistics for sentencing.  My spreadsheet with the statistics is here.  The spreadsheet has links to the IRS statistics.  I have not tried to reconcile the differences.
• The majority of tax fraud offenders had little or no prior criminal history (80.5%of these offenders were assigned to Criminal History Category I).
• The median tax loss for these offenses was $277,576.
• 87.2% of tax offenses involved tax losses of $1.5 million or less.
• 19.8% of tax offenses involved tax losses of $100,000 or less.
• Sentences were increased: (i) 12.5% for sophisticated means; (ii) 8.4% for leadership or supervisory role; (iii) 3.8% for abusing position of public trust; and 8.7% for obstructing or impeding the administration of justice.
• More than half of tax fraud offenders were sentenced to imprisonment only(59.1%).
• The average sentence length for tax fraud offenders was 17 months
• During the past five years, the rate of within range sentences for tax fraud offenders has decreased (from 36.1% in fiscal year 2013 to 26.5% in fiscal year 2017).
• In each of the past five years, approximately one-quarter of tax fraud offenders received a sentence below the guideline range because the government sponsored the below range sentence.
• Substantial assistance departures were granted in approximately 15 to 17 percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 67.3% in their sentence during the five-year time period (which corresponds to an average reduction of 17 months).
• Other government sponsored departures were granted in approximately seven to thirteen percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 68.1% in their sentence during the five-year time period (which corresponds to an average reduction of 13 months).
• The rate of non-government sponsored below range sentences increased during the past five years (from 40.8% of tax fraud cases in fiscal year 2013 to 45.9% in fiscal year 2017). Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months).
• Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months). The average guideline minimum ranged between 24 months and 26 months during that time period.  The average sentence ranged between 15 months and 18 months during that time period.