Wednesday, August 21, 2019

Houston Attorney and Others Charged with Tax Crimes (8/21/19)

The USAO for SD Texas announced issued a press release titled "Houston Personal Injury Attorneys and Case Runners Indicted," here.  I don't know that there is anything exceptional about the case, but being from Houston this caught my attention.  I don't know any of the players mentioned in the press release.

Here are the key excerpts:
The charges against Stern and his alleged co-conspirators stem from a long-running criminal scheme to evade taxes. Stern also allegedly obtained his personal injury cases through barratry - the illegal practice of soliciting law firm clients by paying kickbacks to middlemen known as “case runners.”  
Stern and his co-conspirators sought to enrich themselves by illegally recruiting clients through the payment and receipt of illegal kickbacks in order to generate personal injury cases and legal fees, according to the charges. They allegedly worked to conceal and disguise the payments and hide their resulting income from the IRS by filing false documents with them. These allegedly included tax returns, 1099 forms and an offer in compromise that falsely reported material information including amounts of income, expenses and taxes due and owing. 
Once Stern became aware of the investigation, he allegedly worked to obstruct justice by ordering others to destroy subpoenaed documents and instructing co-conspirators not to cooperate. 
According to the indictment, Stern employed multiple devices to disguise his illegal kickback payments to case runners as legitimate referral fees paid to attorneys or as other types of legitimate payments that would be deductible under the tax laws. Stern allegedly funneled kickback payments to case runners Ratcliff and Marcus Esquivel (charged in a separate case) through the accounts of Bradley and Plezia. The charges allege Stern claimed the payments were legitimate referral fees to Bradley and Plezia rather than illegal kickbacks to Ratcliff and Esquivel. 
The indictment also alleges Stern wrote referral fee checks in the names of attorneys who never received the checks. Instead, Morris would allegedly cash the checks with forged endorsements at check-cashing locations and use the funds to pay illegal kickbacks owed to himself and other case runners for Stern’s referrals.    
Stern allegedly also filed 1099 forms that falsely reported to the IRS the nature of the payments and to whom they were made. On his tax returns, Stern falsely reported the illegal, non-deductible kickback payments as legitimate, deductible business expenses, which greatly reduced his tax burden, according to the charges. 
Bradley and Plezia allegedly filed false tax returns to facilitate the scheme.  Ratcliff failed to report many of the kickback payments he received as income on his company’s tax returns, according to the charges. Stern and Morris also allegedly caused another attorney to file false tax returns and a false offer in compromise with the IRS to help cover-up the scheme. 
All defendants are charged with conspiracy to defraud the United States. If convicted, they each face up to five years in prison. For willfully filing a false tax return, Stern, Ratcliff and Bradley face another three years of imprisonment. Aiding and assisting in the preparation and presentation of false tax returns carries another potential three-year-term, for which Stern and Morris are charged. If convicted of witness tampering or obstruction of justice, Stern could be sentenced up to 20 and 10 years, respectively.
The press release has the standard disclaimer: 
* * * * 
An indictment is a formal accusation of criminal conduct, not evidence.
A defendant is presumed innocent unless convicted through due process of law.

Tuesday, August 20, 2019

FBAR Collection Suit for over $105 Million (8/20/19)

A fellow practitioner alerted me to the FBAR collection suit in United States v. Burga (N.D. Cal. No. 19-cv-03246.)  The Court Listener docket entries are here.  As of this writing, the docket entries (through 8/2/19) show routine entries other than the complaint.  The complaint (from Court Listener) is here.

Note on access to court listener documents, see the last paragraph of this blog.

The complaint is against Francis Burga and her deceased husband (with Francis serving as administrator).  The willful FBAR penalties are $52,581,605 against each, husband and wife, and thus aggregate $105,163,210.  There are also late payment penalty, fees and interest on the base FBAR penalties.

The complaint is pretty damning.  Here are some items in the complaint:

1.  The defendants had "financial interest in at least 294 foreign bank accounts, in various countries, during at least years 2004 through 2009." (Compl. par. 12, which lists the accounts from p. 3 to p. 11.)

2.  The defendants created a Liechtenstein foundation that established complex structures of entities, numbering at least 25, based in Liechtenstein, Switzerland, Singapore and other European and Asian countries.  (Compl. par. 33-35.)

3.  The defendants signed documents with UBS indicating that they were U.S. citizens subject to U.S. tax and directing that statements not be sent to them and that the account not invest in U.S. securities (which would have triggered a U.S. information reporting by UBS).  (Compl. pars. 39-41,)

4.  During an audit in 2007 (apparently August 7, 2007), Mr. Burga told the IRS Revenue Agent conducting the interview that he and Ms. Burga did not have any foreign bank accounts, foreign corporations or foreign trusts.  (Compl. par. 44.)

5.  Immediately after the IRS interview, Mr. Burga moved all of the funds (over $6 million) from the UBS account and into a Liectenstein stiftung, for which Mr. Burga was founder and owner.  (Compl. pars. 45 & 46.)

6.  "Mrs. Burga has admitted that Mr.Burga is liable for the civil FBAR penalties assessed."  (Compl. par. 55.)

7.  The complaint does not have a spreadsheet with the amounts of the willful FBAR penalty for each account per year.

There is a related summons enforcement suit filed in 2018, styled United States v. Burga (N.D. Cal. 18-cv-01633), here on Court Listener.

Friday, August 16, 2019

Court Denies Motion for Partial Summary Judgment on FBAR Willful Penalties (8/16/19)

A colleague alerted me to a Tax Notes article, titled Practitioners Balk at Potential DOJ Willful FBAR Argument (Tax Notes 8/16/19).  The Tax Notes link is here, but requires a subscription.  Here is the opening from the article:
Practitioners are disturbed by a possible legal stance of the Justice Department in the latest dust-up over foreign bank account reporting, which would negate reliance on a professional as a defense to willful penalties. 
Tax Notes talked with two practitioners following filings of a joint pretrial statement and proposed jury instructions in Dadurian that seemingly advanced that stance on the part of  the government. Later filings on August 15 that came in after those conversations  appear to be taking a slightly softer stance. How exactly the case will be argued at trial remains to be seen, however.  
“The government is pushing the envelope,” Steven Toscher of Hochman Salkin Toscher Perez PC said. “While most of the courts have untethered willfulness in FBAR cases from its traditional meaning, a taxpayer’s good faith — including reliance on a professional — has always been considered a defense to willful penalties.” 
In June the U.S. District Court for the Southern District of Florida denied summary judgment for Daniela Dadurian, who is facing a $2.7 million liability for failing to file FBARs for accounts owned by herself, her mother, and several foreign entities after she failed to convince the court that there’s no evidence of willfulness regarding five of the accounts at issue.  
The Justice Department has alleged that Dadurian had financial interest in or signatory authority over several foreign accounts — some with maximum balances of over $2 million in some years — but indicated on her 2007 to 2010 tax returns that she did not have such interest or authority. According to the complaint, while Dadurian had filed FBARs for Swiss and German accounts before 2007, she failed to tell Anthony Caruso, her tax return preparer for the years at issue, about her foreign assets. 
The defense, however, asserts that she did not willfully fail to report her accounts because she relied on her tax attorneys’ advice that she did not need to disclose them.  
As explained by the district court in its summary judgement order, under 31 U.S.C. section 5321(a)(5), reasonable cause is not a defense to willful FBAR violations. The court further noted that reliance on a professional may constitute reasonable cause for underpayments of tax.
Those interested and with access to Tax Notes should track down the full article with more detail.

I pulled up some documents from the case from the pacer.gov web site docket entries.  The case is United States v. Dadurian (S.D. Fla. 9:18-cv-81276).  The documents are:

11th Circuit Pattern Jury Instruction Builder (8/16/19; 8/18/19)

While reviewing some docket entries in an FBAR case in Florida, I found a docket entry referring to the Eleventh Circuit Pattern Jury Instruction Builder, here.  I had not seen such a tool for pattern jury instructions that are so important for fashioning jury instructions for the more commonly encountered jury instructions needed in criminal cases.  (There is also a tool for pattern jury instructions in civil cases.)  In the past, practitioners would have to work from a pdf file with pattern jury instructions and then assemble and revise as appropriate.  Practitioners will still have modify the pattern jury instructions as appropriate to their particular cases.

I used the tool to generate some of the pattern jury instructions and link, here, the Word document the tool generated.  Remember that this is not a complete set that a practitioner would generate in a real case but only some of the instructions of interest to me to get an idea of how the tool worked.  Here is the table of contents generated by the tool.
TABLE OF CONTENTS
PRELIMINARY INSTRUCTIONS
P1 Criminal Cases
BASIC INSTRUCTIONS
B9.1A On or About; Knowingly; Willfully - Generally
B9.1B On or About; Knowingly; Willfully - Intentional Violation of a Known Legal Duty
SPECIAL INSTRUCTIONS
S8 Deliberate Ignorance as Proof of Knowledge
S9 Good-Faith Defense to Willfulness (as under the Internal Revenue Code)
OFFENSE INSTRUCTIONS
O13.6 Conspiracy to Defraud the United States 18 U.S.C. § 371 (Second Clause)
O108 Failure to File a Tax Return 26 U.S.C. § 7203
O109.1 Filing a False Tax-Related Document 26 U.S.C. § 7206(1)
O109.2 Aiding or Assisting in Preparation of False Documents Under Internal Revenue Laws 26 U.S.C. § 7206(2)
O110 False Tax Return, List, Account, or Statement 26 U.S.C. § 7207
O111 Impeding Internal Revenue Service 26 U.S.C. § 7212(a)
O112 Evading Currency-Transaction Reporting Requirement (While Violating Another Law) by Structuring Transaction 31 U.S.C. §§ 5322(b) & 5324(a)(3) 
I have not checked to see whether other Circuits have such a tool for their pattern jury instructions.  If anyone knows, please post a comment with a link or send me an email with the link at jack@tjtaxlaw.com.

Addendum 8/18/19 9:00pm:

Wednesday, August 14, 2019

Court Grants Government Partial Summary Judgment on FBAR NonWillful Penalty (8/14/19)

In United States v. Ott, 2019 U.S. Dist. LEXIS 132013 (E.D. Mich. 2019), here, the court granted the Government's motion for partial summary judgment on the $10,000 nonwillful penalties on 2 separate accounts for each of 3 years.  The penalties aggregated $60,000 plus interest and further nonpayment penalties.  Since the defendant failed to report the accounts, she was subject to penalties unless she could establish reasonable cause.

Reasonable cause is an affirmative defense, meaning that the person claiming reasonable cause must plead and the prove the defense.  On a motion for summary judgment by the party not bearing the burden on the defense (the United States in Ott), the party bearing the burden (Ott in Ott) must submit sufficient evidence to show that there is a fact reasonably in dispute. The Court framed it this way:
The Government moves for summary judgment against Ms. Ott, asserting there is no dispute that she violated 31 U.S.C. § 5314 when she failed to report her financial interest in, or authority over, her foreign financial accounts. Ms. Ott opposes the Motion, arguing there is a genuine dispute of material fact as to whether the affirmative defense of reasonable cause excuses her failure. The Court will disagree.
The steps in the Court's disagreement and thus entry of summary judgment for the U.S. are:

1.  "Ott does not dispute that she violated § 5314's reporting requirements, but maintains that assessing penalties under § 5321 would be inappropriate because she had reasonable cause for her omission."

2.  31 U.S.C. § 5321(a)(5)(B)(ii), here and quoted below in this blog, allowing the reasonable cause defense, does not define reasonable cause.  The Court, as have other courts, looked to the reasonable cause defense to tax penalties, citing Moore v. United States, 2015 U.S. Dist. LEXIS 43979, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015); and Jarnagin v. United States, 134 Fed. Cl. 368, 376 (2017).  The Court also cites the regulation under § 6664, 26 CFR § 1.6664-4(b)(1).

3.  The Court then held (Slip Op. at 6-7):
Here, Ms. Ott has not met her burden of establishing a material question of fact as to whether she had reasonable cause for the failure to disclose her foreign financial accounts. See ATL & Sons Holdings, Inc. v. Comm'r of Internal Revenue, 2019 U.S. Tax Ct. LEXIS 8, 2019 WL 1220942, at *10 (U.S. Tax Court Mar. 13, 2019) ("In litigation a taxpayer's contention of 'reasonable cause' is in the nature of an affirmative defense, which the taxpayer is obliged to raise."). Critically, she has not shown that she took any steps to learn whether she was required to report her foreign financial accounts. To the contrary, she notes that she hired an advisor to complete her tax returns, but fails to even suggest that she informed the advisor of these accounts. See Jarnagin, 134 Fed. Cl. at 378-79 ("[T]he Jarnagins neither requested nor received any advice one way or the other from their accountants regarding whether they were required to file FBARs . . . [t]he Jarnagins . . . cannot use as a shield reliance upon advice that they neither solicited nor received."). This certainly does not constitute ordinary business care and prudence. Ms. Ott's limited education and experience does not excuse this misstep. 
Ms. Ott's primary argument is that she "has yet to present evidence on this critical issue for trial." See Dkt. No. 20, p. 16 (Pg. ID 123). But the time for her to present facts and evidence demonstrating a genuine issue for trial was now, and unfortunately, that opportunity has passed. See Highland Capital, Inc. v. Franklin Nat. Bank, 350 F.3d 558, 564 (6th Cir. 2003) ("[T]he non-moving party cannot rest on its pleadings, but must identify specific facts that can be established by admissible evidence that demonstrate a genuine issue for trial."). Because there is no dispute that Ms. Ott violated § 5314's reporting requirements, and because she has not met her burden of establishing reasonable cause for that violation, the Court will Grant the Government's Motion for Partial Summary Judgment.

Monday, August 12, 2019

2019 Federal Tax Procedure Book Editions Available (8/12/19)

The 2019 editions of the Tax Procedure Book (Student Edition and Practitioner Edition) are available for download on SSRN as of 8/12/18.  The SSRN postings are linked on the page on the right of my Federal Tax Procedure Blog titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

As always in posting the annual editions (and, indeed in posting entries on the FTP Blog), I encourage readers to make comments.  Comments can range from the substantive to any other that can make the next editions of the FTP Book better.  Corrections of grammar and syntax would be appreciated because I do not have a proof reader for the book, and I am a poor proof reader of my own work.

Comments on the blog entries can be made below the entries.  Comments on the FTP Book Editions may be made on the Page titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

Thank you.

Tuesday, August 6, 2019

Swiss Category 1 Bank Enters NPA (8/6/19)

On August 5, 2019, DOJ Tax announced here another nonprosecution agreement (NPA) with a Category 1 Swiss Bank, LLB Verwaltung (Switzerland) AG, formerly known as “Liechtensteinische Landesbank (Schweiz) AG” (LLB-Switzerland).  The announcement has links to the NPA, here, and the Statement of Facts, here.

Key features of this NPA are:

1.  LLB Verwaltung must pay the Tax Division a penalty of $10,680,554.64.  According to the NPA, the penalty is in lieu of restitution, forfeiture or criminal fine.

2.  LLB Verwaltung must "cooperate in any related criminal or civil proceedings in return for the Department’s agreement not to prosecute the company for tax-related criminal offenses committed by LLB-Switzerland."

3.  A related Liechtenstein bank, Liechtensteinische Landesbank AG (LLB-Vaduz), earlier in 2013 reached a separate NPA.  See DOJ Tax Press Release, here.  LLB-Vaduz paid restitution of $7,525,542.  See also Liechtensteinische Landesbank Enters NPA (Federal Tax Crimes Blog 7/30/13), here.

4.  The bad behavior, variations on a theme for many Swiss banks, is described in the press release:
According to the statement of facts agreed to by the parties, LLB-Switzerland and some of its employees, including members of the bank’s management, conspired with a Swiss asset manager and U.S. clients to conceal those U.S. clients’ assets and income from the Internal Revenue Service (IRS) through various means, including using Swiss bank secrecy protections and nominee companies set up in tax haven jurisdictions. At its peak, LLB-Switzerland had approximately one hundred U.S. clients holding nearly $200 million in assets. The majority of those accounts were in the names of nominee entities. 
In 1997, Liechtensteinische Landesbank AG (LLB-Vaduz), a bank headquartered in Liechtenstein, acquired LLB-Switzerland (LLB-Vaduz reached a separate agreement with the Justice Department in 2013 that excluded LLB-Switzerland from the resolution). At that time, LLB-Switzerland provided banking and asset management services to individuals and entities, including citizens and residents of the United States, principally through private bankers based in Zurich, Geneva and Lugano, Switzerland. LLB-Switzerland also acted as a custodian of assets managed by third-party external investment advisers. 
In 2003, LLB-Switzerland began a relationship with a Swiss asset manager. The asset manager offered to create nominee structures, including corporations, foundations, and trusts, to conceal accounts owned by his U.S. clients at Swiss financial institutions. LLB-Switzerland delegated to the Swiss asset manager the authority to prepare account opening and “know your customer” (KYC) documents.  
The Swiss asset manager provided prospective customers with a sales letter, pitching his ability to conceal a client’s assets and income from taxing authorities through the use of multiple layers of sham offshore entities and nominee directors in countries or regions that the Swiss asset manager thought would resist requests for information and assistance from foreign law enforcement, including law enforcement in the United States. LLB-Switzerland and its management knew that the Swiss asset manager was marketing structures to clients as a means of tax evasion as the bank kept a copy of the manager’s sales letter in the bank’s files. 
In 2008, after it became publicly known that UBS AG, Switzerland’s largest bank, was the target of a U.S. criminal investigation focusing on tax and other violations, the amounts that LLB-Switzerland held for U.S. clients swelled. At the end of 2007, the Bank had 72 U.S. clients with almost $80 million in assets. By the end of the next year, the number of U.S. clients increased to 107, but the assets more than doubled to over $176 million. LLB-Switzerland’s management knew that many of the U.S. clients coming to LLB‑Switzerland were bringing undeclared funds with them.  
Although LLB-Switzerland’s management monitored the United States’ investigation of UBS, LLB-Switzerland failed to take actions to cease assisting U.S. taxpayers to evade their taxes. While in August 2008, LLB-Vaduz prohibited U.S. persons from becoming clients of the Liechtenstein bank, LLB-Switzerland did not implement a similar policy. Despite press reports, indicating the Swiss asset manager was under investigation for helping clients evade U.S. taxes, LLB-Switzerland waited two years – until a grand jury had indicted the Swiss asset manager - to close the accounts he managed.

Saturday, August 3, 2019

Restitution Based Assessment--Some Issues of Interest (8/3/19; 8/7/19)

Readers of this blog will likely be interested in a recent post on Procedurally Taxing Blog:  Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).  Highly recommended.  The context is the relationship between restitution as ordered by the court in a criminal case and the restitution based assessment that the IRS is mandated to make, particularly as related to interest on the restitution.

After some emailing with Keith, I thought I would add some related material and comments that readers of this blog might find interesting or useful.

1.  The amount of the restitution can include an interest factor from the date of the loss through the date of the restitution order by judgment in the criminal case.  The DOJ Criminal Tax Manual thus says:  "Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS."  DOJ CTM 44.00 RESTITUTION IN CRIMINAL TAX CASES (last edited January 2019), here.

The U.S. Attorneys Manual (now called Justice Manual after renaming in 2018) had a template in the Tax Resource Manual that would include interest under 6601 and/or 6621 in the restitution order as of the date of sentencing.

https://www.justice.gov/archives/usam/tax-resource-manual-20-optional-restitution-paragraphs
https://www.justice.gov/archives/usam/tax-resource-manual-21-proposed-restitution-order

The Tax Resource Manual seems to have dropped off the current Manual (called the Justice Manual), although the prior Tax Resource Manual is still available per the links above.  (Perhaps it will be added back later.)  So, diligent US Attorneys should be aware of it.  And, of course, DOJ Tax CES attorneys should be aware of the CTM provision.  And, since the IRS makes the calculations, the IRS agents should be aware of as well.  (By contrast, interest is not included on tax loss for Sentencing Guidelines purposes except in the case of evasion of payment, when interest was included in the amount the defendant sought to evade.)

My understanding, though, is that courts sometimes (perhaps even often) do not include interest in restitution.  (See discussion of recent case in paragraph 3 below.)

2.  I have just updated the text and a footnote in the working draft of my Federal Tax Procedure Book (will be published on SSRN by mid-August 2019) dealing with some of the nuance.  Here is a cut and paste of the text and the key text amd footnote:

Tuesday, July 30, 2019

CDP Proceeding Moot Because Restitution Based Assessment and NFTL Withdrawn (7/30/19)

In Catlett v. Commissioner, T.C. Memo. 2019-86, here, Catlett, a return preparer, was convicted of a defraud/Klein conspiracy (27 USC § 371), multiple counts of aiding and assisting (§ 7206(2)) and one count of tax obstruction (§ 7212(a)).  He was sentenced to 210 months and order to pay restitution of $3,810,244, with restitution to "be paid [in] monthly installments of $500.00 over a period of 3 year(s) to commence when the defendant is placed on supervised release."  Catlett remains in prison and likely won't be release for some number of years.  The IRS made a restitution based assessment ("RBA") based on the sentencing court's order of restitution (and separately assessed underpayment penalty and interest).  Catlett filed a CDP proceeding when the IRS attempted to collect.

The IRS conceded that the RBA was premature because the district court order payment to commence after Catlett was placed on supervised release which had not yet occurred.  See United States v. Hassebrock, 663 F.3d 906, 924 (7th Cir. 2011) (Where "a district court can only impose restitution as a condition of supervised release, a defendant cannot be required to pay restitution until his period of supervised release begins."); United States v. Howard, 220 F.3d 645, 647 (5th Cir. 2000) ("Were restitution simply a term of supervised release or probation, it could not be due prior to the commencement of such a term." (quoting United States v. Webb, 30 F.3d 687, 690 (6th Cir. 1994))).

The IRS moved to dismiss the CDP case as moot. The Tax Court agreed and rejected Catlett's claim that, because the IRS indicated that, once he is released, the IRS will refile the RBA.

JAT comments:

1.  Because the restitution apparently related to other taxpayer's taxes, the IRS could not proceed with a regular assessment (requiring deficiency procedures) against Catlett.  If the IRS had been able to pursue a normal assessment (with deficiency procedures), it could assess the tax, penalties and interest and could even collect prior to the period specified in the court's restitution order.

2.  This aspect of the RBA seems to me to be a glitch.  Even where a defendant is permitted to defer payment of the restitution, there should be some lien to protect the creditor (here the IRS) in the interim just in case assets from which restitution can ultimately be collected appear.  Presumably, the general criminal lien will offer some protection, but even if the IRS could perfect an RBA assessment and resulting lien before supervisory release, it certainly should not be able to attempt collection on the RBA where the sentencing court deferred collection.

New IRS LB&I Compliance Campaigns of Interest (7/30/19)

IRS LB&I has announced six new compliance campaigns, here.

1.  The new campaign particularly relevant for readers of this blog is:
• Post OVDP Compliance
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.
JAT Comment:  Readers will recall that the OVDP had several iterations and, with the expansion of the Streamlined alternatives for nonwillful actors, OVDP itself was targeted to willful actors or persons at risk of the IRS treating them as willful actors.  So, those persons who took advantage of OVDP and took care of past issues presumably were back in the system with respect to their foreign income and asset reporting.  But, presumably, the IRS has some reason to believe that those OVDP participants may not  have stayed in compliance after closing out their OVDP participations.

2.  Another campaign of possible interest to readers is:
• ExpatriationPractice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance 
U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

Friday, July 26, 2019

IRS Sending Letters to Taxpayers with Potential Taxable Virtual Currency Transactions (7/26/19)

In IR-2019-132, here, the IRS announced that it is "sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly."  By the end of August, the notice says, more than 10,000 taxpayers will receive the letters.

The Notice further says:
"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."
The Notice concludes with this:
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Wednesday, July 17, 2019

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, ___ F.3d ___, 2019 U.S. App. LEXIS 20701 (6th Cir. 2019), here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up):
If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.
Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said:  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Tuesday, July 16, 2019

Seggerman Siblings (4 of them) Sentenced for Offshore Evasion (7/16/19)

I have previously written on the offshore account saga of the Seggerman family, principally as it relates to the prosecution of their lawyer-enabler, Michael Little.  (My blogs are listed at the bottom of this blog entry.)  The Seggermans were a prominent family.  The Seggerman siblings (4 of them), whose deceased father started the evasion, were sentenced last week.  Three were sentenced to 4-months, and one was sentenced to 6-months.  I post some links to news reports on the internet and in some cases bold-face items that I found particularly interesting:

Aaron Elstein, In surprise, New York's first family of tax evasion sentenced to prison (Crains New York  (6/26/19), here):
A federal judge Wednesday imposed prison sentences of four to six months on the four adult children of deceased Wall Street money manager Harry Seggerman, who bequeathed them a $12 million inheritance hidden in a secret Swiss bank account. 
The siblings funneled the money into the U.S. tax-free through shell companies or a fraudulent foundation. One would return from annual trips to the World Economic Forum in Davos, Switzerland, with just under $10,000 in her pocket, and had her husband and daughter do the same, so they wouldn't have to declare the cash to U.S. customs officials. 
"There is a strong need to deter others from the conduct that went on here," U.S. District Judge P. Kevin Castel declared as he sentenced the family members. Estate taxes could have eroded roughly half of the father's fortune. 
Henry Seggerman, 66, got six months in prison. Henry inherited his father's money management business and is a former movie producer who helped bring Crocodile Dundee to American audiences. 
Judge Castel imposed four-month sentences on Yvonne Seggerman, 63, who used to run a nonprofit playhouse in Rhode Island; Suzanne Seggerman, 56, former president of the nonprofit Games for Change; and John Seggerman, 55, a former aide to Sens. John and Lincoln Chaffee of Rhode Island. 
The eldest sibling got a longer sentence because he was involved in tax evasion for a longer time, the judge said. The Seggermans had all pleaded guilty and cooperated with the government after they were caught. 
The expressions and body language of prosecutors suggested they were surprised the Seggerman offspring got prison time at all, given that the government had not recommended any. Prosecutors had praised the Seggermans for testifying last year at the trial of their adviser, British lawyer Michael Little, who is serving a 20-month sentence. 
Judge Castel took note of the cooperation and commended the heirs for their philanthropic and volunteer activities with immigrant and school groups. He agreed they are unlikely to be repeat offenders. But he also observed that a poor person who committed tax fraud would probably go to prison, as would a poor person who committed immigration fraud. 
"There are not two federal systems of justice," he said.
Andrew Denney and Bruce Golding, Siblings sentenced for elaborate Swiss bank inheritance scam (NY Post 6/26/19), here.

Friday, July 12, 2019

More on Litigation and IRS Raising Civil Fraud New Matter (7/12/19)

I posted this blog entry on my Federal Tax Procedure Blog, here.  I posted the predicate blog entry on both Blogs, so I thought this follow-through should be on both blogs because it deals with the consequences of tax fraud, albeit civil tax fraud which gives rise to a potential civil fraud penalty and an actual unlimited statute of limitations (albeit the IRS may never know about it).  So, here it is:

My last post involved the IRS raising the civil fraud penalty as new matter by amended answer and prevailing. IRS Raises Fraud In Tax Court Amended Answer and Prevails (Federal Tax Crimes Blog 7/9/19), here.  The key point of the blog entry was the danger of unspotted issues after an audit and the risks of petitioning the Tax Court for redetermination.

First, on that issue, I offer the relevant portion of the working draft of my Federal Tax Procedure Book will be published on SSRN in early August 2019 (footnotes omitted):
New Matters [In the Tax Court]
The IRS can raise new issues in its answer that seek to increase the amount of the deficiency on a basis not asserted in the notice of deficiency or to justify the deficiency asserted (or part thereof) on some basis not asserted in the notice of deficiency.  Jurisdictionally, the Tax Court case is a case to redetermine the correct amount of tax liability for the year(s) involved, thus permitting it to determine a higher deficiency amount or an overpayment.  § 6214(a) & 6512(b). So the IRS can seek additional taxes and penalties not previously asserted.  The statute of limitations will be open because, to reprise what we learned earlier, the statute is suspended during the period the Tax Court case is pending.  §§ 6213(a) and 6503(a).   This is one of the dangers in proceeding in the Tax Court where the IRS has not previously spotted an issue.  Since the statute of limitations is suspended upon issuance of the notice of deficiency (§ 6503(a)), all new matters may be raised, assuming that the statute of limitations did not bar the notice of deficiency in the first place. 
The IRS's ability to raise new issues after its original answer is, however, limited by rules of fairness.  If the IRS does assert new matters after filing its original answer, it will formally do so by moving to amend the original answer.  The Tax Court rules, like the Federal Rules of Civil Procedure applicable in district courts and the Court of Federal Claims' Rules, permit amended pleadings, usually requiring the approval of the Court which is liberally granted to promote justice on the underlying merits. New issues cannot be inserted too late in the process so as to deny the taxpayer the effective opportunity to respond.  And, as to “new matters,” the IRS bears the burden of persuasion.  (Of course, if the new matter is the civil fraud penalty not asserted in the notice of deficienty, the IRS would have the burden of persuasion anyway to prove civil fraud by clear and convincing evidence, so asserting civil fraud as a new matter has no affect on the burden of persuasion.) 
The IRS is allowed to raise a new theory or ground in support of an issue raised in the notice of deficiency without the theory or ground being a new matter.  Depending upon how much variance the new theory or ground has with the notice of deficiency, the variance might be considered a new matter subject to the foregoing new issues discussion.  Certainly, if it is raised so late that the taxpayer cannot fairly respond with evidence addressing the new issue, the Court should deny the IRS’s attempt to assert the new issue. 
If the IRS asserts an affirmative defense (such as estoppel), it will be deemed denied and the taxpayer need not file a responsive pleading, which is usually called a “reply.”  If, however, the IRS raises “new matter” either in an answer or an amended answer, the taxpayer should file a reply providing the IRS notice as to the taxpayer's position on the new matter.  This is frequently done via a simple denial of the various matters pled with respect to the new matter. 
I think it would be helpful to illustrate the new matter issue.  Recall that § 6662 provides a 20% substantial understatement penalty that is then increased to 40% if the understatement is attributable to a gross valuation misstatement.  If the notice of deficiency asserted the 20% penalty but, in its answer, the IRS asserts the 40% penalty, the IRS will have the burden of proof on the increase in the penalty.  That seems to be the straight-forward reading of the rule shifting the burden of proof to the IRS.  But, let’s focus on one issue raised in this setting.  The taxpayer can avoid the accuracy related penalties if there was reasonable cause for the position on the return.  This is like an affirmative defense to the penalty.  Thus, as to the 20% penalty asserted in the notice and contested in the petition, the taxpayer bears the burden of proving reasonable cause even after the IRS meets its production burden under §7491(c); as to the increased 40% penalty, however, the IRS bears the burden of proof, including establishing absence of reasonable cause. 
Finally, an even worse case for the taxpayer who improvidently petitions for redetermination is that the IRS can raise as new matter a civil fraud penalty.  Say in the above example, the notice of deficiency asserted either the 20% or 40% accuracy related penalty in § 6662 and then in the answer (or amended answer), the IRS asserts the 75% civil fraud penalty in § 6663.  Note in this regard that, if the IRS raises the civil fraud penalty as a new matter, its burden of proof is not affected because, as to civil fraud, the IRS bears the burden of persuasion by clear and convincing evidence anyway, just as it the civil fraud penalty had been asserted in the notice of deficiency.  So,  if the IRS prevails, the taxpayer will be even worse off for having filed a petition for redetermination.  Thus, taxpayers and practitioners should think carefully about unspotted potential issues before filing a petition for redetermination in the Tax Court.
Now let's work this a little more.  This IRS favorable result works because the statute of limitations is still open in Tax Court proceedings.

Tuesday, July 9, 2019

IRS Raises Fraud In Tax Court Amended Answer and Prevails (7/9/19)

In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business.  There were some other issues.  The numbers are large.  I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):
After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009. 
See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.

The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):
The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard. 
Many of the critical documents in the record reflect “effective as of” dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti’s request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit’s evidence. 
The “effective as of” dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court’s comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent’s proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit’s briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties’ briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.
Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.

General Lesson

The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency.  This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.

Beyond the General Lesson

There is more in the details as lessons to trial counsel.  As noted above, the Court found that the "Petitioners Wegbreit’s briefs misstate the record and are unreliable."  Presumably those briefs were submitted by their trial counsel.

Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination).  Let's go back to the opinion.

Thursday, June 27, 2019

Two New FBAR Opinions -- Nothing New Here (6/27/19)

I report two unremarkable FBAR willful civil penalty cases.  I don't provide links, but provide the court and docket numbers for those wanting to go to Pacer to get the cases.

In United States v. Schoenfeld, 2019 U.S. Dist. LEXIS 105906 (M.D. Fla. No. 3:16-cv-1248-J-34PDB 6/25/2019), an FBAR collection case, the Court denied the defendant's motion for summary judgment holding (Slip Op. pp. 20-21):
In short, none of Defendant's arguments persuade the Court that in failing to update the BSA implementing regulations after Congress's amendment to the statute in 2004, the Secretary intended to prohibit the IRS from being able to use its discretion and impose the maximum penalty allowed by the statute, "particularly given the IRS's clear statements to the contrary." Garrity, 2019 WL 1004584, at *4. Indeed, in its 2008 version of the Internal Revenue Manual (IRM), the IRS specifically recognized the conflict between the statute and the regulation, and stated that although "the regulations at 31 C.F.R. § [1010.820] have not been revised to reflect the change in the willfulness penalty ceiling . . . the statute is self-executing and the new penalty ceilings apply." See IRM § 4.26.16.4.5.1 (July 1, 2008), available at 2008 WL 5900930. Similarly, the current version of the IRM provides that "[f]or violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation." See IRM § 4.26.16.4.5.1 (Nov. 6, 2015), available at 2007 WL 9418679. Although the IRM does not "have the force of law," it does provide "persuasive authority" suggesting that the Secretary did not intend to limit the willful FBAR violation penalty to $100,000. See Griswold v. United States, 59 F. 3d 1571, 1576 (11th Cir. 1995) ("While the IRS Manual does not have the force of law, . . . the manual provisions do constitute persuasive authority as to the IRS's interpretation of the statute and the regulations."); see also Romano-Murphy v. C.I.R., 816 F.3d 707, 719 (11th Cir. 2016) (same). Thus, for all of the reasons explained above, the Court declines to reduce the penalty assessed against Steven Schoenfeld for an alleged willful FBAR violation to $100,000.
I previously reported on an earlier opinion in Schoenfeld.  Court Holds That Liability for FBAR Civil Willful Penalty Survives Death (9/26/18), here.

In United States v. Dadurian, 2019 U.S. Dist. LEXIS 104683 (S.D. Fla. 9:18-cv-81276 6/24/2019), also an FBAR collection suit, the Court denied the defendant's motion for summary judgment, noting the differing definitions of willful for the FBAR civil penalty (i.e., intent to violate a known legal duty, knowing and reckless) but found that under any of these definitions the facts were sufficiently contested to reject summary judgment.  The facts that are recounted by the court do not look good for the defendant, but the court was only dealing with defendant's motion for summary judgment.

Virtual Currency Held in Foreign Accounts Not FBAR Reportable (6/27/18; 7/2/18)

I am not an expert on virtual currency or reporting requirements for virtual currency.  One issue is whether virtual currency or holding virtual currency on a foreign third-party exchange was reportable on the FBAR, FinCEN Form 114.

I link here a report from the AICPA Virtual Currency Task Force which obtained some input from the IRS on the issue.  Kirk Phillips, Virtual currency not FBAR reportable (at least for now) (Journal of Accountancy 6/19/19), here.
FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. 
The report caveats that only FBAR reporting is addressed.  Reporting on Form 8938, Statement of Specified Foreign Financial Assets, is not addressed.

Updates:

  • James Creech (Guest Blogger), Virtual Currency, FBAR, and the Ripple Effect (ProcedurallyTaxing Blog 7/2/19), here.

Wednesday, June 26, 2019

Advising Clients on "How To Do Time" (6/26/19)

I picked up this offering that Tax Crimes fans might be interested in.  Alan Ellis and J. Michael Henderson, How to Do Time, Parts 1-4.  Many of criminal defense lawyers really do not get into the details of the prison experience.  These authors offer useful insights that will be helpful in preparing clients for the experience.  This was published in Law 360 but is available on Allan Ellis' sight, here.

The introduction from an email from Allan Ellis:
How To Do Time, Parts 1-4

Most lawyers understandably are unable to advise a first-time federal inmate as to what it will be like in prison. Rarely do they ever get beyond an attorney visiting room. In this four-part series of articles, Alan Ellis and J. Michael Henderson, the co-authors of the Federal Prison Guidebook, with the help of Phillip S. Wise, retired Bureau of Prisons Assistant Director of Health Services, offer answers to many questions that attorneys, their clients, and their clients' family and friends may have. 

Tuesday, June 25, 2019

Ninth Circuit Rejects Inclusion of Reckless Conduct in Willful Requirement for § 6694(b)(2) Preparer Civil Penalty (6/25/19)

I and other commentators have lamented courts expansion of the concept for willful for the FBAR civil penalty that can be draconian (although the IRS limits its application as a matter of discretion).  Specifically, I and others have urged that the definition of willful for FBAR civil penalty purposes should be the same as the definition of willful in the parallel criminal proceedings (see Ratzlaf v. United States, 510 U.S. 135 (1994), adopting the Cheek standard (Cheek v. United States, 498 U.S. 192, 200-201 (1991)) applicable for tax crimes). 

The courts have decided otherwise.  See e.g., today's other posting in Court Finds Taxpayer Willfully Failed to File FBARs (Federal Tax Crimes Blog 6/25/19), here.

In Rodgers v. United States (9th Cir. 6/21/2019) (unpublished), here.  The Court addressed another civil penalty with a statutory willful requirement.  The penalty was the § 6694(b) preparer penalty which provides:
(b) Understatement due to willful or reckless conduct
   (1) In general.  Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—
      (A) $5,000, or
      (B) 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
   (2) Willful or reckless conduct.  Conduct described in this paragraph is conduct by the tax return preparer which is—
      (A) a willful attempt in any manner to understate the liability for tax on the return or claim, or
      (B) a reckless or intentional disregard of rules or regulations.
The district court in Rodgers defined “willful” in § 6694(b)(2)(A) to include “recklessness.”  Of course, reckless conduct under this statute must mean something different than willful, otherwise (b(2)(B) would be redundant, and certainly there is nothing in the statute to indicate a congressional understanding the reckless was included in the definition of willful.

The Court of Appeals reversed for the district court to determine whether the correct definition of willful would affect the outcome in some cases.  Addressing the correct definition of will, the Court said:
1. We agree with Rodgers that the district court applied the wrong definition of “willful” in § 6694(b)(2)(A). As we explained in Richey v. IRS, 9 F.3d 1407, 1411 (9th Cir. 1993), willfulness under § 6694(b)(2)(A) requires “a conscious act or omission made in the knowledge that a duty is therefore not being met.” Id. (quoting Pickering v. United States, 691 F.2d 853, 855 (8th Cir. 1982)).  We further noted that the definition of “willful” in § 6694(b) is the “same” as the definition used in 26 U.S.C. § 7206. Id. As the Supreme Court has explained, that definition does not include recklessness. See United States v. Bishop, 412 U.S. 346, 354 (1973).
The reason I call this case to readers' attention is that, like the 6694/7206 analogy, the FBAR willful civil penalty drawn in the same language as the criminal penalty for failure to file FBARs and other BSA violations.  The criminal violations clearly require intent to violate a known legal duty, conduct that is more than reckless conduct.  Yet the courts apply a different standard for BSA civil penalties (FBAR penalties here). The Courts may take some comfort for a more relaxed definition and burden of proof (e.g., preponderance rather than clear and convincing) because the penalty is civil and thus not as punitive as a criminal penalty which, so the notion goes, should require more egregious conduct (specific intent rather than reckless conduct).  Yet, the courts applying willful in the tax preparer civil penalty context reach what appear to be opposite conclusions. 

Of course, the FBAR willful penalty does not have a statutory alternative reckless standard like § 6694(b)(2).  But, I just wonder whether, if that alternative were not in § 6694(b)(2), the courts would have reached a different result (i.e., include reckless conduct in definition of willful) simply because a civil rather than a criminal penalty were involved.

Court Finds Taxpayer Willfully Failed to File FBARs (6/25/19)

In United States v. Flume (S.D. TX No. 5:16-cv-00073 Order dated 6/11/19 Dkt. No. 86), here, the Court held Flume liable for the willful FBAR penalty.  The case continues the holdings that, even if Flume did not have the intent to violate a known legal duty, his recklessness with regard to knowledge of the duty establishes liability for the penalty.

The key points that I gathered in my quick read are:

1.  The Court found that Flume was not a credible witness.  That alone creates a huge hurdle in a case where his intent and knowledge and testimony about his intent and knowledge are at issue.

2.  Flume was a successful business man and thus, if indeed he had not reviewed the return and understood the Schedule B question, he acted with extreme recklessness.  Indeed (Slip Op. 16):
His testimony that he was simply “careless with the reading of everything on the tax return” is not credible. (RT2 5:10–11.) Moreover, Schedule B’s question about foreign bank accounts is simple and straightforward and requires no financial or legal training to understand. See McBride, 908 F. Supp. 2d at 1211 (“[B]ecause the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious.”). Even the most cursory review of his tax return would have alerted Flume to the foreign-account reporting requirement.
3.  The Court confirmed (Slip Op. 11 n. 11) its earlier rejection of a "constructive knowledge" theory that "every taxpayer, merely by signing a tax return, is presumed to know of the need to file an FBAR.”   See Robert S. Horwitz, Kimble–A New FBAR Willful Penalty Case, Some Further Thoughts on Bedrosian, Willfulness and the Overlooked Opinion in Flume (Tax Litigator Blog 1/4/19), here.

4.  The attempt to claim reliance on his tax preparers was unavailing because (i) Flume did not advise his tax preparers of the UBS account, and (ii) Flume, a successful businessman, "was reckless in failing to investigate the credentials of the people he claims to have entrusted with his tax liability."

JAT Comments:

Friday, June 21, 2019

Former DOJ Tax Attorney Pleads to Tax Perjury (6/21/19; 6/22/19)

DOJ Tax announced here that James F. Miller, a former Tax Division attorney, pled guilty to willfully filing a false tax return that "underreported his gross income on his 2010 through 2014 tax returns by approximately $2,215,587."  The plea count was § 7206(1) which is a three year felony.  The announcement indicates that he agreed to pay $735,933 restitution.

I calculated the Guidelines range on the following assumptions:  (i) the restitution amount is the tax loss; there is no sophisticated means adjustment, and the maximum 3 point reduction for acceptance of responsibility.  On that basis, my rough calculation indicates an aggregate sentencing level of 17 and a guidelines range of 24-30 months.  (JAT Note:  I corrected the calculation on 6/22/19 to take out the sophisticated means addition which I had not caught in the spreadsheet.)

The plea documents are:

1. The plea agreement, here.
2. The Criminal Information for the plea, here.
3.  The Statement of Facts, here.

Update 6/22/19 10:15am:  Peter Reilly, a frequent and interesting commentator on the tax scene, has posted an entry on Miller's plea and some of the background information.  Peter J. Reilly, Tax Lawyer Turned Lobbyist Pleads Guilty To Leaving Over $2M Off Tax Returns (Forbes 6/22/19), here.   I highly recommend Peter's discussion.  Peter offers links for further information on Miller.

Saturday, June 15, 2019

Court Suppresses Witness Interview Given Pursuant to IRS Summons (6/14/19)

In United States v. Patterson (E.D. La. No. 19-27, Order and Reasons dated 6/11/19 (Dkt. 64)), here, the court ordered suppression of statements made in one of three communicative encounters with IRS CI agents.  I call them communicative encounters because one of the encounters was by text and the other two were traditional CI agent interviews.  During the process of these encounters and before the third one, Patterson said that she was consulting with an attorney, but no attorney was otherwise involved in the process.

After the first encounter (an interview) in which IRS CI's standard noncustodial warnings were given, an IRS CI Special Agent issued a summons.  The second encounter was by texting between Patterson and the Agent about her appearance at the time and place designated in the summons.  Patterson said she could not.  The agent then texted
I can authorize one extension on the summons but I need to remind you that the summons is a legal document. Please read the section entitled Enforcement of Summons. Failure to appear will result in an attachment and arrest. Since you’ve been fully cooperative, I don’t want that to happen.
They then agreed upon a rescheduling of the summons appearance.

The third encounter was Patterson's appearance as rescheduled pursuant to the summons.  The third encounter is described as follows (Slip Op. 8-9, footnotes omitted):
The IRS Summons ordered Patterson to appear at the F. Edward Hebert Federal Building, room 1037. Once she arrived at the Hebert Building, she walked through metal detectors and past security officers to get to room 1037. She did not bring the nameless lawyer she had referred to in her communications with Agent Nuss; instead, she came alone. At the IRS’s office she met with Agent Nuss and she was introduced to Special Agent Cary Davis. The Special Agents were not in uniform, but Davis provided her badge and credentials for Patterson’s inspection. Unlike when Special Agents Boyles and Nuss had interviewed her at her mother’s home, this time the agents did not read Patterson the statement of non-custodial rights, despite the Internal Revenue Manual’s admonition that they do so. It appears that the agents did not advise Patterson of any of her rights; they did not tell her she could terminate the interview or that she could leave at her discretion. The interview took place in a conference room and began at 3:19 p.m.
According to the IRS memorandum, the agents began the interview by giving Patterson a spreadsheet entitled “2012 Returns Deposited to Crown Bank Account,” which Patterson had previously reviewed. The agents asked her to identify the customers she had referred to Butler; she did so. Then, the agents gave Patterson client folders for tax year 2012 which had been summoned from Butler; Patterson proceeded to identify the false items in returns prepared by Butler and her former co-worker, Dana Alvarez. The agents then gave Patterson print-outs of transmitted returns that Patterson had prepared for her No Limit Tax Refund business in 2014 for tax year 2013 and asked her to identify false items. Patterson reviewed the print outs and identified approximately fifty-three false items in thirty-one returns she had prepared. She was asked to do the same with tax returns she had prepared for tax year 2014, both for her own company and for Pelican Income Tax, and she identified many more false items in tax returns she had prepared. The interview lasted until 7:07 p.m.33 Patterson was not arrested at the conclusion of the interview and was allowed to leave.
The issue with respect to all of the communicative encounters was whether they were in a custodial setting.  A custodial setting requiring full-blown Miranda warnings is usually obvious, but can also exist in other settings.  As explained by the court (Slip Op. p. 14)

Friday, June 14, 2019

Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:
"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."
The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):
[*2]  
"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 
* *  * *

Saturday, June 8, 2019

Ninth Circuit Holds for Government in Altera (6/8/19)

Although this is not a tax crimes issue, it is a hot topic in the tax law relating to one of the most revenue potential sources--transfer pricing.  The tax world has anxiously awaited yesterday's decision by Ninth Circuit's reconstituted panel in Altera Corp. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here.  In a sister blog (Federal Tax Procedure) I have posted a blog entry on the decision:  Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/8/19), here.  For those interested in the intersection of administrative law (particularly the APA) and tax law, the case is a good read with a lot more nuance than one might otherwise imagine, and I hope my blog entry helps understand the decision.

As always, I appreciate comments.  Please leave a comment to this blog or email me at jack@tjtaxlaw.com.

Thursday, May 30, 2019

TIGTA Report on IRS Use of Form 3949-A, Information Referral (5/30/19)

TIGTA issued this report:  Improvements Are Needed to Correct Continued Deficiencies in the Processing of Taxpayer Referrals of Suspected Tax Fraud (Ref. No. 2019-40-040 5/23/19), here.  (The Highlights are in the report but separately offered here.)

Key points are:

1.  Taxpayer referrals of suspected tax fraud are on Form Form 3949-A, Information Referral, here.  The instructions say:  "Purpose of the Form:  Use Form 3949-A to report alleged tax law violations by an individual, a business, or both."  As indicated below, the actual use of the information reported seems to be in the civil audit area.

2.  The report focuses principally on the use of the reported information to collect revenue and compares to collection of revenue from other sources (more below).  It is not clear how successful the forms are in pursuing criminal investigations and prosecutions.  (See the routing information in paragraph 5 below.) I note in this regard that, since criminal investigations usually require larger amounts, persons with evidence of tax fraud will likely pursue the whistleblower opportunities by filing Form 211 instead of Form 3949-A.

3.  In FYs 2016 - 2018, the information on Forms 3949-A resulted in over $246 million in assessed taxes.  (I'm not sure how much actual revenue was collected.)  For FYs 2015 - 2018, 290,742 Forms were received.

4. The report makes suggestions on improvements in the use of the Form.  The report notes that the instructions provide that the, for reports on individual taxpayers, the Form is to be sent to the IRS's Submission Processing Function which routes them to the appropriate functional area for further review.  The report explains the process from receipt to referral to the appropriate functional area.  IRS employees "continue to erroneously route a significant number of Forms 3949-A to the wrong IRS function for review."

5.  The routing data for 2018 from W&I and SB/SE indicate that 2,665 cases were routed to CI out of 61,164 total received.  See Figure 3, p. 3.

6.  The assessment statistics presented in Figure 4, p. 4 are:


Monday, May 27, 2019

1st Circuit Affirms Money Laundering and Tax Convictions and Discusses Difference Between SG Loss and Restitution (5/27/19)

In United States v. Flete-Garcia, ___ F.3d ___ (1st Cir. 2019), here, a tax crimes false refund case at heart although money laundering of the proceeds of tax crimes was the more serious charges, the court (Judge Selya) opens with this paragraph (useful at least for encountering some uncommonly used words):
Having identified defendant-appellant Fulvio Flete-Garcia as the architect of a massive swindle, the government charged him with a litany of fraud-based crimes. Following four days of trial, Flete-Garcia threw in the towel and entered a straight guilty plea to all 48 counts of the indictment. Prior to sentencing, though, Flete-Garcia experienced buyer's remorse and attempted to withdraw his guilty plea. The district court denied this motion, as well as sentencing-related motions for discovery and for an evidentiary hearing. It then sentenced Flete-Garcia to 132 months' imprisonment and ordered him to make restitution in the amount of $7,737,486.10. Flete-Garcia appeals, raising a gallimaufry of alleged errors. Finding his asseverational array long on perfervid rhetoric but short on substance, we affirm.
As I said, the opinion was written by Judge Selya.  For more on Judge Selya's and his writing style, see the Wikipedia entry here.

The opinion is 49 pages and has other uses of words not commonly encountered (in my experience).  But that's all beside the point.

Now, what might be useful for readers of this blog?  Let me say that it is all interesting even (in my case beyond the challenge of encountering uncommonly-used words).  But what is really useful for readers of this blog (or at least my target readers of this blog)?

The outline of the opinion with local page cites and links is

I. BACKGROUND (p. 3, here
II. WITHDRAWAL OF GUILTY PLEA (p. 8, here.)
III. CERTAIN SENTENCING RELATED MATTERS (p. 13, here,)
A. Enhancement for Number of Victims. (p. 13, here.)
B. Enhancement for Amount of Loss. (p. 18, here.)
C. Discovery. (p. 31, here.)
D. Evidentiary Hearing. (p. 35, here)
E. The Due Process Claim. (p. 38, here.)
IV. RESTITUTION (p. 40, here.)
V. INEFFECTIVE ASSISTANCE OF COUNSEL (p. 46, here.)
VI. CONCLUSION (p. 49, here.)

I think readers might be interested in the discussion on restitution starting on op. 40, here, where Judge Selya addresses the differences between the loss calculation and restitution.  In brief, the loss calculation determines the Guidelines Sentencing Range ("GSR") calculation which may include intended loss in excess of actual loss; the restitution calculation is to quantify the actual loss so that the victim may be compensated.  In this case, the loss was calculated under the money laundering guideline but basically it appears to be the same quantity as the tax loss since illegal tax refunds were the object of the crimes.  (That is just to say that if the loss had been calculated under the tax guidelines, the loss amount would have been the same.)

Here is Judge Selya's discussion of restitution (or at least the excerpts from that discussion that I think would be helpful for fans of tax crimes).  Note that I used the cleaned up technique:

11th Circuit Affirms Convictions for Wire Fraud, Tax Perjury and False Statement (5/27/19)

In United States v. Beverley, 2019 U.S. App. LEXIS 14617 (11th Cir. 2019) (unpublished), here, Beverly, a previously convicted felon, appealed his convictions and sentence for four counts of wire fraud, 18 U.S.C. § 1343; four counts of filing a false tax return, 26 U.S.C. § 7206(1); and five counts of making a false statement to the United States, 18 U.S.C. § 1001.

The conduct drawing the convictions is garden variety conduct and the claims made on appeal are garden variety as well.  Here is an outline of the opinion.

I. BACKGROUND
II. DISCUSSION
   A. Evidentiary Rulings
   B. Sufficiency of the Evidence
   C. Guidelines Calculations
III. CONCLUSION

The tax convictions were for tax perjury, § 7206(1).  Beverley failed to report income that he shunted through others.  Beverly also claimed he had an $8 million NOL carryover.  He was convicted of tax perjury -- some known falsehood that he willfully presented on his tax return.  The omission of the income was sufficient to convict on the tax perjury counts.  But Beverly insisted that this $8 million NOL carryover should negate the convictions.  The Court rejected the argument as follows:
Beverley also argues that, with respect to his tax returns, the government failed to prove that he knew he was not entitled to report as negative income the $8 million net operating loss. But that argument is a red herring. Beverley's failure to report as positive income the funds he diverted from his employer supplied, on its own, sufficient evidence to sustain the tax fraud convictions.
JAT comments:

Saturday, May 25, 2019

District Court Rejects Argument that JDS Seeking Law Firm Client Identities Violates Attorney-Client Privilege (5/25/19)

In Taylor Lohmeyer Law Firm PLLC v. United States, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex 2019), here, the district court (i) dismissed a law firm ("Firm") challenge to an IRS John Doe Summons (JDS) for client identities and (ii) enforced the JDS.

Based on information from an audit which resulted in substantial tax liability, the IRS obtained the JDS, which is an ex parte proceeding, seeking "names of and other information related to the Firm's clients between 1995-2017 to investigate the tax liability of those who used the Firm to 'create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.'" 

The Court held that the JDS easily met the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) which it stated as:
the Government must establish that the summons: (1) is issued for a legitimate purpose; (2) seeks information which may be relevant to that purpose; (3) seeks information that is not already within the IRS's possession; and (4) satisfies all administrative steps required by the Internal Revenue Code.
The Court recounted the evidence as follows:
But the bar for "reasonable basis" is not high and the affidavit of Russell-Hendrick from the ex parte proceeding establishes a reasonable basis. She details her conclusion that Taxpayer-1 concealed his connection to offshore structures—for which Taxpayer-1 remained the beneficial owner—created under the advice of the firm. Taxpayer-1 entered an agreement with the IRS in June 2017, admitting that Taxpayer-1 owned all assets owned by the offshore trusts and earned over $5 million in unreported income between 1996 and 2000. Taxpayer-1 accepted liability for civil fraud penalties and penalties for failing to file the required forms for reporting foreign income. 
Russell-Hendrick then states the basis for her opinion that the Firm provided similar advice to other clients. Among other pieces of evidence, she states that in an interview with John Taylor, former partner of the firm, Taylor estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. Russell-Hendrick states in part that: 
Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices. 
The information obtained by the IRS and discussed in this Declaration suggests that the still-unknown U.S. taxpayers doing business with Taylor Lohmeyer PLLC may not have reported their offshore accounts, entities, or structures. Instead, they have likely relied on the assistance of Taylor, and the fact the structures are hidden offshore to support a decision not to report the existence of those entities and accounts, expecting  that the IRS would not discover the accounts, omitted income, and/or the existence of the entities. 
18-MC-1046, docket no. 1-2 at 37. Thus, assuming for argument that the Firm could challenge the ex parte proceeding at this stage, issuance was proper.
The minimal Powell standards were clearly met.  The real issue was not whether the IRS abused the JDS process (per the Powell factors) but whether the information sought--the identities of clients--implicated the attorney-client privilege.  Normally, client identity is not within the purview of the attorney-client privilege because, except in rare circumstances, the mere identification of the client does not disclose any client confidential communication for obtaining legal services.  The law firm argued that this was a rare circumstance where the facts indicate that identifying the client will identify the client communications regarding the advice, then the attorney-client privilege may apply.  One now rather old tax case so held.  United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).  The court rejected the argument as follows:

Monday, May 20, 2019

IRS 2018 Data Book Release; Table 18 on Criminal Investigation Program Statistics (5/201/19)

The IRS has released its 2018 Data Book.  The Data Book may be accessed here

For readers of this blog, the key data are presented in Table 18: Criminal Investigation Program, by Status or Disposition.

The link to Table 18 for each of the years 1995-2018 is here for those wanting a deep dive into the data from year to year.

The Table 18 spreadsheet for 2018 for may be downloaded on that page.   Here is a cut and paste of the data.  (Note that the formatting is a little off, but the data should be easily understood.

Table 18.  Criminal Investigation Program, by Status or Disposition, Fiscal Year 2018
Status or disposition [1] Total Legal source
tax crimes [2]
Illegal source
financial crimes [3]
Narcotics-related
financial crimes [4]
 
(1) (2) (3) (4)
Investigations initiated 2,886            1,099            1,064               723              
Investigations completed 3,051            1,197            1,086               768              
Referrals for prosecution 2,130            680            816               634              
Investigations completed without prosecution 921            517            270               134              
Indictments and informations [5] 2,011            636            765               610              
Convictions 1,879            668            725               486              
Sentenced 2,111            774            787               550              
Incarcerated [6] 1,732            614            635               483              
Percentage of those sentenced who were incarcerated [6] 82.0         79.3         80.7            87.8           

[1]  Investigations may cross fiscal years. An investigation initiated one fiscal year may not be indicted, convicted, or sentenced until a subsequent fiscal year. Therefore, the disposition (completions, indictments/informations, convictions, sentences) of investigations shown in this table may be related to investigations initiated, completed, indicted, or convicted in prior fiscal years.
[2]  Under the Legal Source Tax Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving legal industries, legal occupations, and, more specifically, legally earned income associated with the violation of Title 26 (tax violations) and Title 18 (tax-related violations) of the U.S. Code. The Legal Source Tax Crimes Program also includes employment tax cases and those cases that threaten the tax system, such as Questionable Refund Program cases, unscrupulous return preparers, and frivolous filers/nonfilers who challenge the legality of the filing requirements.
[3]  Under the Illegal Source Financial Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving proceeds derived from illegal sources other than narcotics. These encompass all tax and tax-related violations, as well as money laundering and currency violations under the following statutes: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. The utilization of forfeiture statutes to deprive individuals and organizations of illegally obtained assets is also linked to the investigation of criminal charges within this program.
[4]  Under the Narcotics-Related Financial Crimes Program, IRS Criminal Investigation seeks to identify, investigate, and assist in the prosecution of the most significant narcotics-related tax and money laundering offenders. The IRS derives authority for this program from the statutes for which it has jurisdiction: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. IRS Criminal Investigation also devotes resources to high-level multiagency narcotics investigations warranting Organized Crime Drug Enforcement Task Force (OCDETF) designation in accordance with OCDETF Program reimbursable funding.
[5]  Both “indictments” and “informations” are accusations of criminal charges. An “indictment” is an accusation made by a Federal prosecutor and issued by a Federal grand jury. An “information” is an accusation brought by a Federal prosecutor without the requirement of a grand jury.
[6]  The term “incarcerated” may include prison time, home confinement, electronic monitoring, or a combination thereof.
SOURCE:  Criminal Investigation, Communications and Education Division.

JAT Comments:

1.  On the 2018 data, I have no comments.

2.  I have a spreadsheet whereby I compare certain of the line items from year to year.  The caveat is that statistics may be misleading.  All I do is compile the data (and in two lines derive the percentages which compares in the one percentage the IRS offers).  Here it is

Total 2005-2018 Total 2012-2018
2005-2018 Average 2012-2018 Average
1 Indictments 13,816 987 8,264 1,181
2 Convictions 12,445 889 7,688 1,098
3 Percentage Convicted (l. 2 / l. 1) 90.1% 90.1% 93.0% 93.0%
4 Sentenced 12,419 887 7,678 1,097
5 Incarcerated 9,862 704 6,108 873
6 Percentage Incarcerated (l. 4 / l. 5) 79.4% 79.4% 79.6% 79.6%