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.

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. 

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:

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.

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)

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

In Finnegan v. Commissioner, 926 F.3d 1261 (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert that § 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." 

* *  * *

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.