Thursday, December 31, 2020

FinCEN Notice 2020-2 to Make Virtual Currency Foreign Accounts FBAR Reportable (12/31/20; 1/16/21)

 FinCEN Notice 2020-2, here, provides (cut and pasted in full):

Report of Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual Currency FinCEN Notice 2020-2 Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

The IRS continues to focus on cryptocurrency.  See the following resources:

  • Virtual Currencies, here.
  • Frequently Asked Questions on Virtual Currency Transactions, here.
  •  IRS 2020 draft 1040 puts crypto question front and center (Accounting Today 8/24/20), here.
Added 1/16/21 5:30 pm:

A good article on developments on Virtual Currency in this context is James Creech, FinCEN Moves To Include Convertible Virtual Currency On FBAR Form (Procedurally Taxing Blog 1/15/21), here.

Wednesday, December 23, 2020

Fifth Circuit Denies Rehearing En Banc in Controversial Client Identity Privilege Case (12/23/20)

I have previously reported on the Fifth Circuit’s rejection of the client-identity privilege (a subset of the attorney-client privilege) in Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (Federal Tax Crimes Blog 4/26/20), here.   See Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505 (5th Cir. 2020), here.

On December 4, 2020, the Fifth Circuit denied rehearing en banc.  The vote was 9 to 8.  Six of the judges dissenting to denial of rehearing en banc filed a dissenting opinion.  The denial and dissenting opinion are here.    

The panel opinion was controversial.  Amicus briefs on petition rehearing en banc were filed by the National Association of Criminal Defense Lawyers, here, and by the American College of Tax Counsel, here.  

I am not sure what the dissenting opinion really adds to the panel decision other than suggesting a possible interpretation of Fifth Circuit law unaffected by the original panel opinion.  Perhaps it will offer some basis for continuing the fight on remand and in other cases.  Perhaps not.  

An excerpt from the dissenting opinion (footnote omitted):

The amici raised important concerns about how to interpret the opinion in this case. However, the opinion assures us, in its citations to Jones and Reyes-Requena II, that it does not diverge from our settled precedent. Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505, 510–11 (5th Cir. 2020). I take the opinion at its word. Whenever disclosing a client’s identity would reveal the confidential purpose for which the client consulted the attorney, attorney-client privilege applies. This protection may obtain even if the government does not know the specific, substantive legal advice that was provided to the client.

In the district court, the enforcement order is currently stayed and the case has been administratively closed to facilitate our review of the enforcement order. Once our mandate issues, it may be that the case is reopened and the stay lifted. If so, the May 15, 2019 enforcement order provides that the Lohmeyer law firm will have the opportunity to produce a privilege log, asserting privilege on particular responsive documents. If the law firm does so, the district court may choose then to conduct an in camera review of those documents. I am confident that any such review will be guided by the following: “[i]f the disclosure of the client’s identity will also reveal the confidential purpose for which he consulted an attorney, we protect both the confidential communication and the client’s identity as privileged.” Lohmeyer, 957 F.3d at 511 (quoting Reyes-Requena II, 926 F.2d at 1431).

First Criminal Cases from Abusive Syndicated Conservation Easements (12/23/20; 12/29/20)

Abusive conservation easements have been a topic on this blog for some time now.  See here.  DOJ and the IRS have noised about criminal prosecutions, but until this past week none have surfaced.  Now, we have two criminal cases with a pre-wired plea on the filing of the criminal informations.  See DOJ Press Release: Atlanta Tax Professionals Plead Guilty to Promoting Syndicated Conservation Easement Tax Scheme Involving More Than $1.2 Billion in Fraudulent Charitable Deductions (12/21/20), here

Relevant excerpts from the press release are:

According to court documents, from at least 2013 through 2019, S. Agee and C. Agee, then partners at an Atlanta accounting firm, marketed, promoted, and sold together with co-conspirators,  investments in fraudulent syndicated conservation easement (SCE) tax shelters. The SCE tax shelters were designed to produce tax deductions for high-income taxpayers through partnerships that purported to make “real estate investments.” In truth, the partnerships were a sham, lacking economic substance and serving no legitimate business purpose. The placement of conservation easements over the real estate was a foregone conclusion, which fraudulently enabled the investors to shelter their income from the IRS with no economic risk and to claim substantial tax deductions to which they were not entitled. S. Agee, C. Agee, and their co-conspirators marketed the SCE tax shelters by promising investors that for every $1 invested in the partnership, the investor would receive more than $4 in charitable tax deductions. 

“The defendants’ and their co-conspirators' criminal conduct enabled their clients to claim more than $1.2 billion in fraudulent tax deductions and generated hundreds of millions of dollars of tax loss to the United States,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department's Tax Division.

* * * *

Conservation easements were created by Congress to be a key tool used for protecting environmentally and historically important land. The donated conservation easement typically restricts the use or development of land in order to protect its conservation value. When legitimately created and used in compliance with the Internal Revenue Code, the conservation easement can both protect the environment and provide tax incentives. By contrast, abusive SCEs are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of legitimate business purpose.

According to court documents, S. Agee and C. Agee additionally solicited investors after the end of the tax year and advised them to backdate payments and documents to make it appear that the “investments” were timely made before the end of the tax year. S. Agee and C. Agee also prepared and assisted in the preparation of false tax returns for clients who agreed to invest in the SCE shelters. In exchange for their promotion of the abusive SCE tax shelters, between 2013 and 2019, S. Agee and C. Agee each received more than $1.7 million in commissions.

S. Agee and C. Agee both pleaded guilty to one count of conspiracy to defraud the United States which carries a maximum penalty of five years in prison. They also face a period of supervised release, restitution, and monetary penalties.

The CourtListener dockets for these cases are:  Stein Agee, here, and Corey Agee, here.

Details are set forth in the Stein Agee Criminal Information and Factual Basis available at CourtListener here and here.  I have not attempted to determine if there are material differences in the fact patterns for Stein and Corey Agee, but have instead focused generally on Stein Agee.  As with conspiracy charges generally, the details are summarized in cascading fashion in the Manner and Means and Overt Acts paragraphs of the Criminal Information (pars. 103 and 104, pp. 21-30 (repeated in the Factual Basis, pars. 101 and 102, pp. 22-31)).  Those wanting to know at least the summary details should focus on those paragraphs.

JAT Comments:

Note:  I have substantially revised the Comments portion to present the materials in a way that I think will be helpful to Tax Crimes students, focusing on the potential sentencing considerations indicated by the Agee pleas.

Monday, December 7, 2020

Court of Appeals Rejects Lawyer Defendant's Proffered Instruction that Cheek Requires Knowledge that Conduct Is Criminal (12/7/20)

In United States v. Gilmore, 2020 U.S. App. LEXIS 37861 (3rd Cir. 2020), here, a nonprecedential opinion, the Court affirmed the convictions of Gilmore, a lawyer, for tax and financial crimes.  The Court rejected Gilmore’s claims that (i) the trial court erred in excluding expert testimony as to a mental-health disorder with respect to willfulness; (ii) the trial court erred in stating in the jury instruction that willfulness require only that the defendant know the conduct was unlawful rather than criminal; and (iii) the evidence was sufficient to support the convictions.

I focus only on the second holding – regarding the jury instruction.  The Court’s discussion is brief, I include it all:

Gilmore next challenges the District Court's jury instructions on willfulness. The Court instructed that willfulness could not be found if Gilmore believed in good faith that "the tax laws did not make his conduct unlawful." App. 2412. Gilmore requested the word "criminal" be used instead of "unlawful." App. 335. Gilmore claims the instruction was legally erroneous because it equated belief of "unlawful" action with belief of "criminal" action. Gilmore Br. 43.

Contrary to Gilmore's claims, willfulness in the context of tax crimes merely requires knowledge and violation of a duty. It does not require knowledge that one is committing a criminal act. As the Supreme Court has made clear, "the standard for the statutory willfulness requirement is the voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991) (internal quotation marks omitted). Thus, to prove willfulness, the Government had to show "that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek, 498 U.S. at 201 (emphasis added). There is no requirement that a person must be aware that the conduct is criminal. It is enough that he knew he had a legal duty and violated it-in other words, that he acted unlawfully.

For these reasons, we hold the District Court did not err in instructing the jury on the willfulness requirement.

JAT Comments:

1. I don’t think it is uncommon for persons to transmute the Cheek willfulness requirement of intentional violation of a known legal duty to requiring that the defendant know that the conduct (violating a known legal duty) is criminal (or a crime).  For example, take the simple case of failure to file which is a crime under § 7203.  The law requires a taxpayer to file a return, assuming the predicate requirements specified in § 6012 are met.  For conviction, all that the Government must show is that the defendant knew of the obligation to file and the defendant chose not to file.  There is no requirement that the defendant know that failure to file is a crime.

Summons Enforced Against Prominent U.S. Director, Producer, Writer and Convicted Felon After OVDP Termination for Not Disclosing Foreign Indictment (12/7/20)

In United States v. Agrama, 2020 U.S. Dist. LEXIS 226136 (C.D. CA 2020), CL here, the Court enforced a summons issued with respect to an IRS investigation commenced after the taxpayer was terminated from the 2009 OVDP because the taxpayer failed to notify the IRS that he was under criminal tax indictment by Italy.  

Some background which I have drawn (sometimes by inference) from the Agrama opinion and from Agrama’s Wikipedia page, here:  Wikipedia opens with a summary description of Agrama as “an American director, producer, writer, and convicted felon.”   The Wikipedia page says that the Italian tax evasion indictment was issued in 2006 and led to Agrama’s conviction in 2012. Agrama did not serve time because of an Italian amnesty law to reduce prison overcrowding.  I think that is enough background for now, but the key point is that Agrama was under Italian criminal tax indictment when he sought 2009 OVDP and was terminated from OVDP because of failure to advise the IRS of the indictment.

Apparently incident to the Italian investigation leading to the 2006 indictment, the Italian prosecutor sought assistance from the U.S. and some other countries (Switzerland, Hong Kong and Ireland) pursuant to each of those countries' respective MLAT treaties with Italy.  The U.S.  obtained and executed a search warrant at Agrama’s home and business in Los Angeles.  Italian authorities, including a forensic expert, were present during the executions of the search warrants.  After some commotion about whether the U.S. agents executing the search warrant exceeded the scope of the search authorized, the U.S. withdrew the warrants and returned all of the property seized.  Apparently, none of that property seized and returned was delivered to Italy or to the IRS for use in any other proceedings.  Italy’s officials, including a forensic expert, had participated and obviously had some information learned in the execution of the search warrants, although not the documents seized.   Pursuant to the MLAT requests to the other countries, searches were executed and documents seized.  Italian authorities, including the forensic expert, was involved in those seizures and apparently obtained the documents seized.  The forensic expert then produced a report for use in the Italian investigation and  indictment.

In 2009, Agrama and his wife applied to join the 2009 OVDP and was accepted.  In the course of the OVDP process, “the Agramas represented that they were not under criminal investigation by any law enforcement authority.”  Then, according to the court:

In 2012, the IRS learned that Agrama was, in fact, under criminal indictment in Italy. Indeed, Agrama was convicted of tax evasion later that year in Italy, and received a three-year sentence. The Agramas were subsequently removed from the IRS' voluntary disclosure program in early 2013.

After the IRS terminated the Agramas from OVDP in 2013, the IRS started an audit of the Agramas, an audit which at the time of the summons and court petition to enforce covered “the Agramas' tax liability for fourteen tax years, ranging from 1997 to 2011.”  The summons in question arose from that audit and included the following description:

documents, including all documents related to Agrama's two criminal trials in Italy, documents related to Agrama's challenge to Italy's MLAT request to Ireland, and all documents provided to the Italian government from other countries, including Hong Kong, relating to Agrama's two trials in Italy (i.e., the MLAT documents).

Agrama produced some documents but not the MLAT documents.  The IRS then petitioned to enforce the summons.

With that background, I summarize the Court’s holdings:

Sunday, December 6, 2020

Eleventh Circuit Rejects a Marinello Claim that Nexus to Pending Proceeding Not Shown (12/6/20)

In United States v. Graham, ___ F.3d ___, 2020 U.S. App. LEXIS 37871 (11th Cir. 2020), here, the Court affirmed Graham’s convictions for (i) passing a fictitious financial instrument, in violation of 18 U.S.C. § 514(a)(2), and (ii) corruptly endeavoring to obstruct the administration of the Internal Revenue Code, in violation of § 7212(a), tax obstruction.  The tax obstruction conviction was the principle point addressed.

Graham raised a Marinello objection that his use of fictitious financial instruments to pay off his substantial tax debt that the IRS had been trying to collect for years.  As stated by the Court “The question for us is whether the IRS's collection activity qualifies as a ‘particular administrative proceeding.’ We hold that it does.”

After reviewing Marinello’s holding, the Court said (Slip Op. 6-9, footnote omitted):

So, the question is, did Graham's submission of a falsified bill of exchange to the IRS have a "relationship in time, causation, or logic" with some administrative proceeding? Graham thinks not. He suggests that "liens, levies, and related notices" do not qualify as "administrative proceedings" under Marinello. A "proceeding," he argues, must "take place over a period of time, akin to a grand jury proceeding or other investigatory proceeding," where there is "summoning of witnesses and documents" and "questioning under oath." And the IRS's tax collection activities do not bear those particular marks.

Our Court has not had occasion to further define the "nexus" requirement since Marinello. But we do not think the Court's definition of a "proceeding" was so narrow. The Supreme Court nowhere suggested that a defendant must interfere with a quasi-judicial proceeding-like Graham describes-to violate the Omnibus Clause. Indeed, the Court was careful not to identify exhaustively what qualified as an "administrative proceeding" or "other targeted administrative action." Id. at 1109-10. Its concern, instead, was to exclude relatively innocuous conduct from prosecution under the Omnibus Clause. Id. The government could not prosecute someone for interfering with "routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns." Id. There had to be something more-some "targeted administrative action." Id. at 1109.

We need not draw a perimeter setting out what that "something more" encompasses. This is not a borderline case. For years, the IRS took targeted administrative action against Graham well beyond the "ordinary course" of the agency's interaction with taxpayers. It began to take specific steps to collect on Graham's tax debt in 2009. It assigned two revenue officers to his case over a five-year period. These officers issued him notices of liens and levies. They oversaw seizure and sale of some of his property. And only weeks before Graham submitted the international bill of exchange, the IRS sent him another notice of levy reminding him that he owed about $3.6 million. He even attached a copy of this notice to the $3.6 million bill of exchange that he provided to the IRS. The IRS's regular and persistent contact with Graham went well beyond the "routine, day-to-day work" of the agency and we have no difficulty concluding that this collection action qualified as a "targeted administrative action." See id. at 1109- 10.

IRS Group Requests to Swiss FTA for Swiss Bank Customer Information Behind Aggregation Information Disclosures Under FATCA (12/6/20)

The U.S. IRS has made group requests to the Swiss Federal Tax Administration (“FTA”) for customer account information from Swiss banks provided aggregate information under FATCA.  At U.S. Behest, Swiss Pry Open Bank Accounts: Geneva Blocks Funds in U.S. Tax Case (Finews 12/4/20), here.  The FTA has notified the Banks of a process to respond to such requests.  See notices on the Swiss FTA sight here; as listed the banks are (with an indication of which of them joined the DOJ Swiss Bank Program, here):

  • Bank Vontobel AG
  • Banque Pictet & Cie SA
  • Barclays Bank (Suisse) SA
  • CA Indosuez (Switzerland) SA / Crédit Agricole (Suisse) SA
  • FIBI (Suisse) SA en liquidation (entretemps radiée)
  • Hinduja Banque (Suisse) SA
  • Mirabaud & Cie SA
  • Notenstein La Roche Privatbank AG (Bank Vontobel AG)
  • PKB PRIVATBANK SA (DOJ Swiss Bank Program)
  • Schroder & Co Bank AG (DOJ Swiss Bank Program)
  • Union Bancaire Privée, UBP SA (DOJ Swiss Bank Program)
  • Zuger Kantonalbank (DOJ Swiss Bank Program

I have not compared the various notices to see if they are all alike except for the names of the banks involved, but I provide the English part of the notice for two of the Banks -- Banque Pictet & Cie SA  and Union Bancaire Privee, UBP SA.

Banque Pictet & Cie SA, here 

Bedrosian on Remand -- Held Bedrosian Acted Recklessly and thus Subject to FBAR Civil Willful Penalty (12/6/20)

In Bedrosian v. United States, 2020 U.S. Dist. LEXIS 228208 (D. Pa. 2020), CL here, the district court on remand from the Third Circuit in Bedrosian v. United States, Dep't of Treasury, IRS, 912 F.3d 144 (3d Cir. 2018), held that Bedrosian acted recklessly with respect to the FBAR obligation and  thus was willful for purposes of the FBAR civil willful penalty.  For a discussion of the Third Circuit’s opinion remanding the case, see Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (12/21/18; 1/10/19), here.  

The remand was to permit the district court to consider the more objective reckless standard (somewhat like a civil willful blindness standard) in determining whether Bedrosian active willfully so as to be subject to the FBAR civil willful penalty.  The  Court made supplemental findings of objective facts that indicated reckless disregard of the FBAR requirements, concluding that its prior opinion for Bedrosian relied almost entirely on Bedrosian’s subjective intent but that consideration of the objective facts,  relied on in other cases by other courts, indicated that Bedrosian acted willfully.   Readers of this blog will know that this objective spin on willfulness for the FBAR civil willful penalty is the clear trajectory of authority.

The opinion is short, so I just refer readers to the opinion.

Friday, December 4, 2020

Discussion of Criminal Tax Issues in Oral Argument in CIC Services (12/5/20)

Earlier this week, the Supreme Court held oral argument in CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh., en banc, denied 936 F.3d 501 (2019), cert. granted 140 S. Ct. 2737 (2020), a case involving the interface of tax law and administrative law.  I discuss the oral argument on my Federal Tax Procedure Blog.  CIC Services Supreme Court Oral Argument (12/3/20), here, where I link the oral argument recording and transcript.  In the oral argument some of the discussion turned to willfulness and the difference between willfulness for tax crimes and for other types of crimes.  Readers of this blog will know that for most Title 26 tax crimes,  where an element of the crime is that the defendant act “willfully,” a very high level of intent  is required -- The intentional violation of a known legal duty.  See Cheek v. United States, 498 U.S. 192 (1991). 

I thought I would offer here certain excerpts of the discussions on willfulness and potential criminal liability.  First some key background.  CIC wanted to contest an IRS notice that imposed reporting obligations on captive insurance companies and their advisors.  Arguably, failure to comply with the reporting obligations could subject those captive insurance companies and advisors to significant civil penalties and potentially even criminal penalties.  CIC complained that, if the AIA (§ 7421(a)) precluded pre-enforcement review, then the only way to contest the administrative action in the Notice in question would be to not file the disclosures required by the notice and potentially be subject to those civil and criminal penalties.  The key potential criminal penalty is failure to file in § 7203 which has a requirement that the defendant act willfully in failing to file.  Willfully, as noted, would be met if the defendant knew the legal obligation and failed to meet it.  The problem, though, is that if the defendant knew of the Notice, in good faith did not think it was lawfully imposed, and failed to file on that belief, he could subject himself to the risk of civil and criminal penalties by awaiting the normal channel of tax litigation on the substantive merits in a tax refund suit.  That risk is unacceptable and should justify a pre-enforcement review, which for much administrative rulemaking is the norm.

Key to the discussion is that the penalty, as with many tax penalties, is defined as a tax, thus potentially invoking the AIA.

CIC’s argument is that imposing the obligation by Notice rather than notice and comment regulation is unlawful. 

So that sets up the problem articulated by several of the justices.  Should a taxpayer or advisor have to risk civil or criminal penalties for failure to comply with an administrative rule which they do not think was validly imposed?  This concern is expressed throughout the argument and seems to have some gravitas with several of the Justices.  I select only a portion of the discussion on the criminal willfulness issue.  The page numbers are to the transcript which is here:


MR. NORRIS [CIC Counsel)

Third, CIC cannot raise its claims in a refund suit. There is no tax for CIC to pay here. The notice is not a tax, and CIC is a material advisor, not the  taxpayer. To file a refund suit, CIC would have [*5] to gin up a tax by violating the reporting  requirements, risking criminal and professional sanctions, and hoping the IRS agrees to assess it a penalty. The Anti-Injunction Act cannot require this, as this Court held in South Carolina versus Regan.

* * * * 


And I think, while South Carolina [in South Carolina v. Regan, 465 U.S. 367 (1984)] truly had no refund suit available, we are in the same situation in the sense that the only way we can get a refund is by committing a crime, risking imprisonment and massive fines, and violating our professional obligations as attorneys and accountants.


JUSTICE BARRETT: Would it be cleaner for us to go the Regan [South Carolina v. Regan] route but maybe, you know, phrase it this way, that this is covered by the AIA; however,  because you would have to incur criminal penalties in -- in -- in order to sue, that you have no adequate alternative remedy, so even though the AIA applies, it doesn't bar your suit? Would you be satisfied [*30] with that approach?

 MR. NORRIS: We would, Justice Barrett. We just want to go litigate our APA claims, and that -- that resolution would be  fine with us.


* * * *

In FBAR Collection Case, NYT and WSJ Articles on U.S. Offshore Efforts Admissible Against Avid Reader of the Publications (12/4/20)

In United States v. Briguet, 2020 U.S. Dist. LEXIS 221467 (E.D. N.Y. 2020), CL here, in an FBAR collection suit, the Court denied Briguet’s motion in limine to exclude certain New York Times and Wall Street Journal articles published prior to the FBAR filing date.  The Court describe the articles (Slip op. p. 1):  “The 96 newspaper articles in question discuss the Government's efforts to identify U.S. taxpayers with offshore bank accounts and UBS's agreement to provide the Government with account holder information.” The Government sought to introduce the evidence to show that Briguet knew (or should have known in the acting recklessly sense) of the FBAR filing requirements because of the articles in conjunction with Briguet’s testimony that he reads the financial pages of these two publications every day.

In a very short opinion, the Court holds:  (i) the articles are not hearsay because introduced as circumstantial evidence of Briguet’s state of mind and not for the truth of the content of the articles; (ii) the articles are relevant because of Briguet’s testimony except possibly for articles after the FBAR filing deadline; and (iii) the articles would not unduly prejudice the jury’s deliberations reasoning (Slip Op.3)

Defendant argues that if the articles are admitted "the jury may be left with the impression that the UBS case, DOJ's Swiss bank crackdown, and the IRS's offshore voluntary disclosure program were 'hot issues' to investors who read the New York Times and Wall Street Journal and . . . infer . . . that Mr. Briguet probably read some of the articles at issue." Def. Mot., ECF No. 44 at 4-5. Although somewhat overstated, Defendant's observation is valid but in fact supports the admissibility of the news articles. There is nothing unduly prejudicial about the articles. Evidence is prejudicial, but in this instance any prejudicial effect is entirely coextensive with the probative value of the articles and therefore not unduly prejudicial. That said, there may be other valid Rule 403 considerations with regard to the articles published after the filing deadline in question. For that reason, the Court defers ruling on that portion of the defense motion.

In this case, Briguet demanded a jury trial which will, presumably, address the issue of willfulness.

Tuesday, December 1, 2020

Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (12/1/20; 12/2/20)

I recently posted on the Brockman indictment and the Smith NPA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  In that post I noted:

11.  (Added 9:30pm):  Being from Houston, I was particularly interested in the Houston lawyer who assisted Smith. The Houston lawyer is identified as Individual B in NPA Exhibit A, Statement of Facts.  In summary, Individual B did some very bad acts, creating offshore structures and disguising Smith's participation in those offshore structures.  Brockman (identified as Individual A) referred Smith to Individual B.  I don't know who the Houston lawyer is, but suspect that having practiced in Houston during this period, I likely know Individual B (whoever he or she is).  If anyone knows and is willing to share that information, please let me know.

The Houston attorney, Individual B, is named in a Motion to Dismiss in part for lack of Venue and to Transfer to the Southern District of Texas, here.  The relevant paragraph is (p. 11 of Motion, p. 18 of pdf) (bold-face supplied):

Fourth, and by contrast, the Statement of Facts made by Smith (“Individual Two”) in connection with his Non-Prosecution Agreement describes the extensive role of “Individual B, a lawyer in private practice in Houston, Texas who specializes in foreign trusts and ‘asset protection’ planning,” whom the defense recognizes to be Carlos Kepke. Keneally Decl. Ex. M at Statement of Facts ¶ 5. Mr. Kepke’s practice is located in Houston, Texas, as reflected on his website, his LinkedIn Profile, and the State Bar of Texas lawyer profile. Keneally Decl. Ex. N, Ex. O, Ex. P. The defense is not aware of Mr. Kepke’s role in this investigation, but he is an obvious potential witness.

Kepke's web site is here.  On that web site, he touts his work on Offshore Structures for U.S. Income Tax and Estate Tax Savings.

JAT Comments:

Thursday, November 26, 2020

Comisky Article on Tax Evasion and Money Laundering (11/26/20)

Readers of this blog will likely be interested in a recent practice point offering from the ABA Tax Section, Ian M. Comisky, May Tax Evasion Be Charged as a Money Laundering Offense? The Times Are A-Changing (ABA Tax Times 8/25/20), here.  (To access the document ABA or Tax Section membership may be required.)  Comisky (bio here) is a long-time practitioner and commentator on the interface of tax crimes and money-laundering.

Here are some paragraphs introductory and one more (from the already short offering) to tease the interest (footnotes omitted):

Tax evasion has never been a predicate offense for a money laundering charge in the United States. The government, however, has employed mail and wire fraud offenses to charge money laundering arising out of a tax crime. This article reviews the basics of U.S. money laundering laws, the use of mail and wire fraud crimes to transform tax offenses into money laundering, and recent developments worthy of discussion.

The basic U.S. money laundering laws are contained in Title 18 of the U.S. Code: section 1956 (laundering of monetary instruments, referred to herein as the primary money laundering statute) and section 1957 (engaging in monetary transactions in property derived from specified unlawful activity). The primary money laundering statute involves one who engages in a financial transaction knowing that the property represents the proceeds of some form of unlawful activity, which, in turn, involves the proceeds of a specified unlawful activity (SUA) with certain types of knowledge or intent. There is a tax intent money laundering provision contained within the primary money laundering statute, but the defendant must engage in a transaction with SUA proceeds (taxes are not an SUA), and then engage in conduct that violates one of the two primary U.S. criminal tax provisions. Historically, the government would encounter a defendant who engaged in a different type of illegal activity (e.g., securities fraud, which is an SUA) and then later transferred the proceeds from that activity in a way that evaded taxes with those proceeds. In those circumstances, a tax intent money laundering offense could be charged.

There are two other provisions of the primary money laundering statute where money is represented to be from illegal activity: one involving what is known as international money laundering and a “sting provision.” Noteworthy, the international money laundering provision does not require the use of proceeds from a prior offense but only the transfer of funds with an intent to promote an SUA. A violation of the money laundering statute is a twenty-year felony and permits forfeiture of property involved in or representing the proceeds of the offense.

For purposes of this discussion, the statute references SUAs that are defined by way of a combination of predicate offenses listed in the money laundering statute itself and offenses listed in the Racketeering Influenced and Corrupt Organizations Act (RICO). Despite there being well over two hundred and fifty SUAs, what is notable is what is absent: any violation of the Internal Revenue laws dealing with tax offenses. Although a tax offense is not a direct predicate for money laundering, both mail fraud and wire fraud are listed as SUAs. Because the use of the mails or the use of the wires is likely to occur in connection with the filing of a tax return, tax evasion could, in theory, create a mail or wire fraud violation that is itself a predicate for a violation of the money laundering laws.

* * * *

It is of concern, nonetheless, that the government has begun charging money laundering for what is nothing more than a traditional tax offense accomplished in part via wire fraud. The government certainly has sufficient statutory tools under the Internal Revenue Code for charging a conspiracy to defraud and failing to file FBARs that do not require the use of the U.S. wire fraud statute. The money laundering charges, as noted, permit the forfeiture of all property involved in or traceable to the offense and the advisory sentencing guidelines are more severe for money laundering than for tax offenses.

JAT Comments:

Wednesday, November 25, 2020

Third Circuit Sustains Application of Gun Possession Prohibition to Tax Felon (11/25/20)

In Folajtar v. Attorney General of the United States, ___ F.3d ___, 2020 U.S. App. LEXIS 37006 (3rd Cir. 2020), here, decided yesterday, the Court held that a tax felon (tax perjury, § 7206(1)) was subject to the prohibition in 18 USC § 922(g)(1) denying felons the right to possess firearms.  Basically, Folajtar argued that, because her nonviolent crime did not implicate valid reasons to deny her Second Amendment right to bear arms, she should be exempted from the prohibition.

Most readers of this blog will understand the nature of the claims made and resolved by the Court in the case.  The case raises the constitutional issue, but also the political issue of the Second Amendment.  There was a strong dissent, wrapping the political argument into the legal argument.  Already, one of the pundits who straddles the legal / political divide is suggesting that this opinion is a good opportunity for the conservative majority on the Court (enhanced by Amy Coney Barrett) to bolster gun rights.  Jonathan Turley, Barrett Reloaded? A New Third Circuit Decision Could Prove The Perfect Base For A Second Amendment Blowout (Res Ipsa Loquitur 11/25/20), here.

 Until and unless the Supreme Court holds differently, tax crimes practitioners must make sure that to advise clients being prosecuted or at the risk of prosecution for tax crimes that their gun “rights” will be proscribed by conviction.

Wednesday, November 11, 2020

Update on Brockman Indictment (11/11/20)

I previously posted on the Brockman indictment in ND CA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog10/16/20), here. There have been some developments via pre-trial motion practice that I note in this blog.  (Readers may follow these and future developments either on PACER (requiring fees) or on CourtListener, here, which, once a CourtListener user has first accessed via PACER, makes the docket entries and documents available for free.)

1. Brockman has moved to transfer the venue for the tax counts (tax evasion, Counts Two through Eight) to the Southern District of Texas, the district of Brockman’s residence or “in the alternative, for a bill of particulars necessary to fully litigate this motion.”  (Dkt. 21, here) This would, if granted, have the effect of severing the tax counts from the other counts, generally considered more serious counts.  But, it appears that Brockman may be up to something broader than just transfer of those tax counts to SD TX, for he advises in p. 3 n. 1 that he intends to file a motion to transfer the entire case to SD TX “for several reasons, including Mr. Brockman’s serious health issues.”  If the entire case is transferred to SD TX, there may then be a motion to sever some of the counts for separate trials.

The motion for transfer of the tax counts is based on venue requirement that criminal cases be brought in the district where the crime occurred.  The particular motion is filed now rather than as part of the larger motion because 18 USC § 3732(b) requires the motion be file 20 days after arraignment.  That is why Brockman advised the court that he will file the broader motion later.

The Government opposes the motion (both the primary and the alternative).  Dkt. 24 here.

2.  The Government has moved for an order permitting it to disclose third party tax return information pursuant to 26 U.S.C. § 6103(h)(4)(D), in order for the government to comply with its obligations pursuant to 18 U.S.C. § 3500, Rule 16 of the Federal Rules of Criminal Procedure, and Brady v. Maryland and its progeny.”  (Dkt. 25, here.)  The Government identifies a range of potentially sensitive information that the IRS has gathered in the investigation and thus is subject to § 6103’s confidentiality requirements.

JAT Comments:

These are fairly mundane are relatively short filings, so I don’t discuss them further.  Students of tax crimes might want to follow the development of the case through the docket entries because, given the stakes and the resources available to both sides, the case should be well litigated, with a raft of pretrial motions from which the student can learn.

Monday, November 9, 2020

Thoughts on NonProsecution for Trump (11/9/20)

Yesterday, Josh Blackman, law professor at South Texas College of Law, posted this blog:  Would President Biden's Nominee for Attorney General Pledge Not to Prosecute Former-President Trump? (The Volokh Conspiracy 11/8/20), here.  Blackman argues that the Senate, controlled by Republicans, can condition advice and consent to the Attorney General nominee upon the AG nominee agreeing or promising not to prosecute Trump and his associates (whatever associates really means, see below).  I understand that prosecuting Trump for crimes is probably not good for the country, given the passion that almost half the country has for Trump.  I think, however, there is some reason to warrant further investigation as to whether Trump committed serious crimes, including tax crimes, I thought I would state my thoughts on what might be a good resolution of the issue.  I frame my thoughts in terms of tax crimes but it would apply generally for all federal crimes.  And, I frame the discussion in terms of nonprosecution (whether that nonprosecution takes the form of Presidential pardon, full letter immunity, or nonprosecution agreement).

1.  The tax crimes for which nonprosecution is granted to Trump should be identified perhaps without specifying details (such as specific years or tax loss, etc.).  The nonprosecution could be, for example, for all tax or tax related crimes prior to January 2021.  The tax crimes could be listed such as 26 U.S.C. § 7201 (tax evasion) or 18 U.S.C. § 371 (tax conspiracy, offense or defraud).  [As I said above, a similar technique could be applied for other crimes, but I think the crimes for which the country grants nonprosecution should be named.]  I don’t think that Trump should be required to admit specific crimes in the nonprosecution agreement, because he simply won’t do that and investigating the crimes would take too much time and be divisive.  Any crimes Trump commits after January 2021 are not within the scope of nonprosecution.

2.  In return for the country’s gift of nonprosecution, Trump must pledge that he will not attempt to pardon himself or any of his “associates” as Blackman calls them.  [This will require that the agreement be reached before he leaves office.]  I would include in associates that he will not pardon the following: V.P. Pence and all White House officers or appointees (even if serving in a voluntary capacity), cabinet-level appointees, all agency political appointees, all Trump family members, all Trump off-the-Government books minions (like Rudy Giuliani, etc., and Trump players such as Manafort, Stone, etc.), and Trump’s affiliated business entities and their officers, employees or agents.  (This may not be a complete list.)

3. Trump’s civil liabilities to the Government may be pursued.  In the tax area, Trump must agree to cooperate with the IRS and DOJ Tax as necessary to determine tax liabilities, penalties and interest for himself and his affiliated entities.  Trump may still assert any defenses he may otherwise have (e.g., nonliability for the tax or penalties, statutes of limitations, etc.), but Trump must assist and cooperate with the IRS and DOJ Tax in the determination of his liabilities.  On the statute of limitations issue, for years not otherwise within the three or six-year statute of limitations, the IRS would still have to meet the substantial burden of proving fraud by clear and convincing evidence.  (I mention DOJ Tax here only protectively, for the determination of the liabilities is initially an IRS function alone unless it somehow gets to court.)

Friday, November 6, 2020

Smith NPA and the FBAR Costs (Fines or Penalties?) Described (11/6/20)

I have written about the travails, self-imposed, of Robert T. Brockman and Robert F. Smith.  See Private Equity Guru Smith Got a Hell of a Deal (Federal Tax Crimes 10/23/20), here, and One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes 10/16/20), here.  I offer another installment today, focusing on Smith who achieved a nonprosecution agreement (‘NPA”).  

My subject today is the FBAR penalties.  The Smith NPA, here, provides (par. 3.(i)) that Smith will pay FBAR penalties (boldface applied by JAT).

all penalties and interest computed by the IRS, pursuant to Title 31 U.S.C. §§5314 and 5322, in the amount of $82,930,165, related to Robert F. Smith's failure to timely file truthful and accurate Foreign Bank Account Reporting Forms TD F 90-22.1 ("FBARs"), reporting his financial interest in the foreign bank accounts referenced in the Statement of Facts for the calendar years 2012, 2013, and 2014.

Assuming that the NPA is accurate, the penalties and interest relate to the criminal FBAR penalty in § 5322, here, with respect to the reporting requirement in § 5314, here.  One problem is that, exception in the title of the section, § 5322 describes the monetary imposition as a criminal fine rather than a penalty.  The civil willful penalty, by contrast, is stated to be a penalty, both in the title and in the actual provision.  See § 5321(a)(5)(C), here.  I am not sure the quantified amount of $82,930,165 is consistent with the "fines" that could be imposed under § 5322.  Moreover, I am not sure that the criminal fines in § 5322 could be imposed without a conviction for the crime.  If anyone can provide more information on these issues, I would greatly appreciate it.

Assuming that the quantified amount includes, in whole or at least in significant part, the civil willful penalty under § 5321(a)(5)(C), I would like to develop an issue I have on the application of the civil willful penalty.  The willful penalty maximum of the greater of $100,000 or 50% of the amount in the unreported accounts.  Note that the penalty is stated as a maximum and can be less than the maximum, in the IRS's discretion.

Tuesday, November 3, 2020

Robert Frank Editorial on Decline in Enforcement Resources and Tax Evasion (11/3/20)

Noted economist Robert H. Frank (Wikipedia here) has written an excellent NYT op-ed: Without More Enforcement, Tax Evasion Will Spread Like a Virus (NYT 10/30/20), here.  Excerpts

Few people enjoy paying taxes, but as Oliver Wendell Holmes Jr. reminded us, “Taxes are what we pay for civilized society.” On reflection, most of us therefore offer at least implicit support for penalties against tax evasion — penalties that have little meaning unless backed by significant enforcement resources.

Yet prodded mainly by anti-tax Republicans, Congress has cut the Internal Revenue Service budget steadily since 2011. By 2019, the agency was auditing only one in every 222 individual returns, down from one in 90 in 2011. Similar reductions have occurred for corporate returns, and were proportionately larger for the wealthiest individuals and largest corporations.

These cuts have not saved the government money. The former I.R.S. commissioner John A. Koskinen estimated, for example, that every $1 trimmed from the agency’s budget has resulted in $4 in lost revenue. But this estimate refers only to direct, or first-round, losses. Because the extent to which people comply with tax laws depends strongly on the behavior of others around them, the ultimate revenue losses are certain to be much larger.

* * * *

What the reductions in I.R.S. funding will continue to unleash, then, is a characteristic feature of all behavioral contagion processes: an explosive chain of feedback loops that greatly amplify any initial change in behavior.

Thursday, October 29, 2020

Court of Appeals Finds No Harm Attorney's Failure to Assure Client Understood Relevant Conduct for Sentencing Loss Calculations (10/29/30)

In Jones v. United States, 2020 U.S. App. LEXIS 33857 (6th Cir. 2020), unpublished, here, the Court by Order denied Jones’ request for a certificate of appealability ("COA") from the district court’s denial of a motion under 28 USC § 2255 to vacate, set aside or correct his sentence.  The Order rejected Jones’ allegations of ineffective assistance of counsel, a common complaint in § 2255 motions.

The Court reasoned (cleaned up)

A COA may issue “only if the applicant has made a substantial showing of the denial of a constitutional right." 28 U.S.C. § 2253(c)(2). When the district court's denial is based on the merits, the petitioner must demonstrate that reasonable jurists would find the district court's assessment of the constitutional claims debatable or wrong.

Reasonable jurists would not debate the district court's determination that trial counsel did not render ineffective assistance. To establish ineffective assistance of counsel, a defendant must show deficient performance and resulting prejudice. Strickland v. Washington, 466 U.S. 668, 687 (1984). The performance inquiry requires the defendant to show that counsel's representation fell below an objective standard of reasonableness. In the context of a guilty plea, the prejudice inquiry requires the defendant to show that there is a reasonable probability that, but for counsel's errors, he would not have pleaded guilty and would have insisted on going to trial. The test is objective, not subjective; and thus, to obtain relief on this type of claim, a petitioner must convince the court that a decision to reject the plea bargain would have  been rational under the circumstances.  With respect to claims of ineffective assistance of counsel during sentencing, prejudice is established if the movant demonstrates that his sentence was increased by the deficient performance of his attorney.

Reasonable jurists could not debate the district court's ruling that Jones failed to establish prejudice from counsel's alleged failure to advise him that the loss amount would include loss from relevant conduct not charged in the counts to which he pleaded guilty. Jones claimed that he discovered only after reviewing the presentence report that, because of the relevant conduct he would receive a 16-point increase in his offense level under USSG § 2B1.1(b)(1)(I). Jones also notes that counsel acknowledged that a psychologist testified on his behalf during sentencing, and that the psychologist explained that Jones had difficulty understanding "how things worked and was often confused. . . about the positions that the government took, as well as some of the things that took place." Therefore, he contends that counsel “should have taken extra steps . . . to ensure that [he] understood [the plea agreement]" before signing it. He also argues that he made a substantial showing that he would not have accepted the plea offer had he been made aware that pleading guilty would increase the amount of restitution by 2 million dollars. Because Jones claims that he would have proceeded to trial had counsel accurately advised him of his sentence exposure, he was required to establish that a decision to reject the plea bargain would have been rational under the circumstances.

Reasonable jurists would agree with the district court's conclusion that, in light of the strong case against Jones and his failure to cite any evidence that he had a viable defense to the twenty-five counts brought against him, he failed to establish that it would have been rational for him to proceed to trial had he known of the potential increase in his offense level and restitution amount. A petitioner must produce contemporaneous evidence that suggests that, absent counsel's allegedly deficient performance, he would have elected to proceed to trial instead of accepting the plea agreement. Moreover, at the plea hearing, Jones admitted the accuracy of the statement of facts attached to his plea agreement, and he acknowledged that the applicable guidelines range was not a guarantee of his eventual sentence. In these circumstances, knowledge that his guidelines range might be higher than anticipated—a fact that would be true regardless of whether he pleaded guilty or was found guilty at trial—would not make it rational for a defendant to abandon his plea agreement and risk conviction on twenty-two additional counts. Reasonable jurists could not debate that Jones failed to establish prejudice.

JAT Comments:

Saturday, October 24, 2020

Fourth Circuit Affirms District Court Decision in Tax Crimes Case to Limit Taxpayer's Reading Excerpts From Book on Cheek Willfulness Issue (10/24/20)

In United States v. Gerard, 2020 U.S. App. LEXIS 33341 (4th Circuit 10/22/20), here and govinfo here, the Court affirmed the taxpayer’s conviction for “for conspiracy to commit tax fraud” but remanded for the district court to address the elements of the obstruction of justice enhancement for sentencing purposes.  Although the opinion is an unpublished opinion, I thought the following from the opinion might be interesting to readers:

We further conclude that the district court did not err in barring Gerard from reading three books to the jury in support of his defense that he had a good faith belief that his tax minimization plan was lawful. We review a district court's evidentiary rulings for abuse of discretion, and will only overturn a ruling that is arbitrary and irrational. United States v. Farrell, 921 F.3d 116, 143 (4th Cir.), cert. denied, 140 S. Ct. 269 (2019). Rule 403 of the Federal Rules of Evidence states that "[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." We agree with the district court that Gerard's request to read all three books would amount to something similar to the presentation of expert testimony, but without the opportunity for the Government to cross-examine the expert. Furthermore, as the district court observed, Gerard did not have to prove that his tax minimization system was lawful, only that his good faith belief in the lawfulness of his system was credible. See Cheek v. United States, 498 U.S. 192, 201-02 (1991) (holding that a defendant in a criminal tax case can assert a defense of ignorance or misunderstanding of the tax law, leading to "a good-faith belief that he was not violating any of the provisions of the tax laws"). Moreover, as the court observed, Gerard's proposal to read all three books would confuse the jury. We note that, even though the court permitted Gerard to read excerpts from the books, Gerard chose to read excerpts from just one of the three books, suggesting that it was not so imperative that he read each book to the jury.

Corporate Taxpayer (AIG) "Settles" Tax Shelter Litigation Admitting Tax Shelters Were Shams (10/24/20)

The SDNY U.S. Attorney (Acting) issued this stunning press release yesterday:  Acting Manhattan U.S. Attorney Announces Settlement Of Tax Shelter Lawsuit Against AIG For Entering Into Sham Transactions Designed To Generate Bogus Foreign Tax Credits (USAO 10/23/20), here.   Key excerpts for this blog entry (most of the release) are:

Audrey Strauss, the Acting United States Attorney for the Southern District of New York, announced today the settlement of a tax refund lawsuit brought by insurance and financial services company AMERICAN INTERNATIONAL GROUP, INC. (“AIG”) involving seven cross-border financial transactions that the United States asserted were abusive tax shelters designed to generate bogus foreign tax credits that AIG improperly attempted to use to reduce its tax liabilities in the United States.  AIG filed this tax refund lawsuit in 2009, seeking to recover disallowed foreign tax credits and other taxes related to the 1997 tax year.  The United States obtained overwhelming evidence that these transactions lacked any meaningful economic substance, were devoid of any legitimate business purpose, and instead were designed solely to manufacture hundreds of millions of dollars in tax benefits to which AIG was not entitled.  According to the terms of the settlement, approved yesterday by United States District Judge Louis L. Stanton, AIG agreed that all foreign tax credits that AIG claimed for the 1997 tax year and all later tax years for these same transactions, totaling more than $400 million, would be disallowed in their entirety.  AIG further agreed to pay a 10% tax penalty.

Acting U.S. Attorney Audrey Strauss said:  “AIG created an elaborate series of sham transactions that were designed to do nothing – and in fact did nothing – other than generate hundreds of millions of dollars in ill-gotten tax benefits for AIG.  Our system of taxation is built upon the premise that all citizens and corporations must pay the taxes they owe, no more and no less.  People and companies who game that system to avoid paying their fair share of taxes undermine public trust in our tax laws.  We will continue to be vigilant in holding accountable those who use economically empty transactions to avoid paying their taxes.”

As alleged in filings in Manhattan federal court:

During the mid-1990s, AIG Financial Products Corp. (“AIG-FP”), a wholly-owned subsidiary of AIG, designed, marketed, and entered into seven cross-border structured finance transactions with various foreign banks.  These complicated transactions, involving hundreds of agreements, numerous shell companies, and intricate cash flows, had no economic substance but rather exploited differences in U.S. and foreign tax laws to create profits from U.S. tax benefits.  In particular, the transactions generated more than $400 million in foreign tax credits that AIG used to reduce its U.S. tax liabilities.  The U.S. has a worldwide tax system that taxes companies on income earned abroad, but also grants credits for foreign taxes paid.  AIG, was able to turn a profit by obtaining credits from the U.S. Treasury for foreign taxes it did not actually pay in full.  AIG obtained more than $61 million in foreign tax credits during the 1997 tax year alone, the tax year resolved by the settlement. 

In 2008, the Internal Revenue Service (“IRS”) issued a Notice of Deficiency to AIG that, among other things, disallowed the foreign tax credits AIG had claimed in connection with the seven transactions and asserted a 20% tax penalty.  In 2009, after paying the deficiency, AIG filed a lawsuit against the United States in Manhattan federal court challenging the IRS’s determination and demanding a refund.  In response, the United States asserted that the IRS had correctly disallowed the tax benefits because the transactions had no economic substance, a basic requirement for seeking tax benefits. 

According to the terms of the Settlement, AIG agreed that all foreign tax credits that AIG claimed in connection with the seven cross-border transactions that were the subject of the litigation would be disallowed in full for the 1997 tax year and all subsequent tax years during which the transactions were operating, totaling more than $400 million.  AIG further agreed to pay a 10% penalty.  The settlement allows AIG to retain certain income expense deductions relating to six of the transactions that were structured as borrowings, as well as remove certain amounts related to the transactions from its taxable income.  In addition, the settlement resolves certain of AIG’s tax refund claims unrelated to the cross-border transactions stemming from AIG‘s restatement of its publicly filed financials.

One nuance not in the press release is that the press release suggests that the penalty is 10%.  The IRS originally proposed a substantial understatement penalty and a negligence penalty.  Both of those penalties are 20% but only one can apply, so that the taxpayer's maximum exposure before the settlement was 20%.  Under the settlement, the taxpayer concedes the substantial understatement or negligence penalties for the bullshit transaction.  (See paragraph 7 of the Stipulation and Order of Settlement.)  That might suggest that the settlement could be read to imply some level of merit in the taxpayer's position, although I suspect that, from the Government's perspective, it was viewed that as simply a nuisance cost to the Government to resolve this bullshit litigation without expenditure of resources required to litigate the matter.

Of course, large corporations who should know better making sham (aka bullshit) tax shelter claims are not particularly unusual as I have noted on this blog.  But this litigation has one nuance that jumped out that I had not really focused on before – that is, the role of counsel bringing suits to sustain tax shelters that are shams.  I guess that problem lurked in all of the other civil litigation involving bullshit tax shelters.  But it just hit me here.  (I never personally had to face that issue because over my career of practice, I declined to represent taxpayers or promoters in civil tax cases involving bullshit tax shelters; although I do have an anecdote about that which I recount at the end of the blog.  See JAT Comments par. 2)

The question I ask is how exactly does an attorney sign the initial pleading and otherwise participate in a suit, either in the Tax Court or in one of the refund forums (district court or Court of Federal Claims), alleging that a sham tax shelter is entitled to the claimed tax benefits?  OK, I know, the argument is that sham is in the eye of the beholder so long as the technical tax traps appear to be checked off (even when sometimes they are not)?  The question I ask and cannot answer here is what is the role of the lawyers making such claims in litigation?  But, just think about how much energy (creative and  otherwise), time and resources were spent unnecessarily in creating the sham tax shelter to start with and then marshaling it through the administrative audit process (audit and appeals) and litigation before the taxpayer admitted the whole deal was a sham.  Isn’t there some better way to deploy our resources?

Friday, October 23, 2020

Private Equity Guru Smith Got a Hell of a Deal (10/23/20)

Today, the Wall Street Journal published what, I understand, is called an “explainer” about the Brockman indictment and the Smith nonprosecution agreement (“NPA”).  See Laura Saunders The IRS Reels in a Whale of an Offshore Tax Cheat—and Goes for Another (WSJ 10/23/20), here.  I previously wrote on these events.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20), here.  

The WSJ article provides a good bullet point high-level summary of the events.  I write today to provide some nuance to a sound bite quote that I gave for the article.  The quote, at the end, is:  "Jack Townsend, a lawyer who publishes the Federal Tax Crimes blog, says, 'He got a hell of a deal, considering what he did.'"

My statement was based only on the publicly disclosed facts in the NPA and the Statement of Facts (Exhibit A) with the NPA, which are here and here, respectively.  Those publicly disclosed facts may not tell the whole story as to why Smith achieved an NPA rather than some other disposition (I discuss some possible other dispositions below.)  

Just on those facts, Smith’s deal is exceptionally good for him.  He committed years of tax evasion, then attempted to do a Streamlined disclosure (after being rejected from OVDP) where he had to certify nonwillfulness and submit amended returns and delinquent or amended FBARs which he did and which were false.  That pattern, particularly, the second step Streamlined disclosure was just incredibly stupid.  If he had done only the OVDP and been accepted into OVDP, he likely would have avoided prosecution if his OVDP submissions and cooperation were truthful and complete.  Two caveats on that, however: (i) OVDP did not “guarantee” nonprosecution but, as a practical matter it would if the disclosure and cooperation were good (I am not aware of any prosecution of an OVDP participant whose cooperation was truthful and complete); and (ii) his behavior on the subsequent Streamlined suggest at least that his amended return and delinquent or amended FBAR submissions in the posited counterfactual OVDP if it had gotten that far likely would not have been truthful and thus would not have resulted in the key relief generally offered by OVDP – nonprosecution.

What I address today is why, given the facts in the NPA and Statement of Facts, DOJ would have given Smith an NPA for such egregious behavior (by which I don’t mean just the dollars involved, but more importantly his overall behavior to cheat and avoid getting caught with continued lies).

The Statement of Facts and the NPA do not really address that issue, except that in the press release his cooperation was emphasized.  I presume that the cooperation is not only the cooperation in exposing his own criminal conduct but more importantly in indicting and prosecuting Brockman.  So, this raises some speculations / questions.

1. Did Smith get an NPA because the Government did not have the necessary proof to convict Smith and the NPA was the best the Government could do, particularly if it helped nail a bigger fish?  In other words, the facts in the Statement of Facts could have been provable only after Smith’s cooperation after his lawyers negotiated the commitment for an NPA.  Hence, rather than indicting Smith with a weak case, the Government might have been motivated to grant the NPA in order to get his cooperation against Brockman as well as obtain the monetary benefits accorded by the NPA.  That’s a matter of what each party’s hand was as they negotiated Smith’s disposition.  I just don’t know that.

Wednesday, October 21, 2020

Fourth Circuit Holds Taxpayer Liable for Willful FBAR Penalty (10/21/20; 11/3/20)

In United States v. Horowitz, ___ F.3d ___, 2020 U.S. App. LEXIS 33074 (4th Cir. 2020), here, the Fourth Circuit held that the taxpayer, who joined OVDP and opted out, was subject to the willful FBAR penalty.  On the issues presented, the Court held:

  1. The Court applied the expansive definition of willfulness that has taken hold to mean recklessness, a standard significantly less stringent than the Cheek standard applicable to tax and FBAR crimes that the taxpayer must specifically intend to violate a known legal duty.  In the course of this holding, the court rejected the taxpayers’ argument that finding willfulness only from a false declaration to the Schedule B foreign account question would eviscerate the two tier willful and nonwillful FBAR penalty regime.  In this case, of course, there was more to support willfulness than just the Schedule B false answer.  (My experience is that, with good facts, a no answer or a blank answer to the foreign account question can still avoid for the willful penalty.)
  2. The Court rejected the argument that the regulations which had not been updated to include the change in the maximum willful penalty from $100,000 to 50% of the amount in the account barred an FBAR willful penalty exceeding $100,000.  Readers will recall that a couple of early cases so held, but since there the clear trend is to reject the argument.
  3. The Court rejected the argument that the penalty had been abated (or the assessment reversed) and thus was not properly assessed.  The facts show some administrative confusion about that, but the Court concluded that the assessment stood and was timely.  [Added 11/3/20 10:00am:  Les Book has an excellent discussion of this aspect of the opinion:  Leslie Book, Circuit Court Weighs in on Meaning of Willfulness, Maximum Penalty and SOL Issues in Important FBAR Case (Procedurally Taxing Blog 11/3/20), here.]
JAT Comments:

Friday, October 16, 2020

One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20)

I write today about two related developments involving the tax misdeeds of private equity moguls that readers will have probably already read about in the popular news:  (i) Robert T. Brockman the biggest mogul and alleged tax cheat of the two was indicted in the Northern District of California (the indictment is here and the Court Listener Docket Entries is here), with an alleged criminal amount of $2 billion (revised at 5:00pm - I understand this is the omitted income amount rather than the bottom line tax loss); and (ii) Robert F. Smith, the smaller mogul (but still a large one) and now admitted tax cheat, reached a nonprosecution agreement (“NPA”) wherein he agreed to pay $139 million in tax and penalties (presumably with interest thereon as appropriate (the US Attorney’s press release on the NPA is here, the NPA and an Exhibit are linked on the press release)).

So, what’s this commotion all about?  I have not studied the indictment in detail, but here are key points (some with my inferences) that I derive from either the press release and two articles (Kadhim Shubber  & Miles Kruppa, Billionaire Robert Brockman charged in $2bn tax evasion case (Financial Times 10/15/20), here; and Jaclyn Peiser, A Texas billionaire evaded $2 billion in taxes, feds say. Now he’s charged in the ‘largest-ever’ tax fraud case (WAPO 10/16/20), here)

  • This is said to be the largest tax fraud case ever.  The criminal cases against the Son-of-Boss professional enablers involved, in the aggregate more dollars, but I assume the this is the largest single taxpayer (as opposed to enabler of multiple taxpayers) case.
  • Smith is not named in the indictment except by pseudonym which is typical for uncharged co-conspirators.  Smith has agreed to cooperate to achieve his NPA.  (The NPA is linked in the press release linked above.)  In addition to cooperation against Brockman and perhaps others, Smith agreed to pay about $139 million in tax and penalties.  Smith achieved some positive notoriety in 2019 by agreeing to “pay off all the student loans for the graduating class of Morehouse College, an all-male, historically Black college in Atlanta.  (WAPO article.)  I discuss aspects of the NPA below in my comments.  (I wonder whether Smith's generosity at the time was motivated in significant part to contribute in some way to achieving an NPA.)
  • The pattern alleged for Brockman’s offshore evasion is just a variation of a theme that we have seen in offshore tax evasion but ramped up with many intrigues outlined in the indictment.
  • The charges also included allegations that between 2008 and 2010, Brockman lied to investors and allegedly bilked them out of nearly $68 million. (WAPO article.)
  • Smith attempted a voluntary disclosure in 2014 but apparently was already on the IRS radar screen and was rejected.  He probably attempt to do a voluntary disclosure because one or more of the offshore banks had turned information over to DOJ Tax or the IRS.
  • The US attorney said Mr Smith had used a Houston lawyer to direct his offshore nominees.  The Houston lawyer is not named.

The counts charged against Brockman are from the attachment to the indictment (some of these have multiple counts):

  • 18 U.S.C. § 371 – Conspiracy (Offense and Defraud)
    5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
  • 26 U.S.C. § 7201 – Tax Evasion
    5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment, costs of prosecution;
  • 31 U.S.C. §§ 5314 & 5322(b) –FBAR Violations
    10 yrs prison, $500k fine, 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1343 – Wire Fraud Affecting a Financial Institution;
    30 yrs prison, $1M fine, 5 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(1)(B)(i) – Concealment Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(1)(A)(ii) – Tax Evasion Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(2)(B)(i) – International Concealment Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1512(b)(2)(B) – Evidence Tampering;
    20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1512(c)(1) – Destruction of Evidence;
    20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;

Even without considering the multiple counts the concept of stacking will tell readers that the maximum sentence if conviction on all counts is around 130 years. (revised 10/17/20 11:40am: my actual calculations of all counts shows 800 years maximum incarceration). Of course, the Sentencing Guidelines and Booker variance (if appropriate) will produce a much smaller actual sentence.  My rough and ready calculation of the offense level considering only $2 billion tax loss and acceptance of responsibility (although he has not accepted yet) shows a sentencing range of 168-210 months with good time credit of 21.6-27 months.  revised at 5pm: this is true even if $2 billion was the omitted income amount because it would almost certainly produce at tax loss of $550 million, the top of the table and even if the tax loss were less, the Guidelines calculation would not be reduced much).  

(Added 9:30pm):  The following is a summary of key facts (selective) from the Smith NPA Exhibit A, Statement of Facts:  Foreign Bank notified Smith of intent to participate in the Swiss Bank Program that would require outing Smith.  Smith filed preclearance request for OVDP.  The preclearance request was denied.  Smith filed a false FBAR omitting accounts and filed income tax return omitting income and including false Form 8275.  Smith attempted Streamline disclosure, filing false FBARs and false income tax returns.  (Although not stated in the Statement of Facts, the Streamlined filing would have required that Smith represent that his conduct was not willful, a representation that based on other admission would have been false.)  These actions were willful.

JAT Further Comments:

Tuesday, October 13, 2020

District Court Grants Summary Judgment for Government on § 7431 Wrongful Disclosure Claims to Third Party Recordkeepers but Not Other Third Party Summonses (10/13/20)

In Williams Dev. & Constr. v. United States, 2020 U.S. Dist. LEXIS 187212 (D. S.D. 10/8/20), CL here, the IRS Criminal Investigation (“CI”) agent issued 15 IRS administrative summonses falling into two relevant categories:  (i) third party recordkeeper summonses (here to financial institutions) and (ii) third party summonses that are not third party recordkeeper summonses.  The summonses stated that they were issued "In the Matter of Craig A. or Craig Arthur Williams." From the opinion, it appears that Williams is a Houston, TX, based taxpayer and has several related companies.  The IRS subsequently withdrew two summonses.  The taxpayer and related companies originally petitioned the district court in South Dakota to quash all of the summonses.  One problem on the motion to quash was that there was only one summonsee in South Dakota, the venue in which the taxpayer sought to quash all summonses.  Thus, the action to quash could continue only as to the South Dakota summonsee, Citibank, N.A.  (See prior Magistrate’s Order dated 12/10/19, here.)

While the case was pending, the taxpayer filed an amended complaint including a claim for damages under § 7431 for unauthorized disclosure of return information.  The new claim was that the summonses (all of them) improperly disclosed taxpayer return information in violation of § 6103.  In relevant part, the claim was that the disclosure of (i) the taxpayer subject to the investigation, (ii) the taxpayer’s address, (iii) the IRS agent's identity as a CI agent and (iv) the taxpayer identification number.  The Government moved for summary judgment.  The Court mostly granted the IRS motion but denied as to disclosures of tax identification numbers to the third party (i.e., nonrecordkeeper) summonses.

The discussion of the issues resolved in the opinion may be summarized:

  • All of the items (subject of the investigation, fact of CI investigation and taxpayer identification) are return information.  So, the question is whether the disclosures were authorized under § 6103(k)(6), called the investigatory purposes exception.  As explained by the Court, “The investigatory purposes exception authorizes IRS employees to ‘disclose return information’ in connection with their official duties relating to a criminal tax investigation ‘to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available.’”  Further,

Thursday, October 8, 2020

New IRM provision on Offers in Compromise Including FBAR Penalties (10/8/20)

I just picked up this provision in the IRM, here: (09-24-2020)

Foreign Bank and Financial Reporting (FBAR) Assessments

An offer may be submitted which includes FBAR assessments or a taxpayer who submitted an offer to compromise their tax liabilities also has assessments based on FBAR. Since, the IRS does not have authority to compromise assessments based on FBAR, the taxpayer should be requested to submit an amended offer to remove FBAR liabilities which are included on the Form 656.

Note: FBAR penalties are assessed under Title 31 and do not appear in IDRS.

If the taxpayer has a liability for assessments under FBAR, an offer for tax liabilities other than the FBAR may be investigated. During the review of the taxpayer’s financial information, the OE/OS should conduct additional investigation actions to determine if the taxpayer continues to have assets outside the United States. Review the ICS history to determine what research may have been conducted by a field revenue officer. The OE/OS may also issue an other investigation (OI) to an ATAT or International RO group to research FinCEN and/or CBRS to assist in identifying current foreign assets in which they retain an interest.

Note: The taxpayer may also have pending assessments related to Offshore Voluntary Disclosure Initiative.

If the taxpayer is unable or unwilling to submit an amended offer removing the FBAR liabilities, the offer should be closed as a processable return.

JAT Comments:

1.  I am not sure how or if compromises of the FBAR penalties may be achieved.  I assume that there is some way to do that outside the IRS processes for tax liabilities.

2.  The known route to compromises of tax liabilities may be a side benefit of avoiding an FBAR penalty assessment under the various IRS programs (e.g., OVDP and Streamlined) where a substitute penalty is assessed as a miscellaneous tax penalty (sometimes called the “in lieu of” penalty).

This blog is cross-posted on the Federal Tax Procedure Blog, here.

Sunday, October 4, 2020

Second Circuit Affirms Conviction of Lawyer Offshore Account Enabler (10/4/20)

In United States v. Little, 2020 U.S. App. LEXIS 31384 (2d Cir. 9/30/20), here, the Court affirmed the conviction and sentencing of Michael Little, a lawyer who enabled the Seggerman family to cheat on their taxes, using in part failure to file FBARs.  I have written on Little before (see blogs on him, including in some blogs the Seggermans), here

I discuss here only two points from the opinion.

1. Willfulness.

The Court rejected Little’s Cheek defense that there was insufficient evidence to prove that he knew the legal duty.  The Court handled the defense summarily (Slip Op. pp. 5-6):

            We conclude that substantial evidence supports the jury verdict on each of the challenged counts. In a nutshell, Little contends that he merely misunderstood the byzantine tax code. But Little is a British-trained barrister admitted to the New York Bar with a quarter-century of experience in complex international financial transactions who, for much of his life, has claimed German domicile for tax [*7]  purposes. A reasonable juror could easily conclude that the failures of such a sophisticated professional to report his income to the IRS, including compensation from the Seggerman family, and to report foreign bank accounts into which his compensation was funneled, were willful acts. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (permitting the inference of "knowledge of the law" from the "[d]efendants' backgrounds," including education). Similarly, Little's sophistication supports a conclusion that he was willfully misleading the Seggerman family's accountants when he informed them that the transfers from Lixam Proviso were merely "gifts from a kind benefactor from overseas" and not distributions.

2. Jury Instructions on Conscious Avoidance / Willful Blindness

The Court rejected Little’s claim that the conviction should be reversed because the Court improperly instructed the jury on conscious avoidance (usually called willful blindness, but the Second Circuit often uses conscious avoidance).  Again, the Court rejects the defense summarily as follows (Slip Op. 6):

First, Little challenges the "conscious avoidance" instructions on the failure to file return counts, the failure to file FBAR count, and the conspiracy count; and second, that the district court's instructions as to willfulness erroneously converted the standard into a reasonableness standard. Conscious avoidance instructions are permissible only when the defendant mounts a defense that he lacked "some specific aspect of knowledge required for conviction" and "a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Coplan, 703 F.3d 46, 89 (2d Cir. 2012) (citation and internal quotation marks omitted). Here, each predicate is met: Little defended himself by claiming ignorance of his obligations under the Tax Code and, because of Little's legal education and the relative straightforwardness of his obligations, a reasonable juror could conclude that Little was aware of a high probability that his actions were unlawful.

 So, in this case, the conscious avoidance / willful blindness instruction was properly given.

 JAT Comments:

Tuesday, September 22, 2020

ICIJ Investigations In the News - Panama Papers and Suspicious Activity Reports (9/22/20; 9/25/20)

I offer two related items in which the International Consortium of Investigative Journalists (“ICIJ”) is involved.  I have written on ICIJ with respect to the so-called “Panama Papers” which involved ICIJ’s investigation into offshore accounts via access to and disclosure of the Panama-based law firm Mossack Fonseca’s files helping tax evaders, including persons subject to U.S. tax.  Most readers of this blog will already be familiar generally with the Panama Papers.  

1. Yesterday, DOJ posted this release:  “U.S. Taxpayer in Panama Papers Investigation Sentenced to Prison (DOJ 9/21/20), here.  The defendant, Harald Joachim von der Goltz (also identified with several pseudonyms) pled guilty to “one count of conspiracy to commit tax evasion; one count of wire fraud; one count of money laundering conspiracy; four counts of willful failure to file Reports of Foreign Bank and Financial Accounts, FinCEN Reports 114; and two counts of false statements.”  The pattern is familiar.  Von der Goltz conspired with others to conceal assets and income (defraud / Klein conspiracy), using offshore accounts and shell companies.  He was assisted by Mossack Fonseca and others, including a Panamanian lawyer and a U.S. accountant.

2. ICIJ is at it again having gained access to a trove of FinCEN Suspicious Activity Reports that indicate some inattention by major banks and perhaps FinCEN who should be paying attention and even likely violations of money laundering, tax and related laws. The entry page for ICIJ’s revelations is here.  See also ICIJ’s the following ICIJ pages for further information:

  • FAQs on “What is the FinCEN Files investigation?”, here.
  • About Suspicious Activity Reports, here.
  • About the FinCEN Files investigation, here.

The latter article summarizes:

The FinCEN Files investigation was able to trace banks’ roles in hiding money looted from government treasuries, scammed from pensioners, and generated through drug sales, illegal gold mining and other illegal activities.

The findings expose – from the inside – the consequences of allowing banks themselves to lead the world’s anti-money laundering defenses against kleptocracy, crime and terror, even as they earn huge profits from these same malefactors.

They also show how laundered money provides the lifeblood for corrupt authoritarian regimes and the enemies of democracy worldwide.

The Treasury Department documents reveal how major banks continued to move staggering sums of suspect cash even while on criminal probation after highly touted money-laundering crackdowns by U.S. and U.K. authorities.

ICIJ’s analysis of the FinCEN Files and U.S. authorities’ enforcement actions indicates that imposing fines and deferring prosecutions of banks and declining to prosecute bank executives hasn’t stopped banks from continuing to profit from moving suspect transactions

3.  (Added 9/25/20 11:30am).  Relating to Item 1 above, Richard Gaffey, aka Dick Gaffey, 76, the accountant / enabler for von den Goltz and other offshore tax cheats was sentenced by the same judge on 9/24/20 "to 39 months in prison for wire fraud, tax fraud, money laundering, aggravated identity theft, and other charges."  See DOJ Press Release, titled U.S. Accountant in Panama Papers Investigation Sentenced to Prison (9/24/20), here.  As described in the press release, Gaffey was a bad actor as enabler of offshore and related tax cheating.

JAT Comments:

Saturday, September 19, 2020

District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20)

In United States v. Toth, 2020 U.S. Dist. LEXIS 169173 (D. Mass. 2020), CL here, the Court granted the Government’s motion for summary judgment that Toth was liable for the FBAR civil willful penalty.  The holdings break no new ground, so I just list the holdings:

1. The maximum penalty is the greater 50% of the account(s) that should have been reported or  $100,000, rather than being capped at $100,000.  This is the mainstream holding (after a couple of early aberrations).  (Slip Op. 7-10.)

2. The submissions on the motion satisfied the Government’s burden to prove Toth’s failure to file FBAR for 2007 was willful.  (Slip Op. 10-12.)

3. Lenity does not apply to reduce the amount of the willful penalty.  (Slip Op. 12-13.)

4. The Eighth Amendment’s excessive fines prohibition does not apply. (Slip Op. 13-18.)

5. The penalty does not violate Due Process. (Slip Op. 18-19.)

The CL docket entries are here.

Prior blog entries on the Toth case (in reverse chronological order) are:

  • In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here.
  • Government FBAR Willful Penalty Suit Survives Motion to Dismiss (Federal Tax Crimes Blog 5/9/17), here.

Friday, September 18, 2020

District Court Holds Failure to Properly Report Foreign Accounts on a Fifth Amendment FBAR Is Subject to FBAR Willful Penalty (9/18/20)

In United States v. Bernstein, 2020 U.S. Dist. LEXIS 167278 (E.D. N.Y. 2020), CL here and GS here, the Court granted the Government’s motion for summary judgment determining that the defendants, husband and wife (“Bernsteins”), were each subject to the willful FBAR penalty.  Those interested in the motions (and commotions) can find it in the Court Listener docket entries, here, where the motions are available free.

The key facts are;  For many years prior to 2010, the year for which the willful FBAR penalties were assessed, the Bernsteins had foreign accounts.  For the per-2010 years, they did not file FBARs, answered “no” to the Form 1040 Schedule B question about the foreign accounts, and did not report the income from the foreign accounts.  Over the years, they did not tell their accountant about the foreign accounts because they wanted to keep the accounts secret. That conduct, the Court found on summary judgment, was to cheat on their U.S. taxes.

They had the misfortune of having selected UBS as their foreign bank (although they moved the accounts into a single account at Bank Sal Oppenheim after they realized that UBS was caving to Government pressure as readers of this blog already know).  The following series of events then occurred:

Daniel Bernstein later consulted with a U.S. tax attorney, who told him that it was "nothing serious" because the account held "only a million dollars" and therefore the Government would not likely pursue it. Furthermore, Nemirovski, who consulted with a Swiss attorney, conveyed to Mr. Bernstein that the attorney had assured him that their account information had not been turned over to the IRS. Thus, the Bernsteins decided not to take any action in response to the letter and, specifically, not to participate in the Government's voluntary disclosure program.

In April 2011, the Government advised the Bernsteins that it was auditing their 2007 tax return. By that time, the Bernsteins were aware of publicity about the Government's prosecution of UBS account holders. They returned to the U.S. tax attorney who had told them not to worry two years earlier, but this time he told them, "I can't help you; you need a white-collar criminal attorney." He referred them to Lawrence S. Feld, Esq., who is known for his white-collar practice with a specialty in tax prosecutions, and the Bernsteins retained him.

Attorney Feld effectively disagreed with the prior decision not to participate in the voluntary disclosure program. He found the facts as presented to him "deeply disturbing" and believed that there was a "substantial risk" of criminal prosecution. He advised the Bernsteins to file an FBAR for the 2010 tax year in which they would invoke their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. He prepared an addendum to the FBAR describing the basis for the privilege in which the Bernsteins offered to make more detailed disclosures if they received use immunity from criminal prosecution. In addition, the Bernstein's 2010 tax return and Schedule B invoked the Fifth Amendment with regard to any questions about foreign accounts.

Attorney Feld believed that this would protect the Bernsteins from criminal prosecution, although they still might be required "to pay [a] fine." The Bernsteins followed his advice and filed an FBAR for the year 2010 in which they did not provide information about the accounts, instead, in the spaces calling for account information, inserting "Fifth Amendment" in answer to each question. At their depositions, the Bernsteins testified as to their belief, based on the advice from Attorney Feld, that by submitting the FBAR in this manner, they had complied with the disclosure requirements for 2010.

The advice given by Attorney Feld appears to have been sound as there is no suggestion in the record that the Bernsteins are subjects or targets of a criminal investigation. However, in May 2017, the IRS assessed a penalty in the amount of $262,288.50 each for the 2010 tax year. 

The Government brought this collection suit  for the FBAR willful penalties.

Mr. Feld, the attorney advising the Bernsteins to file Fifth Amendment FBARs, is a prominent tax lawyer practicing in the criminal tax arena and is  a co-author of Ian Comisky,  Lawrence Feld,  Steven Harris, Tax Fraud and Evasion (Thomson Reuters), here.