U.S. Group Requests to FTA for U.S. Individual NonConsenteng Account Information (6/30/21)

It’s been quite some time since I paid any attention to the application of FATCA with Swiss Banks and how information of U.S. taxpayers' accounts are reported to the IRS under FATCA.  To provide a high-level summary, for U.S holders of accounts not consenting to automotive disclosure to the IRS of account information, those banks are required to make aggregate disclosures to the Federal Tax Administration ("FTA") which provides the aggregate information to the IRS.  For Swiss Banks that report in the aggregate, the IRS may make “group requests” through the Administrative Assistance procedure that requires the Swiss Banks to disclose the individual account information.  The Swiss Federal Tax Administration discussion of the process is here; the IRS discussion and links describing the general process is here; the IRS description is here  Individual account owners are notified of the request either by notice to the notice information with respect to the account or by publication in Switzerland and may appeal (good luck with that).

Group requests are requests requiring the FTA and the Swiss Banks to get information through account characteristics where the name of the account holder is not known to the requesting authority (here the U.S. competent authority).  I don't know what characteristics a provided in some format like database fields, but imagine that the fields may include (i) amount in each account on the FBAR reporting date; (ii) high amount during the report year; (iii) whether the client had some type of no mail instruction or mail instructions for a non-US address; and other similar characteristics.  The IRS through the competent authority could then ask, for example, for (i) all accounts which in the aggregate for the Bank equaled or exceeded $500,000 on the reporting date or during the year; or (ii) all accounts with aggregate amounts of $250,000 for accounts any of which had a no mail instruction or mail to a non-US address.  There are a number of other characteristics the IRS might specify that would "mine" the "have value" targets requiring that the Banks disclose.

 The IRS has made several group requests starting in December 2020.  The latest request (the 5^th request) was June 28, 2021, with the aggregate banks for whom requests were made as follows (a copy and paste from the FTA page, here; note that some Financial Institution names may be slightly different on my spreadsheet): 

Article and Study on Tax Evasion by the Wealthy (6/28/21; 6/29/21)

This recent article is likely of interest to tax crimes fans.  Asher Schechter, How Insufficient Enforcement Led to Prevalent Tax Evasion and Contributed to American Inequality (U. Chicago Booth School Stigler Center Promarket 6/24/21), here.  The article expands on the recent publication of IRS data on the very wealthy by ProPublica.  See ProPublica Publishes Series Based on IRS Data Trove Produced by Anonymous Source (Federal Tax Crimes Blog 6/8/21), here; and Tax Crimes Core Concept Questions from ProPublica's Publication of Tax Return Information (Federal Tax Crimes Blog 6/10/21), here.

About the ProPublica disclosed data, the author of this article discusses the tax evasion – yes, the crime – aspects of the phenomenon, citing a recent NBER publication, John Guyton, Patrick Langetieg, Daniel Reck, Max Risch & Gabriel Zucman, Tax Evasion at the Top of the Income Distribution (NBER Working Paper Series No. 28542 March 2021), here.

Excerpts from the article:

             The other side of the coin is tax evasion, which unlike tax avoidance is illegal. How prevalent is tax evasion by the rich, and how significant is it to the overall picture of inequality? A working paper published in March by researchers John Guyton and Patrick Langetieg from the IRS, along with economists Daniel Reck (London School of Economics), Max Risch (Carnegie Mellon), and Gabriel Zucman (University of California, Berkeley) showed tax evasion at the top of the US income distribution is much worse than previously thought: while unreported or under-reported income is at 7 percent among the bottom 50 percent of the income distribution, the top 1 percent hide 21 percent of their true income.

            Tax evasion by high-income people is notoriously difficult to measure due to the myriad ways in which wealthy individuals can evade taxes, from unreported offshore accounts to pass-through entities like partnerships and S-corporations. To study the extent of tax evasion, Guyton et al. used a trove of IRS tax return data, mainly from the IRS’ random audit program, the National Research Program (NRP). What they find is that of the 21 percent of true income that top earners don’t report to the IRS, 6 percent is due to these sophisticated tax evasion strategies.

            In addition to the increasingly regressive US tax system (a trend that was also covered in Zucman’s 2019 book with Emmanuel Saez), the study also underscores how inadequate enforcement contributed to America’s current tax inequality, highlighting the asymmetry between high-income, high-wealth individuals, who have the funds to attempt ever more sophisticated methods of tax evasion, and the IRS auditors, who don’t have the resources to keep up.

Evasion Largely Goes Undetected

Tax Court Opinion with Cryptic Comment on Excessive Restitution Based Assessments (6/24/21; 6/28/21)

In Ervin v. Commissioner, T.C. Memo. 2021-75, TC here see fn * at end of blog, the Court (Judge Lauber) nicely sets up the issues and holdings in the opening paragraphs (footnote omitted):

Petitioner failed to file Federal income tax returns for 2000-2009 and was convicted of tax crimes for 2004-2006. In June 2012 he was sentenced to imprisonment and ordered to pay restitution of $1,436,508, the amount of the Government's estimated tax loss. After petitioner was remanded to custody, the Internal Revenue Service (IRS or respondent) completed a civil examination [*2] of his 2002-2007 tax years. In 2014 it sent him notices of deficiency determining deficiencies for those years based on the tax loss figures used in the sentencing. The IRS also determined additions to tax under sections 6651(a)(1), 6651(a)(2), 6651(f), and 6654.1 Petitioner timely petitioned this Court in January 2015 and (about a year later) fully satisfied his restitution obligation.

Respondent has moved for summary judgment. Petitioner does not dispute the deficiencies. But because he has fully paid the deficiencies by virtue of his restitution payments, which were credited against his tax liabilities, he insists that he should not be liable for any additions to tax. Because the additions to tax accrued before the restitution was ordered or paid, we find that petitioner is liable for these amounts, subject to certain concessions by respondent. We will therefore grant respondent's motion for summary judgment to the extent set forth in this opinion.

Something in the opinion caught my eye, so I thought I would post without definitive discussion but as an alert for persons interested in the arcana of restitution based assessments ("RBA") under § 6201(a)(4)(A).  The Court says (p. 12 n. 3) cryptically):

   n2 If petitioner's restitution payments exceed the deficiencies we have determined for 2002-2007, those payments may be available for credit against other unpaid tax liabilities he may have, including the additions to tax discussed in the text.

TIGTA Report on Criminal Restitution Assessment Procedures (6/17/21)

TIGTA has issued a report titled Criminal Restitution Assessment Procedures Need Improvement (TIGTA Report No. 2021-30-033 6/7/21), here.  For those interested in criminal restitution for taxes, this is excellent reading, discussing both the law related to the restitution procedures for taxes and the IRS’s procedural implementation.

The Report Highlights are:

Why TIGTA Did This Audit 

The Firearms Excise Tax Improvement Act of 2010 authorized the IRS to assess criminal restitution ordered after August 16, 2010, so that the IRS could collect the amount as if it were a tax. Prior to this change in the law, the IRS accepted payments of restitution but could not assess the amount of restitution ordered or use its administrative collection tools to collect the restitution. Only the Department of Justice could collect the amount of restitution.

This audit was initiated to determine if defendants convicted of tax-related crimes are held responsible for the payments of the associated taxes. 

Impact on Taxpayers 

The ultimate goal of every criminal prosecution is not merely to obtain a conviction but also to obtain a sentence sufficient to discourage similar criminal violations by other taxpayers. It is important that the IRS have effective procedures to ensure that the defendants are held responsible for their crimes and the maximum amount of criminal restitution is collected. 

What TIGTA Found

IRM PDT and CAU Designations for Problem Taxpayers (6/17/21)

In Hogan  v. Commissioner (T.C. Dkt Docket No. 11229-15 Bench Opinion dated 6/9/21), here, the Tax Court (Judge Buch) rejected the taxpayer’s request for interest abatement on tax liabilities.  Hogan had previously pled guilty to tax evasion.  All of the commotion about tax liability and interest arose from that event.  There was nothing particularly interesting or of precedential value (hence the bench opinion).  But I noted that Hogan complained about being designated a “Potentially Dangerous Taxpayer.”  The relevant portions of the transcript (pp. 13 & 15-16):

Mr. Hogan was displeased with having been labeled as a potentially dangerous taxpayer or PDT. The Commissioner uses the designation of PTD to "identify taxpayers who represent a potential danger to employees." Internal Revenue Manual, 25.4.1.1.1 (Oct. 31, 2018). Mr. Hogan learned of this designation through a request under the Freedom of Information Act. He argues that this designation resulted in unfavorable treatment during the appeal process. He did not direct us to any error or delay resulting from his designation as a potentially dangerous taxpayer.

* * * *

Regarding his designation as a potentially dangerous taxpayer, Mr. Hogan failed to meet his burden at every level. He did not establish that there was an error in designating him as a PDT. Even if that were erroneous, he did not establish that the designation caused any error, delay, or additional interest. And given his repeated efforts to avoid payment, he clearly did not establish that he would have paid his tax earlier.

Having not recalled paying any attention to the PDT designation, I did a Google scholar search and found nothing of interest.  I recommend that readers of this blog interested in the PDT designation, read the IRM here discussing the PDT Program and the related Caution Upon Contact ("CAU") designation.  Key excerpts are:

25.4.1.1.1 (10-31-2018)
Background

In 1984, the IRS Commissioner assigned IRS Inspection the responsibility of developing a program to improve the Service's ability to identify taxpayers who represent a potential danger to employees. Inspection developed the Potentially Dangerous Taxpayer (PDT) program, which included the PDT System database. Inspection was then given responsibility for administering the program.

Inspection became the Treasury Inspector General for Tax Administration (TIGTA) in 1999. Most of Inspection’s previous duties, including the administration of the PDT program, were transferred to TIGTA. Due to TIGTA’s statutory role and responsibilities, however, it was agreed that the administration and maintenance of the PDT program be transferred back to the IRS. IRS established the Office of Employee Protection (OEP) in February 2000 to administer and maintain the PDT program and fulfill other employee safety recommendations. TIGTA, however, retains its investigatory role in the PDT program.

* * * *

Tax Crimes Core Concept Questions from ProPublica's Publication of Tax Return Information (6/10/21)

Two days ago, I posted on perhaps the top tax story at least on this news cycle:  ProPublica Publishes Series Based on IRS Data Trove Produced by Anonymous Source (Federal Tax Crimes Blog 6/8/21), here.  In the posting, I focused on the legality of the disclosure of the IRS information, known as return information, about the identified taxpayers.  Section 7213, here, makes it a felony crime for IRS personnel to disclosethe return information and for nongovernment persons receiving and disclosing (publishing) the information.  ProPublica seems within the scope of § 7213(a)(3).

As I noted in the blog, ProPublica stated that it was aware of the law and justified its disclosure as follows:

There is also a legal question here, and we want you to know we have taken it seriously. A federal law ostensibly makes it a criminal offense to disclose tax return information. But we do not believe that law would be constitutional if applied to bar or sanction publication of a story in the public interest when the news organization did not itself remove the information from the control of the IRS or solicit anyone else to do so — as we did not. And this is not our first experience with this law.

In 2012, someone at the IRS (we don’t know who or why; they used a plain brown IRS envelope) sent ProPublica copies of tax filings seeking exemption for a number of political committees, including Republican political guru Karl Rove’s Crossroads GPS. The filings were not yet supposed to be public, and the IRS indicated that it would consider our publication of them to be criminal. We explained our view of the constitutionality of that statute as applied in such circumstances and published our story, which raised concerns about whether Rove’s group had been forthcoming with the agency. We never heard about the matter from the IRS again.

I offer today questions for Tax Crimes professionals and students to test a basic federal tax crimes concept.  Section 7213(a)(3), like the earlier provisions in § 7213(a) requires that the person “willfully” disclose the return information.  Indeed, most of the tax crimes in the IRC (Title 26) require the person act willfully.  Willfully requires "'a voluntary, intentional violation of a known legal duty.'" Cheek v. United States, 498 U.S. 192, 200 (1991), here.

ProPublica Publishes Series Based on IRS Data Trove Produced by Anonymous Source (6/8/21)

The investigative news organization, ProPublica, started a series based on IRS data about the very rich that somehow showed up on ProPublica’s whistleblower platform.  The first in the series is The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax by Jesse Eisinger (6/8/21(, Jeff Ernsthausen and Paul Kiel.  The article is here.  The first offering provides an overview and focuses on specific well-known super-wealthy American “taxpayers.”  It shows that their true tax paid relative to their economic income is miniscule, sometimes well under 1%.  

It is not a revelation to persons interested in the tax system that the super-wealthy (and even less wealthy) “taxpayers” whose economic income is reflected in assets can do amazing things to make sure the income is not taxed, including shifting values to family and friends and even dying to achieve a step up in basis (true, there may be an estate tax but even that can be mitigated in ways to insure that they never bear their fair share of the cost of government).

The first installment is interesting, although I am not sure it adds much to what tax professionals would have intuited anyway.  Perhaps it will make those intuitions more accessible to the general public and therefore contribute to the discussion of how to allocate the costs of a civilized society among those who benefit from that civilized society.

More interesting for readers of this blog is how ProPublica got the IRS data trove and the legal consequences.  First, as to how ProPublica got the information, ProPublica explains at this web page:  Why We Are Publishing the Tax Secrets of the .001%, here.  Basically, investigative journalists sometimes have a whistleblower or informer site where information can be disclosed with anonymity.  ProPublica further explains:

We do not know the identity of our source. We did not solicit the information they sent us. The source says they were motivated by our previous coverage of issues surrounding the IRS and tax enforcement, but we do not know for certain that is true. We have considered the possibility that information we have received could have come from a state actor hostile to American interests. In particular, a number of government agencies were compromised last year by what the U.S. has said were Russian hackers who exploited vulnerabilities in software sold by SolarWinds, a Texas-based information technology company. We do note, however, that the Treasury Department’s inspector general for tax administration wrote in December that, “At this time, there is no evidence that any taxpayer information was exposed” in the SolarWinds hack.

FBAR Civil Willful Penalty Sustained Against Long Time Accountant and Tax Preparer Who Claimed He Did Not Have Time to Read the Schedule B Instructions (6/4/21)

In United States v. Kronowitz (S.D. Fla. No. 19-cv-62648 Findings of Fact and Conclusions of Law dated 6/3/21), CL here, the Court sustained the Government’s assertion of the FBAR civil willful penalty.  The facts were bad for Kronowitz in trying to avoid the penalty.  He was an accountant and regular tax return preparer over many years.  He claimed inter alia (slip op. 11):

He admitted to seeing hundreds of Schedule Bs, and being familiar with the purpose of Schedule B and its requirements, but testified that he probably did not read the instructions because he was more concerned with providing for his family and taking care of his clients. Indeed, he testified that “my purpose in life at the time was to get clients, bill them, and collect the money, not spending the whole year reading[.]”

Well, he lost.

JAT Comments:

1. Another example of a taxpayer who certainly knew about the OVDP and for  some reason chose not to timely join the program.  (Of course, he did have some relationship to a UBS which could have meant that UBS turned his name over  to the IRS early and thus was disqualified.

2. The Court found the taxpayer was sufficiently reckless that he met the standard for willful for  the civil penalty.  The Court said that Kronowitz's defense was that he was not "willful or reckless."  As stated, Kronovitz's argument was that willful and reckless are alternative bases for the penalty.  That is not true.  The statute imposes the penalty only on willful conduct which, for FBAR civil penalty purposes, is interpreted to include reckless conduct.