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.

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.

Wrongful Disclosure Counterclaim in FBAR Willful Penalty Suit Dismissed Because Decedent Taxpayer Did Not Assert the Wrongful Disclosure (5/30/16)

In United States v. Garrity, 2016 U.S. Dist. LEXIS 66372 (D. Conn. 2016), here, the United States filed a complaint, here, seeking judgement on a willful FBAR penalty assessment for the year 2005. Key background paragraphs of the complaint are:

7. In November 1989, Paul G. Garrity, Sr., established the Lion Rock Foundation, a Liechtenstein Shiftung. Paul G. Garrity, Sr., was the primary beneficiary of the Lion Rock Foundation from the time it was founded until his death in 2008. 

8. In November 1989, Paul G. Garrity, Sr., opened an account in the name of Lion Rock Foundation with LGT Bank, a bank located in Liechtenstein, having a number ending in 718 (“Account”). The Account continued in existence until after the death of Paul G. Garrity, Sr. After his death, in 2009, the funds held in the account were distributed equally to each of his three sons, Kevin S. Garrity, Paul G. Garrity, Jr., and Sean R. Garrity. 

9. On or about the time the Account was opened, Paul G. Garrity, Sr., entered into an Agency Agreement with BIL Treuhand AG (“BIL Treuhand”) to appoint members of the Lion Rock Foundation Board. The agreement required BIL Treuhand “as well as the person(s) appointed by [it] . . . to act in accordance with the Instructions imparted by [Paul G. Garrity, Sr.,] or persons empowered to act on behalf of [Paul G. Garrity, Sr.]” At all times relevant to this matter, Paul G. Garrity, Sr., exercised complete control over the Lion Rock Foundation.

[Money was shunted to the foundation through a related offshore  company which billed Garrity's U.S. taxable entity for "inspection services."  That offshore company never performed any services.]

14. At various times, an entity known as Tamino Trading, Ltd., and Grant Thornton International, Ltd., both also deposited monies into the Account.

16. Paul G. Garrity, Sr., did not report any income or loss from the Account, or otherwise disclose the existence of the Account to the IRS, on his 2005 federal income tax return, or at any other time. Moreover, Paul G. Garrity, Sr., did not advise the accountant who prepared his 2005 federal income tax return of the existence of the Account at any time. 

18. In May 2008, the IRS initiated an audit as to the tax liability of Paul G. Garrity,
Sr., for the 2005 taxable year. In connection with that audit, the IRS was investigating matters related to the Account. 

19. On October 14, 2009, Diane M. Garrity, a representative of the estate of Paul G. Garrity, Sr., deceased, filed Treasury Forms TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), for the 2003 through 2008 calendar years with the IRS. The FBAR filed for the 2005 calendar year indicates that the maximum amount held in the Account during that year was $1,873,382.00.

Obtaining Tax Return Information in Non-Tax Criminal Cases (6/7/13)

One of the core concepts of our internal revenue law is that the information that IRS gathers from and about taxpayers will not be freely disseminated outside the IRS.  IRC Section 6103, here, insures that such information can be viewed and used both within the IRS and outside the IRS only in certain narrow and specific circumstances, and then subject to some controls.

Obviously, in tax cases -- civil and criminal -- that reach a court and tax grand jury investigations that reach the grand jury, the tax information can be shared with DOJ Tax CES personnel and then used by them in presenting cases to the court or grand jury.  But, what about cases which are not tax cases.  Is the information available to the Government prosecutors or attorneys?

In United States v. Ajudua, 2013 U.S. Dist. LEXIS 73003 (D NM 2013), here, the Court dealt with that issue and discusses a method by which tax return information may be obtained by prosecutors for use in criminal cases (both at the grand jury and at the criminal trial).  The defendant was "indicted and charged with a violation of the following: (i) conspiracy to commit wire fraud in violation of 18 U.S.C. § 1349; (ii) aiding and abetting bank fraud in violation of 18 U.S.C. § 1344; and (iii) aiding and abetting aggravated identity theft in violation of 18 U.S.C. § 1028(A)."  The charges related to the defendant's "involvement in a conspiracy to steal the identities of unwitting victims and to use those stolen identities to fraudulently obtain access to bank accounts and lines of credit."  The United States filed a sealed motion under Section 6103(i) to obtain the defendant's tax return information "in order to establish that the income and return information provided is inconsistent with a legitimate business."

I link to Section 6103 above, but since it is a sprawling provision, I will Court's discussion of the legal background as well as its holding.  As summarized by the Court in Ajuda, Section 6103(i) provides:

Subsection (i)(1) authorizes federal officers and employees to obtain a court order to obtain returns and return information from the IRS. Subsection (i)(1) authorizes disclosure by the IRS only to federal officers and employees for their limited use in preparation for specified non-tax criminal proceedings,  any investigation which may result in such proceeding, or any federal grand jury proceeding pertaining to such a statute. See 26 U.S.C. § 6103(i)(1)(A). Subsection (i)(1) specifically provides that the information shall be disclosed upon the grant of an ex parte order by a federal district court judge or magistrate judge. See 26 U.S.C. § 6103(i)(1)(A). 26 U.S.C. § 6103(i)(4) governs such disclosure beyond those working on an investigation, and relates to the use of returns and return information in judicial or administrative proceedings. Subsection (i)(4) provides that returns and taxpayer return information may be disclosed in a judicial or administrative proceeding if: (i) the court makes certain findings regarding their probative value; or (ii) disclosure is required by court order pursuant to 18 U.S.C. § 3500 or by rule 16 of the Federal Rules of Criminal Procedure. See 26 U.S.C. § 6103(i)(4)(A). Thus, when the records need to be disclosed to people other than those tasked with the investigation, a specific court finding regarding their probative value, or 18 U.S.C. § 3500,2 or rule 16, governs the disclosure.