Monday, April 24, 2017

Three Offshore Account Holders Sentenced (4/24/17)

DOJ Tax announced here the sentencing of three related U.S. taxpayers, Dan Kalili, David Kalili and David Azarian, for FBAR violations to which they previously pled.  For my blog on their guilty pleas, see Additional Pleas to Offshore Account Tax Crimes (Federal Tax Crimes Blog 1/18/17), here.

Key excerpts from today's press release are:
Dan Farhad Kalili, 55, a resident of Irvine, California, was sentenced to serve 12 months and one day in prison; his brother, David Ramin Kalili, 52, a resident of Newport Coast, was sentenced to serve eight months in prison; and his brother-in-law, David Shahrokh Azarian, 67, also a resident of Newport Coast, was sentenced to serve eight months in prison. 
According to documents and information provided to the court, Dan Kalili, David Kalili and Azarian willfully failed to file with the Department of Treasury Reports of Foreign Bank and Financial Accounts (FBARs) regarding secret bank accounts in Switzerland and Israel that each maintained and controlled, many for well over a decade. These secret accounts held assets that reached into the millions of dollars. 
* * * * 
From May 1996 through at least 2009, Dan Kalili opened and maintained several undeclared offshore bank accounts at Credit Suisse Group (Credit Suisse) in Switzerland. He also opened and maintained several undeclared offshore bank accounts from at least 1998 through 2008 at UBS AG (UBS) in Switzerland. In July 2006, Dan Kalili opened an undeclared account at UBS in the name of the Colsa Foundation, an entity established under the laws of Liechtenstein. At the end of May 2008, the Colsa Foundation account held approximately $4,927,500 in assets. Similarly, David Kalili opened and maintained several undeclared accounts at Credit Suisse in Switzerland, from February 1999 through at least 2009, and at UBS in Switzerland, from October 1993 through at least 2008. Dan and David Kalili also maintained joint undeclared Swiss bank accounts at both UBS and Credit Suisse beginning in 2003 and 2004. Meanwhile, Azarian opened and maintained several of his own undeclared accounts at Credit Suisse in Switzerland from May 1994 through at least 2009, and at UBS in Switzerland from April 1997 through at least 2008. 
Dan Kalili, David Kalili and Azarian took affirmative steps to prevent their assets in UBS and Credit Suisse from being discovered. Dan Kalili opened an undeclared account at Swiss Bank A in the name of the Colsa Foundation and in May 2008, transferred his assets from the UBS Colsa Foundation account to Swiss Bank A. By this time, Bradley Birkenfeld, an American banker who worked for UBS, had been indicted, Martin Liechti, a UBS executive, had been detained and UBS had announced that the Justice Department and the SEC were investigating whether it helped clients avoid paying taxes between 2000 and 2007. Dan Kalili later made a partial disclosure of the Swiss Bank A Colsa account on his individual income tax returns. In 2009, he opened undeclared accounts at Israeli Bank A and at Bank Leumi, both in Israel. In June 2009, he closed the joint undeclared account at Credit Suisse he held with David Kalili, as well as his own undeclared account, and transferred the funds. Shortly before its closure, the undeclared joint account at Credit Suisse held approximately $2,561,508 in assets. As of December 2009, Dan Kalili’s undeclared account at Israeli Bank A held assets valued at approximately $1,569,973, and his undeclared account at Bank Leumi held assets valued at approximately $2,497,931. 

Sunday, April 16, 2017

Upward Variance Not Asserted by Government Sustained on Appeal (4/16/17)

In United States v. Nguyen, ___ F.3d ___, 2017 U.S. App. LEXIS 6390 (5th Cir. 2017), here, Nguyen was charged by information, here, with a single count of aiding and assisting a false corporate return and pled guilty to that single count.  The plea agreement is here.  The final Guidelines calculation indicated a range of 21-27 months.  The maximum sentence based on the sole count of conviction was 36 months.  The Probation Officer informed in the Court in PSR of apparent structuring conduct and recommended an upward departure based on Sentencing Guidelines § 4A1.3, here, for an underrepresented criminal history or under Sentencing Guidelines § 5K2.21, here, for uncharged conduct.  The district court did not accept the recommendation, but did consider the conduct in question in exercising its Booker discretion under 18 USC § 3553(a), here, to make an upward variance to the maximum allowable sentence of 36 months.

I cut and paste much of the opinion because, I think, I could not improve on it.  After that I offer some comments.
Nguyen, the owner of a wholesale salon equipment business, was charged with aiding and assisting in the preparation of a false and fraudulent corporate tax return. He pleaded guilty pursuant to a written plea agreement and entered into a settlement agreement with the Government, wherein he agreed to forfeit $1,100,000 in seized funds. In preparing the presentence report ("PSR"), the probation officer determined that Nguyen had a total offense level of 13 and a criminal history category of I, resulting in an advisory Guidelines range of 12-18 months. However, the probation officer also noted that Nguyen appeared to be involved in unlawful structuring activities n1: IRS agents found over $4,900,000 in structured deposits made by third parties to bank accounts registered to Nguyen or his family members. Moreover, during a raid of Nguyen's business, IRS investigators found $3,215,703 in currency- most of it separated into $10,000 bundles-whose source could not be determined. In paragraph 87 of the PSR, the probation officer suggested the structuring activities could warrant an upward departure under U.S.S.G. § 4A1.3 for an underrepresented criminal history or under U.S.S.G. § 5K2.21 for uncharged conduct.
   n1 A person "structures" a transaction if he, acting alone or in conjunction with others, "conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading . . . reporting requirements." 31 C.F.R. § 1010.100(xx) . Section 5324 makes it a crime to "structure or assist in structuring, or attempt to structure or assist in structuring," a transaction to avoid § 5313's requirement that financial institutions file a currency transaction report ("CTR") with the government for all cash transactions exceeding $10,000. 31 U.S.C. §§ 5313(a); 5324(a)(3); United States v. Rodriguez, 132 F.3d 208, 212 (5th Cir. 1997). 
Nguyen objected to the suggestion that an upward departure may be appropriate, and the Government agreed that there was insufficient evidence to prove that he had structured or directed the structuring of deposits into his bank accounts. The district court, however, entered an order tentatively concluding that Nguyen's objections to the upward departure were without merit. The district court suggested that it would reject the plea agreement, including the forfeiture settlement, and that Nguyen should receive a sentence above the advisory Guidelines range, given the probability that he knew of the structured deposits being made into his accounts and the Government's failure to prosecute him for that crime. 
At the first sentencing hearing, the district court conducted an evidentiary hearing to determine whether Nguyen had participated in illegal structuring activities. The district court questioned three witnesses. Oanh Nguyen, Defendant-Appellant's wife, testified that the new business bank accounts Nguyen had opened at Chase Bank ("Chase") and Wells Fargo were not an attempt to evade the law but rather a result of his decision to restructure the company after their son decided to leave the business. IRS Special Agent Alan Hampton and IRS Task Force Officer Alison Turner then testified about the investigation into Nguyen's financial activities. Afterwards, the district court accepted the plea agreement but expressed its belief that there was sufficient evidence to conclude that structuring activities occurred, that Nguyen was aware of the illegal transactions, and that he aided and abetted the deposits. The Government, while agreeing there was enough evidence to show that the funds were structured, expressed doubt that there was sufficient proof by a preponderance of the evidence to show that Nguyen himself assisted in the structuring. 
At the second sentencing hearing, the district court sustained Nguyen's objection to an upward departure as detailed in paragraph 87 of the PSR. The district court also concluded that Nguyen was not entitled to a reduction for acceptance of responsibility, which resulted in a newly applicable Guidelines range of 21-27 months. Taking into account the 18 U.S.C. § 3553(a) factors, the district court then sentenced Nguyen to 36 months in prison, to be followed by a one-year term of supervised release and payment of a $250,000 fine. The district court acknowledged the Government's doubt as to whether Nguyen participated in structuring activities, but explained that it had reached a different conclusion based on its examination of the evidence and provided a lengthy explanation as to why "it [was] more likely than not that [Nguyen] committed the offense of structuring." In support of its decision, the district court cited, inter alia, Nguyen's dishonesty in underreporting his taxable income for multiple years; the connection between the investigation into his structuring activities and the discovery of tax fraud; and that Nguyen was able to retain "millions of dollars" that could have been subject to forfeiture had the Government pursued forfeiture proceedings. The district court rejected Ms. Nguyen's explanation for why the new bank accounts were opened and noted that Defendant-Appellant gave conflicting explanations to IRS investigators as to whether funds seized from his business were bank withdrawals. In its thirteen-page Statement of Reasons ("SOR"), the district court reiterated these conclusions and detailed the factors that influenced it to impose an above-Guidelines sentence. Nguyen timely appealed.

Friday, April 14, 2017

Court Denies Motion to Dismiss Counts Against Tax Shelter Lawyer (4/14/17)

In United States v. Levine, 2017 U.S. Dist. LEXIS 54071 (SD NY 2017), here, the court (Judge Rakoff) denied Howard Levine's motion to dismiss.  I had missed the indictment when it was announced last year, so I will first go over the announcement which fairly summarizes the indictment. See USAO SDNY announcement: Tax Attorney And CPA Indicted For Tax Evasion And Diversion Of Tax Shelter Fees From Major Manhattan Law Firm, here, with link to the indictment, here.  The key excerpts are:
HAROLD LEVINE, a tax attorney and former head of the tax department at a major Manhattan Law Firm (the “Law Firm”), schemed with RONALD KATZ, a certified public accountant, to divert from the Law Firm over $3 million in fee income from tax shelter and related transactions that LEVINE worked on while serving as a partner of the New York Law Firm.  In addition, LEVINE failed to report that fee income to the IRS on his personal tax returns during the period 2005-2011.  For his involvement in this scheme, KATZ received and failed to report to the IRS over $1.2 million in fee income.   
As part of the fee diversion scheme, for example, LEVINE caused tax shelter fees paid by a Law Firm client to be routed to a partnership entity he co-owned with KATZ and thereafter used those fees – totaling approximately $500,000 – to be used to purchase a home in Levittown, New York.  LEVINE caused the home to be purchased as a residence for a Law Firm employee (the “Law Firm Employee”) with whom he carried on a close personal relationship.  Although LEVINE allowed the Law Firm Employee to reside in the Levittown house for over five years without paying rent, LEVINE and KATZ prepared tax returns for the entity through which the home was purchased to claim false deductions as a rental property. 
In or about 2013, LEVINE was questioned by IRS agents concerning his involvement in certain tax shelter transactions and the fees received for those transactions.  During that questioning, LEVINE falsely represented that the Law Firm Employee paid him $1,000 per month in rent while living in the Levittown home.  In addition, when the Law Firm Employee was contacted by the IRS and summoned to appear for testimony, LEVINE urged the employee to represent falsely to the IRS that she had paid $1,000 per month in rent to LEVINE.
The charged counts were (the numbering is for the count numbers in the indictment):
  1. Tax obstruction, § 7212(a), Levine & Katz, Count 1
  2. Conspiracy, 18 USC 371, Levine & Katz, Count 2
  3. Tax evasion, § 7201, 2008 Levine, Count 3
  4. Tax evasion, § 7201, 2009 Katz, Count 4
  5. Tax evasion, § 7201, 2010, Katz, Count 5
  6. False statements, 18 USC § 1001 and 1, Levine, Count 6
  7. False statements, 18 USC § 1001 and 2, Levine, Count 7
  8. Wire Fraud, 18 USC § 1343 and 2, Count 8
The following are the motion documents:
  • Motion to Dismiss (Dkt 20), here.
  • US Response (Dkt 22), here.
  • Reply (Dkt 24), here.
  • Docket Entries (as of 4/14/17), here.
The following are the key points from Judge Rakoff's Opinion and Order:

Count One - § 7212(a)

Basically, on this issue, the Court held that the indictment was sufficient.  Levine's defense went well beyond the allegations of the indictment and thus were not properly considered on motion to dismiss.  Judge Rakoff has some good discussion of when and how facts beyond the indictment may be considered on motion to dismiss.  I refer you to the opinion for that discussion.  I will cut and paste Judge Rakoff's discussion about § 7212(a) which I think offers good review for tax crimes lawyers:

Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (4/13/17)

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017), here, the Court denied the parties' cross-motions for summary judgment with regard to an FBAR willful penalty assessed against Bedrosian.  The order is relatively short -- 9 pages.  I will just provide (i) the key documents; (ii) a timeline mostly from the Court's Memo (referred to as Court Memo) but with some from the parties' submissions; (iii) a discussion of the issues discussed and decided in the Court Memo; and (iv) some miscellaneous comments at the end.

KEY DOCUMENTS
  • Bedrosian Complaint (Dkt 01), here.
  • US Answer (Dkt 05), here.
  • Bedrosian Reply (Dkt 07), here.
  • US Motion for Summary Judgment - Memo (Dkt 22), here.
  • US Motion for Summary Judgment - Statement of Facts (Dkt 22-3), here.
  • Bedrosian Motion for Summary Judgment - Memo (Dkt 25), here
  • Bedrosian Motion for Summary Judgment - Statement of Facts (Dkt 25-1), here.
  • Bedrosian Response to US Motion (Dkt 26), here.
  • Bedrosian Response to US Motion - Statement of Facts (Dkt 26-1), here.
  • US Response to Bedrosian Motion (Dkt 27), here.
  • US Reply to Bedrosian Answer to US Motion (Dkt 028), here.
  • Court Memo Denying Cross-Motions for Summary Judgment, here.
  • Bedrosian Docket Entries (as of 4/14/17), here.

TIMELINE

1.  Bedrosian is sophisticated and successful corporate executive (CEO of generic medication manufacturer).  "In this role, Bedrosian supervises approximately 100 employees, signs contracts and financial statements on behalf of Lannett, researches FDA regulations, and decides company policy with respect to FDA filings."  (Court Memo p. 1.)

2.  Bedrosian has had at least one Swiss account -- with UBS (actually a predecessor that transitioned into UBS before the year at issue) -- since the 1970s.  At the time here relevant (as of 2005 and after), he had two UBS accounts.  "Bedrosian avers that he always considered them one account." (Court Memo p. 2.)  The description in the Government's statement of facts is as follows:  "Each account had subaccounts and contained different assets, but the client numbers for each main account ended in 6167 and 5316."  (US Stmt of Facts par. 15, p. 3.)

3.  "Bedrosian would meet with his UBS banker annually to review his accounts and how well the accounts had performed over the year."  (US Stmt of Facts par. 18, p. 3.)

4.  Bedrosian was advised by a prior accountant some years prior to 2007 that he should be reporting his income from the account(s) but, so Bedrosian alleges, that accountant advised him not to correct and the matter would be worked out upon his death when the "the assets in the Swiss accounts would be repatriated as part of Bedrosian's estate and taxes would be paid on them then."  (Court Memo 2-3.)  That accountant died sometime before Bedrosian assigned the tax return work to a new preparer for the 2007 year.

Thursday, April 13, 2017

DOJ Tax Encourages Taxpayer to Avoid Willful Violation of the Tax Law (4/13/17)

We have seen the usual flurry of announcements of indictments for tax crimes, particularly with respect to return preparers.  Today's -- just 5 days from the filing deadline on April 18 (with the weekend/holiday extensions) -- DOJ Tax has a generic "encouragement" to avoid willful violations of Tax Laws: With the Individual Income Tax Filing Deadline Approaching, Justice Department Warns Willful Violations of Tax Laws Are Criminal, here.  The announcement does offer some examples of misbehavior.

For those who have previously filed returns that may be questionable, a superseding return can be filed by the filing deadline that will be treated as the return against which liability for civil and criminal penalties is tested.  So, the prudent thing to do with respect to a questionable tax return filed early is to file a new return by the filing deadline correcting the problems.

Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (4/13/17)

I previously wrote on a dismissal of a tax obstruction count in United States v. Ogbazion, 2016 U.S. Dist. LEXIS 143358 (SD OH 2016) for failure of the count to state that the defendant has intended to obstruct a pending investigation.  Opinion on Effect of Parallel Civil Proceedings, Statute of Limitations on Tax Crimes, and Kassouf (Again) (10/22/16), here.  The portion of that blog entry relevant to today's new blog is:
3. Failure to State an Offense.  The defendant moved to dismiss certain counts on the grounds that they failed to incorporate the necessary elements of the offense.  The most interesting holding on this issue relates to the Kassouf issue that I have mentioned several times in earlier blog entries, but I refer readers particularly to Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  Briefly, Kassouf held that, based on analogy to the obstruction in 18 USC § 1503, here, tax obstruction under § 7212(a) requires an intent to obstruct a known IRS investigation.  Almost all courts other than the Sixth Circuit considering the issue have rejected rejected the Kassouf holding and even the Sixth Circuit has severely limited the holding.  But the holding, as limited, is still precedent in the Sixth Circuit.  The Ogbazion court is in the Sixth Circuit.  The Court thus held that, since the indictment failed to allege that critical element, as interpreted by the Sixth Circuit in Kassouf, the indictment was defective and the Count was dismissed.
After that earlier decision, there was an aborted appellate proceeding where authority to appeal the Kassouf-based dismissal was denied, the Government came back with a superseding indictment. In relevant part, the superseding indictment charged the defraud conspiracy, 18 USC § 371, here, which as readers know substantially overlap with tax obstruction, § 7212(a), here, except that the defraud conspiracy does not require a pending proceeding.  I should note that circuits other than the Sixth Circuit do not adopt the Kassouf limitation on tax obstruction, so in that sense, outside the Sixth Circuit, there is a complete overlap except that tax obstruction can be committed by a single actor (as well as multiple actors), whereas the defraud conspiracy requires two or more actors.  So, basically, what the Government did in the superseding indictment was to charge the same basic crime as the defraud conspiracy rather than as tax obstruction because it could no longer pursue the tax obstruction charge.  And, of course, the defraud conspiracy is a five-year felony, whereas tax obstruction is a three-year felony.  The defendant cried foul and moved in relevant part to dismiss the superseding indictment altogether, alleging foul as to the defraud conspiracy, or, failing that, the defraud conspiracy count.

In United States v. Ogbazion, 2017 U.S. Dist. LEXIS 54465 (SD OH 2017), here, the court denied the motion to dismiss.

As to the motion to dismiss the superseding indictment, the Court rejected the claim of vindictive prosecution.  That claim was based in part:

Wednesday, April 5, 2017

TIGTA Report on Civil Seizures for Structuring (4/5/17)

TIGTA has issued a report on civil forfeitures and seizures:  Criminal Investigation Enforced Structuring Laws Primarily Against Legal Source Funds and Compromised the Rights of Some Individuals and Businesses (Ref. 2017-30-025 3/20/17), here.

The highlights from the report are:
IMPACT ON TAXPAYERS 
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. Title 31 of U.S. Code Section 5324(a) states that no person shall, for the purpose of evading the reporting requirements, cause or attempt to cause a U.S. financial institution to fail to file a report required or structure. Whoever violates the structuring law can be fined, imprisoned, or both. Any property involved in violation of this law may be seized and forfeited. 
WHY TIGTA DID THE AUDIT 
In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements. 
WHAT TIGTA FOUND 
Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases. CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations. 
In most instances, interviews with the property owners were conducted after the seizure to determine the reason for the pattern of banking transactions and if the property owner had knowledge of the banking law and had intent to structure. CI procedures required agents to give subjects advice of rights in Title 26 cases (i.e., Internal Revenue Code) but not in Title 31 cases. In only five of the 229 interviews conducted, noncustodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI. In 202 interviews, the property owners were not adequately informed of important information, such as the purpose of the interview, by CI during the interview. The outcomes for legal source cases lacked consistency. In 37 investigations, the Government appeared to have bargained nonprosecution to resolve the civil case.  
CI also needs to improve its process for identifying grand jury information. 
WHAT TIGTA RECOMMENDED 
TIGTA recommended that the Chief, CI, establish controls to ensure that CI is selecting cases that meet the IRS’s goals and policies, return funds forfeited from legal source cases with no illegal activity, ensure that reasonable explanations are considered when interviews are conducted, ensure appropriate referrals to IRS’s Examination function, and improve the process for designating grand jury information. 
In response to the report, CI agreed with and implemented changes for five of the nine recommendations and partially agreed with another. CI disagreed with establishing guidance on bargaining nonprosecution and procedures that strive for fair and consistent outcomes, and did not agree to improve its grand jury information designation process.
Also helpful for readers are these excerpts from the background section of the report (footnotes omitted):

Monday, April 3, 2017

IRS Criminal Tax Statistics (4/3/17)

The IRS has issued its 2016 Data Book.  The pdf for the Databook is here.  I have extracted here the part under the heading "Collections, Penalties and Criminal Investigations."  In this extraction, there are two pages of graphics and information and then the next pages offer the following tables:

  • Table 16. Delinquent Collection Activities, Fiscal Years 2015 and 2016
  • Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2016
  • Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2016

IRS CI also offers its Fiscal Year 2016 statistics here and its cumulative statistics for the years 2007 - 2016, here.

I have been extracting tax crimes data from both the IRS Annual Data Book and annual report of statistics since 2005 and offer it here.  I have been keeping in a spreadsheet a subset of these statistics since 2005 (note that I have two years not included in the IRS offering linked above).  The spreadsheet is here.  Here are the cumulative statistics for 2005-2016 and for 2012-2016:

FROM THE IRS DATA BOOK
LEGAL SOURCE STATISTICS
2005-2016
2012-2016
1
Indictments
12,353
6,801
2
Convictions
10,850
6,093
3
Percentage Convicted (l. 2 / l. 1)
87.8%
89.6%
4
Sentenced
10,583
5,842
5
Incarcerated
8,396
4,642
6
Percentage Incarcerated (l. 4 / l. 5)
79.3%
79.5%
FROM THE IRS CI WEBSITE STATISTICS:
EXCLUDING FINANCIAL CRIMES
2005-2016
2012-2016
1
Indictments
17,072
8,695
2
Sentenced
15,012
7,544
3
Percentage Sentenced (l. 2 / l. 1)
87.9%
86.8%


I have not tried to reconcile these statistics (I am sure it is in differences in the data in each set.)  I infer, however, that, for the mainstream tax crime, the conviction rate is far less than the general conviction rate of 95% touted by DOJ Tax.  Of course, some tax crimes are charged without an IRS investigation, but DOJ Tax would have to have one hell of a conviction rate on those crimes to move the overall conviction rate up from the convictions obtained from CI investigations -- again, if only mainstream tax crimes are considered.  And, in any event, at least from my practice, the tax crimes cases that I have been involved with have involved CI investigations except in two prominent instances.  For most tax practitioners doing this type of work, the cases will generally progress from an IRS CI investigation (which would cause the ultimate results to be in the CI statistics), although they may stop for some investigation by the grand  jury (in which case they would also be in the CI statistics).

I would appreciate hearing by comment or email from those having more knowledge of how DOJ Tax calculates its statistics and the differences between the IRS statistics and the DOJ Tax statistics.

Court Authorizes John Doe Summons to American Express Unit for Netherlands Taxpayer Info (4/3/17)

DOJ Tax announced today, here, that the district court for WD TX has authorized a John Doe Summons sought on behalf of the Netherlands pursuant to the exchange of information provision of the tax treaty between the U.S. and the Netherlands.  The JDS is issued to American Express Travel Related Services Company and seeks "the identities of Dutch residents who have debit or credit cards linked to bank accounts located outside of the Netherlands so the Dutch government can determine if those persons have complied with Dutch tax laws."

Further
[The] request is based on the Netherlands Tax and Customs Administration’s (NTCA) Payment Card Project, in which information on the use of payment cards (debit or credit) issued by financial institutions outside of the Netherlands can be used to identify non-compliant Dutch taxpayers. NTCA’s project has made similar requests, and already obtained similar information, from other financial institutions outside the United States resulting in several million euros in additional tax, interest and penalties from the non-compliant Dutch taxpayers, according to evidence submitted with the petition. American Express informed the NTCA that the transaction information sought is exclusively available in the United States, according to the evidence submitted with the petition. filing does not allege that American Express violated any U.S. or Dutch laws with respect to these accounts. 
* * * * 
The court order in this case authorizing this enforcement action is a part of ongoing international efforts to stop persons from using foreign financial accounts as a way to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U. S tax obligations, and have approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade tax obligations of a foreign county, pursuant to international tax treaties.
I posted recently on a Netherlands initiative on foreign accounts involving Credit Suisse:  Credit Suisse Caught in Multi-Country Tax Evasion Investigation (Federal Tax Crimes Blog 4/1/17), here.  I have no idea if the two are related initiatives, but it does appear that the Netherlands is serious about cracking down on its citizens' use of foreign accounts for tax evasion.

Saturday, April 1, 2017

Credit Suisse Caught in Multi-Country Tax Evasion Investigation (4/1/17)

Toby Sterling and Joshua Franklin, Credit Suisse under fire as clients hunted for tax evasion (Reuters 3/31/17), here:
Swiss bank Credit Suisse has been dragged into yet more tax evasion and money laundering investigations, after a tip-off to Dutch prosecutors about tens of thousands of suspect accounts triggered raids in five countries. 
Coordinated raids began on Thursday in the Netherlands, Britain, Germany, France and Australia, the Dutch office for financial crimes prosecution (FIOD) said on Friday, with two arrests confirmed so far.\ 
The Dutch are "investigating dozens of people who are suspected of tax fraud and money laundering", the prosecutors said, adding that suspects had deposited money in a Swiss bank without disclosing that to authorities. 
British tax authorities said they had opened a criminal investigation into suspected tax evasion and money laundering by "a global financial institution" and would be focusing initially on "senior employees", along with an unspecified number of customers. 
Prosecutors in the German city of Cologne said they were also working with the Dutch. "We have launched an investigation against clients of a bank," a spokesman said. 
None of the authorities disclosed the name of the bank involved. However, Credit Suisse, Switzerland's second-biggest bank, said local authorities had visited its offices in Amsterdam, London and Paris "concerning client tax matters" and it was cooperating. 
* * * * 
Eurojust, the European Union agency that coordinates cross-border prosecutions, said the investigation had begun in 2016, and representatives from the countries involved -- Switzerland not among them -- had held three preparatory meetings to share information before Thursday's raids. 
Prosecutors "analyzed a huge amount of data," Eurojust said, looking for "individuals and groups suspected of tax fraud and money laundering." 
The investigation uncovered "undeclared assets hidden within offshore accounts and policies...(worth) millions of euros."

Interesting Offshore Account Malpractice Opinion Denying Summary Judgment (4/1/17; 4/6/17)

In Miksic v. Boeckerman Grafstrom Mayer, LLC, 2017 U.S. Dist. LEXIS 46906 (D MN 2017), here, court opens with an short summary of the case:
The Internal Revenue Service ("IRS") assessed substantial taxes, monetary penalties, and interest against Plaintiff Boris Miksic for his failure to file U.S. tax forms during tax years 2005 to 2010, and not disclosing his interests in and income from foreign trusts, businesses, and bank accounts. Miksic filed this accounting malpractice action alleging those errors were due to negligent tax preparation by Defendants Boeckermann Graftstrom Mayer LLC, formerly known as Johnson, West & Co. P.L.C., Boeckermann Graftstrom Mayer, P.A., and Johnson West & Co. P.L.C. (collectively "Defendants"). Miksic also contends that as a result of Defendants' negligence, he changed accountants and retained legal counsel to respond to the IRS audit and to bring this action.
In the opinion, the court (i) denies the accounting firm's motion for summary judgment in major part, (ii) denies the accounting firm's attempt to exclude or limit the plaintiff's expert witness, and (iii) granted the accounting firm's summary judgment on the Form 5471 penalties that had been abated by the IRS.

I deal with only some of the issues discussed in the opinion and with certain other matters.  I sometimes refer to the accounting firm as the accounting firm or the defendant.  I sometimes refer to the plaintiff as the plaintiff or the taxpayer.  For background, I offer also the following (without exhibits):
  • The plaintiff's (taxpayer's) complaint, here.
  • The defendant's (accounting firm's) answer, here.
  • The defendant's memo in support of motion for summary judgment, here.
  • The plaintiff's (taxpayer's) response, here.
  • The defendant's (accounting firm's) reply, here.
  • The docket entries in the case as of 3/31/17, here.
I offer the following brief background probably known to most readers but not covered in the opinion:  In 2009, the IRS began its most recent offshore account initiative with the UBS deferred prosecution agreement and then the first round of OVDP for U.S. persons having previously unreported offshore accounts.  The U.S. and offshore press reports of this initiative in 2009 and later years were significant, which is probably an understatement.  Those practicing in this are will recall that UBS U.S. customers received letters in 2009 regarding their accounts, notifying them the account information may be turned over to the IRS or DOJ and notifying them of the IRS OVDP.  Some of the UBS account holders' information had already been supplied to DOJ and thus were ineligible for OVDP.

Wednesday, March 29, 2017

Motion to Dismiss Superseding Indictment Denied Because Taint Review Proper (3/29/17)

In United States v. Musto, 2017 U.S. Dist. LEXIS 40862 (MD PA 2017), here, the court denied Musto's motion to dismiss and motion to suppress.  The motion to dismiss was from a superseding indictment with two counts of tax perjury, § 7206(1), and one count of tax obstruction, § 7212(a).  I don't think, from a legal perspective, there is anything new or unusual in the case.  I post the case because, in denying the motion to dismiss, the court covers the process whereby the Government, in executing a search warrant, establishes a "taint team" consisting of personnel not involved in the investigation to review evidence to see whether it is privileged and, if so, make sure that evidence is not reviewed by the investigative team, thus tainting the investigation.

This taint team process is described in footnote 5 on page 6 as follows:
n5 Prior to executing the five search warrants on April 28, 2016, the government organized a filter team, also known as the taint team. (N.T. at 52-55). The filter team examined seized evidence to determine whether any of the seized materials were potentially privileged. (N.T. at 154). If the filter attorney determined the seized materials were privileged, these materials were returned to defense counsel, without the prosecution team ever reviewing them. (N.T. at 154-55).
The case has a further wrinkle in that, prior to delivery to the taint team, two IRS agents involved in the execution of the search warrant had reviewed the notebook in question, marked "attorney-client privilege."  One of the agents apparently was not involved in the investigation but simply assisting in the execution of the search warrant.  The other agent was involved in the investigation but, upon review of the privileged material, was immediately re-assigned to the taint team so that his review would not infect the integrity of the investigation.  The Court found that none of the privileged material was disclosed to the investigative team.

Monday, March 27, 2017

Sixth Circuit Affirms Preparer's Convictions Including Tax Perjury (3/27/17)

In United States v. Williams, 2017 U.S. App. LEXIS 5184; 2017 FED App. 0173n (6th Cir. 2017) (nonprecedential), here, the Court affirmed the Williams' convictions for tax perjury (3 counts) with respect to his personal returns and aiding and assisting (17 counts) with respect to returns he prepared for others.  His arguments for reversal of the tax perjury convictions caught my attention.

Because the opinion itself is a bit cryptic, for more detail I offer readers the two briefs that were filed.

  • Williams' Brief, here.
  • U.S. Brief, here.

There were two fact patterns for his personal return convictions.

2004 return

For the year 2004, his business operations were through his tax return preparation S corporation.  The filed a false S corporation return reporting a $745 loss.  He then filed his personal return, Form 1040, reporting a $1 gain on Schedule C but apparently omitting the amount from the S Corporation.  He had thus overreported the income solely by reference to the S Corporation's return K-1.  He claimed that there was no perjury with respect to his Form 1040.  He complained that the Government had not prosecuted him for the false return he actually filed for the year -- the S Corporation but, rather, improperly prosecuted him for the "literally true" return that he did file which, based on my math, overreported his income for 2004 if the S Corporation return set what he was supposed to report on his personal return.

Of course, any falsity on the personal return can be prosecuted as tax perjury.  Overreported income, if false, can be prosecuted.  And, of course, here, Williams did not report the S Corporation loss but reported $1 of Schedule C income when a Schedule C business did not even exist.

And, the Court did not look favorably his argument about tax perjury only being involved with the S Corporation return and handily dispatched it as follow:
In 2004, Williams reported that Imperial experienced a loss of $745 on the company's corporate tax return. He reported one dollar of income on his personal income return, using Form 1040. According to Williams, because Imperial's tax return showed that "the corporation did not report any income, [he] did not have an affirmative duty to report a positive income figure on his individual Form 1040 return." This argument is untenable. "Section 7206 is a perjury statute that criminalizes lying on any document filed with the IRS." Tarwater, 308 F.3d at 504 (emphasis added). If an individual lies on a corporate tax return, he cannot copy that false information onto a personal tax return and claim it as "literal truth." Rather, the tax return would contain information known to be untrue. Williams correctly points out that the government did not charge him with preparing false returns on behalf of the corporation, but because Imperial's income flows through to Williams, evidence of corporate earnings is relevant to determining Williams's personal income. 
At trial, an IRS agent testified that he found unreported income for Williams for the 2004 tax year, explaining that he found a number of deposits made into Imperial's bank account in 2004 totaling over $21,000. The jury was shown a summary schedule of these deposits, and the agent testified that these deposits were income from tax-preparation services. The agent further testified that Williams was the only individual who was involved with Imperial, or who obtained any financial benefit from Imperial. Finally, the agent testified that Imperial's corporate tax return for 2004 did not explain the one dollar reported by Williams on his personal tax return, despite the fact that Williams claimed that the one dollar was earned in connection with Imperial. This testimony provided a sufficient basis from which the jury—or any rational trier of fact—could have found beyond a reasonable doubt that Williams knew that his tax return for 2004 was not true and correct as to every material matter.
2006 and 2008 Returns

Williams seems to have been studying the criminal tax law after 2004.  Essentially, Williams' argument was a variation of the argument for 2004 -- that there was no falsehood on the return he filed -- Forms 1040EZ for each year.  Of course, the Form 1040EZ is an inappropriate return if the taxpayer had, as he had here, income from sources other than allowed on the Form 1040EZ, such as S Corporation return.  So, his use of the Form 1040EZ was inappropriate to start with.  And, the Court noted that he reporting he actually made was inconsistent with the Form 1040EZ instructions and, further, omitted income that the jurat on the Form 1040EZ required him to report.  That jurat, unique to the Form 1040EZ, was:
"Under penalties of perjury, I declare that I have examined this return and, to the best of my knowledge and belief, it is true, correct, and accurately lists all amounts and sources of income I received during the tax year." 
So, he was alerted that that his reporting was amiss and that was enough.

Although the parties briefed a key Form 1040EZ tax perjury case, United States v. Reynolds, 919 F.2d 435 (7th Cir. 1990), the Court in Williams does not mention Reynolds.  I would like to discuss Reynolds briefly because Williams may have been inspired by Reynolds when he started improperly using the Form 1040EZ.

Key Graphics from TIGTA CI Employment Tax Report (3/27/17)

On Saturday, I posted a long blog entry on a TIGTA Report.  TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (Federal Tax Crimes Blog 3/25/17), here.  In that blog entry, amid long excerpts from the report, I included several graphics from the TIGTA Report that I think are worth pulling out and posting in a separate blog entry because otherwise readers may not have focused on them in that very long blog entry.  Those graphics might be particularly useful for students or new practitioners in the tax crimes area.  In one case, I also provide the surrounding narrative for context (but refer readers to the earlier blog entry for more of the context narrative).

CI Employment Tax Investigations 2011-2015
Employment tax investigations represent a small portion CI casework. For example, in FY 2015, CI initiated 102 employment tax investigations, which is less than 3 percent of all initiated cases. In comparison, the top two priorities—identity theft and abusive return preparer fraud and questionable refund fraud—resulted in almost 1,800 new investigations and accounted for 47 percent of new initiations in FY 2015. Figure 5 shows the number of employment tax cases initiated and referred for prosecution from FYs 2011 through 2015.
   n18 Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

Sources of CI Employment Tax Investigations 2011-2015


TFRP and CI Employment Tax Investigations 2010-2015


IRS Civil Division Fraud Referral Process


IRS CI Investigation and DOJ Referral Process








Saturday, March 25, 2017

TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (3/25/17)

NOTE TO READERS, FOR A BETTER VIEW OF THE GRAPHICS IN THIS BLOG, CLICK ON THE GRAPHIC.

TIGTA issued a report titled A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes (Ref # 2017-IE-R004 3/21/17), here.  I highly recommend the report to readers, both those watching the trajectory of criminal tax prosecutions and for students wanting to know more about the process.  I will report on some of the key features here to encourage readers to read or at least puruse the whole report.

I briefly introduce the key context for the report.

Employment taxes withheld from employee compensation and remitted to the IRS are the backbone of our tax and FICA system.  There must be robust incentives to encourage compliance by employers and those within the employer organization reponsible for employment tax withhold and payment to the IRS.  Those incentives include the standard range of civil and criminal penalties applicable to employers that apply to tax noncompliance.  But employment tax noncompliance requires that the penalty disincentives include potential civil liability and criminal penalties of those inside the employer organization that were responsible for the employment tax noncompliance.

The Trust Fund Recovery Penalty ("TFRP") in § 6672, here, is a civil collection mechanism whereby persons within an employer organization required to withhold, collect and pay over employment taxes from the compensation paid employees can be held civilly liable for those taxes.  Liability requires that the person have acted willfully.

The parallel criminal penalty for that failure to withhold, collect and payover employment taxes is in § 7202, here.  That provision imposes up to a 5-year incarceration period for each failure.  Liability requires that the person have acted willfully, but this is generally perceived as a higher level of willfulness than required for the TFRP.

The IRS investigates failures to withhold, collect and pay over.  Where it can, it tries to collect from the employer.  In order to insure collection, it may assert the TFRP against persons it believes are responsible for the noncompliance.  An IRS collection officer investigates the delinquent employment taxes and makes determinations as to potential TFRP liability.  The IRS collection officer will also look for indicators and fraud and, if firm indicators of fraud (also called badges of fraud) are found, may, in conjunction with his supervisor and the fraud technical adviser, refer the the case to IRS Criminal Investigation ("CI") to consider whether the case should be further investigated for potential criminal prosecution and referred to DOJ Tax Criminal Enforcement Section.

With that introduction the following is the the cover memorandum for the TIGTA report (I omit footnotes):
Synopsis 
Employment tax noncompliance is a serious crime. Employment taxes finance Federal Government operations plus Social Security and Medicare. When employers willfully fail to account for and deposit employment taxes, which they are holding in trust on behalf of the Federal Government, they are in effect stealing from the Government. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in our opinion, there is likely little deterrent effect. 
Recommendation 
The TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, CI, should consider a focused strategy to enhance the effectiveness of the IRS’s efforts to address egregious employment tax cases. This strategy should include use of data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. In addition, the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present).  
Response 
The IRS partially agreed with our recommendation. The IRS agreed with the portion of our recommendation describing a focused strategy to enhance effectiveness of the IRS’s efforts to address egregious employment tax cases by citing various initiatives in process and completed. However, the IRS did not specifically address our recommendation to enhance the use of data analytics. The IRS disagreed with the portion of our recommendation that the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present) citing the need to balance several factors by a number of stakeholders and limited government resources including limitations on the number of criminal tax cases the United States Attorneys and the US Courts can accommodate. Management’s response to the draft report is included as Appendix IX.

Another Offshore Account Guilty Plea Coupled with Bank Fraud Conspiracy (3/25/17)

DOJ Tax announced here a guilty plea to commit tax and bank fraud by a U.S. taxpayer, Casey Padula, with offshore accounts assisted by two offshore account enablers, Joshua VanDyk and Eric St-Cyr at Clover Asset Management.  I link at the end of this blog the prior blogs involving those enablers who previously pled and were sentenced.  The key excerpts listing Padula's skullduggery are:
According to documents filed with the court, Casey Padula, 48, of Port Charlotte, was the sole shareholder of Demandblox Inc. (Demandblox), a marketing and information technology business. Padula conspired with others to move funds from Demandblox to offshore accounts in Belize and disguised them as business expenses in Demandblox’s corporate records. Padula created two offshore companies in Belize: Intellectual Property Partners Inc. (IPPI) and Latin American Labor Outsourcing Inc. (LALO). He opened and controlled bank accounts in the names of these entities at Heritage International Bank & Trust Limited (Heritage Bank), a financial institution located in Belize. From 2012 through 2013, Padula caused periodic payments to be sent from Demandblox to his accounts at Heritage Bank and deposited approximately $2,490,688. Padula used the funds to pay for personal expenses and purchase significant personal assets. However, he falsely recorded these payments in Demandblox’s corporate books as intellectual property rights or royalty fees and deducted them as business expenses on Demandblox’s 2012 and 2013 corporate tax returns causing a tax loss of more than $728,000. 
Padula also conspired with investment advisors Joshua VanDyk and Eric St-Cyr at Clover Asset Management (CAM), a Cayman Islands investment firm, to open and fund an investment account that he would control, but that would not be in his name. Heritage Bank had an account at CAM in its name and its clients could get a subaccount through Heritage Bank at CAM, which would not be in the client’s name but rather would be a numbered account. Padula transferred $1,000,080 from the IPPI bank account at Heritage Bank in Belize to CAM to fund a numbered account. 
In addition to the tax fraud, Padula also conspired with others to commit bank fraud. Padula had a mortgage on his Port Charlotte, Florida home of approximately $1.5 million with Bank of America (BoA). In 2012, he sent a letter to the bank stating that he could no longer repay his loan. At the same time, Padula provided Robert Robinson, III, 43, who acted as a nominee buyer, with more than $625,000 from his IPPI bank account in Belize to fund a short sale of Padula’s home. Padula and Robinson signed a contract, which falsely represented that the property was sold through an “arms-length transaction,” and agreed that Padula would not be permitted to remain in the property after the sale. Padula in fact never moved from his home and less than two months after the closing, Robinson conveyed it back to Padula by transferring ownership to one of Padula’s Belizean entities for $1. Robinson also pleaded guilty today to signing a false Form HUD-1 in connection with his role in the scheme. 
* * * * 
Padula faces a statutory maximum sentence of five years in prison, a term of supervised release and monetary penalties. As part of his plea agreement, Padula agreed to pay restitution in the amount of $728,609 to the IRS and to BoA in the amount of $728,609. Robinson faces a statutory maximum sentence of one year in prison, a term of supervised release, restitution and monetary penalties.
The related documents are:
  • The Information, here.
  • The Plea agreement, here.
JAT Comments:

Wednesday, March 22, 2017

Fifth Circuit Rejcts Nontraditional Contest of FBAR Willful Burden of Proof Contest (3/22/17)

I previously had several blogs on the attempt by Bernhard Gubser to contest the burden of proof issue for the FBAR willful penalty through nontraditional means.  The most recent is this:  Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (Federal Tax Crimes Blog 11/16/16), here.  Mr. Gubser complained that the Government's burden of persuasion on the FBAR willful penalty should be clear and convincing rather than preponderance.  He alleged that the Appeals Officer had represented that he would win if the burden of persuasion were clear and convincing rather than preponderance.

It appears that Mr. Gubser failed to persuade the Fifth Circuit of the merits of his argument -- at least on whether he made the argument via the right process.  On March 22, 2017, in a short per curiam nonprecedential opinion, the Fifth Circuit rejected Mr. Gubser's bid.  Gubser v. United States, 119 AFTR 2d ¶ 2017-532 (5th Cir. 2017), here.

Tuesday, March 21, 2017

UBS Reportedly Going to Trial in French Case (3/21/17)

Reuters has this report:  Joshua Franklin and Maya Nikolaeva, UBS faces French trial in long-running tax case (Reuters 3/20/17), here.  Excerpts:
UBS (UBSG.S) and its French subsidiary face trial in France after a long-running investigation into allegations that the Swiss bank helped wealthy clients avoid taxes. 
* * * * 
French magistrates have ordered that UBS stand trial on charges of aggravated tax fraud and money laundering as well as illegally offering related services, a judicial source said. 
* * * * 
Magistrates were expected this week to order a trial after negotiations failed to produce a settlement in the long-running probe into allegations UBS helped clients avoid taxes, Reuters reported on Sunday. 
French newspaper JDD said UBS had rejected a 1.1 billion euro ($1.18 billion) settlement proposed by prosecutors. 
The JDD quoted Markus Diethelm, UBS's group general counsel, as saying a 1.1 billion euro payment was "unthinkable" and out of line with similar settlements reached in other countries.
The report also offers UBS's response, the the standard one for the guilty and the innocent to this type development:
"We will now have the possibility to respond in detail in a court of law," UBS said in an emailed statement on Monday. "UBS has made clear that the bank disagrees with the allegations, assumptions and legal interpretations being made."
The report offers the following related development:
French authorities are also investigating HSBC Holdings (HSBA.L) and last year a source familiar with the matter said the country's financial prosecutor asked for a trial of Europe's biggest bank and its Swiss private banking unit over allegations it helped customers dodge taxes in 2006-2007.