Wednesday, August 23, 2017

HMRC Enlists Financial and Other Professionals to Warn UK Citizen Clients About Offshore Accounts (8/23/17)

Camilla Hodgson, 'Life-changing consequences:' HMRC warns on risks of hiding wealth offshore in new crackdown (Business Insider Date not indicates but I believe today or yesterday), here.

Excerpts:
The UK tax collector is sending letters warning of the "potentially life-changing consequences" of failing to disclose offshore-held wealth, as part of a drive to prevent people skirting tax rules. 
Millions of UK taxpayers are being sent the warning via their financial institutions and advisers. 
These institutions have been given until the end of August to explain to all clients the risks of failing to declare offshore-held money and assets. 
* * * * 
Under new transparency rules, however, information sharing between more than 100 countries will allow HMRC to crack down on individuals who are trying to evade tax they should be paying, the warning said: "The world is becoming more transparent." 
Overseas institutions such as banks and insurers, it goes on, have already begun supplying such data to help HMRC "identify the minority who are not paying what they owe." 
It urges people to "come to us before we come to you," and encourages reporting any undeclared taxable assets via a "worldwide disclosure facility." Although this will result in penalty charges of up to 200% of what is unpaid, penalties are due to rise further from September 2018. 
Since it would entail a huge amount of work for financial institutions to check which of their customers may have offshore-held assets, the warning is being sent out to most customers. However, it includes an assurance that those whose tax affairs are up to date and complete need not take any action.

Monday, August 21, 2017

Agostino & Associates Article on Executor Risks for Decedent's Foreign Accounts (8/21/17)

Frank Agostino and Nicholas Karp, Protecting the Executor Who Becomes Aware of Undisclosed Foreign Accounts, Agostino & Associates Monthly Journal of Tax Controversy (August 2017), here

The introduction:
An executor administering an estate with undisclosed foreign accounts is exposed to substantial risks that may not be apparent. The following discussion is intended for executors and administrators who wish to understand and avoid those risks.
The authors identify the following as "Superficially attractive but risky advice sometimes given by accounting firms:"
The accounting firm advises the executor to:
• Report current year foreign income and file the current year FBAR, reasoning that the executor has signature authority over the foreign account for the current year, but no responsibility for prior years.
• Not file any prior year amended returns or FBARs, reasoning that the executor should not speculate as to the willfulness of the decedent.
• Distribute the proceeds of the foreign accounts to the beneficiaries without taking any position as to whether they are required to file IRS Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. An executor has no obligation to give tax advice to beneficiaries: it is the beneficiaries’ responsibility to determine their obligation to file IRS Forms 3520.
Lastly, the accounting firm advises against hiring a lawyer. The taxpayer is dead: who can the Government prosecute? 
From there, the authors identify the problems and risks.  For example, the authors quickly identify a criminal risk for the executor:
The most dangerous (and perhaps surprising) hazard is the potential for the executor to unwittingly commit a federal crime. 18 U.S.C. § 4 makes it a crime (“misprision”) if a person, “having knowledge of the actual commission of a felony ... conceals and does not as soon as possible make known the same...” Tax evasion is a felony (26 U.S.C. § 7201). Courts have consistently held that misprision requires, “an affirmative act of concealment.” Failing to disclose tax evasion can be considered concealing the theft of money from the United States. Concealing stolen money has been held to be an affirmative act upon which a charge of misprison (sic) may be based. The executor will, under the facts, have all the information needed to conclude that the decedent’s returns understated tax liability and money is due the United States. If it is eventually determined that the decedent’s non-filing was willful, a prosecutor could well reason that the executor’s choice not to amend the returns was tantamount to concealing money stolen from the United States. Moreover, should any returns associated with the estate subsequently be examined, any lapse in providing information about the foreign accounts could implicate the executor in concealment. In either of these situations, if the Government can show the executor had reason to know the decedent’s delinquencies were willful, the Government will have the elements needed to charge the executor with misprision.
And it goes on from there to include civil risks.

Sunday, August 20, 2017

Sixth Circuit Rejects Frontal Assault on FATCA, IGAs and FBAR Requirements (8/20/17)

The Sixth Circuit on Friday rejected a frontal assault on FATCA, Intergovernmental Agreements and FBAR requirements.  Crawford v. United States Dept. of Treasury, ___ F.3d ___, 2017 U.S. App. LEXIS 15648 (6th Cir. 2017), here.  All but one of the plaintiffs were various U.S. taxpayers who claimed, in effect, the real potential for injury by having their foreign account information shared with the U.S. Government or being forced to share it by FBARs.  One of the plaintiffs was Senator Rand Paul, in his official capacity as member of the United States Senate, who likes to strut to gum up governmental works.  The issue was a legal concept called standing.  They failed the standing requirement.

The Court summarized the standing concept as (case citations omitted):
Federal courts have constitutional authority to decide only "cases" and "controversies." U.S. Const. art. III § 2. The requirement of standing is "rooted in the traditional understanding of a case or controversy."  To bring suit, Plaintiffs must have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues" before the court.  
The "irreducible constitutional minimum" of standing is that for each claim, each plaintiff must allege an actual or imminent injury that is traceable to the defendant and redressable by the court. 
That at least is the starting point for the court's more nuanced analysis.

Bottom line, the Court concludes as follows:
FATCA imposes far-reaching reporting obligations on individuals and financial institutions, which, like many government regulations, undoubtedly exact monetary and other costs of compliance. The IGAs, to be sure, are part of an unprecedented scheme of international tax enforcement. And the FBAR Willfulness Penalty, if it were to be imposed, is admittedly steep: it could theoretically bring a $100,000 fine for failure to report a foreign account with a balance of $10,000.01. 
None of these considerations, however, help these Plaintiffs at this time to clear the initial jurisdictional hurdle of standing. 
Accordingly, we AFFIRM the judgment of the district court, and we DENY as moot Defendants' motion to strike.

Tuesday, August 15, 2017

Swiss Asset Manager and DOJ Enter Nonprosecution Agreement (8/15/17 8/18/17)

DOJ Tax and USAO SDNY announced here  and here that it has reached a nonprosecution agreement ("NPA") with Prime Partners SA (“Prime Partners”), a Swiss asset management firm,  The plea agreement and attached Statement of Facts ("SOF") are here.

The cost to Prime Partners is $5 million, consisting of $4.32 million in forfeiture (representing a portion of the gross revenue it earned with respect to the undeclared accounts for 2001-2010) and $0.068 million in restitution to the IRS (representing the approximate unpaid taxes from Prime Partners' clients).  Key excerpts from the press release are:
As part of the NPA, Prime Partners admitted various facts concerning its wrongful conduct and the remedial measures that it took to cease that conduct. Specifically, Prime Partners admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of Prime Partners in order to evade their U.S. tax obligations, in violation of U.S. law. Prime Partners acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by, among other things: (i) creating sham entities, which had no business purpose, that served as the nominal account holders for the accounts; (ii) advising U.S. taxpayer-clients not to retain their account statements, to call Prime Partners collect from pay phones, and to destroy any faxes they received from Prime Partners; (iii) providing U.S. taxpayer-clients with prepaid debit cards, which were funded with money from the clients’ undeclared accounts; and (iv) facilitating cash transfers in the United States between U.S. taxpayer-clients with undeclared accounts. 
The NPA recognizes that, in early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes. The NPA further recognizes the extraordinary cooperation of Prime Partners, including its voluntary production of approximately 175 client files for non-compliant U.S. taxpayers, which included the identities of those U.S. taxpayers.
This NPA is not part of the Swiss Bank Program.  So the question one must ask is why did DOJ even do this?  Well, the press release sets forth DOJ Tax's public explanation in the press release:

The U.S. Attorney’s Office entered into the NPA based on factors including:
  • Prime Partners’ voluntary and extraordinary cooperation, including its voluntary production of account files containing the identities of U.S. taxpayer-clients;
  • Prime Partners’ voluntary implementation of various remedial measures beginning in or around early 2009, before the investigation of its conduct began;
  • Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
  • Prime Partners’ representation – based on an investigation by outside counsel, the results of which have been reviewed by the U.S. Attorney’s Office and the Tax Division – that the misconduct under investigation did not, and does not, extend beyond that described in the Statement of Facts.
The NPA requires Prime Partners to continue to cooperate with the United States for at least three years from the date of the agreement. In the event that Prime Partners violates the NPA, the U.S. Attorney’s Office may prosecute Prime Partners.
Addendum 8/18/17 10:30 am:

Monday, August 14, 2017

Indictment of Taxpayers for Evasion of Payment and Structuring Cash Withdrawals (8/14/17)

DOJ Tax announced here the indictment of two Virginia taxpayers -- husband and wife -- for evasion of payment, § 7201, and conspiracy to structure bank deposits to avoid the reporting requirements.

This is a pretty straight-forward, unexceptional indictment for Count One, evasion of payment.  They owed the tax, they reported the tax liabilities on their returns, the IRS assessed the tax as reported, and they took various actions affirmative acts to evade payment (transfer or assets to kin, signing and filing false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and withdrawing cash from bank accounts (the actions asserted in the structuring conspiracy charge as the overt acts of the conspiracy)).

The structuring conspiracy charge is also unexceptional except for how sparse it is.  The overt acts of the conspiracy are the many cash withdrawals of less than $10,000.  These overt acts are presented in a spreadsheet table.  Often the overt acts of a conspiracy go on ad nauseum to conjure up the defendants as evil actors.  Here, by contrast, these overt acts are simply the list of cash withdrawals during a six month period in 2015.  That is all that is required to have the indictment pass muster as presenting fair notice to the defendants.  If the case goes to trial, however, I would expect the Government to enter into evidence additional acts that could reasonably be described as overt acts of the conspiracy and am surprised that the Government did not lard up the indictment to paint a more sinister picture than presented by the list of withdrawals.

One technical quibble. The indictment refers to the tax liability as "self-assessed."  There is no such concept as a self-assessed tax.  The taxpayer reports -- self-reports, if you will -- tax liability on a return; the IRS assesses the tax liability accordingly.  Section 6201(a)(1) ("The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title").  The act of assessment is  the recording by the IRS of the liability (whether self-reported or not) on the books of the IRS as an assessment.  As I note in my tax procedure book:
Our tax system is described as a “self-assessment” system.  This means that the taxpayer reports the amount of the tax obligation via a tax return.  The IRS must assess the tax reported on the return.  § 6201(a)(1). The taxes thus reported are often referred to colloquially as “self-assessed” which is probably a fair characterization since the statutory requirement that the IRS assess the amount reported is mandatory, making the IRS’s formal assessment a ministerial act.  
And then, elsewhere in the book later, I use the short-hand self-assessed or some variation.

Wednesday, August 9, 2017

Court Sustains $10,000 Per Year § 6038(b) Penalty for Form 5471 Noncompliance for Taxpayer Who Withdrew from 2009 OVDP (8/9/17)

In Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017), here, Dewees, a U.S. citizen residing in Canada, was fined $120,000 -- $10,000 per years for From 5471 noncompliance.  After assessment of that penalty, Dewees declined to pay.  He lived in Canada and apparently felt he was outside the IRS's ability to compel  payment.  Pursuant to the U.S. Canada tax treaty, however, the U.S. enlisted the Canadian tax authority to withhold a Canadian tax refund due Dewees.  At that point, Dewees paid the penalty and brought this suit to have his payments refunded on various constitutional grounds -- Eighth Amendment, Due Process and Equal Protection.  On motion of the U.S., the court dismissed the complaint.

I link the following documents:
  • Complaint, here.
  • U.S. Motion, here.
  • Dewees' Opposition, here.
  • U.S. reply, here.
  • Docket Entries as of 8/9/17, here.
The key timeline that I derive from the opinion and the foregoing documents are:

1. Dewees successfully joined OVDP in 2009.  The 2009 iteration of OVDP had the following requirements:  (i) filing income tax returns for 6 years; (ii) paying income tax, 20% accuracy related penalty, and interest on both; (iii) filing FBARs for 6 years; (iii) paying an IRS penalty now called a miscellaneous offshore penalty in lieu of all other penalties, including the FBAR penalty and Form 5471 penalties.

2. It is not clear from what I saw (I did not study the documents carefully for nuance) whether Dewees completed the package including the Forms 1040 or 1040X, the 5471s, and the FBARs.  It appears that there was some commotion between the IRS and Dewees as to whether he had submitted all information.

3.  On May 26, 2010, the IRS notified Dewees that he would be "terminated from the OVDP for failure to furnish the requested 1040s and FBAR forms (for the years 2003-2008).

4.  "In June 2010, the filings requested in the correspondence dated May 19, 2010 were resent."

5.  On October 28, 2010, a $252,480 penalty assessment was made against Dewees.  Dewees alleges that the penalty assessment was "relating to FBAR non-compliance."  The Government states that it was assessed "under the terms of the OVDP."  If the Government's statement is correct, the penalty assessment was the MOP assessment in lieu of all penalties other than the income tax penalty; in Dewees case, the MOP penalty would have been in lieu of the FBAR penalty and the Form 5471 penalty.  [JAT comment:  a question I have is how the MOP could have moved to assessment without the taxpayer having signed a closing agreement inside the OVDP penalty structure, but I could not find the answer to that question.]

6.  "On November 19, 2010 the penalty assessed is reduced to $185,862, as some accounts had been double counted by the IRS."

7.  "On January 13, 2011 Mr. Dewees receives notification that he is at risk of being terminated from the OVDP program because of his failure to pay the assessed penalty."

8.  "On June 9, 2011, Mr. Dewees received a letter from Mr. Harrington [IRS Agent] requesting confirmation of his intent to no longer participate in the OVDP."

9.  "On June 16, 2011 Mr. Dewees confirms his withdrawal from the OVDP based on the excessive amount of penalties owing. The penalties were removed from his account."  [JAT comment:  this would be consistent with the penalties being MOP rather than FBAR because the MOP could not be assessed unless he completed OVDP without opting out or being removed.]

10.  "On September 20, 2011 Mr. Dewees receives a letter from Mr. Harrington dated September 9, 2011, imposing a new $120,000 of penalties for the late filing of Form 5471. The letter indicates that reasonable cause for failure to file will be considered."  [JAT Comment:  This is consistent with Dewees being removed from OVDP because he would have lost his Form 5471 penalty protection.]

11.  Now, if the taxpayer truly were removed from OVDP, he should have been subject to risk of assessment of FBAR penalties.  From what I have seen, it is not clear that FBAR penalties were imposed.  I infer from the IRS's imposition of maximum Form 5471 penalties that the IRS did not think he was a nonwillful actor, but still there is no indication what, if anything, happened on the FBAR penalties.

Tuesday, August 8, 2017

USSC Practitioners Advisory Group Recommendations on Sentencing Commission Priorities (8/8/17)

The Practitioners Advisory Group ("PAG"), here, A Standing Advisory Group of the United States Sentencing Commission ("USSC"), here, has written a letter, here, to the Chair of the USSC commenting on the USSC's proposed 2017-2018 priorities.  There is no priority relating to tax and thus no comments related to tax.  However, the PAG does recommend one priority that is in a general category that tax defense attorneys should pay close attention to -- Examination of Collateral Consequences.  I have written on collateral consequences in Chapter 12: Criminal Penalties and the Investigation Function, of Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶ 12.06 Collateral Consequences.

The PAG addresses a subset of the general subject, particularly related to the duties and priorities of the USSC.  The discussion is very good, so I cut and paste relevant excerpts:
I. PAG Proposed Priority- Examination of Collateral Consequences 
As in prior years, the PAG urges the Commission to consider as a proposed priority the examination of the impact of the collateral consequences of convictions. Collateral consequences - the legal penalties and restrictions that take effect automatically without regard to whether they are included in the court's judgment - are frequently the most important aspect of punishment from a defendant's perspective. Convicted individuals face reduced employment and housing opportunities, legal barriers to occupational and business licensure, driver's license suspensions, voting restrictions, and many other collateral consequences that make successful reentry more difficult. Some states still have full or partial bans on welfare and food stamps for people who have felony drug convictions. Such limitations can have a crippling effect on the individual, who may have to support a family, yet is unable to rely on any of these important programs.
In a number of recent cases, federal courts have imposed more lenient sentences in consideration of the severe collateral consequences a defendant would experience. In other cases, courts have sought creative ways to relieve defendants from the effect of collateral consequences long after the court's sentence has been fully served.
We briefly describe below the ways in which collateral consequences affect the work of sentencing courts. The PAG urges the Commission to take this matter under advisement and to consider scheduling hearings on this issue. 
1. Understanding Collateral Consequences and Ensuring that a Defendant has been Notified about Them 
In general, the constitutional obligation of advisement is defense counsel's under the Sixth Amendment, not the court's. The one situation in which judicial advisement is required under the Federal Rules of Criminal Procedure is where a defendant considering a guilty plea is not a citizen. n82 That said, a federal court is permitted to inform itself about the collateral consequences that may apply in a particular case in order to decide whether to take such consequences into account when fashioning a sentence. The court may ask the probation office, which is part of the judicial branch, for information about collateral consequences, and probation ought to be informed about collateral consequences in any event so that it can assist defendants with reentry and reintegration. Similarly, the court may ask defense counsel for reassurance that counsel has advised the defendant about applicable collateral consequences before accepting a guilty plea or imposing a sentence, if only as a prophylactic measure to guard against subsequent claims of ineffective assistance. n83
   n82 See Fed. R. Crim. P. 11(b)(l)(O).
   n83 Just last month, the Supreme Court reaffirmed a defense lawyer's obligation to warn defendants about immigration consequences of conviction. See US. v. Jae Lee, 137 S. Ct. 1958 (20 17). In state courts, the judicial advisement obligation may be more robust, both under the state constitution and applicable court rule, such as where sex offender registration or firearms dispossession may result from conviction. However, such notice has generally not been required in the federal system. Case law developments, notably in the past few years since the Supreme Court's decision in Padilla v. Kentucky, 559 U.S. 356 (2010), are described in Chapters 4 and 8 of Love, Roberts and Klingele, COLLATERAL CONSEQUENCES OF CRJMlNAL CONVICTION: LAW POLICY AND PRACTICE (West/NACDL, 2016 ed.). 
While judicial notice about collateral consequences may not be mandated in the federal system outside the immigration context, either by counsel or court, such notice has been recognized as sound practice by the major national law reform and professional organizations of lawyers. n84 The Model Penal Code gives the sentencing commission responsibility for collecting collateral consequences and providing guidance to sentencing courts relating to their consideration of collateral consequences at and after sentencing. 85 The PAG believes that the Commission could usefully consider what if any role it might play in this regard.
   n84 The Uniform Law Commission and the American Law Institute have both proposed that sentencing courts should ensure that a defendant has been informed about collateral consequences that might affect willingness to plead, and at sentencing. See Model Penal Code: Sentencing,§ 6x.04(1); Uniform Collateral Consequences of Conviction Act§§ 5, 6 (2010). The ABA Standards for Criminal Justice also impose this requirement. See Collateral Sanctions and Discretionary Disqualification of Convicted Persons, Standards 19-2.3, 19-2.4(b) (2003).
   n85 See Model Penal Code: Sentencing § 6x.02. 

2017 Editions to Townsend on Federal Tax Procedure Available for Download (8/8/17)

My 2017 editions of my Federal Tax Procedure Book are now posted on SSRN and available for download as follows:
I offer these for all to use.  I originally prepared this for students in my Federal Tax Procedure class at the University of Houston Law School.  I have now retired from teaching that class (last semester was Fall 2015).  But, I keep these editions up with annual publications in August.  I have tried to include in the text the substantive materials for a law school class in tax procedure.  The Practitioner Edition is the same as the Student Edition except that it contains footnotes that, I hope in most cases, support or expand on what is in the text, with some flights of fancy.  The Student Edition strips out the footnotes so that students do not get bogged down in minutia and irrelevances.

I would appreciate hearing from readers about things that need correction or improvement (either in substance or presentation).  I am constantly revising the editions in advance of the next publication (August 2018) and readers can materially help in making that next edition better.

Also, I will be posting material updates, corrections and other matters related to both Editions on my Federal Tax Procedure Blog.

Monday, August 7, 2017

Tax Practitioners' Advice to Clients About the Audit Profile/Risk (8/7/17)

I thought readers might be interested in this recent article:  Michael B. Lang and Jay A. Soled, Disclosing Audit Risk to Taxpayers, 36 Va. Tax Rev. 423 (2017) (no link available).  The issue is whether tax professionals may advise clients as to their audit profile -- risk of audit.  There has been some confusion among practitioners about that issue because of the prohibition on considering risk of audit in assessing the merits of a tax return position.  The following is from the Highlight for the article:
When taxpayers file their tax returns, they are often worried about the prospect of an Internal Revenue Service (Service) audit. To date, the position of the Service and of professional organizations has been that tax return preparers cannot take into account audit risk in evaluating the merits of a return position. Some practitioners have broadly - and incorrectly - interpreted this regulation as a mandate against talking about audit risk with their clients. Taxpayers therefore often make their own assessment of their audit risk, relying on information sources such as the Internet and tax return preparation software. Given the uncertain reliability of such sources, it is appropriate to encourage more communication between tax return preparers and taxpayers on the subject of audit risk. 
This article argues that the Treasury Department and professional organizations should make it clear that tax return preparers may make full disclosure of Service audit risks to the extent this information is known. While this information cannot be used to evaluate the substantive merit of a particular tax return position, readily dispensing it would be emblematic of a transparent tax system and satisfy taxpayers' quest to more fully understand the tax return filing process. As such, the availability of Service audit risk information would be a marked improvement over the existing status quo.
Some key excerpts from the article (pp. 430-433 & 445-446, footnotes omitted):
III. Why Audit Risk Disclosure Makes Sense Today 
Outside the realm of calibrating potential penalty exposure, nothing in the Code, regulations, or professional standards precludes candid conversations on the topic of audit risk. Nevertheless, the myth of a universal prohibition of Service audit risk disclosure endures, making some tax professionals hesitate to provide audit risk projections. Aside from the myth itself, sometimes tax preparers' hesitancy reflects their lack of knowledge of the audit risk; in other instances, tax practitioners fear that aggressive clients might take untenable positions on their returns if they knew the unlikelihood of an audit. 
Notwithstanding this reluctance to disclose audit risk, legal and accounting ethical standards require the free flow of information between practitioners and their clients. n28 Cultural, technological, and social developments have also changed the tax preparation field, bolstering support for the proposition that tax practitioners should disclose audit risk to their clients. These developments, explored below, are threefold: (A) the availability of audit risk information, (B) more rigorous tax return submission and practice standards, and (C) more prevalent professional malpractice litigation. 
A. Ready Availability of Audit Risk Information 
Whether or not the tax profession or the Service cares to admit it, the availability of tax audit risk information is ubiquitous. Individuals can commonly find this information through the Internet and tax preparation software.  
As the Internet has evolved, it has become the primary source of information for many people, particularly the nation's youth. Within milliseconds, entry of a query can retrieve thousands of relevant documents that are directly on point. For example, a Google search of the phrase "IRS audit risk" delivers numerous articles on the topic. Some of the articles are informative; other articles are even interactive, allowing viewers to enter information and, in response, get individualized feedback based upon their personal circumstances. 
Another source of audit risk disclosure is tax software preparation packages such as TurboTax and H&R Block. These tax software preparation packages are widely used by the general public. In addition to helping taxpayers compute their tax liabilities, they all appear to offer another service: upon completion of the tax return preparation process, they assess Service audit risk and present this information to the taxpayer. For example, upon tax return completion, TurboTax sets forth a range from dark green to bright red with an indicator arrow; depending upon the data entered, this arrow will appear somewhere along this range, indicating the taxpayer's supposed audit risk.  
Whether the audit risk information that the Internet and tax software companies provide is accurate is an entirely different issue. Years ago, the Service developed computer algorithms, the Discriminant Function System, which produced a DIF score for a tax return. The DIF score is used to determine whether the tax return should be audited. To date, the Service has kept this information a closely guarded agency secret. The lack of  public accessibility to this vital information means that whatever is published on the Internet or presented to tax preparation software users is suspect, based entirely upon conjecture and speculation, rather than the Service's actual guidelines. 

Saturday, August 5, 2017

Taxpayer Successfully Shows NonPossession and Control to Avoid Summons and Successfully in Most Part Asserted Fifth Amendment (8/5/17; 8/20/17)

In United States v. Lui, 2017 U.S. Dist. LEXIS 119953 (N.D. Cal. 2017), here, the court granted in part and denied in part the IRS petition to enforce the summons to the taxpayer.  The time line of events pieced together from the opinion and the parties' key submissions (Liu's amended memo here, the Gov't's response here,and Lui's Sur-reply here) is:
  • 9/??/13 IRS starts audit for 2010 year
  • 1/29/14 IRS issues IDR 001 requesting "copies of all delinquent FBARs"
  • 2/11/4 "Lui submitted FBAR filings for years 2008, 2009, 2010, 2011 and 2012." [There is some commotion as to whether the 2012 FBAR had been timely filed]
  • 7/8/14 first summons issue for testimony
  • 8/4/14 Lui responds to summons and invokes Fifth Amendment in Q&A.
  • 8/??/14 IRS expands audit to include 2005-2009 and 2011-2012
  • 7/29/15 IRS issues second summons for documents related to offshore activity, related to foreign entities.
  • 8/10/15 IRS issued IDR 13 and an Foreign Document Request ("FDR" pursuant to 26 U.S.C. § 982. The FDR, with IDR 13, sought records from foreign companies. Id.  [JAT Note, the opinion mentions the FDR but says almost nothing about why that is an issue, since it was not part of the summons enforcement proceeding except as background.]
  • 10/14/16 Lui produces some documents but not others.  In his submission, the allegation is made that "Lui fully and timely responded to the IDRs, the FDR, and the both summonses, except that Lui could not provide all documents related to Netfinity and WG. " As to the FDR, "Lui provided certain documents pursuant to the FDR that were not in his possession or control, specifically the limited documents his family in Hong Kong chose to provide him in response to his requests."
  • 2/26/16 IRS petitions to enforce summons (I think it may be both summonses)
  • 3/16/16 Court approves summons on prima facie basis and issues Lui show cause order
  • At some point apparently in 2016, Lui served on Government request for admissions and for documents.
  • 12/15/16 Hearing on show cause order
  • 7/31/17 Order Issued
Decisions as to Document Production

Lui's defense to the petition to enforce was that he had produced the documents he could but that he did not have possession or control or ability to obtain the documents.  The Court hold that the summonsed party asserting this defense must make a credible showing of lack of possession and control as of the date the summons was issued.  As to what the summonsed party must show, the Court adopted the sliding scale test of United States v. Malhas, 2015 U.S. Dist. LEXIS 151990, 2015 WL 6955496, at *4, which it describes as "the more the Government's evidence suggests the defendant possesses the documents at issue, the heavier the defendant's burden to successfully demonstrate that he does not."  Based on that Court's application of the Malhas test, the Court holds that (one footnote omitted):
The Court adopts the sliding scale test from Malhas, but reaches a different result, because the facts here are markedly different than in Malhas. For one thing, Lui presents far more than his own affidavit to support his argument of non-possession. ECF No. 82 at 21-24. Lui argues he does not have possession of the requested documents  because the non-produced records were either beyond his control or no longer existed as of July 29, 2015, the date of the IRS document summons. ECF No. 82 at 14-17, 21-24. On July 26, 2014, Lui resigned as a director of Netfinity and any related records were transferred out of his possession, custody, care and control to the custody of his siblings. ECF No. 82 at 15, citing ECF No. 24-2 at 154; ECF No. 24-6 at 63-71. Lui argues that "[c]oncurrently," the 2002 Trust assets were distributed among Lui's siblings, and "all shares in Netfinity and WG were transferred to Lui's" siblings." Id. Lui contends that "[u]pon distribution of the assets, the 2002 Trust dissolved because it no longer held any assets." ECF No. 82 at 15 (citing ECF No. 23 at 7). Lui presents numerous exhibits that show Lui had limited power over the trust that held Netfinity shares, ECF No. 24-2 at 17-18, 12, 73, 77, 75, 79; ECF No. 22-2 at 3-7; that the interests in Netfinity and WG were transferred to Lui's siblings at their request, ECF No. 24-2 at 38-41, 19, 35, 105,107-112; that the documents sought are now in the possession of Lui's siblings, ECF No. 24-2 at 63-71, 154; ECF No. 22-2 at 3-7; and that Lui was never a beneficial owner, [*11]  ECF No. 24-2 at 14-16. Moreover, Lui has attached advisory letters from law firms within the foreign jurisdictions, explaining that non-beneficial owners have no legal right to compel production of the documents. ECF No. 21-5 at 3-7. Therefore, Lui argues, he has no enforceable legal right to obtain the records. ECF No. 82 at 15. Lastly, Lui presents evidence that he did not receive a dividend from Galaxy during the audit period, ECF No. 24-2 at 81-82, and asserts he is not the beneficial owner of the Netfinity shares, ECF No. 88 at 4. 
The Government offers little direct evidence to the contrary. It primarily relies on a 2005 SEC filing that lists Lui as the owner of Netfinity. ECF No. 33-1. In addition, the Government also asks the Court to consider the suspicious timing of events by which the shares of Netfinity were distributed out of Lui's control and to his siblings, ECF No. 84 at 10, as well as Lui's lack of documentation surrounding the transfer of the Netfinity stock to his siblings. Id. at 8. 
These circumstances, though suspicious, are insufficient to demonstrate that Lui possesses or has the capacity to obtain the challenged documents. Although Lui may have been on notice of the IRS' investigation into his foreign assets because of the FDR or the testimonial summons in 2014, Lui's duty to retain these documents was not fixed until July 29, 2015, the date of the document summons. n4 The Court finds that the suspicious timing alone is not enough to overcome the plethora of evidence that Lui has offered to show that he did not possess, control, or have custody of the documents at issue which the IRS sought in its July 29, 2015 document summons as of that date. The Court cannot compel Lui to produce documents that he does not have in his possession or control.
   n4 The Government argues the relevant summons date was July 8, 2014 because it placed Lui "on notice that the IRS was examining his foreign interests." ECF No. 84 at 8. The obligation to retain documents does not begin until the actual document summons is issued. See Asay, 614 F.2d at 660. 
Nonetheless, although Lui has succeeded in demonstrating that he does not possess documents directly related to the Netfinity or WG assets, he has not met his burden of showing that he has no documents related to the transfer of those assets. As the Government argues, "[i]t is difficult to believe that such a significant purchase and transfer of stock would be unaccompanied by correspondence or at least emails maintained by the transferor." ECF No. 84 at 8. In the IRS' initial summons, it included "letters of wishes, letters of intent, orders of instructions and other similar documents expressing the founder's or beneficiary's wishes or instructions regarding the entity." ECF No. 1-3 at 7. Lui has not included any emails or other correspondence with regard to the transfer of the Netfinity stock. He has, however, been able to provide declarations from his siblings corroborating the fact that he no longer has access to Netfinity documents. ECF No. 83-1, 83-2, 83-3, 83-4, 83-5, 83-6, 83-7, 83-8, 83-9, 83-10, 83-11. Therefore, Lui is ordered to turn over any additional correspondence or other records in his possession regarding the transfers, or to submit a declaration under penalty of perjury that no such documents exist and that none existed as of July 29, 2015. Such declaration must be filed by August 11, 2017.
Decisions as to Testimonial Summons

The Court sustained Lui's assertion of the Fifth Amendment for most questions (related to FBAR obligations and foreign entity ownership).  The exceptions the Court made were
  • Lui had waived his Fifth Amendment privilege to "Who keeps the books and records of Netfinity Asset Corporation?"
  • Lui must answer the following questions because he had asserted that he had searched diligently and produced all records:
  • (1) Did you possess any summonsed documents as of July 29, 2015 (the service date for the Document Summons)?
  • (2) Who possessed the Netfinity documents on July 29, 2015?
  • (3) Where do the individuals that possessed the documents on July 29, 2015 reside?
  • (4) How did you know that your siblings possessed or controlled the documents on July 29, 2015?
  • (5) What documents do you possess that evidence your siblings' possession or control of the Netfinity documents?
The court quashed Liu's requests for admission and production.

The docket entries as of today are here:

JAT Comments:

1.  My gut reaction is that Lui's lawyer did a great job.  See the Lui's submissions linked above.

2.  The general notion is that, once the witness testifies as to anything within the scope of the Fifth Amendment privilege, he has waived the privilege as to all related matters in the proceeding.  As applicable in investigations, once he waives his privilege as to some part of the investigation, he waives it as to all.  As to trials, once he waives the privilege by testifying, he waives it for all questions within the scope of the trial.  (Now there is some nuance behind all of that, but that is the general statement.)  The following arguments were submitted by Liu in the Sur-Reply (footnotes omitted):
First, waiver cannot be lightly inferred. See Smith v. United States, 337 U.S. 137, 150 (1949). For a party to waive the Fifth Amendment, he must have reason to believe that his statements are both “testimonial” and “incriminating.” See Klein v. Harris, 667 F.2d 274, 288 (2d Cir. 1971). “Testimonial” means “voluntarily made under oath in the context of the same judicial proceeding,” which would apply here. Id. “Incriminating,” however, means something more than matters that are “collateral” to the circumstances and must directly inculpate the person in the commission of the (alleged) crime. Id. Here, Lui has merely stated that requested documents are in the control of his siblings as of July 26, 2014, a fact that in no way incriminates him with regard to the actions the IRS may assert are criminal, such as allegedly willfully not filing certain forms.
Second, offering evidence to challenge an IRS summons on the basis of non-possession or control does not mean forfeiting Fifth Amendment protections. See United States v. Asay, 614 F.2d 655, 660 (9th Cir. 1980) (recipients of summonses bear the burden of offering credible evidence of non-possession); United States v. Bright, 596 F.3d 683, 694 (9th Cir. 2010) (upholding Fifth Amendment privilege in a summons action, after the taxpayer submitted declarations regarding non-possession and attempts to comply with document requests); see also Emspak v. United States, 349 U.S. 190, 196 (1955) (courts should indulge every reasonable presumption against finding a waiver). The government’s position contradicts Bright, and would force a taxpayer to choose between (i) preserving his Fifth Amendment rights or (ii) presenting evidence of non-possession.
The government further asserts that Lui’s Fifth Amendment claims for questions relating to Netfinity “are suspect” because “he now alleges that he was never the beneficial owner.” ECF No. 84, pp. 8:28-9:2. The government reasons that if Lui did not own the stock, then he should have no legitimate fear of prosecution. ECF No. 84, p. 9:2-3.
The government’s position ignores that even though Lui was not the beneficial owner of Netfinity, that fact does not resolve whether the IRS questions could lead to incriminating evidence the IRS might use to prosecute Lui. The IRS has consistently declined to acknowledge that the 2002 Trust existed, and it denied that Lui timely filed a 2012 FBAR. Further, the IRS appears to believe that Lui either had income tax or information reporting obligations because of his record ownership of Netfinity shares. The government has not, for example, said that it will not try to prosecute Lui for alleged failures to file IRS Form 5471 relating to ownership of foreign corporations, Foreign Bank Account Reporting Forms (“FBARs”), or other IRS filing obligations subject to criminal enforcement.
Addendum 8/20/17 7:00pm:

A commenter identified as Eliot made an excellent point:
A taxpayer served with a summons for documents she doesn't possess has to carefully thread a needle-- she has to present evidence of non-possession, but may have a legitimate Fifth Amendment privilege as to the obvious follow-up question of "what happened to them?" There are some older cases, which neither the parties nor the court cited in Liu, which deal with this issue: Curcio v. United States, 354 U.S. 118 (1957); United States v. O'Henry's Film Works, 598 F.2d 733 (2d Cir. 1979).
The following is from O'Henry's Film Works (emphasis supplied):
A plain reading of Curcio and McPhaul [364 U.S. 372] leads to the conclusion that the duty of the putative custodian of an organization's records extends beyond mere production or nonproduction: when the agent fails to produce documents that are the subject of a valid summons or subpoena, if called before a court, he must give sworn testimony that he does not possess them. The agent's statement that he does not possess the records at issue is merely part of his duty to comply with a lawful demand for them. It might be called "testimony auxiliary to his nonproduction," by analogy to Judge Learned Hand's holding that an agent must identify the documents he does produce because "testimony auxiliary to the production is as unprivileged as are the documents themselves." United States v. Austin-Bagley Corp., 31 F.2d 229, 234 (2d Cir. 1929). Just as an agent's identification of documents he has produced "merely makes explicit what is implicit in the production itself," Curcio, supra, 354 U.S. at 125, 77 S.Ct. at 1150, so does an agent's statement that he does not possess documents he has failed to produce make explicit what is implicit in the nonproduction. Because the agent's testimony is unprivileged, it is not a waiver of his privilege against self-incrimination as to other matters. The agent cannot be interrogated further unless, at this point, he voluntarily waives his Fifth Amendment privilege or is granted immunity. The Government is then free to attempt to establish by extrinsic evidence that the documents exist in the agent's custody or control, or that the agent destroyed the documents.
 3. Liu's accountant was involved in a previous write-up.  SeeTaxpayer Right to Be Present at Interview of Federally Authorized Practitioner (4/10/15), here.

Saturday, July 29, 2017

Another Plea Agreement for Offshore Account (7/29/17; 7/30/17)

USAO CD CA announced here the plea by a plastic surgeon to one FBAR criminal count.  The relevant excerpts from the announcement are:
          According to the plea agreement filed in this case, while working as a plastic surgeon in Beverly Hills, Mani began to travel to Dubai in 2011 to perform plastic surgery for a foreign medical center. Mani’s accountant, who was aware that Mani was earning foreign income, informed him that he would be required to report any foreign bank accounts under his ownership or control to the IRS. 
          In 2012, Mani opened a bank account with a financial institution based in Dubai and began depositing income he earned from abroad into this account. By February 2013, Mani’s foreign bank account held more than $400,000. However, Mani willfully failed to file a FBAR to disclose his foreign bank account for the calendar years 2012 and 2013. 
          In addition to failing to disclose his interest in his foreign bank account, Mani also failed to report on his federal income tax returns the vast majority of the approximately $1.28 million in foreign income he earned in Dubai for the years 2012, 2013 and 2014.
The plea agreement is here.

JAT comments:

1.  The gravamen of the offenses outlined in the plea agreement and statement of facts is really tax crimes with the FBAR crime facilitating the tax crime.  For this reason, I am surprised that DOJ Tax would approve the FBAR plea.

2.  The plea agreement requires two FBAR penalties of $100,000 (pars. 5(f) and 5(g)).  (Note: I had initially missed one of the penalties and revised this comment accordingly because a reader named Kneave Riggall brought the extra FBAR penalty to my attention; thanks to Mr. Riggall.)

Monday, July 24, 2017

Peter Reilly on Conservation Easement Donations as Bullshit Tax Shelters (7/24/17)

Peter Reilly has a great write up on the conservation easement tax scam -- aka bullshit tax shelter (my description, not his) -- that has featured prominently in many recent cases and is the subject of Notice 2017-10, here.  Peter's write up is New IRS Scandal - Syndication Of Conservation Easement Deductions (Forbes/Taxes 7/24/17), here.  And  I have previously written on Notice 2017-10 in IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (Federal Tax Crimes Blog 1/2/17), here.

Bullshit tax shelters are built on one or two foundations (sometimes both) -- fake law and fake facts.  The bullshit conservation easement shelters often get the law right, but fail on the facts -- particularly the valuations.  I encourage readers to review Peter's article and then read the extra materials I offer below.

I particularly like Peter's Accounting View -- balancing of the books analysis -- to show the problem with the bullshit conservation easement shelters.  

I extend Peter's analysis because many bullshit tax shelters suffer that basic problem.  The seminal balancing of the books case is Commissioner v. Tufts, 461 U.S. 300 (1983).  The taxpayer acquired basis in property via a nonrecourse loan, used the basis for depreciation tax benefit, then surrendered the property and walked away from the nonrecourse loan.  Had that been a recourse loan, the taxpayer would have had to recognize cancellation of indebtedness income, thereby balancing his books for the deductions funded by the recourse loan.  But, the taxpayer argued, because it was a nonrecourse loan, he received no benefit from the the "relief" from  the nonrecourse loan and thus had no offsetting income entry from COD or otherwise.  In effect, the taxpayer was arguing for free deductions with no balancing of his books.  The Supreme Court in Tufts rejected the argument, but took an intermediate position that the nonrecourse loan was includible as an amount realized on a deemed sale of the property securing the nonrecourse loan.  So, the taxpayer could get a combination of deferral from the nonrecourse loan (based on the interim depreciation deductions) and conversion to capital gains.  That is not a bad tax shelter.  But, at least the Supreme Court required a balancing of the books, albeit at capital gains rates.

I am not certain whether Tufts was an overvaluation case in its inception -- i.e., the property securing the nonrecourse loan was overvalued and thus the nonrecourse loan was underwater all along, serving only to generate deductions that the taxpayer in Tufts tried to shelter by not balancing his tax books at the end.  But, many taxpayers before and after Tufts tried that gambit of the overvaluation of the property secured by nonrecourse loans.  At least Tufts required a balancing of the books.

Having been deeply involved in the BLIPS shelters (not as promoter or adviser or taxpayer but as litigator), I always thought that, even if one accepted the aggressive legal position taken about contingent debt when contributed to the partnership, there was a balancing of the books problem akin to what the Supreme Court required in Tufts.  Thus, having achieved the basis benefit fueled by the loan, albeit recourse, that ultimately went "poof," the taxpayer should have to balance his books with the offsetting taxable income.  The shelter opinions that I saw either ignored that or dissembled on it.  Of course, there was a problem at the inception of the analysis on contingent debt, but assuming that problem was cleared, then the back-end issue balancing issue was a problem.

At any rate, thanks to Peter Reilly for his analysis.

Saturday, July 22, 2017

DC Circuit Reverses Preparer Conviction for Prosecutorial Misconduct (7/22/17)

I do not spend much time on this blog on return preparer fraud (or stolen identity refund fraud).  But, this case caught my attention United States v. Davis, ___ F.3d ___, 2017 U.S. App. LEXIS 13109 (DC Cir. 2017), here.  The reason it caught my attention was that the Court of Appeals found prosecutorial misconduct in the prosecutors' closing argument.  The prosecution was of a mother and a son involved in the return preparation business.

Here is the key part of the discussion:
To set the context for assessing Andre's contention that the court must reverse his convictions on both counts because of prosecutorial misconduct during closing arguments, we summarize the relevant evidence, and this necessarily entails some overlap with our consideration of Andre's sufficiency challenge. The government's case against Andre as to both Count 1 and Count 19 was thin. See Part II.B, infra. Although the evidence established that Andre began working with his mother after graduating from college and that false tax returns were filed under the Davis Financial Services EFIN during this period, the evidence of Andre's knowing participation in Sherri's tax fraud scheme was equivocal, at best. LaDonna testified that she cautioned Andre against working for Sherri, but she did not specify why she thought doing so "wasn't a good idea." Trial Tr. 81 (Jan. 20, 2015 (pm)). Thomas Jaycox testified on direct examination that Andre had prepared his 2012 tax return, but qualified his testimony on cross-examination and redirect by clarifying that Sherri had, in fact, also "put[] information on" and "finalize[d]" his return after Andre had worked on it. Trial Tr. 47, 80 (Jan. 22, 2015 (am)). The evidence thus failed to establish who entered the false deductions into Jaycox's return; Sherri was just as, if not more, likely to have done so than Andre. The remaining evidence against Andre, such as Andre's name on the EFIN application and other documents, at most confirms only that he was engaged in operating a tax-preparation business, not that he had the specific intent to file false returns or otherwise knowingly joined Sherri's conspiracy to defraud the United States. 
Examination of the prosecutor's closing arguments reveals multiple misstatements of this evidence and, given the gaps in the government's evidentiary case, their prejudicial effect is readily apparent. For instance, the prosecutor told the jury that Andre personally designated the bank account into which tax preparation fees were deposited in 2013 and that Andre and Sherri made a "staggering amount of money" but failed to report such income in their individual tax returns. Trial Tr. 170 (Jan. 28, 2015). Even assuming that the first point is not false, because Andre's designation of the bank account might be viewed as a reasonable inference from the TaxWise evidence, there is no evidentiary basis for the second, nor does the government point to any on appeal. The evidence of earnings and income reporting related only to Sherri's receipt of fees and failure to accurately report her individual income to the IRS. There was no comparable evidence as to Andre. Not only was there no direct evidence Andre received fees for preparing and filing false returns, much less in "staggering amounts," as the prosecutor told the jury, Trial Tr. 170 (Jan. 28, 2015), there was no evidence Andre under-reported his individual income on his tax returns. Lumping Andre together with Sherri in this manner was clearly prejudicial to Andre. The prosecutor also misleadingly minimized Sherri's role in completing Jaycox's 2012 return, telling the jury that Sherri only "came over to make sure it was okay, or something to that effect," id. at 88, when Jaycox testified that Sherri "finalize[d]" his taxes and "finished everything else out" on his 2012 return. Trial Tr. 47, 80 (Jan. 22, 2015 (am)). 
Even more critically, the prosecutor blatantly misrepresented the evidence regarding Andre's mens rea. First, in the opening portion of his closing argument after asking the jury, "how do we know that the Defendant Andre Davis acted willfully," the prosecutor told the jury that LaDonna had told Andre about the criminal charges she was facing and that Andre had reassured her by saying, "Don't worry. I know what I'm doing." Trial Tr. 96 (Jan. 28, 2015). The prosecutor then told the jury: "So he knows. He knows that 2FT is under criminal investigation, but yet he continues to file. . . . He acted willfully with the specific intent to violate the law." Id. at 97. But this did not accurately recount LaDonna's testimony. Even now, the government's brief misstates that there was evidence LaDonna had told Andre about the criminal nature of the investigation in which she was involved. See Appellee Br. 17. In fact, LaDonna's account of the conversation never indicated that she had told Andre or that he was otherwise aware of the criminal nature of the IRS investigation of 2FT or that Sherri, rather than LaDonna alone, was implicated in it. Second, in rebuttal closing argument, the prosecutor again asked "how do we know that these defendants were trying to commit fraud," and this time told the jury that it's because "[t]hey're photocopying Goodwill receipts and whiting them out . . . to have back-up documents to support the $47,000 and $50,000 deductions for Thomas Jaycox[.]" Id. at 170. But the evidence regarding the business providing clients with blank Goodwill or other charitable receipts pertained only to years prior to the time when Andre began working with his mother and his tenure at Davis Financial Services. Jaycox brought his own receipts in 2012. The government's response on appeal, that the "Sherri or Andre" statement is technically true, because Sherri provided blank Goodwill receipts, rings hollow; the government tarred Andre with evidence that it implicitly acknowledges had nothing to do with him. See Appellee Br. 46. 

Thursday, July 20, 2017

Another Person Indicted for Offshore Accounts (7/20/17)

DOJ Tax has announced here the indictment of Teymour Khoubian for tax obstruction, tax perjury, false FBARs and false statements.  The description of the allegations from news release is:
The indictment charges that from 2006 through 2014, Teymour Khoubian impeded the administration of the internal revenue laws. According to the indictment, Khoubian filed false individual tax returns with the Internal Revenue Service (IRS) for tax years 2005 through 2010 that did not report his financial interest in multiple Israeli and German bank accounts or the interest income that he earned from those accounts. He also allegedly falsely claimed refundable tax credits to which he was not entitled, including the Earned Income Tax Credit, which is intended for low-to moderate-income working individuals. In 2008, Khoubian is alleged to have held approximately $20 million in assets in his undisclosed accounts. The indictment charges that Khoubian also filed a false 2011 tax return that underreported the interest income he earned from his Israeli accounts and continued to fail to disclose that he held an account in Germany. Khoubian is also alleged to have filed false 2012 and 2013 Reports of Foreign Bank and Financial Accounts forms (FBARs) with the U.S. Department of Treasury that concealed his German account. U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file an FBAR disclosing the account. 
In addition to filing false tax returns and FBARs, Khoubian allegedly provided his German bank with a copy of his Iranian passport and a residential address located in Israel to prevent the bank from disclosing the account to the IRS. He also allegedly sent a letter to Bank Leumi falsely claiming he was living in Iran when, in fact, he resided in Beverly Hills, California. 
Khoubian is also charged with making false statements to an IRS Criminal Investigation (CI) special agent – denying that he owned an account in Germany between 2005 and 2010, stating that the German account was closed, when it was in fact still open, and stating that the funds had been transferred to the United States, when Khoubian had allegedly transferred over $600,000 from his German account to his accounts in Israel.
If convicted, Khoubian faces a statutory maximum sentence of three years in prison for corruptly endeavoring to impede the internal revenue laws and each count of filing a false return and five years in prison for each count of filing a false FBAR and making a false statement. He also faces a period of supervised release, restitution and monetary penalties.
 My only reaction is that, assuming the truth of allegation of the size of the accounts, this guy had real chutzpah to claim the Earned Income Tax Credit.

Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (7/20/17)

In Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017), here, the district court finally dismissed a case where the plaintiffs sued on various claims arising from the IRS's service of John Doe Summonses on a bank.  The thing that caught my attention was that, prior to serving the JDSs on the bank, the IRS did not obtain the predicate court order required by § 7609(f), here.   The summonses are here and here.

My reaction was: "Wow!"

So, I pulled up some of the documents from Pacer, the online system to review and download court documents.  I have limited time that I can devote to these interesting issues, so here is what I picked up in the time allowed.  The documents reviewed are:

1.  The docket entries (as of today), here.
2.  Government Brief on Motion to Dismiss (Dkt. 12), here.
3.  IRS Agent Affidavit (Exhibit to Government Brief (Dkt.12 Exh), here.
4.  Order (Dkt27), here.
5.  Final Order (Dkt45), here.

I could not find quickly an adequate explanation for why the IRS agents involved issued the two JDSs without court approval.  I could only find that they did.   On the face of the summonses, they were issued by a revenue agent and approved by a group manager.  The revenue agent's affidavit did not explain why the summonses were issued without court approval, but did say that the limited production was not reviewed because, by the time of delivery, the IRS was aware of a problem.

The following is what the Government said in an early brief in the case:
The first John Doe summons was issued on September 25, 2015. ¶ 34. The second John Doe summons was issued on September 30, 2015. ¶ 54. Copies of the two summonses are attached hereto as Exhibits 1 and 2.2 
The summonses requested signature cards, monthly checking account statements, and cancelled checks for specified account numbers (which have been redacted). Exs. 1, 2. Both summonses were issued “in the matter of John Doe,” id., and neither identified any “person with respect to whose liability” it was issued, § 7609(f). In keeping with John Doe summons procedures, the IRS did not give notice to the then-unknown account holders, which turned out to be plaintiffs. Nonetheless, Ms. Hohman and Jhoman learned about the summons of September 25, 2015, from the bank (Compl. ¶ 38) and filed a petition to quash the summons in this court on November 25, 2015 (¶ 51), see Case No. 2:15-mc-51669-VAR-APP.  
To address concerns raised in the petition, the IRS agent who had issued both summonses gave a sworn declaration to counsel for Ms. Hohman and Jhohman (Complaint ¶ 52) dated January 4, 2016, a copy of which is attached as Exhibit 3.4 The declaration stated that the agent withdrew both summonses via letters dated December 17, 2015 (Ex. 3 ¶¶ 9, 13), copies of which were attached to the declaration and are also attached hereto as Exhibits 4 and 5. The declaration added that none of the materials received in response to the first summons were reviewed by the IRS (Ex. 3 ¶¶ 5-8). The IRS never received any materials in response to the second summons. Id. ¶ 13. Apparently satisfied, Ms. Hohman and Jhoman voluntarily dismissed their petition the next day on January 5, 2016. 
Nonetheless, three months later plaintiffs filed the instant four-count complaint against the United States5, the IRS agent who issued the summonses (C. Mei Chung), and her manager (Maurice Eadie). Count One seeks damages under the Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401 et seq. Count Two seeks damages under the Privacy Act, 5 U.S.C. § 552a. Count Three seeks damages, as well as injunctive and declaratory relief, against both the individual IRS employees named as defendants and the United States for alleged constitutional violations. Count Four seeks damages under 26 U.S.C. § 7431.
The Court ultimately dismissed all counts.  The principal issue thrashed around by the court related to Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401, et seq.  I am not particularly interested in that issue, so I refer readers who are to the court orders for its analysis.  I am interested in the IRS's failure to obtain court orders for the JDSs.  What is the story there?  I am not sure that I have an adequate answer to that broad question.  I do have some more specific questions. I will just list them below and provide some answers if I can give them or reasonably speculate about them.

Credit Suisse Banker Pleads Guilty to Conspiracy (7/20/17)

DOJ Tax announced here the guilty plea by Susanne D. Rüegg Meier, a former Credit Suisse AG banker, for conspiracy.  I link the Plea Agreement here, the Statement of Facts here and the docket entries as of today here.  I previously reported on the indictment here:  Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes Blog 7/21/11), here.  It is unclear where she has been in the meantime, but my spreadsheet indicates (accurately or not) that she was a fugitive, presumably because a Swiss citizen and resident who chose to stay away from the U.S. after the indictment.  There is no indication as to why she returned now

The key parts of the announcement are:
According to the statement of facts and the plea agreement, Susanne D. Rüegg Meier, admitted that from 2002 through 2011, while working as the team head of the Zurich Team of Credit Suisse’s North American desk in Switzerland, she participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts. Rüegg Meier was responsible for supervising the servicing of accounts involving over 1,000 to 1,500 client relationships. She was also personally responsible for handling the accounts of approximately 140 to 150 clients, about 95 percent of whom were U.S. persons residing primarily in New York, Chicago and Florida, which held assets under management totaling approximately $400 million. Rüegg Meier admitted that the tax loss associated with her criminal conduct was between $3.5 and $9.5 million. 
Rüegg Meier assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of their undeclared financial accounts from the U.S. Department of the Treasury and the Internal Revenue Service (IRS). She took the following steps to assist clients in hiding their Swiss accounts: retaining in Switzerland all mail related to the account; structuring withdrawals in the forms of multiple checks each payable in amounts less than $10,000 that were sent by courier to clients in the United States and arranging for U.S. customers to withdraw cash from their Credit Suisse accounts at Credit Suisse locations outside Switzerland, such as the Bahamas. Moreover, Rüegg Meier admitted that approximately 20 to 30 of her U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities or other structures that were frequently created in the form of foreign partnerships, trusts, corporations or foundations. 
Between 2002 and 2008, Rüegg Meier traveled approximately twice per year to the United States to meet with clients. Among other places, Rüegg Meier met clients in the Credit Suisse New York representative office. To prepare for the trips, Rüegg Meier would obtain “travel” account statements that contained no Credit Suisse logos or customer information, as well as business cards that bore no Credit Suisse logos and had an alternative street address for her office, in order to assist her in concealing the nature and purpose of her business. 
After Credit Suisse began closing U.S. customers’ accounts in 2008, Rüegg Meier assisted the clients in keeping their assets concealed. For example, when one U.S. customer was informed that the bank planned to close his account, Rüegg Meier assisted the customer in closing the account by withdrawing approximately $1 million in cash. Rüegg Meier advised the client to find another bank simply by walking along the street in Zurich and locating a bank that would be willing to open an account for the client. The customer placed the cash into a paper bag and exited the bank. Rüegg Meier also recommended that a few U.S. clients open new accounts at other specific banks, such as Bank Frey and Wegelin & Co., and transfer their assets from their Credit Suisse accounts to the new accounts. 
Credit Suisse pleaded guilty in May 2014 for conspiring to aid and assist taxpayers in filing false returns, and was sentenced in November 2014 to pay more than $2 billion in fines and restitution.
JAT comments:

Wednesday, July 19, 2017

Second Circuit Decision Applying Fifth Amendment to Foreign Compelled Testimony (7/19/17)

The Second Circuit issued an important decision today dealing with the use -- directly or indirectly -- of testimony compelled by a foreign government in a U.S. criminal case.  United States v. Allen, ___ F.3d ___ (2017), here. This is not a tax prosecution, but the holding could apply in all U.S. prosecutions, tax or otherwise, where foreign compelled testimony is used.

The opinion is very long and very good.  The Court's summary of the opinion is:
 This case—the first criminal appeal related to the London Interbank Offered Rate (“LIBOR”) to reach this (or any) Court of Appeals—presents the question, among others, whether testimony given by an individual involuntarily under the legal compulsion of a foreign power may be used against that individual in a criminal case in an American court. As employees in the London office of Coöperatieve Centrale Raiffeisen‐Boerenleenbank B.A. in the 2000s, defendants‐appellants Anthony Allen and Anthony Conti (“Defendants”) played roles in that bank’s LIBOR submission process  during the now‐well‐documented heyday of the rate’s manipulation. Defendants, each a resident and citizen of the United Kingdom, and both of whom had earlier given compelled testimony in that country, were tried and convicted in the United States before the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge) for wire fraud and conspiracy to commit wire fraud and bank fraud.
While this appeal raises a number of substantial issues, we address only the Fifth Amendment issue, and conclude as follows.   
First, the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.    
Second, when the government makes use of a witness who had substantial exposure to a defendant’s compelled testimony, it is required under Kastigar v. United States, 406 U.S. 441 (1972), to prove, at a minimum, that the witness’s review of the compelled testimony did not shape, alter, or affect the evidence used by the government.   
Third, a bare, generalized denial of taint from a witness who has materially altered his or her testimony after being substantially exposed to a defendant’s compelled testimony is insufficient as a matter of law to sustain the prosecution’s burden of proof. 
Fourth, in this prosecution, Defendants’ compelled testimony was “used” against them, and this impermissible use before the petit and grand juries was not harmless beyond a resonable doubt. 
Accordingly, we REVERSE the judgments of conviction and hereby DISMISS the indictment

Offshore Account Tax and Bank Fraud Conspiracy Sentencing (7/19/17)

USAO MDFL announced here the sentencing of a Florida businessman, Casey Padula, for conspiring to commit tax and bank fraud.  The sentence is 57 months in prison.  I previously reported on the guilty plea here.  The pattern is a familiar one.  Padula conspired with others to divert money from his U.S. business, thus avoiding tax, into foreign accounts.  The foreign accounts were in Belize and were owned by two nominal foreign corporations.  Padula also conspired with with investment advisors Joshua VanDyk and Eric St-Cyr, who helped them establish a numbered account.  In addition to the tax fraud, Padula committed bank fraud along with another who made a sham purchase of his home secured by a mortgage allegedly under water.  For previous posts mentioning VanDyk and St-Cyr, see here.  The co-conspirator on the bank fraud conspiracy was sentenced to five years probation.

There is no indication in the press release about any potential FBAR penalty.