Source: https://federaltaxcrimes.blogspot.com/2009/03/
Timestamp: 2019-04-24 20:33:22+00:00

Document:
1. Taxpayers must meet the traditional voluntary disclosure requirements. Taxpayers already under criminal investigation do not meet those requirements. Since a taxpayer may not know that he or she is already under criminal investigation, the taxpayer's attorney will have to do a careful song and dance with IRS CI so as not to disclose incriminating information only to find out the taxpayer does not qualify for the program. There are ways to do that and mitigate the risk.
2. Practitioners have discussed the possibility that the Department of Justice, the Government agency charged with prosecution of tax crimes, might prosecute even if the taxpayer is accepted into this new IRS initiative. (See here.) I understand that the spector of that possibility may have already surfaced for a taxpayer making a voluntary disclosure under the regular voluntary disclosure program prior to the new initiative. A question I have is whether the Department of Justice is authorized to prosecute a tax crime where the IRS does not recommend or otherwise concur in the prosecution? I have FOIA requests to DOJ Tax that I hope will flush out a definitive answer to that question but at this time I cannot discount the concerns of the practitioners of possible DOJ prosecution even a taxpayer is compliant with this new Voluntary Disclosure initiative.
3. I do have concerns about the message that this initiative sends to the taxpayers of the U.S. Practitioners in this area routinely represent one-off alleged tax cheats whose alleged crimes are systemically not nearly as damaging to the fisc as the systemic raid through offshore accounts. Players in the offshore tax haven abuse area as a group systemically are far more damaging than one-off tax cheats. Yet, all the one-off tax cheats have at best is the old voluntary disclosure program which might give some reasonable assurance against criminal prosecution but gives no assurance of substantially reduced civil penalties. Why are these offshore tax cheats given preferable treatment on the civil penalties? I actually can articulate good reasons for favorable treatment given these offshore tax cheats. My concern is with preferable treatment. I think that just as favorable treatment (substantially reduced penalties) will get the right response for offshore tax cheats, it will also get the right response for one-off tax cheats. I therefore urge that penalty relief be given in all voluntary disclosure situations. Indeed, for much the same reasons as justifying the qualified amended return no penalty relief, I suggest that regular taxpayers doing a regular voluntary disclosure should have no penalties (but an open statute of limitations in cases of fraud for, say, six years, so that the IRS collects substantial tax and interest). The offshore tax cheats subject to the current initiative should not qualify for this extra relief because, as I noted in starting this comment, those cheating offshore did far more systemic damage than did the ordinary one-off tax cheat. The current initiative for those guys seems to get it right, although even here there may be factual circumstances in particular cases that might further penalty relief (perhaps by coming in under the regular voluntary disclosure policy which now permits more nuanced application and, under my proposal above, would not attract penalties at all).
The Sentencing Guidelines have a related but different concept called tax loss that is a principal driver in calculating the sentence. Tax is a financial crime and, as with other financial crimes, the monetary quantum is the principal driver in the sentencing calculation. The tax loss is "the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." U.S.S.G. § 2T1.1(c)(1). Can the defendant assert items not previously claimed in order to reduce or eliminate the tax loss, thereby reducing his or her sentence?
The Eleventh Circuit recently addressed this issue in United States v. Clarke, ___ F.3d ___ (11th Cir. 2008). The defendant was charged with tax perjury under § 7206(1). (The court itself misspoke in calling the charge tax fraud.) He had filed his original return as married filing separately. The Government asserted that the defendant must be sentenced based on a calculation under that status. The defendant asserted that the tax loss should be calculated on the basis of married filing jointly, as if he had filed an amended joint return, which would reduce the tax loss sufficiently to fall into a lower Guidelines offense level. The judge sentenced on the basis of the tax loss calculated under the married filing separately status. The defendant appealed that issue, among others. The Court of Appeals held that the tax loss was not the actual tax loss to the Government but the tax loss the defendant intended when he filed his return. Since he filed using the status married filing separately, he intended that his omissions in reporting would generate a tax loss based on the status he used in reporting. In so holding, the Court noted that there was a split among the courts as to whether the tax loss could be reduced or eliminated by unclaimed items -- in this case an unclaimed status, but more often unclaimed deductions. In so holding, the Court of Appeals said it was joining the "majority of the circuits."
Does it seem right that a defendant could be convicted of tax evasion on the basis of a tax evaded that is less than the tax loss used in his sentencing? For example, assume that, at trial in the guilt determination phase, the Government indicted and tried the defendant on the basis of a criminal tax number of $100,000, but that through proof of unclaimed deductions, the defendant whittled that number down to $20,000 and even forced the Government’s summary witness to so testify based on the strength of the proof of unclaimed deductions. Assume that the defendant is convicted because $20,000 tax evaded is still material. Then, at sentencing, the Government seeks to sentence based on $100,000 tax loss without giving the defendant the benefit of the $80,000 proved unclaimed deductions. Under the line of authority cited in Clarke, the Government may do that. Does that sound right to you?
1. Taxpayer must file amended income tax returns or, if no original income tax returns were filed, delinquent income tax returns for 6 years and pay tax, interest, and a 20% accuracy related penalty or 25% delinquency penalty, as appropriate. The carrot here is that the IRS will not assert the fraud penalty which is 75% as to fraudulent returns or fraudulent failure to file.
2. Taxpayer must file amended or delinquent FBARs (the information return for foreign bank accounts) and pay 20% penalty on the amount in the foreign bank account in the year with the highest aggregate account or asset value in lieu of all other applicable penalties. The carrot here is that the IRS will not assert the maximum penalty ($100,000 or 50% of the amount in the account) for each year. The 20% penalty imposed pursuant to the program may be reduced to 5% if the taxpayer didn't open the account, there was no account activity while the taxpayer controlled the account, and all taxes have been paid on the account.
3. The taxpayer must file the various other forms that may be required but will not assert the penalties that might apply to them. The carrot here is that the IRS will not assert the otherwise substantial penalties for those delinquencies.
4. The program is available only to those who meet the voluntary disclosure policy in IRM 9.5.11.9. Although, in other contexts, practitioners pursue voluntary disclosures through disclosures by simply filing with the service center and through noisy disclosures (meetings with IRS CI), the program appears to contemplate only noisy disclosures (e.g., initial screening at CI is required and a closing agreement is required). This means more work for lawyers because most clients should be guided through the process that may have major downsides for the unwary. See here for a discussion of the distinction between silent and noisy disclosures.
5. The taxpayer otherwise fully cooperates.
6. If the foregoing conditions are met and agreed upon, the IRS will not pursue criminal prosecution.
ADDITION AS OF MAY 2009: IRS documents related to the initiative, including a key Frequently Asked Questions providing many details may be accessed here.
I discussed earlier today one aspect of the Government's Sentencing Submission in United States v. Larson (SD NY No. S1 05 Cr. 888 (LAK)), filed 3/26/09. That discussion involved the Government position as to constitutional ex post facto considerations in applying the one book requirement for sentencing after Booker. I write here to alert the community that the balance of the Government's Sentencing Submission is also getting some buzz in the press (e.g., see the WSJ report here.) The Government seeks onerous retribution for the convicted defendants. As throughout the litigation, the hallmark of which has been Government retribution in ways that the Court found to have been constitutionally foul, the Government justifies its graceless claim for retribution based on the dastardly deeds it imagines these defendants did. The Government's submission may be viewed here.
This is the same Government (albeit not the same particular actors for the Government) that insisted on similar retribution for Jamie Olis.
I will undoubtedly be writing more on this subject as it develops.
The WSJ reports here and the New York Times reports here that the IRS will announce today that it is dealing on the offshore accounts. I will post more as I learn the details. In the meantime, readers might wish to check the Tax Prof Blog items here.
The Sentencing Guidelines provide that the Guidelines to apply are the Guidelines "in effect on the date the defendant is sentenced." The courts held that applying the current Guidelines raised ex post facto law considerations where the Guidelines in effect at the time of the crime were more lenient than the ones in effect at the time of sentencing. A significant factor in the landscape for that holding was that the Guidelines were mandatory. After Booker, however, the Guidelines are not mandatory. Nevertheless, although not addressing the issue, most courts just carryforward without comment the pre-Booker requirement that the current Guidelines not be used where they produce a more stringent now-advisory sentence.
Indeed, in an appeal where the current Guideline was applied and was more stringent, the Government even sought to confess that the sentencing court erred in applying the current Guidelines. The irrepressible Judge Posner, writing for the Seventh Circuit panel, rejected the Government's confession of error and held sua sponte that, under the post-Booker regime making the Guidelines advisory only, the ex post facto analysis no longer applies and therefore the current Guidelines are the ones to apply. United States v. Demaree, 459 F.3d 791 (7th Cir.), cert. denied, 127 S. Ct. 3055 (2007). Other courts have disagreed with Judge Posner. E.g., United States v. Turner, 548 F.3d 1094, 1098-1100 (D.C. Cir. 2008).
I learned today in reviewing the "Government's Sentencing Submission" in United States v. Larson (SD NY No. S1 05 Cr. 888 (LAK)), filed 3/26/09, that the Government's position is that Judge Posner's analysis is correct. The pertinent parts of that submission may be viewed here. It now appears that, because of this split, unless resolved soon by the Circuits (unlikely), the Supreme Court may well jump in again to further enlighten on the ramifications of the Booker decision.
In the meantime, I suppose there will be a temptation for reverse-averse sentencing judges to do both sets of Guidelines calculations (current and earlier), respectfully consider both in applying the 18 USC Section 3553(a)sentencing factors, and pronounce the sentence with a statement that he or she would have imposed the same sentence regardless of which advisory Guidelines applied. That may bullet-proof an appeal on this issue.
We have covered the Government's most recent initiatives involving U.S. taxpayers with offshore funds and noted that coming clean fast is the way to go, at least for most of the U.S. taxpayers at risk.
On March 5, 2009, U.S. District Court Judge James S. Moody, Jr., imposed a sentence of 30 years imprisonment on Florida businessman Randy Nowak. He noted that, after having listened to Nowak's recorded conversations with an undercover agent posing as a hit man, he had concluded that Nowak had "no conscience."
Nowak was convicted by a Federal jury in December 2008 of attempting to murder a U.S. officer or employee and for using a facility of interstate commerce with the intent that a murder-for-hire be committed.
According to court documents, in June 2008, Nowak, owner of RJ Nowak Enterprises, Inc., had been looking for someone to kill an Internal Revenue Service (IRS) employee who was auditing him because he stood to lose $4,000,000 that he had hidden offshore.
Nowak met with an undercover Federal Bureau of Investigation (FBI) Task Force agent who was posing as a hit man in July 2008. Nowak paid him $10,000 as a down payment to kill the IRS Revenue Officer. Nowak also asked the undercover agent if he would be willing to burn down the IRS's office in Lakeland.
Nowak was charged in a criminal complaint filed in July 2008 with attempting to kill an IRS Revenue Officer who was engaged in the performance of official duties. At that time, Nowak had an outstanding IRS liability of approximately $300,000 related to his personal income tax obligations, and he had four years of outstanding corporate tax returns for his business that he had not filed.
The case was worked jointly with the FBI.
It is no secret that tax haven banks, enabled by their tax haven countries, assist U.S. taxpayers and other persons of varied citizenship to hide ill-gotten gains either from their own tax authorities or from the persons they ill-got their gains from. This has been a problem in the U.S. for years, but the U.S. has finally gotten or used the leverage to start serious attempts to deal with the problem. A few years back, the IRS proceeded against tax havens in the Caribbean by using the John Doe Summons to get credit card records in the U.S. which they could use, with some creative investigation, to identify the U.S. taxpayers using them to spend the money without, they thought, a paper trail to them.
Recently, the U.S. DOJ Tax Division has turned its sight European tax havens, principally (at least in terms of quantity of publicity) Switzerland. I have previously discussed on this blog the U.S.'s recent unilateral attempts to address the abuse -- a deferred prosecution agreement with a substantial monetary fine and a John Doe summons to to compel the Swiss banking giant UBS to identify U.S. depositors, a high percentage of whom may be U.S. tax evaders. This hits UBS and Switzerland where it hurts -- in their respective well-lined dirty pocketbooks. The gravy train is slowing down.
Switzerland's cabinet agreed at a meeting Friday to support negotiation of bilateral treaties with other countries, under which Switzerland would provide legal assistance for international tax-evasion probes. The treaties would be negotiated based on guidelines from the Paris-based Organisation for Economic Co-operation and Development, which require nations to waive bank secrecy for investigations of both tax evasion and tax fraud.
It is unclear what this move may mean in the real world. Often such apparent retreats are nothing more than feints that mean little. But these various initiatives do suggest that the fabled wall of secrecy is slowly coming down. Caveat Taxpayers, and, as always in the crimes area, their counsel.
This article from the WSJ Law Blog is a good reminder for lawyers playing in this and related fields (e.g., money laundering). The article indicates more trouble in paradise because of the possible inability of Sir Allen Stanford to field a defense team because his assets are frozen or at risk. Readers might want to refresh their memory by re-reading Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989); and United States v. Monsanto, 491 U.S. 600 (1989). While run of the mill tax crimes usually do not include forfeiture problems, tax crimes that have money laundering aspects are at risk. See 18 USC 981(a)(1)(A). And attorneys should note the proposed extension of concealment money laundering to tax crimes, a proposal I discuss here.
Update 3/15/2009 8:00 am: See this Houston Chronicle article titled "Stanford Still Shopping for Legal Team."
Update 3/16/2009 10:30 am: See this WSJ Law Blog on Government request for Madoff Forfeitures.
Conspiracy is all about the charged agreement -- the parties' contract. A critical element of the agreement is its scope. What was the object of the agreement? What actions are reasonably foreseeable in furtherance of the agreement? Upon these determinations hinge important consequences -- (1) the commencement of the statute of limitations for prosecution of the conspiracy and (2) so-called Pinkerton liability for acts committed by co-conspirators (see United States v. Pinkerton, 328 U.S. 640 (1946)).
In recent related decisions, the First Circuit struggled with and perhaps misapplied the law relating to scope of the conspiracy in the context of determining the criminal statute of limitations for an alleged money laundering conspiracy. United States v. Upton, 559 F.3d 3 (1st Cir. 2009) (main opinion); United States v. Alberico, 559 F.3d 24 (1st Cir. 2009) (opinion in related case decided on the basis of Upton). In each case, outside the 5 year statute of limitations, the defendants had stolen about $1,000,000 cash and had engaged in a real estate transaction, allegedly to launder the stolen money. Their relevant tax returns filed by each individual did not disclose either the stolen money or the rental income from the real estate. Each defendant failed to file a tax return for 1999 which, if filed, should have reported the gain on the sale of the real estate.
They were charged for conspiracy to commit money laundering, in violation of 18 U.S.C. §§ 1956(a)(1)(b), (h), and 1957(a); filing a materially false income tax return for the year 1997, in violation of 26 U.S.C. § 7206(1); and failing to file an income tax return for the year 1999, in violation of 26 U.S.C. § 7203.
A conspiracy must have some act within the relevant conspiracy statute of limitations - 5 years. (By provision of the Internal Revenue Code, a tax conspiracy has a five year statute of limitations, but the money laundering conspiracy is not subject to the special tax extension of the normal conspiracy statute of limitations.) Focusing on the conspiracy charge, the only acts within the critical 5 year statute of limitations period was the defendants’ respective failures to file their 1999 tax returns which would have been due on April 15, 2000. The relevant issue addressed on appeal was whether their failures to file were acts within the scope of the conspiracy, thus making the conspiracy charge timely. This issue split the panel, with a majority holding the failures to file were acts reasonably foreseeable acts in furtherance of the conspiracy.
This blog is principally targeted to the Tax Fraud class that Larry Campagna and I teach at UH Law School but other blog readers may also find the linked document related to the unfolding Madoff saga interesting.
The Sentencing Guidelines provide recommended sentences based on factors that the U.S. Sentencing Commission deem relevant to the sentencing process. The sentencing judge determines the presence or absence of the factors, each of which have some number assigned to them by the Guidelines (larger translates into more sentence). The judge sums the numbers and then reviews a grid chart which offers an indicated guideline sentencing range. These Guidelines sentencing ranges are now, post-Booker, guidelines only and the judge may deviate from them in his or her discretion. The sentence may be reviewed on appeal for reasonableness.
The Government sent Bernie Madoff a letter making its preliminary assessment of the likely sentencing and other related punishments he will suffer on the charges to which he will plead this morning. The letter may be reviewed here.
And, although off the specific topic of sentencing, the Wall Street Journal Law Blog has here the plea allocution that Madoff read today when he made his guilty plea.
In our University of Houston Tax Fraud class last night, one of the topics we covered was the Fifth Amendment privilege in connection with compulsory process to produce documents. In the federal system, compulsory process is often a grand jury subpoena but also includes an administrative summons, such as the IRS summons, and even a trial subpoena. For the balance of this discussion, I refer to a grand jury subpoena, but the same analysis would apply to the other forms of compulsory process.
The current state of the law is that there is no Fifth Amendment privilege with respect to the contents of documents that have been voluntarily prepared, but a witness subject to compulsory process may invoke a Fifth Amendment privilege to the testimonial aspects of the act of production. See United States v. Hubbell, 530 U.S. 27 (2000) (summarizing cases). The Supreme Court held in Hubbell that a "kitchen sink" grand jury subpoena of general scope, with no particularity as to the documents requested, and with no indication of any knowledge that documents described in the grand jury subpoena even existed would require the witness to "testify" in responding to the subpoena. These testimonial aspects are subject to the Fifth Amendment privilege; this concept is generally referred to as the act of production doctrine. The cases generally interpret the requirement for compulsory process as some prior Government knowledge -- including that the existence of the documents is a foregone conclusion -- in order to overcome a Fifth Amendment objection.
I re-read Hubbell this morning and focused on Justice Thomas' concurrence (joined by his sidekick, Justice Scalia). Justice Thomas concluded his concurrence by suggesting that he and Justice Scalia were open to the question of whether the Government could compel a witness to produce documents regardless of what the Government may know about the existence of the documents. Justice Thomas noted in a footnote (fn 6): "To hold that the Government may not compel a person to produce incriminating evidence (absent an appropriate grant of immunity) does not necessarily answer the question whether (and, if so, when) the Government may secure that same evidence through a search or seizure. The lawfulness of such actions, however, would be measured by the Fourth Amendment rather than the Fifth."
Let's imagine for a minute that the Supreme Court were to reconsider this area of the law and hold that a witness cannot be compelled to produce documents over a Fifth Amendment privilege. If the Government could show probable cause to believe a crime has been committed and particularity as to the documents that are the subject of the search warrant, it could obtain a search warrant. A search warrant is a far more intrusive process than a grand jury subpoena. So, in terms of promoting a civilized society consistent with the values in our constitution, it would seem to be unobjectionable to permit the issuance of a summons or grand jury subpoena for the same documents that the Government could seize by search warrant. But in focusing further upon the relationship between the subpoena and the search warrant, I noted that the two seem to have one parallel element -- the requirement that the documents be described with particularity in order to overcome the Hubble concerns.
In Boulware v. United States, 552 U.S. 421 (2008), here, the Supreme Court rejected the Ninth Circuit's holding that a dividend required some type of intent. The definition of dividend in the Internal Revenue Code requires a corporate distribution up to but not in excess of current or retained earnings and profits (E&P), which roughly -- but only roughly -- equates to retained earnings or deficits. Further, the Code provides, if there is no such E&P, the distribution is not taxable up to the shareholder's basis in the stock and only thereafter is taxable as capital gain. By rejecting a requirement that taxpayer "intend" a return of capital distribution, the Supreme Court moved the criminal rule in line with the civil tax rule, which of course is logical since the tax evasion can only exist if there is a tax due and owing and there is no tax due and owing (at least no tax on a dividend) if there is no E&P.
The Supreme Court remanded the case to the Ninth Circuit to determine whether the taxpayer's offer of proof as to the return of capital defense was sufficient. The Ninth Circuit held that the offer of proof was not sufficient, so the Ninth Circuit affirmed the taxpayer's conviction. The decision may be reviewed here. Before moving to that, I should explain the function of the offer of proof or the actual proof if the judge sustains the offer in a criminal case. In a criminal case, the Government must prove the elements of the crime beyond a reasonable doubt. The element of tax evasion in question in Boulware was the element of a tax due and owing. From one perspective, one might think that the Government must prove that (1) there was sufficient E&P to prove a taxable dividend or (2) insufficient basis to cover the total amount of the distributions. But, the law has developed with respect to the return of capital defense (and some other defenses) that the defendant has to put the elements of the defense in play in order to require the Government to have to meet the noted dual burdens beyond a reasonable doubt. The defendant puts the defense in play by meeting a production burden with actual trial evidence or at least an offer of proof as to such evidence; only then does the Government have to meet the dual burdens beyond a reasonable doubt. Hence, at trial, Boulware's lawyer made an offer of proof as to what the proof, if he were allowed to present it to the jury, would show. The offer of proof has to establish the key elements of the defense -- in this case, no E&P and sufficient basis to cover the distributions so that there is no net taxable income and therefore no tax due and owing. The question before the Ninth Circuit on remand was whether the offer of proof met the minimal requirements.
Once upon a time a major accounting firm looking for revenue and thus profits began a tax shelter operation. The tax shelter operation involved accounting firm personnel at the center (the designers and the decision makers that the strategy should be promoted) and personnel at the periphery in the regional offices of the firm who would market the shelter designed and approved by those at the center. Persons outside the firm were engaged to design and implement a trading strategy that would, at least facially, support the shelter. One such person was a true market expert who designed a trading program that, while independent of the tax rules play giving rise to the shelter, would be wrapped into it to supply the claimed profit motive. A lawyer with an independent law firm worked with this team to refine the program in a way that he felt would give him a basis for rendering a more likely than not tax opinion to the taxpayers buying into the shelter. The tax shelter was successfully marketed. Billions of dollars of tax liability escaped the fisc. The Government was not happy and spied a conspiracy with a cast of hundreds. In a first wave, the Government convinced the grand jury to indict the promoters. The promoters indicted included 12 of those at the center (including accounting firm personnel, the outside lawyer, and the market expert) and three of those in the field whose only role was to sell the shelter. The indictment alleged an overall conspiracy (both offense and defraud / Klein conspiracy) and 39 substantive counts of tax evasion (with perhaps overlapping Pinkerton and accomplice aiding and abetting liability for those not directly involved in some or all of the substantive counts) with respect to the shelters sold.
The Government then tried to pick off some of the vulnerable defendants to offer a plea. The plea negotiation went like this: If we are successful in prosecution, you (the defendant being solicited for the plea) are at risk of a sentence that the Guidelines (then mandatory) pegged at a low range of 25 years. The Government’s first offer to shake this defendant down was for 2 counts of tax evasion (maximum 10 year sentence). Getting a no, the Government then sweetened the pot with a 1 tax evasion count offer (maximum 5 year sentence). The defendant who has always maintained his innocence is a rational actor and is tempted by the new offer. Being a rational actor and knowing the risks that he might be tarred by being included in a conspiracy where there are some persons with less compelling objective facts than his, he perceived that a certain cap at 5 years, even with the loss of some civil liberties, would be better than the risks of going to trial – to wit up to 25 years. He wanted the 1 proffered count but he was unwilling to profess guilt in order to get the plea. The fable ends there with his dilemma.
1. The concept of permitting a truly innocent defendant to plea to and be convicted of a crime that he did not commit is disturbing but it does illustrate a truth. In our system, the innocent are convicted because those involved in prosecuting, determining guilt and imposing punishment draw the wrong conclusion (even when that may be a – or even the – logical conclusion from the incomplete evidence).
Although a bit old news now (it happened last week), I post this item to make sure readers know about it if they have missed other news sources. The Government's much ballyhooed case about abuse of the Virgin Islands Economic Development Program which offered tax magic for taxpayers earning effectively connected income from a business in the Virgin Islands. (See the DOJ Announcemennt of the Case here.) For more on this taxpayer victory - Government loss, see the report in the Tax Prof Blog here. For those who just love to review not guilty verdicts, see this link from the Tax Prof Blog web page.
One of the defendants in that case was represented by Chuck Meadows, a major player in tax crimes and white collar crimes defense.
For a related article on the White Collar Crime Prof Blog, click here.
I picked up from the Tax Prof List Serv this "lineup" of prominent Americans with tax woes. Not all of these should or will end up with criminal tax problems (perhaps civil tax fraud in some cases). Of course, Snipes is there. Note that the actual name of the URL is a bit overstated -- famoustaxfraud -- because tax fraud (either civil or criminal) as we know it and love it is probably not involved for many of the cast of characters.

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