Source: https://federaltaxcrimes.blogspot.com/2012/01/
Timestamp: 2019-04-24 20:45:39+00:00

Document:
A large majority of taxpayers continue to express strong support for compliance with the federal tax code. Eighty-four percent of the general public surveyed feels that it is “not at all acceptable to cheat on one’s income taxes.” However, the share of the pubic holding this view is down three percentage points from 2010, reversing a three-point increase for that year. Only six-percent believe that cheating “a little here and there” is acceptable. But the percentage of taxpayers who think it is acceptable to cheat “as much as possible” has increased to eight percent in 2011. Nonetheless, tolerance for tax cheating continues to be widely viewed as unacceptable (see page 2).
The vast majority of the public – 72 percent – “completely agree” that “it’s every American’s civic duty to pay their fair share of taxes.” The figure is up three percentage points from last year. Sixty-six percent “completely agree” that “everyone who cheats on their taxes should be held accountable.” This figure is three points below last year’s survey (see page 3).
Taxpayers continue to take a strongly ethical stance on paying taxes. Seventy-nine percent say that their “personal integrity” has a “great deal of influence” on whether they report and pay their taxes honestly and another ten percent say it is “somewhat of an influence.” Meanwhile, third-party reporting of financial information to the IRS influences 65 percent (37 percent are influenced “a great deal,” with 28 percent by “somewhat of an influence”). Fear of an audit remains the third most important influence to pay; down five points from last year to 59 percent (see page 5).
The Wall Street Journal Law Blog reports today that DOJ Tax has given up its prosecution of the John Rigas and Timothy Rigas, father and son ("the Rigas Defendants"), for alleged tax crimes. Joe Palazzolo, The Daily Writing Sample: Paying Homage to Kenny Rogers (WSJ Law Blog 1/27/12), here. Readers of this blog will be familiar with the Government's cases against the Rigas Defendants. For blogs on the saga, see here. In a nutshell, the Government prosecuted the Rigas Defendants for their alleged skullduggery with the failed Adelphia which they treated as a personal piggybank (Adelphia being the bank and the Rigas Defendants being the piggies).
The major criminal trial was in New York City, in the Southern District of New York, where many large financial and securities crimes are prosecuted. The SDNY indictment contained the ubiquitous conspiracy charge as Count One and various other substantive counts. The conspiracy alleged was a conspiracy related to securities and bank fraud. The defendants were convicted and sentenced to substantial terms (more on that later).
Following the SDNY convictions, the Government pursued charges against the Rigas Defendants in the Middle District of Pennsylvania for various alleged tax and related crimes related to their alleged looting of Adelphia. (Note the venue rules for tax charges require or encourage prosecution closer to home.) Again, the ubiquitous conspiracy count appeared as Count One, alleging conspiracy to commit tax offenses and a Klein (defraud the IRS) conspiracy, presumably both as objects of the single alleged conspiracy relating to tax matters.
In a prior interim appeal in this MDPA case, the Third Circuit held that the Rigas Defendants had made a substantial claim that this tax conspiracy charge was within the scope of the conspiracy alleged and tried in the original SDNY trial. United States v. Rigas, 605 F.3d 194 (3d Cir. 2010) (en banc), here. The consequence of that claim, if ultimately accepted, would be that the Rigas Defendants would be subject to double jeopardy in the second criminal case, requiring that the count be dismissed. The Court remanded for the trial court to reconsider that issue. For more detail on this holding, see my prior blog. En Banc Rehearing in Rigas - Scope of Conspiracy, Totality, and Double Jeopardy (5/14/10), here.
The U.S. Senate is reportedly investigating HSBC for money laundering. See Carrick Mollenkamp, Exclusive: Senate Investigating HSBC for Money Laundering (1/25/12), here. I don't know precisely what that means in terms of the topic of this blog. I can say that my impression is that, generally speaking, the U.S. Government would treat money laundering that touches important U.S. interests as more important than promoting U.S. tax evasion.
U.S. HSBC depositors who have not yet resolved their U.S. tax situations should be concerned. You may quickly be on the chopping block as HSBC tries to mitigate the damage. While I doubt that the U.S. Government would be assuaged by merely delivering up the U.S. depositors HSBC helped with their U.S. taxes, still such cooperation might buy some time or be seen as a good faith action that will get something somewhere down the road.
However, among those U.S. HSBC depositors there may be some whose goal was not just to cheat on their taxes, but to launder money. Those persons should be particularly concerned, especially those who may have joined the voluntary disclosure program and submitted either false or misleading information about their offshore banking activity.
Update on 2/4/12: Please see the later blog titled Wegelin Indicted in SDNY with Money Laundering Fofeiture (2/2/12), here. In that initiative against Wegelin & Co., the Government indicted for the defraud / Klein conspiracy and not for money laundering, but did seek money laundering forfeiture.
I speculate that the Second Circuit might have been given the district judge another consolation by not reversing him on everything, although it seems likely that had the court reached this issue, it would have reversed.
1. A lot of the fight is about whether Williams should be bound by -- hanged by, perhaps -- statements he made during a plea allocution in the earlier criminal case. I am not going to comment on that.
2. A key argument the Government makes if it cannot hang Williams on those statements is that willfulness for purposes of the FBAR penalty is perhaps not the same as Cheek willfulness or even Ratzlaf willfulness (Ratzlaf v. United States, 510 U.S. 135 (1994), the statutory amendment for Ratzlaf did not amend the willfulness civil penalty in question here). Willfulness is not a term with a single meaning, but certainly in the tax law it has a specific meaning -- intentional violation of a known legal duty. And, Ratzlaf said it had that meaning the Treasury reporting requirements. So a good argument, I think, can be made that the standard is the same as the Cheek standard, but the Government argues otherwise. Indeed, the Government claims that recklessness will suffice -- in effect, the Government imports something like a conscious avoidance (aka willful blindness and other terms) into the concept. I suppose that, if willful should be interpreted by analogy to the criminal provisions requiring willfulness, then perhaps the conscious avoidance concept, if valid for criminal purposes for the high willfulness standard, should also apply for civil FBAR willfulness. (See my prior blogs on conscious avoidance by clicking the conscious avoidance link below.) In any event, it seems to me that the standard should not be different, only a less strict standard of proof applies in a civil case.
Under 18 U.S.C. § 3143(b)(1) [here], detention pending appeal is presumed unless a judicial officer finds (A) "by clear and convincing evidence that the person is not likely to flee or pose a danger to the safety of any other person or the community," and (B) "that the appeal is not for purpose of delay and raises a substantial question of law or fact likely to result in" reversal, a new trial, or a lesser sentence. The district court concluded that Ms. Farr had failed to show the required substantial question of law or fact.
The Court concluded, on appeal of the denial, it applies a de novo review to mixed questions of fact and law and a clearly erroneous review to the questions of fact.
Proceeding under incorrect statute. Ms. Farr contends that she should have been charged under 26 U.S.C. § 7202 [here] rather than 26 U.S.C. § 7201 [here]. It appears, however, that § 7201 encompasses her conduct. See Farr I, 536 F.3d at 1186 [here] ("[T]he government has adduced ample evidence from which a jury could find Ms. Farr guilty of evading the trust fund recovery penalty."). "When a defendant's conduct violates more than one criminal statute, the government may prosecute under either (or both, for that matter, subject to limitations on conviction and punishment)." United States v. Bradshaw, 580 F.3d 1129, 1136 (10th Cir. 2009). "Absent certain allegations of impropriety, it is not the role of the jury (or the judge) to decide whether the government has charged the correct crime, but only to decide if the government has proved the crime it charged." Id. Accordingly, this issue does not present a substantial question for appeal.
Guilt: By Plea Agreement - See prior blog entry on guilty plea: A New UBS Depositor Plea in SDNY (6/27/11), here.
Maximum Possible Sentence: 15 years.
Tax Loss: $400,000 - $1,000,000 (Apparently this number was not more finitely calculated because this is a single Guideline tax loss range and would not change any of the sentencing calculations).
Civil income tax penalty: Civil Fraud Penalty (75%) agreed to in the plea agreement (see the prior blog), hence, given the tax loss, the civil fraud penalty would be between $300,000 and $750,000.
* also with significant, perhaps age related, physical impairments.
Discovery is a significant part of criminal tax practice and criminal practice in general. FRCrP 16, here, allows limited discovery, sometimes reciprocal. In addition, there are certain constitution disclosure requirements, such as Brady, Giglio and Jencks Act. Brady v. Maryland, 373 U.S. 83 (1963); Giglio v. United States, 405 U.S. 150 (1972); and 18 USC 3500, here. Some, perhaps most, USAO offices have an open file policy in criminal tax cases -- at least the run of the mill tax cases -- which will disclose everything the Government has in terms of raw data (generally not mental processes related to the investigation and prosecution, but some of that can be reasonable inferred from the data in the files). Most of the time that works to put the defendant on notice of the Government's case. And, because of the work performed by the time of indictment, the files will not only put the defendant's counsel on notice, but will paint a sufficiently devastating picture that it will induce a plea in most cases (because most federal tax crimes cases, like most federal crimes cases, result in a plea)..
Reasonableness does play a role in determining whether the defendant acted in good faith. Good faith is a defense to the willfulness element that the government must prove. The court instructed the jury that if it found "that the defendant, subjectively in his own mind, believed that he was not required by the law to file the returns in question or pay the taxes, it will be your duty to find him not guilty." The jury could use the reasonableness of the defendant's explanation for his actions to assess whether the defendant's version was credible. The more unreasonable the jury perceives the defendant's reasons for not paying taxes to be, the more the jury would likely infer that the defendant's proffered reasons were pretextual. Similarly, the more reasonable the defendant's reasons were, the more likely it is that the jury would credit them as being truthful. If the jury believed the testimony of the defendant and that testimony reflected an honest mistake in law, then the jury could find that the defendant acted in good faith. Accordingly, the court properly instructed the jury that the reasonableness of the defendant's actions "is a factor [the jury] can consider in determining whether the defendant acted in good faith."
I have previously written on the logical inconsistency of and dangers of the conscious avoidance concept that juries may be asked to apply in tax crimes requiring willfulness -- defined as the intentional violation of a known legal duty. The problem is that the jury may believe that it can convict if the defendant knew (the statutory requirement) or should have known but did not because he or she consciously avoided knowledge (not the statutory requirement). For prior rantings on this subject, click the Conscious Avoidance label below.
Because punishable guilt requires that bad thoughts accompany bad acts, the Model Penal Code (MPC) typically requires that jurors infer the mental state of a criminal defendant at the time the crime was committed. Specifically, jurors must sort the defendant’s mental state into one of four specific categories—purposeful, knowing, reckless, or negligent—which will in turn define both the nature of the crime and the degree of the punishment. The MPC therefore assumes that ordinary people naturally sort mental states into these four categories with a high degree of accuracy, or at least that they can reliably do so when properly instructed. It also assumes that ordinary people will order these categories of mental state, by increasing amount of punishment, in the same severity hierarchy that the MPC prescribes.
The MPC, now turning fifty years old, has previously escaped the scrutiny of comprehensive empirical research on these assumptions underlying its culpability architecture. Our new empirical studies, reported here, find that most of the mens rea assumptions embedded in the MPC are reasonably accurate as a behavioral matter. Even without the aid of the MPC definitions, subjects were able to distinguish regularly and accurately among purposeful, negligent, and blameless conduct. However, our subjects failed to distinguish reliably between knowing and reckless.
In In re Special February 2011-1 Grand Jury Subpoena Dated..., --- F.Supp.2d ----, 2011 WL 6973429 (ND Ill 2011), the Court quashed a grand jury subpoena for foreign bank account records, holding that the Fifth Amendment privilege (the act of production iteration of the privilege) trumps the required records doctrine.
I won't try to analyze the opinion, because I don't think it necessarily adds critical analysis that has not been considered before. I will say that it strikes me that this is an issue that can go either way, depending upon the predilections of the court considering the matter. In terms of numbers (judges weighing in on the issue), the Government is ahead. And, in terms of appellate victories (one with no dissents from the liberal 9th Circuit), the Government is ahead. I am not so bold as to predict the ultimate resolution after these cases bounce around for a while. I think it depends upon the guts -- perhaps better, gut reactions -- of as yet unknown judges (including perhaps justices) that will hear the cases.
But, if I were picking Judges taxpayer friendly guts on this issue, Judges Hughes and Holderman would be at the top of the list (even before they decided these cases).
For prior blogs on the topics, click the labels below.
Addendum: This case was reversed on appeal. See Seventh Circuit Compels Production of Offshore Bank Under the Required Records Doctrine (8/27/12), here.
In United States v. Williams, the District Court for the Eastern District of Virginia held that the government did not prove that a taxpayer’s failure to report his foreign accounts on a Report of Foreign Bank and Financial Accounts (FBAR) was willful, even though Schedule B of his income tax return indicated that he had no foreign accounts and he acknowledged willfully failing to report income from the accounts on his return.
Mr. Williams, a U.S. citizen and New York University-trained lawyer, pled guilty to tax evasion and criminal conspiracy to defraud the government with respect to more than $7 million in unreported income that he deposited in foreign accounts and more than $800,000 in earnings on those deposits. in connection with this plea, Mr. Williams admitted that he intentionally failed to report income in an effort to evade income taxes between 1993 and 2000. Acting on a request from the U.S., the Swiss government froze his accounts in 2000.
Sentencing on 1/11/12, per USAO SDNY Press Release, here.
Restitution (per Guilty Plea): $458,000 +.
FBAR Penalty: $1,217,316 (FBAR penalty; 50% of highest balance for one year).
Prior blog entry on guilty plea: Yet another plea deal for UBS Depositor (8/6/11), here.
In In re Vaughn, 463 B.R. 531, 2011 Bankr. LEXIS 5091 (D. CO 2011), here, the taxpayer was denied discharge in bankruptcy for tax arising from his investment in a tax shelter of the BLIPS variety. As I have noted before, bankruptcy discharge is denied for certain reasons, including in part here pertinent "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." "11 USC 532(a)(1)(C). The Court held that the Government proved that this taxpayer flunked that test.
I will provide a summary below, but note first that the holding is interesting because rarely did the Government put in play the issue of taxpayer fraud with respect to the reporting of the BLIPS and similar Helmer inspired shelters, all of which, the Government claimed, were hokey ("too good to be true") and all of which ultimately failed when tested. Many of the shelters involved in the current Supreme Court brouhaha over the 6 year statute of limitations were basis boost shelters such as these shelters that positioned the taxpayers to argue that income was not omitted so as to trigger the 6 year statute. But, if fraud were involved with respect to the reporting, then there is no statute of limitations. Interestingly, the fraud does not even have to be the taxpayer's fraud to trigger the unlimited statute of limitations; it can be the preparer's fraud (Allen v. Commissioner, 128 T.C. 37 (2007)) or, presumably someone else such as a promoter. But, certainly the taxpayer's fraud -- the type of fraud involved alleged and found in In re Vaughn -- suffices to trigger the unlimited statute of limitations. And, of course, fraud gives rise to a 75% civil fraud penalty. And, of course, as in In re Vaughn, fraud can preclude bankruptcy discharge for a tax liability. (Although interestingly, the civil fraud penalty can be discharged in bankruptcy.) So with all of these incentives to the Government to assert fraud against the taxpayer, why don't we see the issue arise more often. I don't know the answer to that question, but the dearth of cases is noteworthy.
In IR 2012-5, here, the IRS announces that it is "Reopening" its Voluntary Disclosure Program. For now, I will just refer readers to the Notice and make comments later if appropriate. The key features of the program (IRS puffing omitted).
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
In United States v. Allen, 670 F.3d 12 (1st Cir. 2012), here, the Court affirmed convictions of tax protestors / defiers -- husband and wife -- for convictions of one Klein / defraud conspiracy count, one evasion count, and four failure to file counts. The defendants "defense" was that they had a Cheek good faith belief that they had complied with their legal obligations. The case offers nothing particularly exceptional, but does present an opportunity for some reminders to students and practitioners.
First, the defendants testified in their defense. I have observed before that testifying in a criminal tax case -- indeed in white collar cases generally -- is a dicey gambit. But, if the only defense is Cheek good faith, that defense is usually hard to sustain without the defendant testifying.
"Are you telling this jury that you firmly hold these beliefs even after your good friend Larken Rose went to jail for 15 fifteen [sic] months for not filing tax returns for these same and similar beliefs?" -- to which Allen responded, "Absolutely."
In United States v. Rozin, ___ F.3d ___, 2012 U.S. App. LEXIS 230 (6th Cir. 2012), here, the Sixth Circuit affirmed a business owner's conviction for tax shenanigans related to a tax shelter promotion known as Loss of Income insurance. Essentially, the taxpayer wrongfully claimed a deduction for the so-called insurance premium when it was nothing more than an investment through a U.S. Virgin Islands supposed insurance company. Whether or not the insurance company was bona fide, the insurance policy as written was not at least as an insurance policy. A number of people from the promoters through Rozin and a co-owner were indicted. All were charge with the Klein defraud conspiracy. Rozin was also charged with tax perjury and tax evasion related to the scheme. Some defendants pled. One died before trial. Rozin and an in-house attorney for his business went to trial. Rozin lost and was not happy with the result. He moved for acquittal and, failing on that motion and being still unhappy, appealed.
I found the appeal to be a fairly routine-type of appeal in a tax shelter oriented criminal case -- i.e., standard arguments for Cheek willfulness, reliance on tax professionals, etc. As usual, they did not work on appeal.
Two aspects of the opinion, while not particularly exceptional, are noteworthy as reminders for students and practitioners.
Tax Notes Today has a fascinating summary, with underlying documents, of an internal dispute between the Taxpayer Advocate and the IRS about the administration of OVDP. Shamik Trivedi, Marie Sapirie, and Jeremiah Coder, IRS, Taxpayer Advocate Spar Over OVDP Examiner Discretion, 2012 TNT 4-1 (1/6/12), here..
I state the issue of this blog in layman's terms first. The issue is whether the statute of limitations for refund claims might upset the normal expectations of persons entering the OVDI program. The answer to that question is perhaps. I will try to explain more detail below, but the problem is the way the tax statutes of limitation work. Just as the statute of limitations may prevent the IRS from assessing tax that might have otherwise been due for a year barred for assessment, so the statute of limitations prevent the IRS from refunding a tax paid for a year barred from filing a refund claim. The protective fix for the potential problem -- and it really may only be a potential problem rather than a real one depending upon future administration of OVDI and the opt out procedures -- is for the taxpayer to file a written protective refund claim (formal or informal) within the normal statute of limitations for refunds of any taxes paid pursuant to the programs or the opt out procedures.
Let me illustrate the problem in an example. Taxpayer A joined the OVDI program on August 1, 2011. Taxpayer A submitted the OVDI package on September 9, 2011 (the extended due date for submission). Along with the package, the taxpayer calculated and remitted by check the income tax, income tax penalty and interest on the income tax and income tax penalty for the years 2003 through 2010. Pending further processing, the IRS posts the payments as calculated to the respective years pursuant to the taxpayer's calculations. (I have some anecdotal evidence that the IRS may be doing an interim posting to the year 2007 for all amounts paid, even if according to the taxpayer's calculations they relate to years other than 2007; let's set that aside for later consideration and just assume that the IRS posts to the years 2003 forward as the taxpayer has indicated.) That means that some portion of the tax, penalty and interest gets allocated to tax years beyond the normal three year statute of limitations on assessment. Although we are talking here about refunds, the statute of limitations on assessment is important because, although, inside the programs, the statute of limitations is irrelevant, if the taxpayer opts out of the program, the IRS will only be able to assess tax for the years that are otherwise open. That means any tax allocated to years that are otherwise closed for additional assessments is, under the law, an overpayment of tax that should be refunded.
Three Swiss enablers, reputedly employed by or affiliated with Wegelin & Co., have been indicted in NYC. The indictment is here; the USAO SDNY press release is here, see quote below].
The three are Michael Berlinka, Urs Frei, and Roger Keller. The amount of money hidden allegedly exceeds $1.2 Billion (with a B).
Unindicted Co-Conspirators: (i) the U.S. taxpayers involved (numbering over 100, although only U.S. taxpayers A - W (numbering 23) and two by name, Arthur Joel Eisenberg, see here, and Kenneth Heller, see here) are discussed specifically in the indictment; and (ii) other Swiss enablers, such as Client Advisor A, Managing Partner A, Swiss Asset Manager, Swiss Bank A Executive and Gian Gisler, see here.and Beda Singenberger, see here.
Banks : Principally Swiss Bank A (reputedly Wegelin & Co.); UBS AG and Swiss Bank No. 1 (unknown) play roles.
Charges: One count of conspiracy (both the ubiquitous Klein / defraud conspiracy and offense conspiracy to violate 7206(1) (tax perjury) and 7201 (evasion), charged as a single count).

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