Source: https://federaltaxcrimes.blogspot.com/2012/10/
Timestamp: 2019-04-24 19:50:45+00:00

Document:
Overall, McDougal [an IRS attorney prominently involved in the offshore initiatives] was confident that good progress has been made in battling offshore tax compliance issues, both in the United States and abroad. "Consciousness is being raised about this problem," he said. "And let's face it, when you've got the Pope coming out and writing a letter talking about how harmful it is for wealthy people to be evading their taxes when the needs of the poor are going unmet, that really adds fuel to the fire. So there is a change in consciousness and the situation is gradually improving."
In a new study, the authors take a close, empirical look at the use of shell corporations to skirt the law. Michael Findley, Daniel, and Jason Sharman, Global Shell Games: Testing Money Launderers' and Terrorist Financiers' Access to Shell Companies, (9/22/12), here. Some of the findings of the study have been the subject of speculation. The study confirms some of the speculation. One interesting finding is that the countries complaining the loudest about tax haven use of shell companies are some of the biggest abusers.
Of course, we have seen shell corporations and other types of shell entities used with the offshore accounts to give added levels of identity protection. Use of such entities are deemed particularly egregious by DOJ Tax and the IRS. Indeed, virtually all of the prosecuted cases involving offshore accounts have involved such shell entities.
I have just recently come across the plea agreement in United States v. Robert Edward Cone (SD TX Crim. No. H-11-617), here. The plea was entered in February; sentencing is set for early next year. The plea and my personal knowledge of the case (I represented a witness) indicate that, although a foreign account and the Schedule B foreign account question were involved, the case was an outlier to the Government's foreign account initiative. Hence, I have put the case in spreadsheet with an indication that it is an atypical case. First the key data and then I provide a narrative explanation.
Restitution: $939,917 (contractual restitution for the year 2001, consisting of the tax, apparently the civil fraud penalty and tax on each).
[T]he discovery obtained in this action may be used solely for purposes of this litigation and may not be shown, distributed or disseminated to any other person or otherwise used for any purpose other than for impeachment purposes in another proceeding or in connection with a perjury prosecution arising out of the defendants' deposition testimony. However, the government may use information derived from this action against other individuals or entities in any other proceeding.
The Magistrate Judge thought this was the appropriate balancing of the competing needs for the civil litigation and the defendants' potential Fifth Amendment privilege.
The Government appealed the Protective Order to the district judge.
This discovery appeal presents an interesting issue at the intersection of a court's power to issue a protective order prohibiting the use of discovery obtained in a civil litigation in other proceedings, and a party's constitutional right to assert the Fifth Amendment privilege against self-incrimination in a civil enforcement action brought by the government. First, under Federal Rule of Civil Procedure 26(c)(1)(B), a court "may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense" that "specif[ies] terms . . . for the disclosure or discovery." Second, "there is no question that an individual is entitled to invoke the privilege against self-incrimination during a civil proceeding . . . [a]nd this means that a civil litigant may legitimately use the Fifth Amendment to avoid having to answer inquiries during any phase of the discovery process." 4003-4005 5th Ave., 55 F.3d at 82 (citations omitted). If a defendant in a civil proceeding chooses to invoke the Fifth Amendment as a result of an overlapping criminal investigation, such defendant risks an adverse inference from his assertion of the privilege. Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 97-98 (2d Cir. 2012).
Dennis Duban, a Los Angeles accountant, has pled guilty to conspiracy and aiding and assisting. The DOJ Tax Announcement is here.
Mr. Duban was the accountant who aided and assisted another client commit tax crimes. The client, Charles Alan Pflueger, previously pled guilty. See my blog on that plea; Plea for Defendant Charged with Tax Crimes (including FBAR) (5/30/12), here.
As explained in the press release, Mr. Duban apparently got too close to his client, so the conspiracy charge related to that. In addition, he had has own offshore accounts that he failed to properly report. I quote the foreign activity portions of the press release below.
Wolfgang Roessell has been sentenced. I previously blogged his guilty plea: Another UBS Related Taxpayer Plea Agreement (5/31/12), here.
I don't have all the information from the sentencing, but I cut and paste the core information from the blog on the plea and add information from the reports on the sentencing that I have. I will try to clean up all this tomorrow and update the spreadsheet.
Information from the Bloomberg report (Ex-UBS Client Roessel Avoids Prison in Offshore Tax Case (Bloomberg 10/11/12), here.
The second issue raise in both the Walton and the Brooks petitions for certiorari in United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here and here, is whether the trial court properly instructed the jury on deliberate ignorance as a substitute for specific intent (knowledge) in a crime where the text requires specific intent (knowledge). The deliberate ignorance concept is also called conscious avoidance, willful ignorance and the ostrich concept (mostly mentioned as the ostrich instruction).
Accepting the lay of the land as the Supreme Court has served it up in Global-Tech, the petitions in Brooks ask whether the instructions in Brooks were consistent with what the Supreme Court said about deliberate ignorance and whether the varying court's application of the doctrine should be reconciled so that the standards of criminality are consistent among the Circuits. I should say in this regard that no court has rejected the concept of deliberate ignorance -- the conflict is over how it is conceptualized and the elements required that the jury must be instructed in some meaningful manner.
It is commonplace that the prosecutors will give immunity to a prosecution witness to overcome the witness's Fifth Amendment privilege and forcing the witness to testify for the Government which, in a criminal case, means against the defendant. But, the defense has no such tool in order to prevent a defense witness from claiming the Fifth Amendment. Is this fair? If not, what can be done about it.
The historical rule has been that the defense has no way to force the granting of immunity in order for the witness to have the incentive or the compulsion to testify over Fifth Amendment claims. But there are exceptions.
In United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here, the defendants' requested immunity for a defense witness who refused to testify for the defense. The prosecutors refused to request immunity under the statute, and the trial court refused to grant immunity. The Fifth Circuit affirmed the trial court's refusal to grant immunity. One of the defendants, Walton, seeks certiorari on the issue. See petition here.
I introduced other issues in the Brooks case in an earlier blog, A White Collar Crime Case with Issues Relevant to Tax Crimes (Federal Tax Crimes Blog 10/10/12), here. In this blog, I focus on the defense witness immunity issue.
First, I offer the key excerpts from the Fifth Circuit decision. Second I offer excerpts from the reasons argued for granting the petition for certiorari in Brooks. Third, for what it is worth, I offer my discussion from my Federal Tax Crimes book.
The White Collar Crime Prof Blog has an interesting post on a petition for certiorari filed recently in United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here. See Defense Witness Immunity & Global Tech - Important Issues on Cert (White Collar Crime Prof Blog 10/7/12), here. These issues presented for certiorari arise in many white collar crimes cases, including tax crimes.
In Brooks, allegedly in order to manipulate commodity prices, Defendants, commodity traders with an energy company, provided false information on commodity trades to an trade publication widely used to indicate prices and price movements, thus potentially having a disruptive effect on the markets in those commodities. They were prosecuted and convicted for false reporting in violation of the Commodities Exchange Act and the federal wire fraud statute.
The Fifth Circuit addressed many issues in affirming their convictions. I will discuss in separate blogs later the two issues being presented on petition for writ of certiorari. Those issues are (i) the holding that the Government did not have to grant immunity to witnesses who might be exculpatory to defendant and (ii) the blessing of the deliberate ignorance instruction given to the jury.
I will summarize here the remaining issues in the Fifth Circuit opinion that I think of particular relevance to tax crimes. Keep in mind that tax crimes are just a subset of white collar crime, so many of the skirmishes in white collar crime cases generally will often appear in tax crimes cases.
1. Government Interference with Payment of Legal Fees.
The defendants alleged that the Government's actions, direct and indirect, caused their employer to withhold attorneys fees for their defense and thereby violated their Fifth and Sixth Amendment privileges. Defendants relied upon the landmark decision in United States v. Stein, 541 F.3d 130 (2d Cir. 2008), a criminal tax prosecution of tax shelter promoters, where the Second Circuit affirmed dismissal of most of the defendants because the Government had put undue pressure on KPMG to withhold attorneys fees for those defendants. The Court noted in this regard that the case was distinguishable from Stein because: "The district court's factual findings bound the Second Circuit, and on such findings, the Second Circuit held KPMG's actions were state actions that violated the defendants' right to counsel of their choice." No such findings were made in Brooks.
In Hovind v. Commissioner, T.C. Memo. 2012-281, here, the Tax Court decided decided that (i) the taxpayer had "had unreported Schedule C income and expenses (collectively, net profit) attributable to Creation Science Evangelism (CSE) and Dinosaur Adventure Land (DAL) for each of the years at issue; " (ii) that the taxpayer was liable for additions to tax under section 6651(a)(1) for failing to timely file her income tax return for each of the years at issue; and (iii) and that the taxpayer is liable for the fraud penalty under section 6663(a) for each of the years at issue.
The IRS website for reporting fraud was visited 501,218 times in Fiscal Year 2011, and during that year 116,307 individuals submitted a Form 3949 A, Information Referral, to the IRS. The IRS is not efficiently or effectively processing these referrals. Reporting guidelines provided to taxpayers and employees are confusing and inconsistent and cause individuals to use Forms 3949 A for other than its intended purpose. This creates a burden on both the individuals and tax administration. Additionally, a lack of oversight and effective procedures has resulted in workable Forms 3949 A, including identity theft claims, being destroyed without any acknowledgement of receipt to the taxpayer.
This audit was initiated based on a TIGTA Office of Investigations referral which reported that thousands of identity theft cases reported on Forms 3949 A were not being processed.
Reporting guidelines provided to taxpayers and employees are confusing and inconsistent. Instructions on Form 3949 A do not explain what types of fraud and tax law violations to report using this form. As a result, individuals often use Form 3949 A for purposes other than reporting suspected tax fraud or tax law violations. Additionally, because Form 3949 A lacks specificity, taxpayers do not always provide the IRS with sufficient information for the IRS to take action. Finally, the IRS routes identity theft referrals received on a Form 3949 A as regular correspondence, which delays actions from being taken on identity theft cases.
As a result, many referrals do not meet any criteria under which the IRS could or would be able to take action(s). A lack of quality review resulted in referrals being destroyed. Additionally, the forms are often used for other purposes (e.g., claims by victims of identity theft). About 3,000 Forms 3949 A used to report identity theft were destroyed due to a lack of procedures on how to process these claims. Victims were not notified.
Ineffective routing procedures and oversight have allowed Forms 3949-A to be misrouted to the wrong functions. Others are mistakenly considered unworkable and retained for 90 days and then destroyed.
TIGTA has released a report titled "Criminal Investigation's Firearms Training and Qualification Policies Neet to be Clarified, Report Number: 2012-30-104 (9/6/12), here.
In performing the IRS’s law enforcement mission, Criminal Investigation (CI) special agents may be called upon to execute search warrants and arrest those suspected of violating the U.S. tax laws and other Federal statutes over which the IRS has jurisdiction. When performing their duties, special agents carry firearms and are authorized to use deadly force to protect themselves and the public. Suspected criminals, who face the prospect of incarceration, may violently resist arrest regardless of how minor the crime may seem. CI special agents must be fully prepared to respond with force when necessary. Special agents not properly trained in the use of firearms could endanger the public, as well as their fellow special agents, and expose the IRS to possible litigation over injuries or damages.
This audit is part of TIGTA’s Fiscal Year 2012 Annual Audit Plan and addresses the major management challenges of Tax Compliance Initiatives and Achieving Program Efficiencies and Cost Savings. The overall objective was to determine whether CI has effective internal controls to ensure special agents are adhering to procedures regarding the required training and qualifications in the use of firearms. This included evaluating the potential impact on CI’s program if special agents failed to qualify.
CI’s firearms training and qualification requirements generally met or exceeded those of other Federal law enforcement agencies. However, TIGTA found that some CI special agents did not meet all firearms training and qualification requirements. Field office management did not always take consistent and appropriate actions when a special agent failed to meet the requirements because the guidance is vague. In addition, there is no national-level review of firearms training records to ensure that all special agents meet the qualification requirements. TIGTA also found that firearm discharge incidents were not always properly reported and that remedial training was not always required after accidental discharges due to special agent negligence. Lastly, procedures for securing a firearm after a discharge are not adequate.
Francis further admitted that in July of 2007 and January of 2008, currency deposits totaling $50,000 and $99,600, respectively were structured into his domestic bank accounts. Structured deposits involve amounts of less than $10,000 that are designed to avoid laws requiring that all cash transactions of $10,000 or more be reported to federal authorities.
IRS Notice 97-24, here, issued in April 1997, expressed the opinion of the IRS that trusts akin to the Aegis trusts were an unlawful means of tax avoidance. The evidence established that the defendants were aware of the notice and continued their behavior anyway. "The defendants proposed an instruction that would have advised the jury on the relative legal weight of IRS regulations, revenue rulings, letter rulings, and public notices, the last of which "have no force of law.'" The question is what exactly was the role of the Notice that the defendant's ignored. Was it like a regulation which usually does have the force of law or just an IRS opinion? What was the jury to make of the defendants not taking heed of the Notice?
The IRS issues “Notices” that are less formal than Regulations. These notices are used to provide quicker notice to the public than allowed by the other forms of pronouncement.
The Aegis defendants were convicted of conspiracy which, as Judge Easterbrook has lamented, are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.” United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990). At the end of this blog, I address the role of the conspiracy charge in white collar crime, of which tax crimes are a subset. First, I want to deal with the Seventh Circuit's affirmance of conspiracy in the Aegis case, Vallone.
(a) defraud the United States by impeding, impairing, obstructing and defeating the lawful government functions of the IRS of the Department of the Treasury, an agency of the United States, in the ascertainment, [*94] computation, assessment, and collection of revenues, namely income taxes; and (b) commit offenses against the United States, namely: to willfully aid and assist in, and procure, counsel, and advise the preparation and presentation, to the IRS, of returns and claims on behalf of others which were fraudulent and false as to various matters, in violation of Title 26, United States Code, Section 7206(2).
Tax and white collar crimes afficionados will recognize that, as framed, there is a single conspiracy with two objects. The first object is what is called an offense conspiracy. The second object is a defraud conspiracy, in a tax setting commonly referred to as a Klein conspiracy to impair or impeded the lawful functioning of the IRS. (Note, the word defraud in the conspiracy statute is broader than the normal definition of defraud and reaches mere attempts to impair or impeded.) A conspiracy can have a single object to violate one or more specific statutes (that is more technically an offense conspiracy) or to defraud (that is more technically a defraud conspiracy). But the conspiracy can be to do both -- both to violate one or more statutes and to defraud. The latter is the type involved in Vallone.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.