Source: http://federaltaxcrimes.blogspot.com/2016/03/
Timestamp: 2019-04-24 20:01:28+00:00

Document:
Mark Matthews, here, a prominent player in the tax crimes area has written this article: Mark E. Matthews, IRS Criminal Investigation: A National Asset Being Damaged, 150 Tax Notes 1319 (MAR. 14, 2016), here. I highly recommend the article by a thoughtful practitioner who has been involved in enforcement and defense.
CI is the only enforcement agency pursuing investigations of potential criminal violations of the IRC. There are two key aspects of its work from a tax enforcement perspective. First, unlike IRS civil audit activity, CI's cases are public. CI publicizes its cases to send a message far beyond the individual taxpayer being prosecuted -- to more than 300 million taxpayers. The message has two components: (1) the threat to those tempted to cheat that there is a great risk to tax evasion, and (2) the assurance to those paying their fair share that they are not chumps and that those not paying it are not getting a free pass, or are at least risking their liberty. Second, the prospect of incarceration is a principal motivator to those tempted to cheat. If the only sanction for tax violations were civil penalties, many more would play the audit lottery more aggressively, especially as congressional budgets drive the audit rate lower each year. Yet even the slight prospect of a loss of liberty in one of our federal correctional institutions causes many to focus when they sign the perjury jurat on their returns.
CI is the most dramatic example of the concept of general deterrence. Tax offenses are the one federal felony that every American confronts each year. We are not all tempted to sell drugs; we are not all in the securities industry or in a position to commit an environmental crime. But we all file returns. Therefore, the IRS must maintain a strong compliance message for the country's 300 million taxpayers, and it has -- in recent history, with as few as 1,500 criminal tax prosecutions each year. Even that low number, however, is dropping. That is far below the number of narcotics prosecutions brought by the federal government in attempting to deter a far smaller group of potential violators. Hence, CI needs publicity to achieve even a minimum enforcement presence.
The CI chief, Richard Weber, recently made the same point in a conversation with the author: "Taxpayers voluntarily comply because they know it is the right thing to do, but they also want those who cheat the government to be held accountable. They want a level playing field. When they see that criminals get away with not paying their fair share, there is a direct impact on the voluntary compliance rate and the confidence in our entire system begins to erode. IRS-CI restores that confidence by ensuring that we all play by the same rules."
Mark then discusses the data on declining enforcement from declining resources. I will let Mark's discussion speak for itself. Highly recommended for readers of this blog.
I will close with my own brief thought. The IRS is a critical agency, no less important to who we imagine ourselves to be as Americans than any other federal agency. To the extent that there are problems in the IRS (or any other agency), the solution is to fix them which may even require additional budgeting to insure that the agency is functioning fairly and efficiently to meet the needs of the country. Politicized budget cuts are going to make the IRS serve this country worse.
Pursuant to an IRS Freedom of Information Act (“FOIA”) request, my colleague at Anaford AG, James Gifford, discovered that the IRS for the past several years has had a “national” policy which selectively denies an estate tax deduction for the miscellaneous Title 26 offshore penalty (“MOP”) incurred in Offshore Voluntary Disclosure Program (“OVDP”) cases (see FOIA response from IRS dated March 17, 2016, here).
But first, some background on the issue.
In the OVDP, participants are required to pay in lieu of all other penalties that may apply to the previously undisclosed foreign assets and entities a miscellaneous Title 26 offshore penalty generally equal to 27.5%of the highest aggregate value for those assets during the period covered by the voluntary disclosure. Inevitably, some OVDP participants include estates. Ordinarily, administration expenses are deductible from a decedent’s gross estate under I.R.C. § 2053 for purposes of determining the estate tax. These include administration expenses incurred in the collection of assets, payment of debts, and distribution of property and normally would include the MOP.
If anyone other than the decedent (which would include a surviving spouse, children, siblings, accountant, attorney, or anyone else with a material interest) was cognizant of the existence of the offshore account, and the executor/personal representative failed to disclose the existence of the account (or, did not file a Form 706) by the due date of the return, then we will not allow a reduction to the gross estate for the related OVDI [OVDP] offshore penalty.
Even though the IRS issues voluminous rules and guidance each year, the IRS acknowledged in a Tax Notes article posted on March 28, 2016 (“IRS Inconsistent in Denying Estate Tax Deduction for OVDP Penalty”) that it has not previously published any guidance on this policy. Thus, it appears the IRS has not followed any public procedures for creating this policy or informed applicants to the OVDP of this policy. Nor has it issued any notice, bulletin, or any form of rulemaking for communicating and establishing this policy.
The Transaction Records Access Clearinghouse ("TRAC"), here, has published new statistics on a web page titled "IRS Criminal Enforcement Slides," here. I discuss some aspects of that data in this blog entry, but I do caveat the saying popularized by Mark Twain (who attributed -- perhaps misattributed -- it to Benjamin Disreali): "there are lies, damned lies, and statistics." See Wikipedia, here.
The data reported shows that referrals by the IRS to DOJ Tax peaked in the early 90s at 20 per million of population and are about 9 per million in fy 2015. (In several years there were slightly lower numbers, but I have not attempted to analyze why that happened.
Of course, as a general proposition, the criminal tax enforcement resources that can be systemically deployed by the various players (IRS, DOJ Tax, Courts, Probation Office, Bureau of Prisons) are small relative to the population and tax revenue overall. So those limited resources have to be deployed for maximum effect, which is what the players claim. What that results in is a low number of prosecutions for tax crimes relative to the number of U.S. taxpayers who actually cheat on their taxes. The message through prosecution and punishment is to show honest taxpayers that something is being done and to discourage the potentially dishonest from misbehaving.
1. The Lead Charges for Prosecution are overwhelmingly non Title 26. That really does not tell us what portion of the charges are tax-related Title 18 charges (such as, most prominently, conspiracy (offense or defraud / Klein conspiracy) related to tax misconduct, but also including §§ 286 and 287, false claims conspiracy and false claims).
2. More surprisingly are the number of "declinations." As presented, the declinations are almost 50% (1,633 prosecuted and 1,461 declined). There may be some year-to-year problems that a single year's data do not explain. More importantly, I think, would be to have the data limited to the tax crimes as indicated in paragraph 1 (without the other crimes that are not normally considered tax crimes, such as wire fraud or money laundering).
3. The IRS's fy 2015 statistics, here, may or may not be consistent with TRAC's presentation since they may not be using the same data sets. The IRS statistics show 3,289 prosecution recommendations and 3,208 indictments, a much lower apparent declination rate (again with the caveat of year to year issues) than TRAC offers.
The New York Law Journal has published this article of an interview of Acting AAG Caroline Ciraolo. Jeremy H. Temkin, DOJ Tax Division Today: Interview With Acting Assistant Attorney General, 255 NYLJ No. 55 (3/23/16), here. The interview is a general overview of the Tax Division's work, with particular focus on offshore accounts that have been perhaps its most visible effort over the past few years. Of course, there is the expected claims of great success on the offshore efforts starting in 2009, with many prosecutions of individuals and financial institutions and much revenue gathered.
I focus in the balance of this blog only on matters that I found particularly interesting.
1. Regarding follow-through, Ciarolo says that DOJ and the IRS are following leads they have obtained in the various efforts and are continuing to obtain from various sources "to identify and investigate U.S. accountholders who willfully concealed their foreign accounts and evaded U.S. tax, as well as those entities and individuals, foreign and domestic, that facilitated this criminal conduct."
Finally, Tax Division attorneys and IRS personnel are reviewing the information received from Swiss banks that fall under Category 3 and Category 4 of the program. Category 3 and 4 banks maintain that they did not commit any violations of U.S. law, and seek a non-target letter after providing information required by the program.
I have written before that I am baffled that any Swiss Financial Institution would have proceeded under Category 3 or 4. See US DOJ Swiss Bank Program Categories 3 and 4 Comments (Federal Tax Crimes Blog 2/4/16; 2/7/16), here. Certainly, though, the Financial Institutions that did join under Categories 3 or 4 would have expected to have been closely scrutinized.
The IRS continues to struggle with identify theft, even as it has notable successes in prosecutions. Yesterday, the IRS published a webpage titled: "IRS’s Top 10 Identity Theft Prosecutions: Criminal Investigation Continues Efforts to Halt Refund Fraud," here. By announcements such as this, the IRS wants to discourage other would be identity thieves from attempting identity theft and to give some assurance that the IRS's "cops are on the beat."
The IRS's message from the selected 10 examples is that identify theft is serious and draws serious sentencings, with the principals involved receiving over 70 months (some well in excess of 100 months) incarceration (persons with lesser roles receive lesser, but still significant sentences).
A jury found Veronica J. Fairchild guilty on four counts of making and subscribing a false tax return, in violation of 26 U.S.C. § 7206(1). The district court n1 sentenced Fairchild to 33 months' imprisonment. On appeal, Fairchild argues that (1) insufficient evidence supports the jury's finding that Fairchild knowingly and willfully underreported her income; (2) the district court abused its discretion in failing to instruct the jury that it was required to unanimously agree on which source of income that Fairchild failed to report on her income tax return; and (3) the district court improperly calculated Fairchild's Guidelines range and imposed a substantively unreasonable sentence. We affirm.
Highly summarized, the facts are: Fairchild was a female adult entertainer who received large sums of money (over $1,000,000) from one of her customers and smaller significant sums from another. She failed to file timely income tax returns during the years in which she received the income but subsequently filed delinquent tax returns for the years "apparently unaware of the ongoing IRS investigation." (The delinquent returns were apparently needed in order to obtain financing for a real estate purchase.) In those delinquent returns, she reported about 1/2 the amount that the two customers had given her and probably most of that was from sources other than the two customers. Fairchild claimed that the transfers from her two customers to her were gifts rather than compensation for services.
She claimed that when she met with her accountant in 2010 to prepare her tax returns, she decided to claim some of the gifts from Karlen as income to benefit him, so that he did not have to pay the taxes on all of it. To determine her income over the four years, she "decided that any time [she] spent with David [Karlen], anything that could be construed as income or considered a gray area at a thousand dollars an hour." She testified that she spent an average of two times per month with Karlen over the 48-month period, and she estimated that she spent approximately four or five hours with Karlen during each "session." She stated that she also included going out to eat with Karlen as part of the billable time. Fairchild calculated that she had earned "about $120,000 a year" for each of the four years for services that she provided to Karlen. She testified that, at the time that she filed the tax returns, she believed that the money in excess of what she reported as income was "[g]ifts." But Fairchild admitted that "Karlen never used the word 'gift' with [her]."
I am leaving out some of the details from the opinion. I think most readers can project the general nature of the details or can read the opinion to get them from the court.
Since that time, Mr. Boulware has popped up again in the case reporters. E.g., HIE Holdings v. Commissioner, 521 F. App'x 602, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, cert. denied 134 S. Ct. 712 (2013). (HIE is Boulware's company, and his personal case was consolidated on appeal, see Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (Federal Tax Crimes Blog 4/14/13), here.
Just yesterday, Mr. Boulware showed up again in a Collection Due Process ("CDP") case on appeal. Boulware v. Commissioner, ___ F.3d ___, 2016 U.S. App. LEXIS 4502 (D.C. Cir. 2016), here. The issues in the case are not tax crimes issues per se, but the case does serve as a reminder that there are civil tax consequences that attend criminal tax prosecutions. I will briefly address the case to illustrate that point.
After HIE Holdings and Boulware lost on the merits in the prior Tax Court case and failed to post bond while appealing, the IRS was permitted assess the tax determined by the Tax Court while the appeal was pending. § 7485(a)(1). The IRS did so and moved to collect. § 7485(a)(1). Boulware filed a CDP request in issue here.
First, Boulware would have to agree to pay $29,000 per month, which Martin calculated was his "ability to pay" based upon Boulware's most recent tax returns and other financial documents. Second, Boulware would have to become compliant with all current tax obligations, including his estimated taxes for 2012. Finally, he would have to liquidate various personal assets, including a 401K account and two life insurance policies all together worth approximately $950,000, and put the proceeds toward his deficiency.
If the person is not a citizen or lawful permanent resident, the calculations for the application of the substantial presence test under section 7701(b)(3) for 5 years (the 3 years in return covered period and the two previous years).
An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story.
A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.
If I missed any key differences, please let me know either by comment or email.
I have previously posted on certain comments at a recent Federal Bar Conference. See Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16), here, and Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. A significant portion of the AAG's prepared remarks related to criminal enforcement initiatives for prosecutions under § 7202, Willful failure to collect or pay over tax, here. This is the criminal analog to the trust fund recovery penalty, § 6672, Failure to collect and pay over tax, or attempt to evade or defeat tax, here. The article is Matthew R. Madara, DOJ Seeking to Change Employment Tax Sentencing Guideline, 2016 TNT 45-8 (3/8/16) [no link available].
1. As DOJ Tax has made clear both in pronouncements and prosecutions, it is very serious about § 7202 prosecutions.
3. Besides being inaccurate because of the increase in § 7202 prosecutions, the statement is being deployed by defense lawyers to minimize the gravity of the offense in sentencings. I would not think, however, that sentencing judges are much swayed by that genre of argument.
4. As to characteristics of failure to withhold and pay over cases that are prosecutors, a DOJ Tax attorney said that DOJ Tax is particularly looking for cases where the responsible parties have lied to the IRS. (As I has said often on the blog, criminal tax cases, like many or most white collar crimes cases, are principally about the lie, in one form or another.) The lie is what will help make the substantial burden to prove willfulness beyond a reasonable doubt.
5. Proving willfulness -- and thus obtaining conviction -- is relatively straightfoward despite the criminal burden of proof. If the employer -- with the action of the responsible person -- has withheld from the wages, any defense by the responsible person with regard to failing to pay over "falls by the wayside."
I recently blogged on the prepared comments for Caroline Ciraolo, Acting Assistant Attorney General, for a recent tax conference. Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. Tax Notes Today has an article summarizing her remarks and Bryan Skarlatos, a prominent private practitioner in the offshore account practice, at the conference. Nathan J. Richman, International Tax Enforcement Efforts Include Civil Tools, 2016 TNT 45-7 (3/8/16) [no link available]. I will highlight the key comments, as reported, that I think may be of interest to readers of this blog.
JAT Comment: Obviously, it will be getting harder and harder to claim nonwillfulness as time moves on. Skarlatos' point, I think, was that the practitioner must perform his due diligence to question whether clients coming in this late can really certify their nonwillfulness. See paragraph 2, below.
2. Ciraolo called out as having a weak case for nonwillful in streamlined submissions situations involving (1) accounts moving from category 1 banks to category 2 banks and then to a new foreign country and (2) accounts with nominee entities. JAT Note: Those are the obvious cases. Those cases should always have proceeded in OVDP without opt out, from the inception in 2009. Still, I suspect that there will be situations even into the future that, with due diligence, a professional may be able to advise a client that streamlined is appropriate.

References: § 2053
 § 7206
 v. 
 v. 
 § 7485
 § 7485
 § 7202
 § 6672
 § 7202
 § 7202