Wednesday, August 20, 2014

Another Offshore Account Depositor Guilty Plea (8/20/14)

The USAO SDNY announced, here, another guilty plea for a U.S. person, Bernard Kramer, with hidden offshore accounts in Switzerland and Israel.  The plea is to conspiracy (5 year offense) and tax perjury (3 year offense).  Here is the description of the conduct:
Between approximately 1987 and 2010, KRAMER maintained an undeclared bank account at a Swiss private bank headquartered in Zurich, Switzerland (the “Swiss Bank”). With the assistance of others at the Swiss Bank, KRAMER took steps to conceal the existence of, and his interest in, the undeclared account. KRAMER and certain individuals at the Swiss Bank used the coded phrase “Hot Lips” to refer to KRAMER’s undeclared account at the Swiss Bank. Periodically, KRAMER met with a representative of the Swiss Bank (“Swiss Bank Representative-1”) in the United States to discuss KRAMER’s undeclared account at the Swiss Bank and to review statements related to the account. With the assistance of the Swiss Bank, KRAMER repatriated funds to the United States from his undeclared account in a manner designed to ensure that U.S. authorities did not discover the account, including by requesting and receiving checks from the account in amounts just under $10,000 each. 
In approximately 2008, it became publicly known that the Swiss bank UBS AG (“UBS”) was being investigated by United States authorities for helping U.S. taxpayers maintain undeclared accounts. Around that time, KRAMER chose to maintain his undeclared account at the Swiss Bank after being assured by Swiss Bank Representative-1 that KRAMER’s undeclared account would remain safe at the Swiss Bank despite the UBS investigation. In approximately March of 2010, however, with the assistance of Swiss Bank Representative-1 and others at the Swiss Bank and an Israeli bank headquartered in Ramat Gan, Israel (the “Israeli Bank”), KRAMER transferred the remaining assets in his undeclared account at the Swiss Bank to a new undeclared account at the Israeli Bank. KRAMER maintained the new undeclared account at the Israeli Bank from 2010 to 2012. 
From approximately 1987 through 2012, KRAMER filed false tax returns with the IRS that failed to report his interest in his undeclared accounts at the Swiss Bank and the Israeli Bank, and the income generated in these undeclared accounts, which had a high value of at least $1.1 million.
JAT Comment:  Another bad actor.  This is one of the rare prosecutions which apparently does not involve entities to hide ownership of the accounts.

According to a USA Today report, here:
The Manhattan court filing shows Kramer secretly received periodic disbursements from the unidentified Swiss bank by requesting checks for amounts less than $10,000 — the threshold that requires banks to report transactions to government regulators.

Saturday, August 16, 2014

Tidbits on the New Streamlined Procedures (8/16/14)

Virginia Jeker, her blog is here, recently spoke with an IRS representative on the OVDP hotline.  Virginia reports [quoted from her email]:

1)      I asked if clients who were expatriating & needed 5 years of tax compliance could submit the 5 years of returns through Streamlined. I was told YES, they could. I then asked if the T needed to explain that they were expatriating in the cover letter. She said NO… but they could if they wanted to.  She said that IRS will process all years submitted in the Streamlined procedure and she was told this was acceptable. Another practitioner who wrote to the IRS on this Q was just given the same answer yesterday.  This conflicts with what I was told about 2 weeks ago and which was the subject of my tax blog. http://blogs.angloinfo.com/us-tax/2014/08/04/ovdp-hotline-nixes-practical-use-of-new-streamlined-program/. . Has anyone else asked IRS about submitting earlier years in the S/L procedure? If so, please share the info received.

2)      If a Domestic Streamlined case is being submitted there is imposition of the 5% offshore penalty. Technically, the penalty can apply to any account that should have been reported on an FBAR but that was not. This can include for example, children’s accounts over which the parent has signature authority as well as an employer’s account over which the T has signature authority.  IRS just very recently clarified for its personnel that NO penalty will apply to such accounts (or any account for which there was no tax noncompliance).

3)      FBARs in Streamlined– in the case where T has over 25 foreign accounts I asked if they can check the box on the FBAR to simplify reporting or if each account must be separately listed. This is daunting when T has Certificates of Deposit that roll over etc. each year.  She said they can check the box as far as she is aware but she suggests calling FBAR hotline  to confirm this TEL --1 313 234 6146.

Thursday, August 7, 2014

U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator (8/7/14)

DOJ has issued a press release, here, titled: U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator in Largest Forfeiture Ever Obtained Through a Kleptocracy Action.  Wikipedia, here, defines kleptocracy (footnotes omitted):
Kleptocracy, alternatively cleptocracy or kleptarchy, (from Greek: κλέπτης - kleptēs, "thief" and κράτος - kratos, "power, rule", hence "rule by thieves") is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often with pretense of honest service. This type of government corruption is often achieved by the embezzlement of state funds.
This blog does not focus, directly or indirectly on kelptocracy issues.  I guess they could be related in some way to U.S. tax noncompliance.  But it is not clear that this one was.

Rather, I post this entry because of the role the U.S. and foreign financial institutions played in assisting the former dictator and his associates in hiding the money.  Hiding the money is what the IRS offshore account initiative for U.S. taxpayers has been all about.  Solutions to the tax issues (for all countries, not just the U.S.) require transparency. Those solutions will make it harder for kleptocrats to hide their ill-gotten gains.  Joe Louis, the famous boxer, is reputed to have said:  "He can run, but he can't hide." We are moving into a brave new world for a whole host of people who have an incentive to hide and will be constrained in doing so.

Of course, the human race is communal.  If not, we would not have a human race today.  Throughout most of our history, wealth was transparent to the community -- maybe not in the sense of finite bottom-line net worth, but the trappings of wealth were physical.  We knew who the guys with wealth were and, in a sense, we knew how wealthy they were.  And we could assess the community's coherence and bonding by how people contributed to the community and were rewarded for doing so.  With secret financial institutions for hiding wealth, we lose that ability to assess and, as a community, demand what is best for the community.

So, as readers who have read this far, will know.  I think transparency is a good thing.  FATCA is a good thing.  And the global initiatives it and the U,S. spotlight on tax havens have spawned are good things.

We are all in this together.

It's So Easy to Say No -- The IRS Often Gets to No for Streamlined Transition Relief in OVDP (8/7/14; 8/11/14)

The feedback I am getting from various sources is that there is a lot of practitioner disenchantment with the Transition to Streamlined by those in OVDP.  The bottom-line is that the IRS is denying the nonwillful certification in far more cases than practitioners thought would be the case.  And, the process of denial is a bit of a black box.  In OVDP cases, the IRS will have a lot of information other than just the certification.  It will have the OVDL intake letter and the various documents in the final package.  So, at least as I understand it, unless the certification in light of the other information does not affirmatively present / prove nonwillfulness, the IRS default response is denial of the Transition relief.  As administered, therefore, it appears that the IRS is only approving the certification in cases where the case for nonwillfulness is clearly made / proved.  Obviously, just the certification and some light statement in support is not going to work in most cases.  (This probably is true only in the Transition cases for persons in OVDP; for persons doing a straight Streamlined, it remains to be clearly how and in what cases the IRS will question the certification.)

The taxpayer can then still opt out.  In the opt out audit, the issue of willfulness / nonwillfulness can be better developed by the taxpayer and the IRS so that the IRS can made a better determination.  Keep in mind that, in that process, at least theoretically, the burden is not on the taxpayer to prove nonwillfulness but on the IRS to prove willfulness.  (I say that, but obviously the IRS can do whatever it wants -- it can assert a willful penalty because it does not like the color of the taxpayer's eyes -- until it has to prove willfulness in court.)

As to the process in getting to no in Transition, apparently the decision is made by a committee.  It is unclear who the committee is, what its delegated authority is, and who the members are.  I have heard in most cases that the decision of the committee is final when announced.  There is no review or appeal of that decision.  However, I have heard of one practitioner being allowed to make a supplemental submission.
Addendum 8/11/14 9:15 am:  I just talked with  an Agent who advised that the current procedure was that the agent and his/her supervisor made the decision on the transition certification, with involvement as necessary by the technical adviser,  I think some readers had so indicated in their comments.  In this regard, Streamlined Transition FAQ 8, here, does provide some role for a central committee in those cases designated for central committee review.  There is no indication which cases will be designated.  Since the examiner and examiner's manager must concur, perhaps there would be a review if they do not.  Or, if the technical adviser did not agree, although I was told that the technical adviser pretty much relies upon the examiner and the manager.
Today's Tax Notes Today has an article with related information.  Andrew Velarde, Practitioners Disagree on Fairness of Lack of OVDP Retroactivity, 2014 TNT 152-2 (8/7/14).  The thrust of the article is on the unfairness of not opening the new Streamlined Program to taxpayers who previously closed out their OVDI/Ps with Form 906.  There are two sides presented.  First, one practitioner, Larry Campagna, suggests that in the past, those who did not opt out likely had indications of willfulness such that opting out would not be a wise choice.  For that category of person, the Streamlined Transition, as administered, would not apply.  Second, one practitioner, Josh Ungerman, argued that many who might have been nonwillful and good opt out candidates did not opt out because of the black box nature of the opt out process.  Basically, they were scared.

Describing the opt out process, the article says:
Under the opt-out system, taxpayers who were arguably non-willful could take such a position with the IRS and be subject only to small penalties if they were successful in their assertion. Last year an IRS official said the average foreign bank account report penalty in opt-out cases was only between $10,000 and $15,000. 
The information reported above is necessarily anecdotal.  I have heard from only a small number of practitioners.  I would appreciate readers comments, particularly sharing their anecdotal experiences to the extent consistent with their representation of their clients and with prudence.

Tuesday, August 5, 2014

Whistleblower Award for FBAR Penalties? (8/5/14)

In Whistleblower 22231-12W v. Commissioner, T.C. Memo. 2014-157, here, the Tax Court accepted the IRS position that the jurisdictional prerequisite for Tax Court review -- a determination by the IRS WBO -- had not been made and, hence, the Tax Court did not have jurisdiction over a whistleblower claim still pending before the WBO.  The IRS asserted an alternative defense that FBAR penalties are outside the scop of the whistleblower statute, Section 7623(b), here.  The Tax Court deferred ruling on that issue because there had been no determination which is the jurisdictional prerequisite for the Tax Court to do anything  in the matter.

Here are some key excerpts of the opinion:\
At the hearing the Court received testimony from Stephen Whitlock, Director of the Office. He testified about the Office's procedures for processing claims generally and about its handling of the particular claim at issue here. We found his testimony instructive and credible in all respects. 
Petitioner filed Form 211, Application for Award for Original Information, with the Office in November 2010. On the application petitioner asserted that he was cooperating with the Department of Justice and the IRS Criminal Investigation Division in connection with the ongoing investigation of two Swiss bankers. Petitioner alleged that his cooperation with those agencies had led to, and would lead to more, information about these bankers' involvement in tax evasion by U.S. persons having undeclared offshore financial accounts. 
* * * * 
III. Foreign Bank Account Reporting 
In the alternative, respondent contends that this Court lacks jurisdiction because payments under title 31 are outside the scope of section 7623(b)(5)(B) and are therefore outside the scope of our jurisdiction under section 7623(b)(4). Petitioner agrees that this issue is jurisdictional and urges that the Court resolve it. 
Because we have concluded that the Office did not make a "determination" within the meaning of section 7623(b)(4) sufficient to confer jurisdiction on this Court, we need not decide whether FBAR payments are "additional amounts" for purposes of ascertaining whether the monetary threshold in section 7623(b)(5) has been met, or whether that question is a jurisdictional one. See Friedland v. Commissioner, T.C. Memo. 2011-217, 102 T.C.M. (CCH) 247, 249 (not addressing the monetary threshold question when granting respondent's motion to dismiss for lack of jurisdiction).
So, at least for  now, there is no court ruling on the authority of the IRS to make whistleblower awards under Section 7623(b) for information leading to FBAR penalties.  Notwithstanding that, it would seem a streatch for that expanded scope.

Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (8/5/14)

Sam and Charles Wyly (Wikipedia here and here) have previously been subjects of my blogs.  See SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here, and The Big Boys Get Better Treatment in Our Tax System Than Do Minnows (Federal Tax Crimes Blog 1/12/13), here.  There is an update in this Reuters article:  Joseph Ax, Texas tycoons Wylys should pay $750 mln for fraud, SEC tells judge (Reuters 8/4/14), here.  Key excerpts:
Texas tycoon Sam Wyly and his late brother Charles' estate should pay about $750 million in damages for their role in a fraudulent offshore tax scheme, a lawyer for the U.S. Securities and Exchange Commission told a judge in New York on Monday. 
"There was a decision to violate the law here, Your Honor, and that decision was made in part because Sam Wyly knew it would be profitable, even if he were caught," Bridget Fitzpatrick said at the outset of a trial to determine the amount of damages the Wylys must pay after a jury found them liable for fraud in March. 
But lawyers for the Wylys have said in court papers the appropriate penalty is $1.38 million, arguing the SEC's theory of disgorgement is unsupported by the law. 
U.S. District Judge Shira Scheindlin is overseeing the nonjury trial, which is expected to last three days. 
A federal jury found the Wylys liable for a system of offshore trusts in the Isle of Man that netted the brothers $553 million in profits through hidden trades between 1992 and 2004 in companies they controlled. 
* * * * 
On Monday, Fitzpatrick said the SEC should be entitled to collect all unpaid taxes on the scheme's profits, plus interest, because the Wylys' failure to disclose their control of the trusts effectively fooled the government into accepting they owed no taxes. 
But the Wylys' lawyers have argued the SEC cannot step into the shoes of the Internal Revenue Service. 
Fitzpatrick acknowledged the SEC's tax-based theory of disgorgement is "novel" but nevertheless appropriate, given that the trusts were constructed explicitly to gain tax benefits.
The SEC originally sought as much as $1.4 billion, based on every dollar of profit earned through the trusts, but Scheindlin last week barred the agency from pursuing that theory.

Update Article on Swiss Category 2 Banks Efforts to Comply and Mitigate Penalties (8/15/14)

Giles Broom and Carolyn Bandel, Swiss Banks Send U.S. Client Data Before Cascade of Settlements (Bloomberg 8/4/14), here.  Excerpts:
Swiss banks will on the whole meet the deadline for delivering information on offshore accounts to the U.S., improving their chances of settling the cases this year. 
Roiled by the demise of the country’s oldest bank, the lenders are helping the Justice Department build cases against Americans who failed to report money stashed in Switzerland, a $2.3 trillion global hub for cross-border banking. 
As many as 106 banks have entered the department’s program to deliver documents showing how they helped clients hide money from the Internal Revenue Service. Bloomberg News contacted 34 of the lenders, 20 of whom said they will meet today’s deadline. Five others declined to comment, and seven didn’t have clear-cut answers. Two banks said they have dropped out of the program. 
The results indicate that banks with few exceptions will comply with the program’s exacting terms. This would put them in position to pay fines and avoid the fate of Wegelin & Co., a more than 270-year-old bank forced out of business by a U.S. tax probe that led to a guilty plea in 2013. 
* * * * 
Swiss law forbids the transfer of client names to foreign governments, unless requests for information conform to criteria set out in tax treaties. But banks can send other information to complement what the U.S. government gleaned from over 43,000 voluntary disclosures by American taxpayers. 
Category 2 banks must disclose the total number of U.S. accounts since 2008, their highest dollar value, and the employees who managed them, in documents verified by an independent examiner, according to a joint Swiss-U.S. government statement announcing the program last August. 
Account Disclosure 
June 30 was the deadline for turning over information on Americans considered in breach of U.S. tax rules. Today marks the end of the second wave of deliveries and includes documents that show which American clients were compliant. 
Some banks will try to mitigate penalties by providing documents to the Justice Department by Sept. 15 to support their claims that they encouraged clients to disclose accounts to the IRS through its offshore voluntary disclosure program.

Monday, August 4, 2014

Williams Yet Again - Court Bows Deeply to Government Claims of Expansive Discretion for FBAR Willful Penalty (8/4/14)

Readers may recall that I discussed the jury verdict in Zwerner imposing multiple year willful penalties at the max.  Zwerner Jury Verdict -- FBAR Willfulness for 3 Years (5/29/14), here.  I made the following observation:
I will close with one thought that I have not fully researched yet.  It seems to me that the structure of the statute, 31 USC 5321(a)(5), here, is to provide maximum penalties for nonwillful of $10,000 (perhaps per account) and for willful of the greater of $100,000 or 50% on the key date (June 30, as interpreted).  Each of these maximums could apply per year.  The point is that, as the statute is written, the penalty is not required to be at the maximum.  The jury was not asked to review the IRS's assertion of the maximum willful penalty.  Is the IRS's decision to assert the maximum not reviewable?  That just seems odd to me. 
But that also raises the question of what standard the trier -- here the jury -- would apply in determining whether something less than the maximum penalty should apply and, if so, what the lesser penalty should be.  There are of course mitigation guidelines in the IRM, but the IRM is not the law even under relaxed notions of Chevron deference.
The continuing saga in Williams has been brought to a close (unless appeal) with this issue.  United States v. Williams, 2014 U.S. Dist. LEXIS 105666 (ED VA 2014), here.  (The order is cryptic, so I also include the brief (without exhibits) as follows:  Williams  opening brief, here, U.S. opening brief, here, Williams response brief, here, and U.S. response brief, here.)

The Government argued that the statute should be interpreted to give the IRS unreviewable discretion with respect to the penalty up to the maximum permitted by the statute.  Whether no penalty, $1 or the max, the Government's argument was that there was no review.  The Court, at least nominally disagreed, holding that the IRS decision was reviewable.  Williams argued that the standard of review was de novo; the Government argued, on fall back, that the standard was for abuse of discretion.  The Court held that the standard was abuse of discretion.

Here is all the Court had to say on the proper standard:
Although the Government argues that the amount of the penalty assessed may not be considered on remand, this Court does review the penalty amount for abuse of discretion under the "arbitrary and capricious" standard of the Administrative Procedure Act. 5 U.S. § 706. The Court rejects Defendant's contention that the Fourth Circuit's remand for "further proceedings" is an invitation to engage in de novo review of the penalty amount. Although some courts have held in similar contexts that de novo review is appropriate when the issue of a defendant's underlying tax liability is at issue, see, e.g., Dogwood Forest Rest Home, Inc. v. United States, 181 F. Supp. 2d 554, 559-60 (M.D.N.C. 2001) (collecting cases), the Fourth Circuit has already ruled on the issue of Mr. Williams's liability in this case. On remand, it has been established that Williams is eligible for the FBAR penalties, including the penalties for willful violations. Because review of the penalty amount is the only remaining issue in this case, the appropriate standard of review is abuse of discretion. n1
   n1 Although the only other court to have considered the appropriateness of an FBAR penalty amount did not specifically identify a standard of review, it reviewed the penalty with great deference to the judgment of the agency. In United States v. McBride, 908 F. Supp. 2d, 1186, 1214 (D. Utah Nov. 8, 2012), the court affirmed two maximum penalties after determining that they were within the range authorized by Congress. The court did not consider the propriety of the penalty amounts, simply stating that the penalties were authorized by the statute and "[a]ccordingly . . . were proper."

Sunday, August 3, 2014

Article on British Deal with Swiss to Flush Out Evades and Lost Revenue -- Not So Good (8/3/14)

In this article, the authors discuss the problems to U.K. in it agreement with the Swiss to flush out tax evaders.  Stephen Castle and Doreen Carvajal, Britain Fails to Find Riches It Expected in Swiss Accounts (NYT 8/1/14), here.

Some excerpts:
When the British tax authorities struck a landmark deal with the Swiss to crack down on tax evasion, they sat back and waited for the cash to flow in. Almost three years later, they are still waiting. 
So far, only about $1.7 billion of the $8.4 billion windfall they once expected has materialized, and sheepish tax authorities now hope to eventually collect just a third of their original estimate.
Instead, the deal struck by Britain, which once seemed a pioneer in combating tax evasion, is emerging as a cautionary tale for a growing number of nations that are feeling the pinch of Europe’s flat economy and are desperate to reap revenues from secret accounts held by the wealthy. The amounts at stake are enormous. In 2012, the British government estimated that Britons had amassed more than 40 billion pounds, or $68.5 billion, in Swiss banks. Some conservative estimates of the amount of money tucked away in tax havens and out of reach of governments worldwide range as high as $21 trillion — more than the gross domestic product of the United States. 
* * * * 
The lesson is that “you cannot rely on a black hole to get income,” according to Pascal Saint-Amans, a tax expert with the Organization for Economic Cooperation and Development, based in Paris. The organization is currently developing standards for a broader international deal. So far 60 jurisdictions and nations, including Switzerland, have committed themselves. But that agreement is not expected to take effect until 2017, and critics are already pointing out loopholes. 
Britain’s deal with Switzerland had plenty of its own. For those who wanted to evade the British tax authorities, the agreement gave ample warning — 16 months — to shift money to other offshore havens or put it into gold, bearer funds, artwork, insurance or safe deposit boxes. 
The 16-month warning was “almost absurd,” said Ian Swales, a Liberal Democrat and member of Britain’s parliamentary Public Accounts Committee. “If you had 100 pounds in your pocket and I told you that in a few weeks I would take a portion of it, then you wouldn’t really keep 100 pounds in your pocket, would you?” he said. 
Other money is hidden in ever more elaborate mazes of offshore trusts and foundations often managed by trustees, usually foreign lawyers, allowing the real beneficiaries to remain secret. 
* * * * 
Another example is the bribery trial in Germany of Bernie Ecclestone, 83, a billionaire and Formula One tycoon considered one of the richest men in Britain. Mr. Ecclestone is accused of bribing a German banker, Gerhard Gribkowsky, with $44 million, for a favorable business deal. His defense is that he lavished the money to prevent the banker from alerting British tax authorities that it was he, and not his former wife, Slavica, who controlled a family trust set up in Liechtenstein, another famous tax haven. 
* * * * 
The British-Swiss deal was always contentious, with critics arguing that it amounted to an amnesty to tax evaders. The German government abandoned efforts to sign a similar agreement with Switzerland. 
Under the deal with Switzerland about 18,000 Britons disclosed their names to the British authorities. Those who did not want to be identified paid a one-time levy of up to 34 percent to settle past taxes. Then last year, the Swiss started deducting a regular “withholding tax” on the interest on behalf of the British authorities. 
But recently, the Swiss sent the British a list of the international jurisdictions that had received money from accounts held by Britons in Switzerland before the deductions could be made. Jason Collins, a tax lawyer with Pinsent Masons in London, said that the likely locations include Singapore and Dubai. Other experts see money shifting to Mauritius, Seychelles, and Hong Kong.

Wednesday, July 30, 2014

UBS Continuing Woes, Including Settlement with Germany (7/30/14)

Katharina Bart, UBS pays out in German tax case as lawsuits target private bank (Reuters 7/29/14), here

Excerpts:
UBS AG booked a near $300 million charge in the second quarter mainly to settle claims it helped wealthy Germans to dodge taxes, the latest in a string of lawsuits that have targeted its private banking business. 
* * * * 
UBS, which faces a separate probe in Germany and similar probes in Belgium and France, took a 254 million Swiss franc ($280.8 million) charge and said it aimed to have all its German clients come clean by year-end, from more than 95 percent. 
Yet the charge is only one of a slew of legal issues with which the bank is contending. It hiked its provisions against future litigation to nearly 2 billion francs but warned this might still not be enough to cover possible fines and charges. 
The bank has taken a strategic decision to scale back its risky investment banking operations in favor of private banking and asset management, but remains under threat from possible past market transgressions. 
Underscoring that risk, it said in its quarterly results statement U.S. regulators were probing its off-market share trading venue or dark pool, an area where Germany's Deutsche Bank also said it was under scrutiny. 
* * * * 
The settlement in the German tax case comes less than a week after a 15-month French inquiry into UBS escalated, with the bank put under formal investigation on allegations it laundered the proceeds of tax evasion. 
* * * * 
The tax probes are only one of UBS' legal worries. It is among a handful of large banks regulators are investigating over alleged rigging in the $5 trillion-a-day foreign currency market. In March, UBS said it had widened an internal probe of forex to include precious metals trading. 
In the U.S., authorities are probing UBS for criminal fraud after a former broker in Puerto Rico allegedly directed clients to improperly borrow money to buy mutual funds that later plunged, Reuters reported last month. 
The Swiss bank was fined $780 million for helping wealthy U.S. citizens avoid taxes in 2009.

Monday, July 28, 2014

Time for an IRS Ass Kicking? Herein of Lack of Honor and a Dumb Decision in OVDI/P and Streamlined (7/28/14)

I have said  before that the IRS has, in broad concept, a general program (within the program some variations) to get taxpayers back into the system with some cost.  The problem has always been is whether the cost is appropriate.

I won't go through the IRS's implementations of the program since it started in 2009.  Readers of this blog know that.  Of course, what the IRS did not tell from the beginning so that the ordinary lay reader or, let's say, the ordinary taxpayer (who is the customer the IRS claims it serves) could understand that the OVDI/P inside penalty was really meant for the bad actors -- those who intended to violate known legal duties (FBAR and income tax).  What does intend to violate a known legal duty mean?  Actually, the IRS customer would not really know that, at least to the extent required to take the legal risk that the IRS was claiming they might suffer -- criminal prosecution, multiple year FBAR willful penalties, etc.  So, the design of the program forced these intimidated customers to seek legal counsel at great expense, when even most legal counsel could only make somewhat better analyses of the situation, but not perfect because of the uncertainties in application of the concept of willfulness in conjunction with the IRS threats of dire consequences.  Who knows what willfulness is except in the eyes of the beholder, and the IRS was threatening, threatening, threatening?

So, a lot of innocent (well, clearly on the innocence side of the continuum) joined OVDI/P, but because of the IRS continual saber rattling (aka threats), many of those innocents were afraid to opt out, and many lawyers were afraid or unable to counsel them as to their real risks on opt out.  (I have to admit that I have not been reticent to recommend opt out in appropriate cases, but the dicey nature of this exercise is the fact that, in my absolute -- on any scale -- best opt out case, the IRS asserted multiple year FBAR willful penalties; the IRS won't prevail, but the IRS is hell-bent to force angst and processing costs to force my client into litigation that, in my best judgment, the IRS can't win.)  The point though is that the IRS forced through threats an exercise that innocent taxpayers should not have to endure.

Now, as best I understand the recent iteration of the Streamlined program, the IRS realized that it had forced through fear taxpayers into the OVDI/P when they could opt out and get better results.  Why force them to join in the first place when a shortcut implementation such as Streamlined can get somewhat close to the right result?  Well, now the IRS seemed to be finally talking to their customers in a language they could understand.  So, one could ask, why wouldn't it be an easy decision for the IRS to let taxpayers in OVDI/P who had not yet signed a Form 906 to proceed fully under Streamlined.  Well, it appears, that the IRS wanted to keep all of the income tax, penalties and interest for closed income tax years and penalties for open years that it was not entitled to, while giving a partial benefit of the Streamlined program (the 5% penalty applied to innocents, many of whom should owe no penalty).  Basically, the IRS wanted something that it was not entitled to.

Oh, sure, the IRS says that, well, the taxpayer / customer unhappy with its lesser Streamlined benefit via transition, can opt out and get a better result if he or she is entitled to a better result.  That sounds well and good but seems to me to be bullshit, of the same genre smoke that was hawked by tax shelter promoters promoting bullshit tax shelters, but in reverse.  Basically, the message the IRS is sending -- intentionally or unintentionally, but by now knowingly -- is that those people who got into the program early to get right with the IRS will be treated more harshly and subjected to greater processing costs, time, angst, etc., than those who sat back and waited on straight Streamlined or proceeded otherwise (quiet disclosure, etc.).

Ty Warner Appellee Brief on Sentencing Appeal (7/28/14)

I previously offered the Government's opening brief in the appeal of the Ty Warner sentencing.  See When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (Federal Tax Crimes Blog 5/12/14), here.

I offer  today Warner's answering brief here.

The brief is very well written, as one  would expect from  counsel involved, including Paul Clement (ubiquitous Supreme Court and Appellate Counsel) and Mark Matthews (the tax guru).  For those interested in Warner and the state of the sentencing court's broad Booker discretion, the brief is a great read.  Keep in  mind that it is not a disinterested discussion of the law.

Friday, July 25, 2014

Article on Risks of Certifying NonWillfulness (7/26/14)

Tax Notes Today has the following article:  Andrew Velarde, Streamlined Program Non-Willful Certification Can Be Hazardous, 2014 TNT 143-4 (7/25/14) (no link available).  The article reports of several prominent practitioners on a Bloomberg sponsored webcast:  Robert F. Katzberg, of Kaplan & Katzberg, Alan Granwell of Sharp Partners, and Bill Sharp of Sharp Partners.

The thrust of the article is the certification of non-willfulness is risky and not for the poorly counseled, particularly because false certifications can lead to higher penalties (even than offered by OVDP) or even criminal prosecution.

I do agree with the thrust of the article.  I will quibble with part of one of the paragraph of the article.
Citing Cheek v. United States, 498 U.S. 192 (1991), Alan W. Granwell of Sharp Partners PA said that willfulness requires awareness of a legal duty, but it does not go so far as to require the taxpayer to be aware of the specific statutory provision for a tax violation. Speaking on willfulness under foreign bank account reporting requirements, which are under Title 31, William M. Sharp, also of Sharp Partners, said that it could be more difficult to show an intentional disregard of a known legal duty under Title 26 than under Title 31. In United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) 2012 TNT 219-21: Court Opinions, the court determined that the taxpayer's signature on the return constituted knowledge of a duty to comply with FBAR requirements. 
I focus on the second two sentences of this paragraph.

1.  The standard for both Title 26 criminal violations with a willful element is intentional violation of a known legal duty.  The sentence in the paragraph above uses "disregard" rather than "violation," but I think the word disregard weakens the requirement and prefer the standard formulation of intentional violation of a known legal duty.  That is perhaps a quibble.  But, focusing on whether there would be a difference in the Government's difficulty of proof between Title 26 and Title 31's FBAR requirements, the standard is exactly the same.  The only difference is proof levels.  In both Title 26 and Title 31's FBAR criminal prosecutions, the standard is the same and the proof level -- beyond a reasonable doubt -- is the exactly same.  No difference.  Now when we turn to the civil FBAR penalty and compare to the Title 26 and Title 31 criminal penalties, the proof level is different.  Criminal requires beyond a reasonable doubt.  Civil requires preponderance or, I argue, clear and convincing.  But the standard -- intentional violation of a known legal duty is the same.

Wednesday, July 23, 2014

Report that UBS Is Facing the Music in France (7/23/14; 7/26/14)

David Jolly, UBS Being Investigated in France Over Tax Evasion (NYT DealBook 7/23/14), here.  Key excerpts:
UBS, the largest Swiss bank, was placed under formal investigation by the French authorities on Wednesday and ordered to post bail of more than $1 billion in the kind of tax-evasion case that ensnared it in the United States several years ago. 
The bank, based in Zurich, faces charges of money laundering and tax fraud for helping French clients hide funds from the national tax administration from 2004 to 2012, an official in the Paris prosecutor’s office said. The official cannot be identified, in keeping with the rules of the office.
UBS has also been ordered to post bail of 1.1 billion euros (about $1.5 billion), the official said. The bank did not respond to requests for comment. 
The news, first reported Wednesday by Agence France-Presse, was not entirely unexpected. A whistle-blower’s tip had led the authorities to the Swiss bank, and UBS was last year placed under formal investigation on suspicion that it illegally sold banking services to French citizens to enable them to move money offshore. It was ordered to pay a 10 million euro fine in that case over lax internal controls. 
* * * * 
UBS bankers in France used the same approach to tap wealthy investors that they used in the United States, according to French news reports, attending prestigious cultural and sporting events and seeking to mingle with high net-worth individuals through their social networks. 
* * * * 
At the global level, the movement to rein in tax havens has also been gathering momentum recently, with the Organization for Economic Cooperation and Development announcing this week standardized rules for improving banking transparency in tax matters. 
But despite giving some ground to maintain its relations with the United States financial system, Switzerland, continues to hold stubbornly to its banking secrecy laws. ​
Addendum 7/26/14 10:00 am:

David Jolly, UBS Lashes Out at French Prosecutors (NYT DealBook 7/24/14), here.  UBS denies that it did anything wrong -- at least denies that it should be punished as much and claims that the prosecution is political.  Here is an excerpt:
UBS has ‘‘taken significant and broad steps to ensure tax compliance of our clients and will continue to do so,’’ according to the statement cited by Mr. Steiner. ‘‘It is not acceptable to us that this has become a highly politicized process.’’ 
In the French system, formal investigation indicates prosecutors believe there is sufficient evidence to suggest criminal charges may be warranted. But there is no certainty that the bank will ever face trial, and such cases often drag on for years only to be dropped.
My only comment is how is it political that a sovereign nation (France, the U.S. or any other country) would object to Swiss banks (or any other banks or persons) enabling with great reward massive raids on their respective treasuries?  Is it political for that sovereign country to redress violations of their laws?  Of course not.

Tuesday, July 22, 2014

More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (7/22/14)

Yesterday, I wrote a blog titled Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.  In that blog, I concluded that willful blindness for purposes of the income tax and the FATCA willful penalty did not include gross negligence or its parallel recklessness.  A reader pointed out that the Fourth Circuit had concluded that recklessness could meet the definition of willfulness.  United States v. Williams, 489 Fed. Appx. 655; 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).  (For my prior blog on the Williams case, see Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  Today's blog addresses this aspect of the Williams holding.

I will focus on the FBAR side of the issue here.  The FBAR willfulness civil penalty is as follows (Section 5321(a)(5)(C), here:
(C) Willful violations.— In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
    (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
        (I) $100,000, or
        (II) 50 percent of the amount determined under subparagraph (D), 
So, the key statutory term is willfully.  As the Courts have noted on many occasions, when Congress uses the term willfully in statutory schemes, it may mean different things.  See Bryan v. United States, 524 U.S. 184, ___ (1998), here; see also former Justice Souter's opinion in  Justice Souter’s opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir.  2014), here (“willful” is a “chameleon” which changes in tone and color according to the Code section involved and the circumstances).  However, as Cheek noted, in the federal tax criminal provisions, it means intent to violate a known legal duty, the strictest formulation of scienter for the word willfully.  Cheek v. United States, 498 U.S. 192 (1991), here.  In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court held that willfully as used in Section 5322(a), here, the criminal provision for willfully violating the antistructuring provisions, should be interpreted the same as in Cheek -- intent to violate a known legal duty.  Ratzlaf had to know that structuring was illegal and intend to violate the law in order to be prosecuted.  In the course of so holding, the Court said:
A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] -- reading the word differently for each code section to which it applies -- would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").
The FBAR criminal penalty is in Section 5322(a) also. The FBAR civil willfullness penalty is part of the same regulatory scheme, incorporated in the immediately  preceding Code section, Section 5321.  Significantly, Section 5321(d) says that the civil penalty can apply "notwithstanding the fact that a criminal penalty is imposed with respect to the same violation."  So, referring to the above quote from Ratzlaf, willfulness for purposes of the civil penalty would have the same interpretation of willfully -- intent to violate a known legal duty.  Hence, the IRM  says that, for purposes of the FBAR civil penalty, "The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.  4.26.16.4.5.3  (07-01-2008) FBAR Willfulness Penalty - Willfulness, here.  We thus do not have to pick among possible meanings of willfully, we know the meaning of willfully.

Monday, July 21, 2014

Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (7/21/14)

Readers are aware of the willful blindness concept.  (Willful blindness goes by various labels, such as willful ignorance, conscious avoidance, etc.)  For most tax crimes and the FBAR crimes, willfulness -- defined as specific intent to violate a known legal duty -- is required.  Ignorance is an excuse.  In the context of tax crimes requiring willfulness, the willful blindness construct says that, if a trier of fact is otherwise unable to find the requisite specific intent for willfulness, the trier may consider the fact that the defendant deliberately acted in a way to be – or appear to be – ignorant of the facts or the law applicable to the facts and treat that real or feigned ignorance as either (i) the equivalent of the specific intent required or (ii) an inference of the specific intent which, with the other evidence, will permit the trier to find the required specific intent beyond a reasonable doubt.  (As I note below, I think the second of these is the only legally permissible application of the concept; willful blindness is not the equivalent of specific intent.)  In either event, if permitted, it can lead to a conviction of a crime requiring specific intent where the evidence might otherwise be insufficient for the trier to find the requisite specific intent.  In the FBAR civil penalty context, the willful blindness concept can permit the application of the FBAR willful civil penalty.

I have discussed before how uncertain the application of the willful blindness concept is.  The uncertainty has presented itself again in the certification for Streamlined relief -- offshore with a 0% penalty and domestic with a 5% penalty.  In each case, the U.S. person must certify that he or she was not willful in failing to report income or failing to file FBARs.   The certification is:
My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
I will demonstrate in the remainder of this blog that this definition of nonwillfulness is incomplete unless it is meant to state a special definition of nonwillfulness for the program (which I doubt).

Let's start with a discussion of the conceptual problem with the concept.  If the concept means that, as to a crime or penalty requiring specific intent, anything less than specific intent can be willful, then it expands the scope of the criminal statute or civil penalty by judicial interpretation.  For this reason, if willful blindness is to be in the landscape for tax crimes or FBAR crimes and penalties, the better interpretation for its application is the second alternative noted above – it merely permits an inference of specific intent which, with the other evidence, will permit the trier to find the required specific intent to the required level -- beyond a reasonable doubt in criminal cases and either preponderance or clear and convincing in a civil case.  E.g., United States v. Stadtmauer, 629 F.3d 238 (3d Cir. 2010) (approving jury instruction that "A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.") In other words, a finding of willful blindness is not a substitute for statutorily required specific intent.  As the DOJ CTM 8.08[4], here, warns prosecutors regarding conscious avoidance (same as willful blindness)

Article on Swiss Bank Attempts to Reduce DOJ Penalty (7/21/14)

The Wall Street Journal has an interesting article on Swiss banks' attempts to reduce the DOJ penalties for their misbehavior in assisting clients' hide untaxed funds.  John Letzing, Swiss Banks Use Carrot and Stick in Addressing Hidden Accounts (WSJ Markets 7/18/14), here.  Key excerpts:

Swiss banks are seeking to chip away at potential penalties from the U.S. Justice Department by offering to compensate American clients who disclose their hidden accounts, according to people familiar with the matter. 
More than 100 Swiss banks have signed up for a self-reporting program offered last year by the Justice Department, which can result in penalties for harboring undeclared American accounts. Banks can mitigate penalties by encouraging clients to pre-emptively disclose those accounts to the U.S. Internal Revenue Service. 
Some banks have dangled financial incentives in front of current and former clients to entice them to divulge accounts to the IRS. In some instances token amounts of around $5,000 are being offered, attorneys and financial advisers say. In other cases significantly larger offers are selectively being made to share the legal and accounting costs that accompany the voluntary disclosure process. 
* * * * 
The Justice Department is aware of such transactions, but hasn't offered guidance on whether or not they may ultimately be objectionable. "We are currently looking at all the factors that contribute to a bank's compliance with the program," a Justice Department spokeswoman said. 
* * * * 
Category 2 banks have until mid-September to provide proof that they encouraged clients to enter the IRS's disclosure regime. Hidden funds disclosed by those clients could then be subtracted from a bank's penalty amounts, which may be severe. A single, undeclared account containing $2 million opened after early 2009 could result in a penalty of $1 million, for example. 
* * * *  
Switzerland's financial regulator, Finma, says banks in the program are free to mitigate penalties as they choose.

Wednesday, July 16, 2014

Court of Appeals Rejects Arguments that Instructions on Willfulness and Good Faith Were Reversible Error (7/16/14)

In United States v. Basile, 2014 U.S. App. 12388 (3d Cir. 2014), here, the defendants, husband and wife, chiropractors, engaged an asset protection firm who put them into offshore entities and bank accounts to avoid tax.  The defendants took other actions to obscure their income and avoid tax.  The defendants were intransigent in dealing with the IRS; their intransigence led to criminal prosecution.

As often the case, their  principal defense was the Cheek willfulness defense -- that the defendants did not intend to violate a known legal duty.  The jury convicted.  On appeal, the defendants asserted that the instructions were deficient.  The Court of Appeals held (one footnote omitted; bold face supplied by JAT):
A 
First, the Basiles argue that the instructions wrongly permitted the jury to reject their good-faith defense if jurors found their beliefs objectively unreasonable, in violation of Cheek v. United States, 498 U.S. 192 (1990). We disagree. 
The  jury instructions stated: 
A belief need not be objectively reasonable to be held in good faith; nevertheless, you may consider whether the Defendant's stated belief about the tax statutes was reasonable as a factor in deciding whether the belief was honestly or genuinely held. 
A1685 (emphasis added). This is an accurate statement of law under Cheek, which held that a jury instruction cannot require a tax evasion defendant's claimed good-faith belief to be objectively reasonable to negate the government's evidence of willfulness. 498 U.S. at 203. As "[k]knowledge and belief are characteristically questions for the factfinder," such an instruction erroneously transforms a fact question into a legal one. Id. However, even though a good-faith belief need not be objectively reasonable, the jury can still consider reasonableness in determining whether the belief was honestly held. As the Cheek Court noted, "[o]f course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge." Id. at 203-04. 
B 
The Basiles also contend that the District Court erred by instructing the jury that they did not act in good faith 
if, even though they honestly held a certain opinion or belief or understanding, they also knowingly made false statements, representations, or promises to others. 
A1686. This sentence comes from the Third Circuit's model instruction on the good faith defense generally, which also states that in tax cases, "the trial judge should give Instruction 6.26.7201-4 (Tax Evasion — Willfully Defined), n5 supplemented if need be under the circumstances of the case, by this instruction." See Third Circuit Model Criminal Jury Instruction 5.07.
   n5 The entire instruction reads as follows:
The third element the government must prove beyond a reasonable doubt is that (name) acted willfully. "Willfully" means a voluntary and intentional violation of a known legal duty. (Name)'s conduct was not willful if (he)(she) acted through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law. A good faith belief is one that is honestly and genuinely held.