Monday, March 27, 2017

Sixth Circuit Affirms Preparer's Convictions Including Tax Perjury (3/27/17)

In United States v. Williams, 2017 U.S. App. LEXIS 5184; 2017 FED App. 0173n (6th Cir. 2017) (nonprecedential), here, the Court affirmed the Williams' convictions for tax perjury (3 counts) with respect to his personal returns and aiding and assisting (17 counts) with respect to returns he prepared for others.  His arguments for reversal of the tax perjury convictions caught my attention.

Because the opinion itself is a bit cryptic, for more detail I offer readers the two briefs that were filed.

  • Williams' Brief, here.
  • U.S. Brief, here.

There were two fact patterns for his personal return convictions.

2004 return

For the year 2004, his business operations were through his tax return preparation S corporation.  The filed a false S corporation return reporting a $745 loss.  He then filed his personal return, Form 1040, reporting a $1 gain on Schedule C but apparently omitting the amount from the S Corporation.  He had thus overreported the income solely by reference to the S Corporation's return K-1.  He claimed that there was no perjury with respect to his Form 1040.  He complained that the Government had not prosecuted him for the false return he actually filed for the year -- the S Corporation but, rather, improperly prosecuted him for the "literally true" return that he did file which, based on my math, overreported his income for 2004 if the S Corporation return set what he was supposed to report on his personal return.

Of course, any falsity on the personal return can be prosecuted as tax perjury.  Overreported income, if false, can be prosecuted.  And, of course, here, Williams did not report the S Corporation loss but reported $1 of Schedule C income when a Schedule C business did not even exist.

And, the Court did not look favorably his argument about tax perjury only being involved with the S Corporation return and handily dispatched it as follow:
In 2004, Williams reported that Imperial experienced a loss of $745 on the company's corporate tax return. He reported one dollar of income on his personal income return, using Form 1040. According to Williams, because Imperial's tax return showed that "the corporation did not report any income, [he] did not have an affirmative duty to report a positive income figure on his individual Form 1040 return." This argument is untenable. "Section 7206 is a perjury statute that criminalizes lying on any document filed with the IRS." Tarwater, 308 F.3d at 504 (emphasis added). If an individual lies on a corporate tax return, he cannot copy that false information onto a personal tax return and claim it as "literal truth." Rather, the tax return would contain information known to be untrue. Williams correctly points out that the government did not charge him with preparing false returns on behalf of the corporation, but because Imperial's income flows through to Williams, evidence of corporate earnings is relevant to determining Williams's personal income. 
At trial, an IRS agent testified that he found unreported income for Williams for the 2004 tax year, explaining that he found a number of deposits made into Imperial's bank account in 2004 totaling over $21,000. The jury was shown a summary schedule of these deposits, and the agent testified that these deposits were income from tax-preparation services. The agent further testified that Williams was the only individual who was involved with Imperial, or who obtained any financial benefit from Imperial. Finally, the agent testified that Imperial's corporate tax return for 2004 did not explain the one dollar reported by Williams on his personal tax return, despite the fact that Williams claimed that the one dollar was earned in connection with Imperial. This testimony provided a sufficient basis from which the jury—or any rational trier of fact—could have found beyond a reasonable doubt that Williams knew that his tax return for 2004 was not true and correct as to every material matter.
2006 and 2008 Returns

Williams seems to have been studying the criminal tax law after 2004.  Essentially, Williams' argument was a variation of the argument for 2004 -- that there was no falsehood on the return he filed -- Forms 1040EZ for each year.  Of course, the Form 1040EZ is an inappropriate return if the taxpayer had, as he had here, income from sources other than allowed on the Form 1040EZ, such as S Corporation return.  So, his use of the Form 1040EZ was inappropriate to start with.  And, the Court noted that he reporting he actually made was inconsistent with the Form 1040EZ instructions and, further, omitted income that the jurat on the Form 1040EZ required him to report.  That jurat, unique to the Form 1040EZ, was:
"Under penalties of perjury, I declare that I have examined this return and, to the best of my knowledge and belief, it is true, correct, and accurately lists all amounts and sources of income I received during the tax year." 
So, he was alerted that that his reporting was amiss and that was enough.

Although the parties briefed a key Form 1040EZ tax perjury case, United States v. Reynolds, 919 F.2d 435 (7th Cir. 1990), the Court in Williams does not mention Reynolds.  I would like to discuss Reynolds briefly because Williams may have been inspired by Reynolds when he started improperly using the Form 1040EZ.

Key Graphics from TIGTA CI Employment Tax Report (3/27/17)

On Saturday, I posted a long blog entry on a TIGTA Report.  TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (Federal Tax Crimes Blog 3/25/17), here.  In that blog entry, amid long excerpts from the report, I included several graphics from the TIGTA Report that I think are worth pulling out and posting in a separate blog entry because otherwise readers may not have focused on them in that very long blog entry.  Those graphics might be particularly useful for students or new practitioners in the tax crimes area.  In one case, I also provide the surrounding narrative for context (but refer readers to the earlier blog entry for more of the context narrative).

CI Employment Tax Investigations 2011-2015
Employment tax investigations represent a small portion CI casework. For example, in FY 2015, CI initiated 102 employment tax investigations, which is less than 3 percent of all initiated cases. In comparison, the top two priorities—identity theft and abusive return preparer fraud and questionable refund fraud—resulted in almost 1,800 new investigations and accounted for 47 percent of new initiations in FY 2015. Figure 5 shows the number of employment tax cases initiated and referred for prosecution from FYs 2011 through 2015.
   n18 Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

Sources of CI Employment Tax Investigations 2011-2015

TFRP and CI Employment Tax Investigations 2010-2015

IRS Civil Division Fraud Referral Process

IRS CI Investigation and DOJ Referral Process

Saturday, March 25, 2017

TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (3/25/17)


TIGTA issued a report titled A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes (Ref # 2017-IE-R004 3/21/17), here.  I highly recommend the report to readers, both those watching the trajectory of criminal tax prosecutions and for students wanting to know more about the process.  I will report on some of the key features here to encourage readers to read or at least puruse the whole report.

I briefly introduce the key context for the report.

Employment taxes withheld from employee compensation and remitted to the IRS are the backbone of our tax and FICA system.  There must be robust incentives to encourage compliance by employers and those within the employer organization reponsible for employment tax withhold and payment to the IRS.  Those incentives include the standard range of civil and criminal penalties applicable to employers that apply to tax noncompliance.  But employment tax noncompliance requires that the penalty disincentives include potential civil liability and criminal penalties of those inside the employer organization that were responsible for the employment tax noncompliance.

The Trust Fund Recovery Penalty ("TFRP") in § 6672, here, is a civil collection mechanism whereby persons within an employer organization required to withhold, collect and pay over employment taxes from the compensation paid employees can be held civilly liable for those taxes.  Liability requires that the person have acted willfully.

The parallel criminal penalty for that failure to withhold, collect and payover employment taxes is in § 7202, here.  That provision imposes up to a 5-year incarceration period for each failure.  Liability requires that the person have acted willfully, but this is generally perceived as a higher level of willfulness than required for the TFRP.

The IRS investigates failures to withhold, collect and pay over.  Where it can, it tries to collect from the employer.  In order to insure collection, it may assert the TFRP against persons it believes are responsible for the noncompliance.  An IRS collection officer investigates the delinquent employment taxes and makes determinations as to potential TFRP liability.  The IRS collection officer will also look for indicators and fraud and, if firm indicators of fraud (also called badges of fraud) are found, may, in conjunction with his supervisor and the fraud technical adviser, refer the the case to IRS Criminal Investigation ("CI") to consider whether the case should be further investigated for potential criminal prosecution and referred to DOJ Tax Criminal Enforcement Section.

With that introduction the following is the the cover memorandum for the TIGTA report (I omit footnotes):
Employment tax noncompliance is a serious crime. Employment taxes finance Federal Government operations plus Social Security and Medicare. When employers willfully fail to account for and deposit employment taxes, which they are holding in trust on behalf of the Federal Government, they are in effect stealing from the Government. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in our opinion, there is likely little deterrent effect. 
The TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, CI, should consider a focused strategy to enhance the effectiveness of the IRS’s efforts to address egregious employment tax cases. This strategy should include use of data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. In addition, the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present).  
The IRS partially agreed with our recommendation. The IRS agreed with the portion of our recommendation describing a focused strategy to enhance effectiveness of the IRS’s efforts to address egregious employment tax cases by citing various initiatives in process and completed. However, the IRS did not specifically address our recommendation to enhance the use of data analytics. The IRS disagreed with the portion of our recommendation that the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present) citing the need to balance several factors by a number of stakeholders and limited government resources including limitations on the number of criminal tax cases the United States Attorneys and the US Courts can accommodate. Management’s response to the draft report is included as Appendix IX.

Another Offshore Account Guilty Plea Coupled with Bank Fraud Conspiracy (3/25/17)

DOJ Tax announced here a guilty plea to commit tax and bank fraud by a U.S. taxpayer, Casey Padula, with offshore accounts assisted by two offshore account enablers, Joshua VanDyk and Eric St-Cyr at Clover Asset Management.  I link at the end of this blog the prior blogs involving those enablers who previously pled and were sentenced.  The key excerpts listing Padula's skullduggery are:
According to documents filed with the court, Casey Padula, 48, of Port Charlotte, was the sole shareholder of Demandblox Inc. (Demandblox), a marketing and information technology business. Padula conspired with others to move funds from Demandblox to offshore accounts in Belize and disguised them as business expenses in Demandblox’s corporate records. Padula created two offshore companies in Belize: Intellectual Property Partners Inc. (IPPI) and Latin American Labor Outsourcing Inc. (LALO). He opened and controlled bank accounts in the names of these entities at Heritage International Bank & Trust Limited (Heritage Bank), a financial institution located in Belize. From 2012 through 2013, Padula caused periodic payments to be sent from Demandblox to his accounts at Heritage Bank and deposited approximately $2,490,688. Padula used the funds to pay for personal expenses and purchase significant personal assets. However, he falsely recorded these payments in Demandblox’s corporate books as intellectual property rights or royalty fees and deducted them as business expenses on Demandblox’s 2012 and 2013 corporate tax returns causing a tax loss of more than $728,000. 
Padula also conspired with investment advisors Joshua VanDyk and Eric St-Cyr at Clover Asset Management (CAM), a Cayman Islands investment firm, to open and fund an investment account that he would control, but that would not be in his name. Heritage Bank had an account at CAM in its name and its clients could get a subaccount through Heritage Bank at CAM, which would not be in the client’s name but rather would be a numbered account. Padula transferred $1,000,080 from the IPPI bank account at Heritage Bank in Belize to CAM to fund a numbered account. 
In addition to the tax fraud, Padula also conspired with others to commit bank fraud. Padula had a mortgage on his Port Charlotte, Florida home of approximately $1.5 million with Bank of America (BoA). In 2012, he sent a letter to the bank stating that he could no longer repay his loan. At the same time, Padula provided Robert Robinson, III, 43, who acted as a nominee buyer, with more than $625,000 from his IPPI bank account in Belize to fund a short sale of Padula’s home. Padula and Robinson signed a contract, which falsely represented that the property was sold through an “arms-length transaction,” and agreed that Padula would not be permitted to remain in the property after the sale. Padula in fact never moved from his home and less than two months after the closing, Robinson conveyed it back to Padula by transferring ownership to one of Padula’s Belizean entities for $1. Robinson also pleaded guilty today to signing a false Form HUD-1 in connection with his role in the scheme. 
* * * * 
Padula faces a statutory maximum sentence of five years in prison, a term of supervised release and monetary penalties. As part of his plea agreement, Padula agreed to pay restitution in the amount of $728,609 to the IRS and to BoA in the amount of $728,609. Robinson faces a statutory maximum sentence of one year in prison, a term of supervised release, restitution and monetary penalties.
The related documents are:
  • The Information, here.
  • The Plea agreement, here.
JAT Comments:

Wednesday, March 22, 2017

Fifth Circuit Rejcts Nontraditional Contest of FBAR Willful Burden of Proof Contest (3/22/17)

I previously had several blogs on the attempt by Bernhard Gubser to contest the burden of proof issue for the FBAR willful penalty through nontraditional means.  The most recent is this:  Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (Federal Tax Crimes Blog 11/16/16), here.  Mr. Gubser complained that the Government's burden of persuasion on the FBAR willful penalty should be clear and convincing rather than preponderance.  He alleged that the Appeals Officer had represented that he would win if the burden of persuasion were clear and convincing rather than preponderance.

It appears that Mr. Gubser failed to persuade the Fifth Circuit of the merits of his argument -- at least on whether he made the argument via the right process.  On March 22, 2017, in a short per curiam nonprecedential opinion, the Fifth Circuit rejected Mr. Gubser's bid.  Gubser v. United States, 119 AFTR 2d ¶ 2017-532 (5th Cir. 2017), here.

Tuesday, March 21, 2017

UBS Reportedly Going to Trial in French Case (3/21/17)

Reuters has this report:  Joshua Franklin and Maya Nikolaeva, UBS faces French trial in long-running tax case (Reuters 3/20/17), here.  Excerpts:
UBS (UBSG.S) and its French subsidiary face trial in France after a long-running investigation into allegations that the Swiss bank helped wealthy clients avoid taxes. 
* * * * 
French magistrates have ordered that UBS stand trial on charges of aggravated tax fraud and money laundering as well as illegally offering related services, a judicial source said. 
* * * * 
Magistrates were expected this week to order a trial after negotiations failed to produce a settlement in the long-running probe into allegations UBS helped clients avoid taxes, Reuters reported on Sunday. 
French newspaper JDD said UBS had rejected a 1.1 billion euro ($1.18 billion) settlement proposed by prosecutors. 
The JDD quoted Markus Diethelm, UBS's group general counsel, as saying a 1.1 billion euro payment was "unthinkable" and out of line with similar settlements reached in other countries.
The report also offers UBS's response, the the standard one for the guilty and the innocent to this type development:
"We will now have the possibility to respond in detail in a court of law," UBS said in an emailed statement on Monday. "UBS has made clear that the bank disagrees with the allegations, assumptions and legal interpretations being made."
The report offers the following related development:
French authorities are also investigating HSBC Holdings (HSBA.L) and last year a source familiar with the matter said the country's financial prosecutor asked for a trial of Europe's biggest bank and its Swiss private banking unit over allegations it helped customers dodge taxes in 2006-2007.

Monday, March 20, 2017

Article on Filings in Coinbase John Doe Summons Case (3/20/17)

I recently reported on the IRS John Doe Summons for bitcoin records of Coinbase.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.  That matter is still churning as the parties spar over whether and how Coinbase should comply.  Part of the sparring undoubtedly involves negotiations between the IRS and Coinbase, but some of the sparring is on the public record in court.  Fortune has this article about a recent filing:  Jeff John Roberts, Only 802 People Told the IRS About Bitcoin - Lawsuit (Fortune 8/19/17), here.

The principal feature of the Fortune article is a new filing of an IRS affidavit in the court case.  The filing is styled:  Declaration of David Utzke in Support of Petition to Enforce Internal Revenue Summons.  The article links the affidavit on the Scribd website here.

I refer readers to the affidavit which provides some detail into the operation of the bitcoin virtual currency.

Also, the affidavit indicates a low level of tax compliance on Form 8949 for bitcoin users.

The article also indicates that this JDS initiative may be an opening gambit for negotiations that may result is Coinbase producing less than the universe of documents requested in the JDS.

The article concludes:
Finally, it's unclear if the IRS is also targeting other virtual currency operators. While Coinbase is the most popular and mainstream bitcoin platform, there are numerous others. Meanwhile, the growing value of other virtual currencies, including Ethereum, mean firms that offer such currencies could soon find themselves in the cross-hairs of the IRS too.
JAT Comments:

Tuesday, March 14, 2017

Third Circuit Affirms Contempt on Foreign Bank Account Records Subpoena (3/14/17)

I previously reported on United States v. Chabot, 793 F.3d 338 (3d Cir 2015), here, an almost garden-variety case enforcing a grand jury subpoena for production of foreign bank account records.  See Third Circuit Applies Required Records Doctrine to Require Taxpayers to Respond to Compulsory Process About Foreign Bank Account (Federal Tax Crimes Blog 7/18/15), here.  Yesterday, the Third Circuit issued another opinion after Eli Chabot was held in contempt on remand for failure to comply.  United States v. Chabot, 2017 U.S. App. LEXIS 4355 (3d Cir. 2017) (nonprecedential), here.

In order to avoid contempt below on remand, the Chabots submitted
supplemental evidence, including a medical report questioning Eli's capacity to testify. They also submitted several letters from their foreign counsel and a report from an accounting firm denying that the Chabots had the requisite connection to any foreign financial accounts necessary for them to maintain documents under the Bank Secrecy Act. 
The trial court then found that
[T]he Government satisfied its initial burden, Chabot had to establish his "present inability to comply with the order in question." Gov't Br. 13. The Court found that Chabot failed to establish he lacked the requisite connection to the foreign financial accounts and held Chabot in civil contempt, ordering him to pay $250 per day as a coercive sanction. 
The Court of Appeals held that, once the Government establishes (1) a valid court order; (2) Chabot's knowledge of the order and (3) disobeyance of the order, the burden shifted to Chabot to either produce the records or establish a present inability to comply.  (Citing United States v. Rylander, 460 U.S. 752, 757 (1983)).  The court then cryptically held that the trial court had properly held Chabot in contempt.

Monday, March 13, 2017

Taxpayer with Israeli Bank Accounts Sentenced to 24 Months (3/13/17; 3/18/17)

DOJ Tax announced here the sentencing of Masud Sarshar.  (I had previously posted on his information and plea in an earlier blog entry Another Plea to Offshore Account Tax Crimes (Federal Tax Crimes Blog 8/1/16), here.)  The key information from the current news release regarding the sentencing is:
A Los Angeles, California businessman was sentenced to 24 months in prison today for hiding more than $23.5 million in offshore bank accounts * * * * 
According to court documents, Masud Sarshar, a U.S. citizen, maintained several undeclared bank accounts at Bank Leumi and two other Israeli banks, both in his name and in the names of entities that he created. Sarshar owned and operated Apparel Limited Inc., a business that designed, manufactured and sold clothing and other apparel. For decades, with the assistance of at least two relationship managers from Bank Leumi and a second Israeli bank (Israeli Bank A), Sarshar hid tens of millions of dollars in assets in these accounts in an effort to conceal income and obstruct the Internal Revenue Service (IRS). Between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to those undeclared accounts and earned more than $2.5 million in interest income from the funds. Sarshar reported none of this income on his 2006 through 2012 individual and corporate tax returns. He also filed false Reports of Foreign Bank and Financial Accounts, commonly known as FBARs, with the U.S. Department of Treasury on which he omitted his ownership and control of these offshore accounts. 
* * * * 
Sarshar’s relationship managers at Israeli Bank A (RM1) and Bank Leumi (RM2) visited him frequently in Los Angeles. At Sarshar’s request, neither bank sent him his account statements by mail. Instead, RM1 and RM2 provided Sarshar with his account information in person. RM2 concealed Sarshar’s account statements on a USB drive hidden in a necklace that she wore when she visited Sarshar in the United States. Sarshar’s meetings with RM1 sometimes occurred in Sarshar’s car. RM1 and RM2 used their visits to offer Sarshar other bank products, including “back-to-back” loans. Through back-to-back loans, which Bank Leumi made to Sarshar through its branch in the United States and which Sarshar collateralized with funds from his account at Israeli Bank A, Sarshar was able to bring back to the United States approximately $19 million of his assets without creating a paper trail or otherwise disclosing the existence of the offshore accounts to U.S. authorities. At the direction of RM1 and RM2, Sarshar also obtained Israeli and Iranian passports in an effort to avoid being flagged as a U.S. citizen by the banks’ compliance departments. The banks still flagged Sarshar as a U.S. citizen after Sarshar received these two passports, so RM1 and RM2 advised him to transfer his remaining funds from Israeli Bank A to Israeli Bank B, which Sarshar did in late 2011. In addition, with the help of someone identified as Individual 1, Sarshar transferred approximately $5.8 million from his Bank Leumi accounts to an account at Hong Kong Bank A, which Individual 1 then helped transfer to Sarshar in the United States, disguising it as a loan to Apparel Limited. 
 In addition to the term of prison imposed, Sarshar was ordered to serve three years of supervised release and to pay more than $8.3 million in restitution to the IRS, plus interest and penalties. Sarshar also agreed to pay an FBAR penalty of more than $18.2 million for failing to report his Israeli bank accounts.
Addendum 3/18/17 6:00pm

As of today, the only documents that re on the pacer site were filed before the sentencing.  The key filings are:

  • Plea Agreement, here.
  • U.S. Sentencing Memo, here,
  • Sarshar Sentencing Memo, here.
  • Sarshare Sentencing Letters, here.

I offer these comments from the linked documents.

Thursday, March 9, 2017

Sixth Circuit Rejects Argument that False Statement to CI Agent Should be Sentenced as Obstruction Rather than Tax Offense (3/9/17; 3/10/17)

In United States v. Ballard, ___ F.3d ___, 2017 U.S. App. LEXIS 3832, 2017 FED App. 0051P (6th Cir. 2017), here, the taxpayer lied to an IRS CI special agent about his employment and the timing of his income (attributing it to prior years).  The taxpayer was charged for tax obstruction, § 7212(a), here.  He pled guilty to that charge.  The issue was the appropriate Sentencing Guideline to apply -- the tax Guideline under § 2T.1 or the obstruction of justice Guideline under § 2J1.2.

Where two possible Guidelines can apply, the Guidelines instruct that the "most appropriate" Guideline to the conduct applies.  U.S.S.G. App. A, Introductory cmt.  The taxpayer preferred the obstruction Guideline because it produced the lower sentencing range.  The sentencing court held that the tax Guideline applied.  Given the tax context, that holding does not seem unexceptional.  But, one has to give the taxpayer some credit for trying.

What was his argument?  He urged that he really did not have an intent to evade tax, because all he was doing was trying to delay payment of the tax.  Ergo, he alleged, the crime was obstruction rather than a tax crime.

Here is how the sentencing court framed the taxpayer's argument in rejecting it:  "he never intended to evade paying his taxes but was merely delaying the payments (merely obstructing justice in other words) until he made real money—apparently more than $500,000 a year."

The Court of Appeals dispatched the argument as follows:
The district court thought the most appropriate guideline for Ballard's crime was § 2T1.1, and so do we. Consider the description of his offense conduct, as outlined in the indictment:  that he "falsely stat[ed] to an Internal Revenue Service—Criminal Investigations Special Agent investigating [Ballard's] outstanding debt for taxes due . . . that commission checks [Ballard] received from NFP Securities, Inc. in January 2009, April 2009, May 2009, June 2009, August 2009, and December 2009 were for work done at an earlier date, and that he was not working in 2009, whereas in truth and in fact [Ballard] then well knew that these commission checks were for work done" in the months the checks issued. R. 1 at 1. 
This is just the sort of "Willful Failure to . . . Supply Information[] or Pay Tax" that § 2T1.1 is built for. He lied to an IRS agent. Why? To throw off the investigation of his "outstanding debt for taxes." R. 1 at 1. That offense conduct could have been charged under other statutes punishable under § 2T1.1. See, e.g., 26 U.S.C. §§ 7201 (tax evasion), 7203 (willfully failing to supply required information). And the government would have incurred a tax loss of over $800,000 if that lie, in conjunction with his many other uncharged evasions, had succeeded. Even if Ballard is telling the truth about always intending to pay his tax bill once he hit it big—even indeed if he had already started repaying his outstanding taxes—§ 2T1.1 has a provision explaining how to account for that circumstance: Change nothing about the tax loss calculation. All of that points to § 2T1.1 as the right guideline. Yes, § 2J1.2 covers a broad genus of obstruction offenses, including Ballard's. But when another possible guideline explicitly includes the offense conduct, in addition to covering offenses that are close cousins of that conduct, that's where the offense belongs. See Neilson, 721 F.3d at 1188-89. 
Ballard objects. Because he always admitted he owed taxes, because he had always intended to pay them one day, and because the only charged conduct was one false statement, he claims that his offense is more like obstruction of an investigation than tax evasion. Like the district court, we think these points are fair. But like the district court, we think they are unpersuasive in the end. Ballard's promise about intending to eventually pay his taxes is irrelevant to our determination of which guideline is the right one; the only facts that matter are the ones in the criminal information. See U.S.S.G. § 1B1.2; United States v. Malki, 609 F.3d 503, 510 (2d Cir. 2010). Ballard stipulated that he lied to IRS investigators in order to avoid having to pay taxes at that time and that he failed to pay the debt even though he earned a significant income in 2009, conduct quite similar to tax evasion. But even if we looked outside the charges, we have nothing but Ballard's word to indicate that he was going to pay one day. His promise is less than credible, we think, in context—particularly in the context of his efforts to outmaneuver the IRS over a dozen years and the sudden appearance of his noble intentions only after being caught. 
Nor are we swayed by the fact that the charged conduct was just one lie. The egregiousness of the offense does not determine which of these two sections is appropriate (though it can, and here did, drive the district court to vary below the guidelines range). What matters in the choice between two guidelines sections is which section is more precisely tailored to reflect offense characteristics—like tax evasion and tax loss—and which section covers a more closely related group of crimes. What Ballard did, and what the government charged, was a lie to the tax collector about his earnings. The district court sentenced Ballard accordingly.
Addendum 3/10/17:

Tuesday, March 7, 2017

Supreme Court Holds Sentencing Guidelines Are Not Unconstitutionally Vague (1/7/17)

In Beckles v. United States, 580 U.S. ___ (3/6/2017), here, the Court held that the Sentencing Guidelines, advisory under Booker, are not unconstitutionally vague.  The opinion, written by Justice Thomas, reasoned from the historic understanding that a sentencing judge's discretion to render sentences within the statutory range (such as between 0 months and 60 months for tax evasion under § 7201) did not render that statutory discretion unconstitutionally vague.  Similarly, the Guidelines do not render sentencing unconstitutionally vague because all they do is provide advice as to appropriate sentences within the statutory range for the counts of conviction, but the discretion is left to the judges just as it had always been.  

I link the opinion above and offer here the Court's Syllabus of its opinion.  I boldface the part that is key to the Court's analysis:
Petitioner Beckles was convicted of possession of a firearm by a convicted felon, 18 U. S. C. §922(g)(1). His presentence investigation report concluded that he was eligible for a sentencing enhancement as a “career offender” under United States Sentencing Guideline §4B1.1(a) because his offense qualified as a “crime of violence” under §4B1.2(a)’s residual clause. The District Court sentenced petitioner as a career offender, and the Eleventh Circuit affirmed. Petitioner then filed a postconviction motion to vacate his sentence, arguing that his offense was not a “crime of violence.” The District Court denied the motion, and the Eleventh Circuit affirmed. Petitioner next filed a petition for a writ of certiorari from this Court. While his petition was pending, this Court held that the identically worded residual clause in the Armed Career Criminal Act of 1984 (ACCA), §924(e)(2)(b), was unconstitutionally vague, Johnson v. United States, 576 U. S. ___. The Court vacated and remanded petitioner’s case in light of Johnson. On remand, the Eleventh Circuit affirmed again, distinguishing the ACCA’s unconstitutionally vague residual clause from the residual clause in the Sentencing Guidelines. 
Held: The Federal Sentencing Guidelines, including §4B1.2(a)’s residual clause, are not subject to vagueness challenges under the Due Process Clause. Pp. 4–13. 
   (a) The Due Process Clause prohibits the Government from “taking away someone’s life, liberty, or property under a criminal law so vague that it fails to give ordinary people fair notice of the conduct it punishes, or so standardless that it invites arbitrary enforcement.” Johnson, supra, at ___–___. Under the void-for-vagueness doctrine, laws that fix the permissible sentences for criminal offenses must specify the range of available sentences with “sufficient clarity.”  United States v. Batchelder, 442 U. S. 114, 123. In Johnson, this Court held that the ACCA’s residual clause fixed—in an impermissibly vague way—a higher range of sentences for certain defendants. But the advisory Guidelines do not fix the permissible range of sentences. They merely guide the exercise of a court’s discretion in choosing an appropriate sentence within the statutory range. Pp. 4–10. 
      (1) The limited scope of the void-for-vagueness doctrine in this context is rooted in the history of federal sentencing. Congress has long permitted district courts “wide discretion to decide whether the offender should be incarcerated and for how long.” Mistretta v. United States, 488 U. S. 361, 363. Yet this Court has “never doubted the authority of a judge to exercise broad discretion in imposing a sentence within a statutory range,” United States v. Booker, 543 U. S. 220, 233, nor suggested that a defendant can successfully challenge as vague a sentencing statute conferring discretion to select an appropriate sentence from within a statutory range, even when that discretion is unfettered, see Batchelder, supra, at 123, 126. Pp. 6–7.  
      (2) The Sentencing Reform Act of 1984 departed from this regime by establishing several factors to guide district courts in exercising their sentencing discretion. It also created the United States Sentencing Commission and charged it with establishing the Federal Sentencing Guidelines. Because the Guidelines have been rendered “effectively advisory” by this Court, Booker, supra, at 245, they guide district courts in exercising their discretion, but do not constrain that discretion. Accordingly, they are not amenable to vagueness challenges: If a system of unfettered discretion is not unconstitutionally vague, then it is difficult to see how the present system of guided discretion could be. Neither do they implicate the twin concerns underlying vagueness doctrine—providing notice and preventing arbitrary enforcement. The applicable statutory range, which establishes the permissible bounds of the court’s sentencing discretion, provides all the notice that is required. Similarly, the Guidelines do not invite arbitrary enforcement within the meaning of this Court’s case law, because they do not permit the sentencing court to prohibit behavior or to prescribe the sentencing ranges available. Rather, they advise sentencing courts how to exercise their discretion within the bounds established by Congress. Pp. 7–10. 
   (b) The holding in this case does not render the advisory Guidelines immune from constitutional scrutiny, see, e.g., Peugh v. United States, 569 U. S. ___, or render “sentencing procedure[s]” entirely “immune from scrutiny under the due process clause,” Williams v. New York, 337 U. S. 241, 252, n. 18. This Court holds only that the Sentencing Guidelines are not subject to a challenge under the void-for-vagueness doctrine. Pp. 10–11. 
   (c) Nor does this holding cast doubt on the validity of the other factors that sentencing courts must consider in exercising their sentencing discretion. See §§3553(a)(1)–(3), (5)–(7). A contrary holding, however, would cast serious doubt on those other factors because many of them appear at least as unclear as §4B1.2(a)’s residual clause. This Court rejects the Government’s argument that the individualized sentencing required by those other factors is distinguishable from that required by the Guidelines. It is far from obvious that §4B1.2(a)’s residual clause implicates the twin concerns of vagueness more than the other factors do, and neither the Guidelines nor the other factors implicate those concerns more than the absence of any guidance at all, which the Government concedes is constitutional. Pp. 11–13. 
616 Fed. Appx. 415, affirmed. 

Monday, March 6, 2017

Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (3/6/17; 3/8/17)

I have not written on the alleged Caterpillar tax manipulations that were prominently the subject of an investigation by the Senate Permanent Subcommittee on Investigations.  The hearings page is here.  There is a link to the report titled Caterpillar's Offshore Tax Strategy (which has the hearing date of 4/1/14, but was finalized 8/28/14 per page 2).  In very broad overview, the Senate investigation focused on Caterpillar's alleged shifting of profit attributable to U.S. operations from the U.S. tax base to a Swiss tax base where Caterpillar conducted essentially no meaningful operations related to the profits in issue and had negotiated a very low tax rate (essentially free-money for the Swiss government).  Tax geeks often refer to this as a transfer pricing issue; the relevant code section for the substantive tax issues is § 482, here.  I am told, however, that, according to the SEC filings, the IRS used a substance over form / assignment of income type argument rather than a transfer pricing argument (presumably because, in order to have a legitimate transfer pricing argument the entity to which income is shifted must have some reality -- meaning real costs associated with the creation of the income).  Too aggressive positions in this area can have significant civil and criminal penalties.  I refer readers to the Senate report that outlines what the Senate thought was objectionable.

It  has been known for some time that there has been a grand jury investigation in the Central District of Illinois, which encompasses Caterpillar's home offices.  The precise nature and scope of the grand jury investigation is not known, although the assumption was that it was related to Caterpillar's tax issues discussed in the Senate report.  On Thursday, March 2, federal agents executed a search warrant on certain Caterpillar premises,  According to the news sources, the search warrant execution was led by the US Attorney and carried out by three agencies -- IRS Criminal Investigation ("CI"), the FDIC office of inspector general, and the Department of Commerce office of export enforcement.  (I list some news sources at the bottom of this blog.)

Rule 6(e), FRCrP, requires secrecy about grand grand jury activity, including search warrants; so the Government is extremely limited as to what it can say publicly. Caterpillar, a pubic company, had to say more.  Caterpillar issued a cryptic press release, here:
Caterpillar Continues to Cooperate with Law Enforcement 
PEORIA, Ill. – On March 2, 2017, law enforcement authorities entered three Peoria-area Caterpillar Inc. (NYSE: CAT) facilities, including the corporate headquarters, to execute a search and seizure warrant. The warrant is focused on the collection of documents and electronic information. Caterpillar is cooperating with law enforcement. 
While the warrant is broadly drafted, we believe the execution of this search warrant is regarding, among other things, export filings that relate to the CSARL matter first disclosed in Caterpillar’s Form 10-K filed on February 17, 2015, and updated in Caterpillar’s most recent Form 10-K filed with the SEC on February 15, 2017. 
The two 10-Ks referenced are the 2015, here, and the 2017, here.  Excerpts from the 10-Ks are:

On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.
On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.
Notice that the company claims in each of these reports is cooperating with the investigation.  If that is true, I wonder why the need for a search warrant.  A simple request or a grand jury subpoena should have been sufficient.  Background on this issue may be gleaned from the 1991 edition of the DOJ Antitrust Division Grand Jury Practice Manual, here, says (III-174 - II-177, footnotes omitted):

Tuesday, February 28, 2017

Court Denies Suppression and Exclusion Despite Odd Facts Regarding Third Party Recordkeeper Summons (2/28/17)

I write today about what seems to me to be a significant failure on the part of an IRS CI agent with respect to a third party recordkeeper summons.  In United States v. Galloway, 2017 U.S. Dist. LEXIS 26362 (ED CA 2017), here, the Court denied motions to suppress or exclude certain evidence obtained by CI agents by summons to Galloway's CPA.

On April 9, 2009, two CI agents  (they usually travel in pairs for the type of activity I describe) showed up unannounced at Galloway's place of business.  Often the first notice a taxpayer has of a pending CI investigation is when the CI agents show up to see if he will submit to an interview.  But Galloway apparently was well-counseled or otherwise savvy enough not to appear when requested and had an employee advise the agents to talk to his lawyer.  The CI agents thus, having lost the element of surprise, felt it was important to secure the files of the taxpayer's former CPA who had represented him in the audit from which the CI investigation apparently arose.  So, they dashed out in handwriting a summons to the CPA and forthwith delivered it to the CPA at his office.  Such summonses -- in this case, third party a recordkeeper summons -- cannot require the summonsed party to deliver the summonsed documents immediately.

Now, for some background.  The IRS is authorized to issue summonses in IRS criminal and civil investigations.  Generally, the notice must be served on the summonsed party and notice given to the taxpayer within 3 days of that service.  Further, the return on the service (production of the documents) must not be required until 23 the issuance of the summons in order to permit the taxpayer to bring a proceeding to quash the summons.  § 7609(a), here.  The notice is not required if the summons is served by a CI agent, except that notice is required if the summons is to a third party recordkeeper.  § 7609(c)(2)(E)(ii).  The summons to a third party recordkeeper is called a third party recordkeeper summons.  Third party recordkeepers include financial institutions, consumer reporting agencies, attorneys, and "accountants."  § 7603(b)(2), here.  The CPA in Galloway clearly fell within the scope of the third party recordkeeper definition and the summons was thus a third party recordkeeper summons.  So, the summons was required to be served on Galloway, in time to permit him to pursue the proceeding to quash the summons.

I noted above that the summons was served on the CPA on April 9, 2009.  The opinion says that the CIA agents interviewed the CPA on June 22, 2010, 439 days after service of the summons.  During that interview, the CPA showed the CI agents some Quickbook records in his file.  The question is whether the CI Agent took delivery of documents earlier than the June 22, 2010 intreview.  In a footnote (Slip Op. p. 13,  fn. 14), the Court says:  "despite the fact that the records in question were obtained by the IRS in 2009," so I think this means that the documents were obtained in the normal course after the summons was served on the CPA.

The brouhaha in the case surrounded the original issuance of the summons.  It is unusual to issue a summons "on the fly" so to speak as was done in that case.  Indeed, the CI agent had only issued one such handwritten summons in his entire career.  Then, when the defense team began inquiring into the summons, the IRS file copy could not be located.  Further, there is no mention in the decision that the taxpayer had been served a copy of the third party recordkeeper summons.  (The decision does not mention the third party recordkeeper summons (except in a parenthetical explaining a case and, perhaps by inference, from § 7609 and § 7603).)  But, the CI agent advised the Government attorney (bold-face supplied by JAT):
Agent Applegate stated he would have sent a copy of the summons to Galloway after serving it on Livsey [the CPA]. (Id. at 5.) He also would have given a copy of the summons to Galloway's attorney after he received a power of attorney signed by Galloway and his attorney. (Id.) Agent Applegate said he would have written a due date on the summons for at least twenty-three days after the date of service to allow Galloway an opportunity to quash the summons. (Id.) Applegate kept all of the summonses issued in the case in a folder in his office. (Id.) However, at the time of the interview, a copy of the summons issued to Livsey could not be found in this paperwork.

Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (2/28/17)

I previously reported on the decision in United States v. Marinello, ___ F.3d ___, 2016 U.S. App. LEXIS 18498 (2d Cir. 2016), here.  See Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  On February 15, 2017, the Court denied en banc review after an active judge requested that the judges be polled on the issue.  See United States v. Marinello (2d Cir. 2017), here.  I write because of the strong dissent to denial of en banc review authored by Judge Dennis Jacobs and joined by Judge Jose Cabranes.

Judge Jacobs starts:
I respectfully dissent from the denial of rehearing in banc. The panel weighed in on the wrong side of a circuit split, affirmed a criminal conviction based on the most vague of residual clauses, and in so doing has cleared a garden path for prosecutorial abuse.
Just a reminder for the background.  Many of the crimes that are deployed for tax violations have very specific elements for conviction.  Think tax evasion, tax perjury and failure to file which require specific elements, including willfulness which is the voluntary intentional violation of a known legal duty.  Some of the crimes deployed in the fight against tax misbehavior, however, are much loosier-goosier.  Section 7212(a), here, was charged as one count.  Section 7212(a) is the problem (although, as I note below, the same problem inheres in the Klein conspiracy).  Judge Jacobs nails it in the next paragraphs:
Marinello was convicted at trial on nine counts. Eight of them (for willful failure to file tax returns) raise no issue. The single problematic count is for violating the "omnibus clause" of the criminal portion of the Internal Revenue Code, which makes it a felony to "in any other way corruptly . . . obstruct[] or impede[], or endeavor[] to obstruct or impede, the due administration of this title." 26 U.S.C. § 7212(a). Yes: "this title" is the entire corpus of the Internal Revenue Code -- a slow read in 27 volumes of the United States Code Annotated.  
The government charged that Marinello violated the omnibus clause in eight different ways. And the district court instructed the jury that it was enough for conviction that Marinello violated the statute in any single one of those several ways -- and that the jurors did not need to agree among themselves as to which. 
Among the acts listed in the jury charge as violating the omnibus clause are: 
• “failing to maintain corporate books and records for Express Courier [his small business]”;
• “failing to provide [his] accountant with complete and accurate information related to [his] personal income and the income of Express Courier”;
• “destroying, shredding and discarding business records of Express Courier”;
• “cashing business checks received by Express Courier for services rendered”; and
• “paying employees of Express Courier with cash.” 
839 F.3d at 213 (internal brackets omitted). If this is the law, nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant. 
After conviction on all counts, Marinello moved for a new trial on the ground, inter alia, that the omnibus clause applied only to knowing obstruction of an ongoing IRS investigation, not to every possible impediment to the administration of any of the uncountable provisions of the Internal Revenue Code; and that he therefore should have been acquitted because there was no evidence that he was aware of an IRS investigation. 
The district court rejected the argument and the panel affirmed, holding: "under section 7212(a), 'the due administration of this title' is not limited to a pending IRS investigation or proceeding of which the defendant had knowledge." 839 F.3d at 223. Accordingly, the law in the Second Circuit today is that it is a felony to "corruptly" take (or try to take) any of the actions listed above -- or to take or try to take any other action that impedes the "due administration" of the Internal Revenue Code. 
The Sixth Circuit, alert to the sweep of criminalizable conduct, held that the omnibus clause was limited to cases in which the defendant knew of a pending IRS action. United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Miner, 774 F.3d 336, 342-45 (6th Cir. 2014). The Sixth Circuit's view is now distinctly in the minority, and the panel's opinion here signs on to the emerging consensus of error in the circuit courts.

Sunday, February 26, 2017

FBAR Due Date Reminder - April 18, 2017 Extended to October 16, 2017 (2/26/17)

A reader posted a reminder under another blog entry that the due date for the FBAR report, FinCEN 114, here, is now due April 15 for the prior year's report.  When the filing date falls on a weekend day or on a holiday, the filing date is the next succeeding business day (a weekday that is not a holiday).  Accordingly, the due date for the 2016 year is April 18, 2017 (per the IRS web site here).  And, FinCen is providing an automatic extension (no filing required to obtain the extension) until October 15 (which, for the 2016 report, will be October 16, 2017, because October 15 is a Sunday).

Here is my discussion in the current draft for the next revision (due August 2017) of my Federal Tax Procedure Book (note that the footnote numbers are not the ones that will be in the final text)):
The FBAR was historically required to be filed on June 30 for the prior year.  In 2015, Congress changed the filing date to April 15 (contemporaneously with the individual income tax return due date for calendar year taxpayers, which can be the next succeeding business day if April 15 falls on a weekend or holiday) with the ability to obtain a 6-month extension to October 15 (also contemporaneous with the extended due date for individual income tax returns and also extended to the next succeeding business day if October 15 falls on a weekend or holiday). n1 Under the current instructions, FinCEN grants an automatic extension from April 15 to October 15; the automatic extension applies without any action on the filer’s part other than not filing by the original due date.  n2
   n1 § 2006(b)(11), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41).  The effective date of this FBAR filing provision is the filing year 2016 (i.e., the 2016 FBAR is due April 15, 2017 (actually, on the next succeeding business day), subject to the automatic extension to October 15, 2017 noted in the text).
   n2 FinCEN web page, titled New Due Date for FBARs (12/16/16), viewed 2/1/17, providing in relevant part after noting the statutory due date of April 15 (emphasis supplied):
To implement the statute with minimal burden to the public and FinCEN, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.  (Please note: The due date for FBAR filings for foreign financial accounts maintained during calendar year 2016 is April 18, 2017, consistent with the Federal income tax due date.)
One might even say that, as thus formulated, the real filing due date is October 15.
Some helpful web pages (including the one mentioned in fn. 2 above are:

  • New Due Date for Filing FinCEN Form 114 -- 12-JAN-2017, here.
  • Individuals Filing the Report of Foreign Bank and Financial Accounts (FBAR), here.
  • BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114), here.

Monday, February 20, 2017

Further on Contempt Sanctions for Failure to Produce Foreign Documents (2/20/17)

I previously blogged on a case In re Various Grand Jury Subpoenas, 2017 U.S. Dist. LEXIS 9697 (SD NY 2017), involving contempt sanctions for failing to produce foreign bank and entity documents allegedly in the control of the person subject to the grand jury subpoena.  See Contempt Sanctions Continued in GJ Subpoena for Required Records (Federal Tax Crimes Blog 1/25/17), here.  On February 13, 2017, Judge Pauley issued a further order staying the effective date for the contempt sanction of $1,000 per day to comment from February 14, 2017 to March 20, 2017 to permit the subpoenaed party additional time to arrange with the foreign entities and coordinate with the Government to produce the documents.  The key documents for this new opinion are:=

  • The order, here.
  • The motion was filed but apparently the memo in support was filed under seal; the motion was just the bare motion, so I don't link it.
  • The United States response, here.
The subpoenaed person sought to purge the contempt order previously issued by showing that she had complied with the compulsion in the subpoena by requesting that the Swiss banks produce the records directly to the Government.  One of the banks notified the person that, under Swiss law, it could not produce the documents to the Government.  But, the Government urged, whether or not that was true, with the right form of request (requesting production to her rather than the Government), the banks could produce the documents to the person and she could then provide them to the Government.  Judge Pauley gave the additional time to make sure that she had the time necessary to get the documents, but he makes clear that the Government will not wait forever -- hence the March 20, 2017 date.

Monday, February 13, 2017

Some Lessons from the Big Data from Panama Papers and Tax Haven Secrecy (2/13/17)

Readers of this blog interested in offshore tax havens may want to read this law review article:  Arthur J. Cockfield, Big Data and Tax Haven Secrecy, 18 Fla. Tax Rev. 483 (2016), here.  The author, a professor of law at Queens University (Canada), dives into a subset of the Panama Papers data and draws some conclusion as to the offshore account secrecy offered by so-called tax havens, both for persons avoiding taxes but also for persons avoiding scrutiny of large sums of illegal cash and assets.

While there is now significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering, and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the Author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. A transaction cost perspective assists in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in nondemocratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.
On April 3, 2013, the International Consortium for Investigative Journalists (ICIJ) announced that it had obtained the world's largest financial data leak. The leak included over 2.5 million documents detailing the tax haven financial dealings of over 70,000 taxpayers and over 120,000 offshore corporations and trusts. This leak had been investigated by over eighty-six journalists in forty-two countries prior to its public revelation, forming what is likely the most comprehensive global journalist collaboration in history. For the first time, the secret world of tax havens was revealed in great detail. 
The "big data" derived from the ICIJ financial data leak provided journalists and selected researchers, including this Author, with the opportunity to understand how individuals use tax havens to criminally evade taxes, launder illegal earnings, and finance cross-border terrorism (collectively, "global financial crime"). This Article provides a taxonomy of offshore tax evasion efforts derived from the Author's study and analysis of the data leak, with the ultimate aim of providing insights into the incentive and information problems that make it difficult to inhibit global financial crime. 
While there is now a significant literature in law, politics, economics, and other disciplines that examine tax havens and offshore tax evasion, there is little information on what tax haven intermediaries--offshore service providers such as finance and trust companies--actually do to facilitate offshore evasion.  The gap in the writings can be largely explained by the secretive nature of tax haven activities that shielded them from outside scrutiny. For example, the ICIJ financial data leak revealed that offshore service providers were often not complying with international "know your customer" standards, which creates information problems that significantly raise transaction costs for law enforcement authorities with respect to enforcing tax and criminal laws governing offshore tax evasion and other global financial crime.  
A less explored idea is that the secret world dramatically lowers transaction costs for criminals engaged in these offshore activities--the secrecy effectively reduces certain risks facing tax evaders, international drug launderers, and financiers of global terrorism. A transaction cost perspective can assist with understanding the incentive and information problems revealed by the ICIJ financial data leak. The approach emphasizes the ways that offshore service providers take advantage of information problems to facilitate global financial crime. 
The ICIJ financial data leak also provides evidence of capital flight from non- or quasi-democratic countries to wealthier democracies such as the United States and other Organization for Economic Cooperation and Development (OECD) nations; it reveals how a small portion of ruling elites in countries such as China use tax haven intermediaries as conduits to invest their monies in stable democracies. The capital-importing countries hence benefit from trillions of dollars of inward foreign direct and portfolio investment, a significant portion of which would not likely take place in the absence of tax haven secrecy.  
This environment provides a moral hazard for the capital-importing countries, as the current regime in many ways benefits their economies at the expense of the capital-exporting countries. Tax havens, non-democratic states, and even wealthy democracies all face political incentives to pursue the status quo of tax haven secrecy. This Article shows that, even in a world of perfect information, until political incentives change it will be difficult to make any real progress to inhibit global financial crime. 

Saturday, February 11, 2017

Whistleblower Claims Swiss Bank IHAG did not Come Clean with DOJ as Category 2 Bank Receiving an NPA (2/11/17) reports (based on a Tax Notes report) that 
A whistleblower reported a Swiss private bank to U.S. prosecutors for violating an offshore settlement, it has emerged. Among his accusations: a Zurich-based bank shielded a gigantic precious emerald from the prying eyes of tax officials. Has IHAG [Private Bank] got a new problem on its hands?
Katherina Bart, Whistleblower Alleges Swiss Bank Cheated in U.S Tax Pact ( 2/8/17), here.

Other excerpts:
He [Rolf Schnellmann]  is the most recent in a series of Swiss private banking whistleblowers including former UBS banker Bradley Birkenfeld, ex-Julius Baer banker Rudolf Elmer, and Herve Falciani, who stole data from HSBC private bank when he worked at the Geneva-based institute as an information technology specialist.  
* * * * 
Schnellmann came forward as an informant to U.S. justice officials several months before IHAG reached a settlement in the U.S. for helping wealthy Americans cheat on their taxes. The bank, founded in 1949 by a wealthy weapons manufacturer and art collector, agreed in 2015 to pay a nearly a $7.5 million penalty to to avoid prosecution for its wrong-doings with U.S. clients. 
The bank voiced confidence that it is out of the woods. 
* * * * 
$870 Million Emerald 
A cursory read of Schnellmann's accusations, summarized in letters to U.S. officials through a lawyer, appear to at least partly jibe with the bank's own admissions to U.S. prosecutors.  
IHAG admitted to using several steps, including with the help of third parties, to strip assets of any sign they belonged to U.S. taxpayers. 
The gist of Schnellmann's accusations is that IHAG's deception went further: for example, he maintains that IHAG also set up a fund structure to hide beneficial ownership – the true account holder. 
Schnellmann also accuses a Zurich private bank of safekeeping an emerald valued at $870 million for a client who has since died. This claim appears far-fetched: the world's most expensive emerald gemstone, the Bahia Emerald, is valued at $400 million – a 341-kilogram schist. 
U.S. Revisits IHAG? 
The Department of Justice, or DoJ, must determine if Schnellmann's accusations are compelling enough to warrant revisiting IHAG's non-prosecution agreement. The DoJ didn't comment to