Tuesday, March 13, 2018

IRS to Ramp Down and Then End OVDP on 9/28/18, But the Streamlined Procedures for Offshore Assets Will Continue for Now (3/13/18)

The IRS has announced that it will "begin to ramp down [OVDP] * * * and close the program on Sept. 28, 2018."  IR-2018-52, here   Related FAQs, titled Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers are here.  I discuss the FAQs at the end of the blog.

First, the contents of the news release are:
Issue Number:    IR-2018-52 
IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now 
WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.  
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” 
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. 
The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017. 
The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns. 
Tax Enforcement 
The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. 
“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS." 
Streamlined Procedures and Other Options 
A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. 
The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets: 
IRS-Criminal Investigation Voluntary Disclosure Program;
Streamlined Filing Compliance Procedures;
Delinquent FBAR submission procedures; and
Delinquent international information return submission procedures. 
Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

Saturday, March 10, 2018

Seventh Circuit Holds that Attorney Advising Client to Plead Guilty Without Discovery from the Government Was Strategic Decision Rather than Ineffective Representation (3/10/18)

In United States v. Jansen, 2018 U.S. App. LEXIS 5755 (7th Cir. 3/7/l8), here, Jansen pled to "to one count of wire fraud and one count of tax evasion."  He later sought to withdraw the plea, "arguing it was not 'knowing and voluntary' because of ineffective assistance of counsel."  In the plea agreement, the Government agreed to recommend the U.S.S.G. § 5K1.1 sentence reduction but only if he provided "substantial assistance."  Thereafter, Government determined that he had not provided substantial assistance and did not recommend the reduction.  That apparently caused Jansen to seek to withdraw his plea.  The district court took testimony sporadically over a long period and then concluded that his attorney at the time of the plea agreement -- Jansen had several attorneys over the course of the relevant events -- had not given ineffective assistance.

As I read the opinion, the principal factor which caused Jensen to seek to withdraw the plea was the Government's notice that it would not recommend the 5K1.1 sentence reduction.

In any event, the most interesting claim of ineffective assistance related to his attorney's failure to pursue discovery or other investigation before the plea agreement.  Jansen claimed that, had the attorney done so, Jansen would have had information that would have persuaded him not to plead guilty.  The larger background is that, in the course of legal representation in a criminal case, it is not uncommon for attorneys to advise clients to take certain action based on incomplete information.  Actually, that phenomenon is true of all of life.  The issue is when do we take action -- or recommend a course of action -- on the basis of information that we know is not complete?

That is what happened in the case.  To simplify the more complex facts, the attorney negotiating the plea had been substituted into the case after Jansen had decided to plead guilty and had, indeed, engaged the attorney to negotiate the plea.  That attorney apparently felt himself competent to negotiate the plea but not to handle the trial if a plea agreement were not reached.  The attorney, based on all the facts he knew and his discussions with the prosecutor, believed that Jansen was at significant risk for significant additional prosecutions and, for the wire fraud count to which he pled, a potentially higher sentence because of a change in the law.  Indeed, because of that change in the law, applicable to later years for which Jansen was at risk absent the plea, Jansen waived the statute of limitations on the fraud count year.  The attorney advised Jansen to accept the plea agreement based upon (i) the expectation that other charges which could be charged if the Government investigated would not be charged, and (ii) the Government would not assert that other conduct as relevant conduct.  Basically, the attorney felt it in Jansen's interest to truncate the Government's focus on the case, which if it continued may result in  greater damage.  In short, as the Court noted, the attorney's advice was "strategically motivated" and was not ineffective representation. 

Tuesday, February 27, 2018

IRS OVDP Declines-Withdrawals Campaign (2/27/18)

Late last year, IRS LB&I announced here certain compliance "campaigns" for examinations.  Among the campaigns is the following:
OVDP Declines-Withdrawals Campaign 
The Practice Area is Withholding & International Individual Compliance 
Lead Executive: Pamela Drenthe 
The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. Taxpayers, who have yet to resolve their non-compliance and who meet the eligibility criteria, are encouraged to consider entering one of the offshore programs currently available. The IRS will address continued noncompliance through a variety of treatment streams including examination and letters.
 The linked letter which notifies the taxpayer of inclusion in this campaign is Letter 5935, here.  The letter is actually the second two pages of the pdf.  The letter indicates that a Form 15023, here, is included with the letter.  Note that the Form bears a creation date of January 2018, so I suspect that taxpayers did not start receiving the Letter and Form until

A commenter who received the Letter and Form called them to my attention here, and I provided a response just below it.  In the commenter's case, after his withdrawal in 2011 the commenter was in full compliance for 2011 forward and filed 3 years amended returns and original FBARs for the years 2008, 2009 and 2010.  It appeared therefore that the commenter's six-year statute of limitations for FBAR penalties for the latest originally noncompliant year (2010) was June 30, 2017 and statute of limitations for the income tax had expired for all years absent civil fraud.  needless to say, the criminal statute of limitations had expired, something to suspend the statute of limitations.  He says that he is a resident, so the criminal statute under § 6531 was not suspended for absence from the country.

Some issues just off the top of my head:

1.  The letter offers in Option 1 the opportunity to do a Streamlined Filing.  I thought (but have not double checked) that people who filed for preclearance in OVDP did not have the opportunity to do Streamlined.  Apparently, this letter suggests that they can.

Monday, February 26, 2018

Coinbase Will Comply with JDS on Approximately 13,000 Customers for Bitcoin Transactions (2/26/18)

I have reported before about the IRS John Doe Summons issued to Coinbase, a digital currency exchange.  See Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17), here.  According to Coinbase's web site titled "IRS Notification," here, Coinbase has notified approximately 13,000 customers that, pursuant to the Court judgment, here, Coinbase expects to comply with the JDS.

The Coinbase web page has the contents of the letter notification.  Key points of the notification are:

  1. Conbase expects to comply within 21 days of the notification (February 23, 2018).
  2. Potentially affected customers may want to seek advice of counsel.
  3. Regarding the effect of the delay in compliance from the original issuance:

In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.
Section 6501, here, is the civil statutes of limitation, and Section 6531, here, is the criminal statute of limitations.  Pursuant to Section 7609(e)(2), here, the suspension is from: (i) the date which is 6 months after the service of such summons, until (ii) "the final resolution of such response."  Assuming that the expected Coinbase response on or around mid-March fully resolves the scope of the summons as ordered by the Court, the period of the suspension will be about 280 days.  If, however, that response does not fully resolve the summons, then the statute will continue running until there is full compliance.  So far as I am aware, there is no public announcement as to when there is full compliance to conclude the suspension period.  However, the IRS calculation of the suspension period should be disclosed in any audit where the IRS relies on the suspension period and may also be obtained informally if a publicly released document otherwise refers to it or a document from an audit is circulated among practitioners.  (See the FTC Blog link for 1/26/15.)

For earlier posts on the suspension of the statutes of limitation for noncompliance with summonses, see (presented in reverse chronological order):

  • IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.
  • Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.
  • Suspension of the Statute of Limitations from the UBS John Doe Summons (Federal Tax Crimes Blog 8/11/12), here.

Saturday, February 24, 2018

Willful Blindness -- Does the Concept Expand the Statutory Element of the Crime of Knowledge? (2/24/18)

In United States v. Carbins, 2018 U.S. App. LEXIS 3585 (5th Cir. 2018), here, the defendant "was convicted of one count of conspiracy to defraud the United States in violation of 18 U.S.C. § 371, seven counts of aiding and abetting theft of Government money in violation of 18 U.S.C. §§ 2 and 641, and one count of aiding and abetting aggravated identity theft in violation of 18 U.S.C. §§ 2 and 1028A."

Readers of this blog will know that I have been troubled for some time about the potential scope of the concept of willful blindness.  (See search on willful blindness here.)  The concept goes by several names other than willful blindness (e.g., willful ignorance, deliberate ignorance, conscious avoidance, etc.), but I use willful blindness because the Supreme Court did in Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011), a civil patent infringement case which discussed the criminal use of the concept.  My general concern has been that, in cases requiring some knowledge as an element of the crime, deliberate ignorance can be a substitute for the required degree of knowledge even though Congress stated in the statute that knowledge was required for the crime.

Most Title 26 tax crimes required a special, higher level of knowledge -- specific intent to violate a known legal duty.  I have been particularly concerned about the use of willful blindness to satisfy that knowledge element of the crime.

In Corbins, I read the following which was, I think, directed to a nontax crime that had a knowledge element:
As the Government contends, "[t]his court has expanded the definition of knowledge to include circumstances where a defendant exhibits deliberate ignorance." n19
  n19 United States v. Churchwell, 807 F.3d 107, 117 (5th Cir. 2015) (citation omitted).
I read Churchwell, here, and, indeed, the opinion does state (pp. 116-117):  "This court has expanded the definition of knowledge to include circumstances where a defendant exhibits deliberate ignorance."

The concept that a court can expand a statutory crime element seems to me to be fundamentally wrong.  I don't have any citation authority for my concern right now, but will be looking to see if there is any such authority.  I would appreciate any reader views on this subject.

If willful blindness is not a substitute for the knowledge element of the crime but is simply a factor, like circumstantial evidence, from which the trier of fact can infer the knowledge element, then it is not an expansion of the statute and my concern is not warranted.  My concern, of course, is that some triers of fact may be tempted to use it as a substitute for the statutory knowledge element of the crime.

Taxpayers with Failed Bullshit Tax Shelters Use FOIA to Try to Get Whistleblower, if any, Information (2/24/18).

In Montgomery v. IRS, 2018 U.S. Dist. LEXIS 26313 (D. D.C. 2/20/18), here, taxpayers were caught using partnerships to claim large tax benefits based on bullshit tax shelters.  "In fact, both partnerships were structured in such a way that they were able to report tax losses without the partnerships (and, by extension, the partners) experiencing any real economic loss." After the FPAA proceedings and resulting and related litigation resolved those cases, the taxpayers made FOIA requests and, upon denial, brought this suit for the requested information and documents.  Their goal is "to deduce who, if anyone, tipped off the" IRS as to their raid on the fisc.  In this FOIA suit, the Government moved for summary judgment, alleging that the earlier resolutions of the cases they brought over the bullshit tax shelters foreclosed their FOIA claims.  The Court denied the Government's motion for summary judgment, so the case will proceed to further proceedings.  The Court ordered the parties to submit a new proposed briefing schedule.

Basically, the issue resolved by the Court was whether the prior resolutions in the cases dealing with the merits of their claims for tax benefits foreclosed their right to pursue FOIA requests.  The Court held that the neither the settlement agreements in the merits litigation nor principles of law (collateral estoppel and res judicata) foreclosed their right to pursue FOIA requests.  The settlement agreements merely presented a contract issue, and the Court held that the contracts did not foreclose the suits.  And the merits resolutions did not invoke principles of claim or issue preclusion because the FOIA claims or anything like them were not resolved in the earlier case.

The resolution is not particularly noteworthy.  Rather, what I thought was noteworthy is the taxpayers' pursuit of the whistleblower, if any, role, probably at some significant additional expense.  Maybe they are just curious, maybe they seek revenge, maybe they want to make some type of claim against the whistleblower, if any.  Who knows?  But maybe the further proceedings, if public, will shed light on that.

The docket entries are here.

Congress Amends Tax Whistleblower Section, § 7623, to Clarify Broad Reading of the Award Base (2/24/18)

Earlier this month, Congress amended the mandatory minimum tax Whistleblower award program to make clear that proceeds for purposes of the award base includes non Title 26 collections for fines, forfeitures and reporting violations (such as FBAR penalties).  See § 41108 of the Bipartisan Budget Act of 2018, P.L. 115-123, here.  The change is effected by using the term "proceeds" rather than "collected proceeds and adding § 7623(c) to provide as follows.

(c) Proceeds.—For purposes of this section, the term ‘proceeds’ includes—
   (1) penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws, and
   (2) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate, including—
      (A) criminal fines and civil forfeitures, and
      (B) violations of reporting requirements.

The expanded definition is both for the award base and for the minimum proceeds for § 7623(b).

I have revised my discussion of the Whistleblower Chapter, Chapter 19, in my working draft of my Federal Tax Procedure Book (pending the next publication) to incorporate these changes and attach a red-lined version of it here.  (Thanks to a reader who notified me by comment below as to an error regarding the effective date in a prior version of the working draft; I have corrected and now link the corrected version.)

Sunday, February 18, 2018

Recent Articles of Interest to Tax Crimes Fans (2/18/18)

  • Fran Obeid, Passport Revocation Begins for 'Seriously Delinquent Tax Debt,' 259 NYLJ No. 19 1/29/18), here.
  • Jeremy Temkin, The Next Frontier: Civil Penalties for Undisclosed Offshore Accounts, 259 NYLJ No. 12 (1/18/18), here.

Tuesday, February 13, 2018

Third Circuit Affirms Summons Enforcement for Client Identity Information (2/13/18)

In United States v. Martin, 2018 U.S. App. LEXIS 2526 (3d Cir. 2018) (nonprecedential), here, the Court of Appeals affirmed the district court's order enforcing an IRS administrative summons issued to a lawyer in a collection action to discover his income and assets.  The Court said that the scope of the summons was:
Specifically, it sought to verify the income Servin generated through his law practice. The summonses requested two categories of information: (1) Servin's current client list, including the names and addresses of each client; and (2) a list of his cases that will be settling or have settled within a specified time period, including the parties' names and addresses. In response to the summonses, Servin appeared, but refused to disclose the requested information.
The district court ordered compliance, but limited the compliance to "only those cases that have settled, not cases that may settle[.]"  Martin then appealed.  There is no indication that the court held him in contempt for noncompliance with the order but that is the usual way that a summons enforcement order gets to the court of appeals.  In any event, the court rejected Martin's claim of attorney-client privilege and attorney-client confidentiality.

Basically, the Court said that, based on precedent, there was no attorney-client privilege to protect client identities except in unusual circumstances no present here.
Servin fails to identify any unusual circumstances here that suggest protected communications would be revealed by disclosing the names and addresses of his clients and other parties. Because he has not shown that the attorney-client privilege shields the information requested by the IRS, the privilege cannot constitute grounds for quashing the summonses.
As to any state law confidentiality requirement beyond the scope of the attorney-client privilege, the Court said:

Friday, February 9, 2018

IRS CI Focuses on Crytpocurrencies and Related Tax Evasion Schemes (2/9/18)

David Voreacos, IRS Cops Are Scouring Crypto Accounts to Build Tax Evasion Cases (Bloomberg 2/8/18), here.  Excerpts:
The U.S. Internal Revenue Service *  * * has assigned elite criminal agents to investigate whether Bitcoin and other cryptocurrencies are being used to cheat the taxman. 
A new team of 10 investigators is focusing on international crimes. In addition to following undeclared assets that are flowing out of Swiss banks after a crackdown, it will also build cases against tax evaders who use cryptocurrency. The promise of anonymity that has drawn money launderers and drug dealers to virtual coins is also attracting tax cheats, the IRS has said. 
* * * * 
“It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” Fort [CI Chief] said. 
* * * * 
Fort said his unit is focusing on how users convert cash to cryptocurrency and back. “We know that you want to get your money out at some point,” he said. 
In addition to individuals who evade taxes, Fort’s agents are looking at unlicensed exchanges in the U.S. and overseas. They are working with other criminal agents around the U.S. and stationed abroad. 
The Criminal Investigation Division gained expertise in tracking cryptocurrency by working on hundreds of identity-theft cases. The division has shrunk in recent years as Congress has reduced funding, resulting in a loss of 21 percent of agents since 2011.\ 
As a result, the division is forming specialized teams with expertise to develop high-impact cases. Aside from cryptocurrency and the flow of funds out of Switzerland, the international team will focus on tax crimes involving expatriates and cases arising out of the Foreign Account Tax Compliance Act.

Wednesday, February 7, 2018

Second Circuit Makes Limited Remand for Sentencing Court to Explain Tax Crime Fine Variance to $10 Million from High Guideline Amount of $250,000 (2/7/18)

I have previously written on the prosecution of Morris E. Zukerman for tax crimes.  I collect those prior blogs at the end of this blob.  I had not written on his plea and sentencing which are described in highly summary fashion in the Government's appellate brief, here (from which I have also drawn some of the facts later in this blog):
Superseding Indictment S1 16 Cr. 194 (AT) (the “Indictment”) was filed on May 11, 2016, in three counts. Count One charged Zukerman with corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws, in violation of Title 26, United States Code, Section 7212(a). Count Two charged Zukerman with tax evasion, in violation of Title 26, United States Code, Section 7201. Count Three charged Zukerman with wire fraud, in violation of Title 18, United States Code, Section 1343. On June 27, 2016, Zukerman pled guilty to Counts One and Two of the Indictment, pursuant to a written plea agreement. 
On March 21, 2017, Judge Torres sentenced Zukerman to a term of 70 months’ imprisonment, to be followed by a one-year term of supervised release. Judge Torres also imposed a fine of $10,000,000, a mandatory $200 special assessment, and an order of restitution in the amount of $37,547,951, payable to Zukerman’s two victims: the Internal Revenue Service (“IRS”) and the New York State Department of Taxation and Finance (“NY Tax”).
The current appellate action -- a Summary Order -- relates to the fine of $10,000,000.  United States v. Zukerman (2d Cir. No. 17-948), here. For those who follow federal criminal sentencing generally and with respect to tax crimes specifically, that is a pretty high fine.  Like the sentencing for incarceration, the Sentencing Guidelines has advisory ranges for fines.  SG §5E1.2. Fines for Individual Defendants, here. For both sentences of incarceration and fines, the Guidelines ranges increase with the offense level.

As stipulated by the parties, recommended by the Probation Office and found by the Court, the offense level was 27 and a criminal history category of 1.  The Guidelines fine range for level 27 is $25,000 through $250,000.  As with the sentencing ranges, the court is authorized to vary above or below the recommended fine ranges.  The Government recommend that the judge make a "substantial variance" upward, but did not make a recommendation of what the fine should be.  Zukerman sought either no fine or at most a modest fine within the stipulated Guidelines range.  The Probation office recommended a fine of $100,000.  The Court imposed a fine of $10 million.

Of course, variances, particularly substantial variances as involved here, require explanations by the sentencing judge imposing the fine.  That was the point of the current Summary Order by the Second Circuit.  The Court of Appeals felt that it did not have enough explanation of the sentence to decide Zukerman's claim that the fine was excessive.

Saturday, February 3, 2018

Problems with Restitution Based Assessment in Excess of Amount Due (2/3/18)

In Choi v. United States, 2018 U.S. Dist. LEXIS 14393 (D. Md. 2018), here, the Court rejected an attempt by a defendant convicted of tax evasion to reduce the amount of restitution based on a subsequent resolution of the underlying liability with IRS Appeals that, on its face to me at least, indicates that the restitution amount was grossly overstated.  There is a lot to unpack there.  At the outset, I offer the following additional documents that I pulled from Pacer:

  • The defendant's memorandum in support of the 28 USC § 2255 motion, here, whereby the defendant sought to invoke the Court's authority to reduce the restitution award and the resulting tax assessment under § 6201(a)(4).
  • The U.S. Response, here, and Exhibit 1, here, to the Response (a Memo from Appeals)
  • The docket entries as of yesterday, here.  Note that there are many extensions for the U.S. response, as the views of IRS CI and IRS Appeals were sought (this is noted in the U.S. response linked above).

The basic problem is that, once the criminal judgment becomes final, there appears to be no way to reduce the restitution award even if it exceeds the subsequently determined real loss to the victim (here the IRS).  Bottom line, that is what the Choi court held, although in any event the procedural device Choi used - the 28 USC § 2255 motion was not the proper procedure in any event.

The basic facts as narrated by the Court are (I eliminate the record references for easier readability):
On March 30, 2012, Petitioner Choi pled guilty in this Court to one count of tax evasion in violation of 26 U.S.C. § 7201. In his plea agreement, he agreed that the corporate tax returns that he filed for his business, Frankford Garden Liquors, for the years 2006 through 2009 "each understate the amount of the corporation's taxable gross receipts by more than $300,000." Further, he acknowledged that he understated his corporation's income to evade paying taxes. The plea agreement, however, did not state an agreed amount of taxes due and owing as a result of Choi's undereporting. Rather, the plea agreement laid out the Internal Revenue Service's (IRS) calculation of the taxes due and owing for the years 2006 through 2009. By the time of Choi's sentencing, however, both parties told this Court that they agreed to the IRS's calculation of tax loss and the imposition of a restitution order in the amount of $739,253.98 representing the taxes he owed for the years 2006 through 2009. This Court subsequently sentenced Choi to eighteen months incarceration, six months home detention, and three years supervised release. Additionally, this Court ordered a payment of $100.00 in special assessment, a $20,000.00 fine, and $739,253.98 in resitution. 
After his sentencing, Choi challenged the amount of taxes owed by his company in a civil action with the IRS Office of Appeals. In December of 2013, Petitioner was released from prison after serving his eighteen month term. Around January of 2016, Choi negotiated a settlement through the IRS Office of Appeals for total amount of $132,991.00.1

Wednesday, January 31, 2018

Opinions on Motions in Limine Regarding Government Use of Defendant's Former Tax Lawyer as Witness Against Him (1/31/18)

I blogged earlier about opinions on motions in limine in the Scali prosecution.  See Opinion on Discovery in Tax Evasion Case of Reliance on Counsel Documents (Federal Tax Crimes 1/26/18), here.  I blog today on two more opinions on motions in limine regarding, in part, testimony of a tax attorney, Jared Scharf, that Scali had used before the criminal prosecution for certain civil tax matters.  The first is an opinion dated 1/23/18, here, and the second is an opinion dated 1/29/18, here.  And here is an updated docket report, here, showing a lot of commotion in the case.

  • The 1/23/18 opinion, here:

The Court resolves several issues, but here I found only one particularly interesting.  Scali moved to preclude six Government witnesses.  One was Jared Scharf.  Here is the discussion:
Jared Sharf, the Defendant's former tax attorney, is expected to testify about information and documents provided to him by the Defendant for the purposes of drafting correspondence to the IRS with respect to Counts Three through Seven n5 of the Superseding Indictment. (Govt. Opp. to Def. Second Motion In Limine ("Govt. Second Opp.") 4-5, ECF No. 132.) The Defendant moves to bar the Government from compelling Sharf s testimony in their case-in-chief on the grounds that it may violate the attorney-client privilege. (Def. Second Mot. 5.) The Court denies the motion at this time. First, the Government submits that it intends to question Scharf on issues which do not include communications between the Defendant and Scharf protected by the attorney-client privilege. n6 (Govt. Second Opp. 5.) Second, it is still unclear if the Defendant will waive the attorney-client privilege as to these communications by appropriately raising an advice of counsel defense. See United States v. Wells Fargo Bank N.A., No. 12-CV-7527, 2015 U.S. Dist. LEXIS 84602, 2015 WL 3999074, at *2 (S.D.N.Y. June 30, 2015) (noting the "well-established principle that where a party asserts an advice-of-counsel defense, that party impliedly waives any privilege that would otherwise attach to communications between him and his counsel"). As a result, the Court is unable to ascertain the extent of the Defendant's waiver of the attorney-client privilege at this time. Accordingly, the Defendant's motion is denied.
   n5 Counts Three through Seven charge the Defendant with making false statements to IRS officers on two occasions, corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue Laws, and two counts of tax evasion.
   n6 Specifically, the Government argues that the Defendant relinquished the attorney-client privilege as to the documents that the Defendant intended to send to the IRS in connection with his taxes. See Schaeffler v. United States, 806 F.3d 34, 40 (2d Cir. 2015) (The privilege ... protects communications between a client and its attorney that are intended to be, and in fact were, kept confidential. A party that shares otherwise privileged communications with an outsider is deemed to waive the privilege by disabling itself from claiming that the communications were intended to be confidential.); see also Bradley v. C.I.R., 209 Fed. App'x 40 (2d Cir. 2006) (noting that it could be reasonably inferred that Defendant waived the attorney-client privilege after the Defendant's tax attorney disclosed documents to accountants, who then disclosed the documents to the IRS).

  • The 1/29/18 opinon, here:

The portion of this opinion I find interesting also relates to Scharf:

Ninth Circuit Rejects Defendant's Attack on Sentencing Calculations (1/31/18)

In United States v. Murphy, 2018 U.S. App. LEXIS 1508 (9th Cir. 2018), unpublished, here, Murphy was convicted of four counts of filing fictitious financial obligations (18 USC § 514), three counts of making false claims (18 USC § 287, and one count of tax obstruction (§ 7212(a).  The opinion, as is sometimes true particularly of unpublished opinions, is fairly cryptic.  I focus on four issues, more as reminders to students and practitioners rather than addressing new issue or analysis.

First, as to his tax loss, Murphy argued that the refunds he claimed of $1.2 million because he had printed on the returns and in an accompanying letter that "he in fact requested that this amount be set off against his preexisting debt, not returned to him as a refund."  The Court rejected the argument as follows:
Neither the largely unintelligible text he printed on each page nor the equally opaque letter accompanying his returns clearly indicate that he sought to have that money set off against his debt rather than refunded to the accounts whose information he provided; indeed, these passages are largely gibberish.
I am confused as to why the court needed to affirm on that basis.  Applying refunds to other debts -- I presume other tax debts -- is the equivalent of a refund, and if that were Murphy's intent to illegally lower his other debt (tax or otherwise), the object of the offense was the amount that he requested be applied.

Second, Murphy complained that the sentencing court had applied both the sophisticated means two level enhancement and the obstruction two level enhancement.  It is not clear what the basis for the sophisticated means enhancement was but Probation recommended the obstruction enhancement because "the defendant sent false written accusations of criminal conduct to an IRS employee, for the purposes of intimidation, in order to prevent him from performing official duties."  Of course, such conduct could be obstruction.  And it is not at all clear from the opinion how that conduct would have entered into the determination of sophisticated means, so as to even present the issue of "double counting."  There is nothing at all sophisticated about sending "false written accusations of criminal conduct to an IRS employee, for the purposes of intimidation, in order to prevent him from performing official duties."  The Court of Appeals does say that overlapping conduct may have been involved, but does not hint what the overlapping conduct may have been or that the sentencing court considered such overlapping conduct in imposed the obstruction enhancement .  In any event, the Court of Appeals ties its conclusion that the sentencing court did not improperly based the obstruction enhancement on conduct considered for the sophisticated means enhancement.

Monday, January 29, 2018

The Rise of Cryptocurrencies for Tax Avoidance/Evasion (1/29/18)

A good article on Cryptocurrencies and Taxes.  Rob Urban, Governments Worry That Cryptocurrencies Could Be the ‘Next Swiss Bank Account’ (BloombergMarkets 1/29/18), here.  Excerpts:
Authorities around the world worry that cryptocurrencies could become tax havens. 
* * * * 
British Prime Minister Theresa May and Indian Prime Minister Narendra Modi are among the world leaders who’ve expressed alarm at the rise of virtual cash to move money offshore. The U.S. Congress held hearings this month, and Treasury Secretary Steven Mnuchin called on the world’s 20 biggest economies to work together to make sure cryptocurrencies don’t “become the next Swiss bank account.” The concern comes after a successful international crackdown on tax havens in traditional banking. 
“Every country is scrambling to come up with an answer,” said Drake, who serves on the boards of 25 public and private companies. “There needs to be a regulated structure that won’t kill the industry.” 
* * * *
There’s demand for fresh ways to hide assets after U.S. and European regulators clamped down on traditional banks. They’ve ramped up enforcement of “know-your-customer” and anti-money-laundering rules and forced offshore financial institutions to disclose client information. The campaign prompted many mainstream financial firms to limit customers’ access to Switzerland’s secretive banking system. That’s made it harder to hide funds from the government, courts, spouses or other prying eyes back home. 

Friday, January 26, 2018

Tax Controversy Attorney Rettig To Be Nominated IRS Commissioner (1/26/18)

Chuck Rettig, here, a prominent and respected player in the tax controversy (including tax crimes) arena is reported to be Trump's pick for Commissioner of Internal Revenue.  Here is one article:

David M. Katz, Trump Tax-Returns Defender on Tap to Head IRS: Report (CFO 1/25/18), here.
President Trump is reportedly on the verge of naming Charles P. Rettig, a Beverly Hills tax lawyer who wrote that candidate Trump’s lawyers shouldn’t advise him to release his tax returns, as commissioner of the Internal Revenue Service. 
“Is there any legal impediment to Trump publicly releasing his tax returns? Absolutely not,” Rettig, a tax litigator who has served more than 35 years at Hochman, Salkin, Rettig, Toscher & Perez and has represented clients before the IRS, said on February 28, 2016  in one of a number of columns he’s written for the “IRS Watch” section of Forbes. 
“Would any experienced tax lawyer representing Trump in an IRS audit advise him to publicly release his tax returns during the audit? Absolutely not,” Rettig added. To date, President Trump, who Forbes reports as having a current net worth of $3.1 billion, hasn’t made his returns public.   
On Tuesday night,  Politco, citing multiple sources with knowledge of the selection process, reported that President Trump will nominate Rettig to head the IRS. Rettig would then have to be confirmed by the Senate.
Now for some of you who are not tax litigators, I think Rettig's hypothetical advice was solely from the perspective of a tax controversy lawyer advising Trump with the sole focus on representing him under audit.  I think most tax controversy lawyers would advise Trump that, solely based on the needs of that representation in the audit, there would be nothing to be gained from  disclosing his tax returns.  Rettig's advice did not address anything other than the hyptothetical tax controversy lawyer's perspective.

Finally, in my opinion, Chuck will be a great Commissioner.

Tax Crimes Related News from Davos (1/26/18)

Some tax crimes related news on the Davos World Economic Forum, here.

Switzerland asks US to swiftly conclude proceedings against Swiss banks (The Economic Times 1/26/18), here.  Excerpts:
Switzerland today asked the US to swiftly conclude proceedings against some Swiss banks for better banking activities, as its President Alain Berset met his American counterpart Donald Trump.  
* * * * 
With regard to the banking dispute, the Swiss delegation explained that it would be beneficial for bilateral business activities if the proceedings against Swiss 'Group 1 banks' were to be concluded swiftly.  
This would provide greater legal certainty and open up fresh economic opportunities. The separation of powers is to be respected, as per the statement.  
Some Swiss banks are facing regulatory action from the US authorities for allegedly helping American citizens evade tax.
Swiss president says Trump meeting was productive (SwissInfo.ch 1/26/18), here.  Excerpt:
The tax dispute between the two countries involving Swiss banks was also mentioned, with Berset adding that it was time to turn a new page on this issue, in a move that would benefit both countries.

Opinion on Discovery in Tax Evasion Case of Reliance on Counsel Documents (1/26/18)

In United States v. Scali, 2018 U.S. Dist. LEXIS 8137 (S.D. N.Y. 2018), here, the defendant was (bold=face supplied by JAT):
charged in a ten-count indictment with (1) mail fraud in violation of 18 U.S.C. § 1341; (2) structuring to evade currency transaction reports in violation of 31 U.S.C. § 5324(a)(3); (3)—(4) false statements in violation of 18 U.S.C. § 1001; (5) corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue Laws in violation of 26 U.S.C. § 7212(a); (6) tax evasion for the year 2011 in violation of 26 U.S.C. § 7201; (7) tax evasion for the year 2012 in violation of 26 U.S.C. § 7201; (8) obstruction of justice in violation of 18 U.S.C. § 1503; (9) perjury in violation of 18 U.S.C. § 1623; and (10) mail fraud in violation of 18 U.S.C. § 1341.
The Court acted on the Government's motion in limine on a number of issues.  The only issue and its resolution that interested me is the "Advice of Counsel Defense."  The discussion is short, so I excerpt it in full:
V. Advice of Counsel Defense 
The Government's motion for an order compelling Defendant to provide prompt notice and to produce all discovery relating to any advice of counsel defense he intends to advance at trial is granted in part. The question of whether the Defendant will assert an advice of counsel defense with regards to the two tax evasion counts is moot because the Defendant unequivocally admitted to it in his pleadings. (Def. Mot. 25 ("Scali intends to demonstrate that he is not guilty of tax evasion because, for the years in question, he followed counsel's advice and provided his complete books and records to the IRS").) See Royal Park Investments SA/NV v. United States Bank National Association, 14 Civ. 2590 (VM), 2017 U.S. Dist. LEXIS 157986, 2017 WL 4174926, at *9 (S.D.N.Y. Aug. 28, 2017) ("[A] defendant must clearly elect whether it will raise an advice-of-counsel defense before the close of discovery and in time to allow for such discovery") (citation and quotations omitted). As a result, the Defendant should have made pertinent disclosures during discovery, absent special considerations. See id; see also United States v. Wells Fargo Bank, N.A., 2015 U.S. Dist. LEXIS 84602, 2015 WL 3999074, *1 (S.D.N.Y. June 30, 2015) ("[T]he burden is on the party who intends to rely at trial on a good faith defense to make a full disclosure during discovery and the failure to do so constitutes a waiver of that defense") (quotations and citations omitted); Arista Records LLC v. Lime Grp. LLC, No. 06 CV 5936(KMW), 2011 U.S. Dist. LEXIS 42881, 2011 WL 1642434, at *2 (S.D.N.Y. Apr. 20, 2011) ("[A] party who intends to rely at trial on the advice of counsel must make a full disclosure during discovery; failure to do so constitutes a waiver of the advice-of-counsel defense.") (citations and quotations omitted); United States v. Hatfield, No. 06-CR-0550 (JS), 2010 U.S. Dist. LEXIS 4026, 2010 WL 183522, *13 (E.D.N.Y. Jan. 8, 2010) ("This disclosure should include not only those documents which support [the] defense, but also all documents (including attorney-client and attorney work product documents) that might impeach or undermine such a defense"). 
The parties contest whether the Defendant made full disclosure. Therefore, the Court orders as follows: (1) the Defendant produce all discovery relating to any advice of counsel defense he intends to advance at trial by January 23rd, 2018; and (2) that the parties address whether the Defendant has proffered the factual prerequisites of an advice of counsel Defense at the scheduled status conference on January 19, 2018. n4
   n4 The Government suggests that the Defendant may be precluded from asserting an advice of counsel defense, but does not make the argument forthright. Guided by efficiency and judicial economy, it behooves the Court to address this issue before trial. See United States v. Paul, 110 F.3d 869, 871 (2d Cir. 1997) ("[I]t is appropriate for a court to hold a pretrial evidentiary hearing to determine whether a defense fails as a matter of law").