Wednesday, March 21, 2018

Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18)

Today, the Supreme Court held in Marinello v. United States, ___ U.S. ___ (2018), here, that "To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence."  There is a lot to unpack there, and I haven't had time to study the opinion.  I therefore offer for now only the Court's syllabus of the opinion (not the opinion itself, but probably as good a discussion other than the opinion as available right now).
Between 2004 and 2009, the Internal Revenue Service (IRS) intermittently investigated petitioner Marinello’s tax activities. In 2012, the Government indicted Marinello for violating, among other criminal tax statutes, a provision in 26 U. S. C. §7212(a) known as the Omnibus Clause, which forbids “corruptly or by force or threats of force . . .obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede,the due administration of [the Internal Revenue Code].” The judge instructed the jury that, to convict Marinello of an Omnibus Clause violation, it must find that he “corruptly” engaged in at least one of eight specified activities, but the jury was not told that it needed to find that Marinello knew he was under investigation and intended corruptly to interfere with that investigation. Marinello was convicted. The Second Circuit affirmed, rejecting his claim that an Omnibus Clause violation requires the Government to show the defendant tried to interfere with a pending IRS proceeding, such as a particular investigation.

Held: To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence. Pp. 3–11. 
(a) In United States v. Aguilar, 515 U. S. 593, this Court interpreted a similarly worded criminal statute—which made it a felony “corruptly or by threats or force . . . [to] influenc[e], obstruc[t], or imped[e], or endeavo[r] to influence, obstruct, or impede, the due administration of justice,” 18 U. S. C. §1503(a). There, the Court required the Government to show there was a “nexus” between the defendant’s obstructive conduct and a particular judicial proceeding. The Court said that the defendant’s “act must have a relationship in time, causation, or logic with the judicial proceedings.” 515 U. S., at 599. In reaching this conclusion, the Court emphasized that it has“traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress and out of concern that ‘a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.’ ” Id., at 600. That reasoning applies here with similar strength. The verbs “obstruct” and “impede” require an object. The taxpayer must hinder a particular person or thing. The object in §7212(a) is the “due administration of [the Tax Code].” That phrase is best viewed, like the “due administration of justice” in Aguilar, as referring to discrete targeted administrative acts rather than every conceivable task involved in the Tax Code’s administration. Statutory context confirms this reading. The Omnibus Clause appears in the middle of a sentence that refers to efforts to “intimidate or impede any officer or employee of the United States acting in an official capacity.” §7212(a). The first part of the sentence also refers to “force or threats of force,” which the statute elsewhere defines as “threats of bodily harm to the officer or employee of the United States or to a member of his family.” Ibid. And §7212(b)refers to the “forcibl[e] rescu[e]” of “any property after it shall have been seized under” the Internal Revenue Code. Subsections (a) and (b) thus refer to corrupt or forceful actions taken against individual identifiable persons or property. In context, the Omnibus Clause logically serves as a “catchall” for the obstructive conduct the subsection sets forth, not for every violation that interferes with routine administrative procedures such as the processing of tax returns, receipt of tax payments, or issuance of tax refunds. The statute’s legislative history does not suggest otherwise. The broader context of the full Internal Revenue Code also counsels against a broad reading. Interpreting the Omnibus Clause to apply to all Code administration could transform the Code’s numerous misdemeanor provisions into felonies, making them redundant or perhaps the subject matter of plea bargaining. It could also result in a similar lack of fair warning and related kinds of unfairness that led this Court to “exercise” interpretive“restraint” in Aguilar. See 515 U. S., at 600. The Government claims that the “corrupt state of mind” requirement will cure any over-breadth problem, but it is difficult to imagine a scenario when that requirement will make a practical difference in the context of federal tax prosecutions. And to rely on prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute’s general language places too much power in the prosecutor’s hands. Pp. 3–9.
(b) Following the same approach taken in similar cases, the Government here must show that there is a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. See Aguilar, supra, at 599. The term “particular administrative proceeding” does not mean every act carried out by IRS employees in the course of their administration of the Tax Code. Just because a taxpayer knows that the IRS will review her tax return annually does not transform every Tax Code violation into an obstruction charge. In addition to  satisfying the nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant. See Arthur Andersen LLP v. United States, 544 U. S. 696, 703, 707–708. Pp. 9–11.
JAT Comments (revised through 3/22/18):

FBAR Civil Penalty Items (3/21/18)

Items of interest to FBAR fans:
  • First, FinCEN has updated the inflation adjustment for the FBAR civil penalties stated in $ amounts.   Those adjustments are 

Amount as Inflation Adjusted
Nonwillful Penalty Maximum (§ 5321(a)(5)(B)(i))
Willful Penalty Minimum (§ 5321(a)(5)(C)(i)(1)

  • The National Taxpayer Advocate posted the following article on her blog:  Analysis of Tax Settlement Programs as Amnesties - When Should the Government Offer Them and How Should They Be Structured? (Part 1 of 3) (NTA Blog 3/14/18), here.  This first installment addresses the general effect of tax and tax-related amnesties.  The blog indicates: "Next week we will apply what we’ve learned about amnesties to the IRS’s OVDP.."

Second Circuit Discuss Conscious Avoidance (Willful Bllindness) (3/21/18)

In United States v. Dambelly, 2018 U.S. App. LEXIS 6382 (2d Cir. 2018), unpublished, here, the Court had some interesting language regarding the willful blindness concept (which the Court, as often in the Second Circuit, refers to as conscious avoidance, see United States v. Ferguson, 676 F.3d 260, 278 n16 (2d Cir. 2011)). 

Dambelly was convicted of "one count each of conspiracy to export, transport, and possess stolen motor vehicles in violation of 18 U.S.C. § 371; exportation of or attempt to export stolen vehicles in violation of 18 U.S.C. §§ 2, 553(a)(1); transportation of stolen vehicles in violation of 18 U.S.C. §§ 2, 2312; and possession of stolen vehicles in violation of 18 U.S.C. §§ 2, 2313(a)." 

The opinion is short and discusses the conscious avoidance issue.  I excerpt here only a portion of the discussion (emphasis supplied by JAT):
As Dambelly points out, one of the prerequisites for a conscious-avoidance instruction is that "the defendant [have] assert[ed] the lack of some specific aspect of knowledge required for conviction." Svoboda, 347 F.3d at 480. A conscious-avoidance instruction permits the jury to draw an inference of knowledge, not an inference of specific intent. See United States v. Samaria, 239 F.3d 228, 239-40 (2001), abrogated on other grounds, United States v. Huezo, 546 F.3d 174 (2d Cir. 2008). To convict a defendant of aiding and abetting, a jury must find that the defendant had the specific intent to commit the underlying substantive offense; mere knowledge is not enough. United States v. Frampton, 382 F.3d 213, 223 (2d Cir. 2004). Conviction on a charge of attempt requires proof of intent unless it is clear from the language of the statute that only knowledge, not intent, is required. See United States v. Kwong, 14 F.3d 189, 194 (2d Cir. 1994) (citing Braxton v. United States, 500 U.S. 344, 351 n. (1991, 111 S. Ct. 1854, 114 L. Ed. 2d 385)).
While this is not a tax case, the discussion does echo the intent requirement in tax crimes requiring willfulness -- per Cheek, specific intent to violate a known legal duty. Cheek v. United States, 498 U.S. 192, 200-201 (1991).  As I understand it, at least some courts use the willful ignorance -- aka conscious avoidance -- instruction in such tax crimes cases.  So, I decided to look at the cases cited above.

Tuesday, March 20, 2018

Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (3/20/18)

In United States v. Evdokimow, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018), here, the Evdokimow was convicted of 8 tax crimes counts "relating to his failure to report and pay taxes on his personal and business income."  The issues he raised on appeal arose from his attempt after learning of the criminal tax investigation to file amended return and pay the indicated tax and interest.  (The opinion refers to payment of tax, penalties and interest, but penalties are not usually paid with amended returns; I suppose he may have paid penalties with the amended returns or upon assessment by the IRS; in any event, that is not relevant and I will just refer to his payments as payments of tax.)  The underlying gambit to evade his tax liability was contorted, but not particularly interesting to the point of this blog.  After obfuscating in a civil audit, the IRS opened a criminal investigation in 2009 but, for some reason, he was not aware of that investigation until 2012.  (The under the radar screen investigation for so long is not relevant to this blog, but I suspect there is a story there.) Then:
After he became aware of the investigation, Evdokimow took steps to repay his tax deficiencies. n1 He retained lawyers and accountants to assist him to identify his taxable income for the years 2005 through 2013 * * * * Evdokimow filed an amended tax return for 2006 in June 2013, and filed amended returns for the remaining years in September 2013. Evdokimow accordingly paid all of his tax liability, including penalties and interest, totaling $3,395,394.00.
   n1 Because the District Court precluded Evdokimow from testifying regarding the remedial steps he took after receiving the subpoena in 2012, our recitation of these facts relies on counsels' proffers of what the evidence would show, were it to be admitted.
Criminal tax practitioners will recognize this gambit designed to mitigate or avoid criminal prosecution.  The standard advice (at least in my experience) is that filing amended returns and paying the tax will not mitigate or avoid prosecution because the focus in a criminal tax trial is the tax loss and intent when the original returns were filed.  Later amended returns and payments, particularly in response to a criminal investigation, are not likely to be successful in staving off prosecution.  And here, it did not do so; the defendant was indicted.  Butt the defendant still wanted to present this to the jury as bearing on his good faith intent.

In the pre-trial skirmishing, the Government moved in limine to "the Government moved to preclude Evdokimow from presenting evidence that he filed amended tax returns and paid additional taxes after learning of the criminal investigation."  The district court granted the Government's motion:
The District Court concluded that any evidence concerning Evdokimow's subsequent tax payments was "of marginal probative value" that was "substantially outweighed by its potential for prejudice and confusion to the jury." App. 156. The Court reasoned that, while subsequent payments "could have probative value," the "delay of at least 18 months" between the point when Evdokimow learned of the investigation and when he filed his amended returns eliminated any such value in this case. App. 157. The Court further concluded that the eventual payment of the taxes was "potentially confusing to the jury" and created a risk of jury nullification that was "potentially uncurable . . . by even a careful instruction as to render it admissible" because it opened the prospect of the defendant "argu[ing] to the jury that [he] pay[s] [his] taxes like anybody else." App. 157-58. Evdokimow sought reconsideration of the District Court's decision on the first day of trial, but the request was denied.
Then at closing argument:
the Government, in its summation, described Evdokimow's conduct at several points in terms of the "tax loss" that he had caused. The Government also argued that Evdokimow had benefited from and "saved" millions of dollars by underpaying his taxes. Evdokimow objected to these comments, arguing that they misleadingly suggested to the jury that he still had tax obligations outstanding, when in fact he had satisfied the tax debt before he was indicted. As a remedy, Evdokimow requested that the District Court instruct the jury that he had paid his tax obligations after learning about the investigation, which he conceded was a fact not in evidence. The Court denied the request, but instructed the Government to be careful in rebuttal to make clear that the issue before the jury related only to the time period covered by the indictment. In rebuttal, the Government mentioned Evdokimow's wealth and ability to pay his taxes between 2006 and 2012, and argued that "[s]ometimes people that have a lot of money are willing to commit crimes to get more. And that's what happened here." App. 326-27.
Evdokimow was convicted on all counts.

Two Opinions on Joinder of Tax Charges and NonTax Charges (3/20/18)

I generally do not write about criminal cases where the gravamen of the case is a nontax crime but with a tax crime charge which, while an important charge, seems to be swamped by the nontax crime..  However, two such cases popped up in my searches recently.  United States v. Sabean, ___ F.3d ___, 2018 U.S. App. LEXIS 6619 (1st Cir. 2018), here, and United States v. Li, 2018 U.S. Dist. LEXIS 40411 (M.D. Penn. 2018), here.  In each case, the defendant objected to the joinder of the tax crime(s) with the nontax crime.  I focus this blog on the issue in each case of whether the tax charge should have been severed from trial from the nontax crime(s).  But, that requires some brief context.


I wrote earlier about pre-trial skirmishing in the case.  See District Court Rejects Suppression for Interview of Target of Grand Jury Investigation Without Notifying His Counsel (Federal Tax Crimes Blog 10/4/16), here.  The trial occurred.  The First Circuit decision I write about today is from the conviction on all counts.

Judge Selya wrote the opinion.  He starts the opinion:
This case, which reads like an anthology of pain, pathos, and personal degradation, paints a grim picture of the human condition. It intertwines allegations of an incestuous relationship with criminal charges of tax evasion, unlawful distribution of controlled substances, and health-care fraud. Following a contentious trial, the jury found defendant-appellant Joel A. Sabean guilty on all of the charged counts. 
The defendant strives to convince us, through a wide-ranging asseverational array, that the jury's verdict should not stand. After careful consideration of a tangled record conspicuously free from prejudicial error, we are not persuaded. Consequently, we affirm the judgment below.
The indictment charged :
(i) "five counts corresponding to five different tax years, with knowingly evading nearly $1,000,000 in federal tax liability by claiming fraudulent medical deductions between 2009 and 2013. See 26 U.S.C. § 7201.  
(ii) "fifty-two counts, with having distributed Ambien, Lunesta, and Xanax to S.S. [S.S. is Sabean's daughter with whom he has a sexual relationship] on fifty-two separate occasions between December 15, 2010 to January 4, 2014 outside the usual course of professional medical practice and without legitimate medical purpose.1 See 21 U.S.C. § 841(a)(1); 21 C.F.R. § 1306.04(a)."
(iii) "a single count [of] health-care fraud by writing certain prescriptions meant for S.S. in his wife's name between March 28, 2010 and December 9, 2012. See 18 U.S.C. § 1347."
Sabean was convicted on all counts.  Of course, Sabean could not be charged in federal court with incest or any related crime, because those are not federal crimes.  But, the Government did sweep that conduct into the trial as other acts evidence under FRE 404(b).  The Court does discuss and affirm the use of that evidence, but I won't get into that discussion here because the detail is not directly relevant to the severance issue I discuss.

Ninth Circuit Rejects Bank Argument Against FDIC Cease and Desist Order from Failure to File SAR (3/20/18)

I have previously written on the Bank Secrecy Act requirement that financial institutions file Suspicious Activity Reports ("SARs").  31 USC § 5318(g); see IRS Use of Suspicious Activity Reports of Financial Institutions (Federal Tax Crimes Blog 11/23/12; revised 11/24/12), here; and Tidbits from ABA Tax Section May Meeting (Federal Tax Crimes Blog 5/13/15), here.  In California Pacific Bank v. FDIC, ___ F.3d ___, 2018 U.S. App. LEXIS 6047 (9th Cir. 2018), here, the FDIC issued a cease and desist order to the Bank for failure to file an SAR.  The Bank appealed; the Ninth Circuit sustained the FDIC action.  I thought some readers of this blog might appreciate the some of the discussion of the circumstance of the failure to file the SAR.

For introduction, the Ninth Circuit's summary of the opinion is as follows:
The panel denied a petition for review brought by California Pacific Bank, challenging the constitutionality of the Bank Secrecy Act ("BSA") and its implementing regulations, and alleging that the Federal Deposit Insurance Corporation Board of Directors' decision — finding that the Bank violated the BSA and ordering the Bank to implement a plan to bring the Bank into compliance — was not supported by substantial evidence. 
The FDIC Board concluded that the Bank did not comply with the BSA's implementing regulations because it failed to establish and maintain procedures designed to ensure adequate internal controls, independent testing, administration, and training — the "four pillars." 
As a preliminary matter, the panel held that the Bank preserved its constitutional challenges, and they were not waived. 
The panel held that the BSA and its implementing regulations were not unconstitutionally vague, and the FDIC and the administrative law judge did not exhibit unconstitutional bias against the Bank. The panel further held that the FDIC acted in accordance with the law by relying on the Federal Financial Institutions Examination Council Manual to clarify its four pillars regulation. The panel also held that substantial evidence supported the FDIC Board's decisions that the Bank failed to comply with the four pillars and that the Bank failed to file a suspicious activity report, where one was needed, and thus, that the Bank did not comply with the BSA.
I focus on the opinion discussion behind the last sentence of the summary.  That discussion is:
The FDIC Board affirmed the ALJ's finding that the Bank failed to file a SAR where one was needed and to document its decision on whether or not to file a SAR. The Bank argues that this decision is not supported by substantial evidence. The Bank argues that it could not have been obligated to file a SAR because the FBI and DOJ told the Bank not to disclose any aspect of an ongoing federal criminal investigation. The Bank further contends that the examiners manufactured a new justification for filing a SAR months after the 2012 examination was complete. 
Pursuant to 12 C.F.R. § 353.1, an insured state nonmember bank must file a SAR whenever it suspects "a known or suspected criminal violation of federal law or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act." For transactions of $5000 or more that involve potential money laundering or BSA violations, a SAR must be filed with the appropriate federal law enforcement agencies and the Financial Crimes Enforcement Network, where "[t]he transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities" or "[t]he transaction has no business or apparent lawful purpose or is not the sort of transaction in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction." Id. § 353.3(a)(4)(i) and (iii). The FFIEC Manual advises banks to review account activity for any customer for whom the bank receives a subpoena and to independently evaluate the need to file a SAR based on the bank's review of those materials. The FFIEC Manual discourages banks from referencing receipt or existence of a grand jury subpoena in the SAR and states that the SAR should only reference any underlying facts supporting the determination that the transaction at issue in the SAR is suspicious. 
During 2011 and 2012, the Bank received grand jury subpoenas seeking documentation and other information regarding certain customer transactions. These customers were part of an FBI investigation into international espionage and misappropriation of trade secrets. The FBI executed a search warrant on the Bank and interviewed Alan Chi and other Bank employees regarding these accounts. In early 2012, some of these customers were indicted for economic espionage and theft of trade secrets. 
It is undisputed that the Bank did not file a SAR or document its decision not to file a SAR. The only issue is whether the Bank's non-action was excused. The FDIC Board found that the Bank was not legally precluded from filing a SAR. On August 10, 2011, the DOJ sent the Bank a letter, directing the Bank to maintain the utmost secrecy with regard to the federal grand jury subpoena. Alan Chi interpreted this to mean that he could not disclose any aspect of the FBI investigation—including providing notice to regulators of customer activity in a SAR, even if that SAR did not include any mention of the FBI investigation. But this interpretation was erroneous. The Federal grand jury subpoena letter advised that "you and employees of California Pacific Bank [are required to] maintain the utmost secrecy with regard to this Federal grand jury subpoena." In recounting his conversation with an FBI agent, when Alan Chi asked if he could file a SAR, he recalled the agent saying, "Don't mention anything about the subpoena . . . just don't mention the subpoena." The FFIEC Manual explicitly contemplates the filing of SARs for customer activity that is also subject to law enforcement investigations and subpoenas, which suggests that investigations and subpoenas should often prompt filing SARs. The Bank's BSA Policy Manual reflected this guidance as well. Nothing prevented the Bank from filing a SAR that only referenced the suspicious activity at a general level without mentioning receipt of the subpoenas. The FDIC Board's finding that the Bank was able to file a SAR is supported by substantial evidence. 
Rawlins' draft 2012 ROE concluded that the Bank should have filed a SAR pursuant to 12 C.F.R. § 353.3(a)(4)(i) after learning of the indictments. Edmund Wong, Rawlins' immediate supervisor, initially disagreed, and concluded after conducting a second-level review of the ROE that an indictment alone was insufficient to support filing a SAR. However, upon receiving additional information on the accounts, Wong determined that the Bank should have filed a SAR. Wong detected several red flags, including "large dollar" and "round dollar" amounts that were much larger than the anticipated activity in the accounts, large wire transfers, and transactions that lacked any information on source of income, purpose of account, or expected activity—all of which he deemed evidence of a "layering scheme." The FDIC Board's findings that the filing of a SAR was warranted and that the examiners did not manufacture a justification for filing a SAR are supported by substantial evidence. 
The FDIC Board's decision that, in failing both to file a SAR and to document its decision not to file a SAR, the Bank violated 12 C.F.R. § 353 and did not comply with the BSA is supported by substantial evidence.

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

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