Another UBS Client Sentenced (10/6/11)

Another UBS client, Peter A. Schober, was sentenced on 10/5/11.  I blogged the original charges, Other UBS Account Holders are Charged (10/28/10), here.  The following are the key bullet points as of now:

Taxpayer: Peter A. Schober
Bank: UBS
Entities: ?
Guilt: By Plea Agreement - 1 Count FBAR violation.
Sentence: 1 month incarceration; 2 months home; 6 months supervised release
Unreported Income: ?
Tax Loss: $77,870.67
FBAR Penalty: $773,652
Court: D MA
Judge: Nathaniel M. Gorton

I will supplement these bullet points when more information is available.  I will also update the spreadsheet at that time.

Lawyers and Obstruction: the Stevens Case (NonTax) Lessons for Tax Lawyers (9/5/11)

This is a guest blog by Scott Schumacher.  Scott is an Associate Professor of Law and Director of the Graduate Program in Taxation at the University of Washington School of Law in Seattle, Washington. Prior to entering academia, he was an attorney with the Department of Justice Tax Division and in private practice with the law firm of Chicoine & Hallett in Seattle. He writes frequently on criminal tax matters and is one of the authors, along with our blog host Jack Townsend, of the book Tax Crimes, here.

In May of this year, the U.S. District Court for the District of Maryland granted a motion for judgment of acquittal in the case of United States v. Stevens (No.: RWT 10 CR 0694 (D. Md. 2011), here. Lauren Stevens, former vice president and associate general counsel of pharmaceutical giant GlaxoSmithKline (GSK), had been charged with obstruction of justice and making false statements during a civil investigation by the FDA.

In a stinging rebuke of the government’s case, the court held that “only with a jaundiced eye and with an inference of guilt that's inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant, and that “it would be a miscarriage of justice to permit this case to go to the jury.” The court concluded that “the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

Even though the court acquitted Stevens, as I discuss in the Tax Notes article, “Stevens: Is Zealous Advocacy Obstruction of Justice?”, 132 Tax Notes 1169 (9/12/11) here, this prosecution has implications for any lawyer, including tax lawyers, who regularly deal with the government.
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Courts Reject More BS Tax Shelters (10/5/11)

DOJ Tax is touting the stunning phenomenon of three major victories in BS tax shelters all in a single day. See Press Release, Justice Department Prevails in Three Tax Shelter Cases on Same Day (10/4/11), here (with links to the pdf files for the opinions). All of these cases were tried to judges in U.S. district courts. (Note the Altria case I discussed in the prior blogs here was tried to a jury with the same outcome.)

The common thread of these tax shelter is captured in Michael Graetz's famous characterization of a tax shelter as: "a deal done by very smart people that, absent tax considerations, would be very stupid." That is not a complete definition -- it is more like Potter Stewart's famous quotation (presented here in full):

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Well, these courts knew abusive tax shelters when they saw them, as did the jury and judges in Altria.
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Altria # 4 - Second Circuit Declines Altria's Invitiation to Sustain a BS Tax Shelter (9/30/11)

The Second Circuit recently rejected another hokey tax shelter in Altria Group, Incorporated v. United States, ___ F.3d ___, 2011 U.S. App. LEXIS 19644 (2d Cir. 2011), here. I have previously blogged on the trial level results in the following blogs: (i) Altria # 1 - Frank Lyon and tax shelters (3/20/10), here, (2) Altria #2 - Economic Substance and Juries (3/22/10), here, and (iii) Altria #3 - What Were Those Guys Smoking? (3/23/10), here.

The only question I have about the appeal is whether Altria really harbored the fantasy that, having failed to smoke these these shelters past the jury and then the district judge, the Second Circuit just would not be paying attention? Altria's goofy adventures -- first in getting into these shelters and then thinking that it could con the jury and the judges -- should be the best refutation that if we just let business people be business people they will make good decisions.
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Superseding Indictment for Dr. Ahuja Adding Conspiracy Count (9/28/11)

Jeff Neiman posted a blog this morning in the superseding indictment for Dr. Ahuja. See Jeff Neiman, Superseding Indictment: HSBC India Customer Charged (9/28/11), here. Jeff's Blog entry has a good discussion and link to the superseding indictment, so I recommend it and will not repeat it here, other than to note that the allegations which flesh out any conspiracy charge are quite interesting. I have previously blogged the original indictment which did not include the conspiracy charge, here.
I do note the nature of conspiracy charges in this context by this cut and paste from my book (footnotes omitted):

Not surprisingly, therefore, the Government trots out the conspiracy charge whenever it can imagine more than one bad guy behind the tree – it is so easy to do. The conspiracy count allegations are framed as a cascade of allegations telling a damning story (if true and, although literally true, not misleading), but sometimes producing more heat than light. This contrasts with counts for the tax offenses which are dry, sparse, boring, and usually not even flowered up for dramatic effect. The benefits for the Government are great, and the downsides are few; after all, the prosecutors’ life and liberty are not at stake. This means, of course, that the Government’s power to tack on conspiracy charges can be abused, particularly with a weapon as potent and elastic as conspiracy. The Supreme Court has noted that:

We agree that indictments under the broad language of the general conspiracy statute must be scrutinized carefully as to each of the charged defendants because of the possibility, inherent in a criminal conspiracy charge, that its wide net may ensnare the innocent as well as the culpable.

Addendum on 9/29/11:
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Another UBS Client Pleads -- With the Baggage of Illegal Income (9/27/11)

Michael A. Hase, a former comptroller for the U.S. Agency for International Development, has pled guilty to Theft of Government Property and Tax Perjury. The bullet points are below, but I caution the reader that this is an illegal source income case where the Government's main angst is about the conduct underlying the Theft Count. This limits the ability to make inferences to legal source income as is the bulk of the cases involving the current offshore financial account initiative. Notwithstanding that, since the tax Guidelines produced the highest offense level, the tax Guidelines governed with one level added for the theft crime. I link the Information here, the Plea Agreement here, the Statement of Facts here, and the USAO Press Release here.

Taxpayer: Michael A.Hase
Bank : UBS AG and its predecessor Swiss Bank Corporation Jersey Islands;
Entities: No
Guilt: By Plea Agreement - 2 counts - theft of government property 18 USC 641 (one count); tax perjury (Section 7206(1)) (1 count covering 10 years).
Maximum Incarceration Period: 13 years (10 years on theft count; 3 years on tax count)
Admits: Failure to File FBARs but not charged or pled
Unreported Income: $909,156.66
Tax Loss: $254,564.14
FBAR Penalty: $1.937,934.53 + (Based on 50% of the indicated highest balance of $3,875,934 in 2006).
Offense Level (Before AOR): 21 (20 for tax count plus 1 for multiple offense)
Offense Level After AOR: 18 (Criminal History I).
Guidelines Range: 27 - 33 months
Restitution: $36,325.52 (for theft count)
Court: D DC.
Judge: ?
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The Willfulness Element of Tax Crimes (9/27/11)

A commenter to one of my other blog entries mentioned the excellent article in today's Wall Street Journal - Gary Fields and John R. Emshwiller, As Federal Crime List Grows, Threshold of Guilt Declines (WSJ 9/27/11), here. The article is a good introduction for afficioinados to the range of general criminal intent requirements:

For centuries, a bedrock principle of criminal law has held that people must know they are doing something wrong before they can be found guilty. The concept is known as mens rea, Latin for a "guilty mind."

This legal protection is now being eroded as the U.S. federal criminal code dramatically swells. In recent decades, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Today not only are there thousands more criminal laws than before, but it is easier to fall afoul of them.

As a result, what once might have been considered simply a mistake is now sometimes punishable by jail time.

* * * *

Over time, lawmakers have devised a sliding scale for different crimes. For instance, a "willful" violation is among the toughest to prove.

Requiring the government to prove a willful violation is "a big protection for all of us," says Andrew Weissmann, a New York attorney who for a time ran the Justice Department's criminal investigation of Enron Corp. Generally speaking in criminal law, he says, willful means "you have the specific intent to violate the law."

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Update on RRSPs in OVDI (9/26/11)

This blog entry reviews a Tax Notes Today article -- Marie Sapirie, Clarification of Retirement Plans Need in OVDI, 2011 TNT 186-4 (9/26/11):

1. RRSPs are similar to U.S. IRAs permitting Canadian tax deductions and reporting of income upon subsequent withdrawal. For persons also subject to U.S. taxation, deferral requires the filing of a Form 8891, "U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."  U.S. persons residing in Canada were often unaware of the implications of the RRSP and thus did not file the Form 8891. Late filing of the Form 8891 requires filing a private letter ruling request for relief under under Reg. Section 301.9100-3.

2. The issues raised by RRSPs are (i) whether, absent the Form 8891, the RRSP will be included in the in lieu of penalty base in OVDI; (ii) whether the income earned inside the RRSP is subject to current U.S. taxation in the year earned or whether the taxpayer may get some retroactive Form 8891 relief; and (iii) whether the U.S. sourced income inside the RRSP will be considered in determining the $10,000 relief.
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Sentencing - Plea Bargaining and the Right to Trial (9/25/11)

As tax crimes practitioners know, the vast majority of tax crimes indictments end in a plea agreement. This is true of federal crimes generally. The plea agreement the prosecutor offers usually materially raises the risks of going to trial as opposed copping a plea. We also know that the inducements can include the obvious -- acceptance of responsibility 2 or 3 level downward adjustment to the Guidelines offense level calculation and, where appropriate, a 5K1 departure for substantial cooperation. But the plea equation can also be manipulated in other ways probably not intended by the Guidelines. This means that the prosecutors can make the plea deal so sweet that, in many cases, a defendant cannot take the risks of exercising his or her Sixth Amendment right to go to trial.  At one level, that is the nature of the plea agreement; at another level, it can be corrosive to the system as we imagine it.

In a very thoughtful opinion in United States v. Ring, ___ S. Supp. 2d ___, 2011 U.S. Dist. LEXIS 106217 (D DC 2011), here (and with appendix here), Judge Segal Huvelle of the DC District Court addresses these manipulations of the Guidelines sentences to discourage the exercise of the Sixth Amendment right to trial. Ring was one of the lobbyists caught up in the Abramoff affair. Several, including Ring, were affiliated with the Greenberg Traurig law firm. There were others, including a congressman.  Ring was the only one of the targets to go to trial -- the others found the plea deal the prosecutors offered to be just to good to go to trial. As a result of going to trial (and perhaps in some form of perverse punishment for going to trial), the prosecutors sought to managing the sentencing to make the punishment harsh indeed compared to those who pled. I won't go into all the detail of how the prosecutors sought to mete out extra punishment through the Guidelines calculations for Ring. I cite below several articles that flesh this out. Suffice it to say, Judge Huvelle navigated the Guidelines to take away the sting the prosecutors sought to impose.  As a predicate to doing so, Judge Huvelle has a very thoughtful discussion of just how corrosive the process can be.  For that reason, I strongly recommend that the reader interested in this subject, read the opinion.
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Tax Crimes and Money Laundering (Particularly Defense Attorney Fees) (9/24/11)

In United States v. Blair, ___ F.3d ___, 2011 U.S. App. LEXIS 19326 (4th Cir. 2011), here, the Fourth Circuit opens with a high level summary of the case:

Walter L. Blair, a Maryland attorney, concocted and executed a scheme to launder drug proceeds that he obtained from a client. Blair was tried and convicted on eight counts of concealment money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i); one count of laundering in violation of 18 U.S.C. § 1957(a); one count of tampering with a witness in violation of 18 U.S.C. § 1512; one count of obstructing justice in violation of 18 U.S.C. § 1503(a); one count of making a false statement in violation of 18 U.S.C. § 1001(a)(2); and two counts of failing to file an income tax return in violation of 26 U.S.C. § 7203.1 He received a 97-month sentence. Blair appeals several counts of conviction for money laundering as well as his obstruction of justice conviction. Blair also challenges the ruling of the district court denying his motion to sever the failure-to-file counts. We affirm the convictions for money laundering under §§ 1956 and 1957, and we affirm the district court's denial of Blair's motion to sever. We reverse, however, Blair's conviction on the obstruction-of-justice charge (Count 11 of the superseding indictment) for insufficient evidence. We remand for resentencing in light of this opinion.

The facts were, in their essence (at the expense of detail and nuance): (1) a drug dealer left the proceeds of the drug dealing with a third party otherwise uninvolved in the drug dealing; (2) after much violence related to the drug dealer's associates and the drug dealer's disappearance, the third party contacted Blair, a lawyer and, at his request, delivered the proceeds to his office; (3) Blair then orchestrated the deployment of the proceeds, in part in ways to (a) launder a portion of the proceeds and in part to pay for the legal representation of two of the drug dealer's associates. Blair was charged with a panoply of money launder, tax and obstruction offenses. Blair was convicted on these charges and appealed.
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Voluntary Disclosures of Foreign Financial Account and Related Matters After OVDI 2011 (9/20/11)

The IRS has posted contact information for persons desiring to make noisy voluntary disclosures. See Voluntary Disclosure Contacts in IRS Criminal Investigation, here. The notice states:

Tax professionals or individuals who want to make a voluntary disclosure not covered by the 2011 Offshore Voluntary Disclosure Initiative, may contact an IRS criminal investigator at the numbers below.

I speculate that

1. As in the two programs (OVDP 2009 and OVDI 2011) the IRS will discourage quiet disclosures of foreign financial institution accounts.  Will the IRS and DOJ Tax will pick off one or two or more where the quiet is not quite up to snuff and prosecute?  (I can't define the up to snuff standard; it is like pornography -- you will know it when you see it and good practitioners will prevent their clients from submitting not up to snuff quiet disclosures.)
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DOJ Tax Web Site Touts DOJ Tax and IRS Juggernaut on Foreign Financial Accounts (9/20/11)

DOJ Tax has a new web page titled "Offshore Compliance Initiative," here.  The page touts DOJ Tax's efforts and the strategic timing of efforts with IRS's offshore compliance initiatives (OVDP 2009 and OVDI 2011).    However, the claim of the eclipse of the tax efficient secret Swiss bank account may be exaggerated.

DOJ Tax touts the statistics as follows:

The prosecution results so far have been encouraging: To date, approximately 150 grand jury investigations of offshore-banking clients have been initiated, of which 30 cases have been charged, with 24 guilty pleas having been entered, 2 convicted after trial, and 4 awaiting trial. A number of facilitators who helped clients hide assets offshore at UBS and other banks have been indicted, resulting in ten bankers and two attorneys being charged and awaiting trial, and one advisor being charged and convicted. In addition, grand jury investigations have been opened into eight additional offshore banks across the world.

Statistics are always dicey things. The 150 grand jury investigations is new public information, but it is unclear what exactly the number means. Does the 150 refer to the number of "targets" or to the number of investigations with some of them having more than one target? And, the statistics I show for the prosecutions (see my spreadsheet available from the page in the right column) do not match DOJ Tax's number of prosecutions (30 cases, but that may be because a case can have more than one defendant and some involving offshore account and/or FBAR prosecutions that I count may did not arise out of the initiative). In any event, the numbers are impressive.

Diverting Corporate Earnings - Constructive Dividends or Wages / Salary (9/17/11)

One of the common ways of cheating on taxes is to divert corporate earnings from a C corporation to an entity that is off the IRS's radar screen. The diversions may be of the income which never hits the corporation's books and thus is not reported as income on its tax returns; they may also occur after the income is recorded with the diversion achieved by making payments from the corporation for goods or services which are deducted.  When the transactions thereafter get on the IRS's radar screen, the issue is whether the diversion was an underpayment of tax at the corporate level. 

In a wholly owned corporation, particularly a personal service corporation providing professional services, the corporate income arises from the personal services of the sole shareholder. In such a case, the corporation could easily pay the shareholder wages or salary of the entire net income before payment of compensation. (I refer to this as wages, as did the Court in the case I discuss below.) There would certainly be no unreasonable compensation issue. But, by paying the amount as wages, although fixing the tax issue at the corporate level, the income still is taxed at the shareholder level and the corporation has to withhold, payover and provide a W-2 for an easy IRS match at the shareholder level. By diverting that amount via  either diverting the income or through falsely deductible payments to a shareholder designated entity which does not pay tax, the tax cost at both the corporate and the shareholder levels are avoided (at least until caught). When caught, of course, in order to minimum the tax avoided, the corporation and the shareholder may try to claim that the diversion payments were really wages to the sole shareholder rather than dividends thereby eliminating the corporate level tax. Sometimes, when caught, the shareholder will cause the corporation to amend its returns making that claim.
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The Object of a Klein Conspiracy and Specificity (9/17/11)

In United States v. Mubayyid, ___ F.3d ___, 2011 U.S. App. LEXIS 18215 (1st Cir. 2011), here, the First Circuit addressed the issue of the nature of the Klein conspiracy when the object alleged indictment went beyond the usual general allegation of impairing and impeding the lawful functions by specifically alleged how the object was achieved.
The Court introduces the case as follows:

This complex appeal arises out of the joint criminal prosecution of Emadeddin Muntasser, Muhamed Mubayyid, and Samir Al-Monla for conspiring to defraud the United States by obstructing the functions of the Internal Revenue Service ("IRS"), for corruptly endeavoring to obstruct the due administration of the Internal Revenue laws,  for filing false tax returns, for making false statements to agents of the Federal Bureau of Investigation ("FBI"), and for scheming to conceal material facts from a federal agency. The charges stem from each defendant's involvement with Care International, Inc. ("Care"), a charitable organization incorporated by Muntasser in 1993 with a stated purpose of providing worldwide humanitarian aid.

The defendants' twenty-four day jury trial focused on the circumstances motivating Muntasser's formation of Care in 1993; the defendants' failure to disclose some of Care's activities, such as the publication of certain newsletters from 1993 to 1997; and Care's support for, and promotion of, Islamic jihad and fighters known as "mujahideen." n1 The government's central theory at trial was that Muntasser had established Care in order to fraudulently obtain a tax exemption, so that contributions being used to finance mujahideen overseas could be deducted from individual tax returns as charitable donations.
n1 At trial, witnesses for the government testified that "jihad" means "holy struggle," and specifically refers to the duty to fight against the enemies of Islam, while "mujahideen" refers to Islamic [*3] "holy warriors." In its own materials, Care defined "mujahideen" as "[t]hose who are going out for Jihad, fighting in the path of Allah."

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IRS Promotes the Success of OVDI and Related Items (9/16/11)

As suspected, the IRS is promoting the success of the most recent offshore initiative -- OVDI 2011.  I will use this blog to post items in that general category, but encourage readers to post as comments any additional items -- pro and con -- that they think will be useful to readers.

The IRS promo piece is IRS Shows Continued Progress on International Tax Evasion, IR-2011-94 (9/15/11), here.  In the piece, the Commissioner claims major progress in global tax enforcement and getting back into the system.

My Editorial:  On the point of getting people back into the system, the truth is that the one size fits all approach kept many people out of the system and made many taxpayers cynical that good guys were being treated the same as bad guys.  Hopefully those taxpayers will get right in the system on a go-forward basis without serious repercussions from the past.  The truth is that most of those taxpayers who let by-gones be by-gones probably will never be bothered by the IRS and that could make those conscientious / fearful taxpayers who got into the program look and feel like dupes.  I think the system would have been better off with a more nuanced program.  A more nuanced program would have required more systemic resources but the additional cost would, I think, have been justified by treating bad actors worse than good actors.  (That's a relative scale, a continuum if you will, but I think the system would be better off with more nuance than the programs allowed.)  Just my thought, and really not trying to open up comments about the horrors of the system.  There are plenty of other posts where those comments are developed.

Experiences Inside OVDP / OVDI (9/14/11)

This blog is created for users to share, by their comments, their experiences inside the OVDP / OVDI programs.  I know the IRS touts that there is little flexibility inside these iterations of the voluntary disclosure program, and that has concerned the practitioner and taxpayer communities.  However, I suspect that, in extreme cases, accommodations may be made inside the program without the necessity of opting out to obtain the just and fair result.

So, I encourage readers to post their experiences here to help persons in the program, particularly those who are not represented, to take affirmative steps, to avoid pitfalls or just to obtain some comfort from others' experiences.  Or even some amusing anecdotes "inside the program," if any, could be helpful.

Thanks,

Jack Townsend

The Noose Tightens: Swiss Banks Deliver Up Data (9/11/11)

Ten of the more significant Swiss bank players in assisting U.S. taxpayers hide their income from U.S. tax authorities have delivered statistical data to the U.S. The data is sufficiently broad that it does not identify individual taxpayers but almost certainly could give the U.S. ways to sharpen its focus on the information and documents that it might ultimately demand from the banks.

An article in Tax Notes (Randall Jackson, Swiss Banks Turn Over Statistical Data in Tax Evasion Investigation, 2011 TNT 177-3 (9/13/11)) reports:
The banks include the following:

HSBC
Wegelin
Julius Baer
Basler Kantonalbank
Zürcher Kantonalbank

Eveline Widmer-Schlumpf, chief of the Swiss Federal Department of Finance, on September 10 also stated that statistical data had been turned over to U.S. officials. However, she added that no personal data had been disclosed. "That would be a violation of banking secrecy," she said, as quoted in a September 11 Agence France-Presse report.
Widmer-Schlumpf stressed that reaching a mutually acceptable outcome between the United States and Switzerland over the latest tax argument is of vital importance, but that it would not require an emergency law or separate treaty.
"The fact is that we are working with a lot of commitment for a solution that Switzerland can deliver within the existing legal framework of administrative assistance in the case of tax fraud and tax evasion. This is happening in accordance with the government and in conjunction with the involved banks. There is no need for an emergency law or separate treaty," she said, as quoted in a September 11 interview with NZZ am Sonntag.

Katie Reid, U.S. Obtains Data From 10 Swiss Banks In Tax-Dodging Probe (Huffington Post/Reuters 9/10/11), here.

Breaking News 9/13/11:

As the commenter notes below, the reports are that the Swiss are caving for all banks by now allowing what I call John Doe Treaty requests as follows (US client data to be provided based on activity (swissinfo.ch), here):

In cases where US authorities are able to supply enough details to justify a suspicious pattern of behaviour, Swiss banks will hand over the names and account details of US clients suspected of tax fraud – which happened to 4,500 UBS clients in 2009.

Of course, the U.S. will only be able to supply very general characteristics, such as use of foreign entities between the swiss account and the U.S. taxpayer, failure to supply the required forms, perhaps some minimum dollar amount (say $50,000).  Many of the characteristics might be discernible from the aggregate data discussed above, and were a key component of the UBS requests.

I will post more on this as more details are known.

Materiality and Corruptly in Tax Obstruction under Section 7212(a) (9/10/11)

In United States v. Bonds, ___ F.Supp. 2d ___, 2011 U.S. Dist. LEXIS 96051 (ND CA 2011), the jury had found Barry Bonds guilty of obstruction of justice in violation of the so-called Omnibus Clause of 18 U.S.C. section 1503. The court rejected Bonds' Rule 29 for acquittal and Rule 33 for new trial. The Court's discussion is interesting for tax crime afficionados because the tax obstruction statute, section 7212(a), has its roots in the general obstruction statutes in 18 U.S.C., including specifically section 1503(a)'s Omnibus Clause. See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.

The key elements of 1503's Omnibus Clause for present purposes are: (i) the defendant must endeavor (ii) corruptly to (iii) obstruct or impede the due administration of justice. The Court has the obligatory discussion of the leading case, United States v. Aguilar, 515 U.S. 593, 598 (1995), which is fascinating but need not detain us here.
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Opting Out Considerations - A Jeff Neiman Guest Blog (9/10/11)

The OVDP and OVDI programs have come to an end and many taxpayers who participated in the programs are about to get their tax bill from Uncle Sam. In the programs, the formula to calculate tax and penalties was rigid and inflexible. The programs dictated that penalties are the same for the taxpayer who knew of his reporting obligations and the taxpayer who innocently was not in compliance. As I described in more detail in a Tax Notes opinion piece entitled, “Jeffrey A. Neiman, Opting Out: The Solution for The Non-Willful OVDI Taxpayer," Tax Notes 11135 (9/23/11), here, the failure to differentiate between the two distinct taxpayers has prevented thousands of taxpayers from coming forward as they view the programs as too expensive.

As we turn the corner, taxpayers who entered the program and who were not aware of their obligation to file an FBAR or to report their worldwide need to consider opting out of the voluntary disclosure program. Under the program, the IRS and DOJ assumed every taxpayer acted intentionally or willfully. However, in fact, I think in many cases, it will be very difficult for the government to prove that a taxpayer willfully violated the law.

Willfulness is defined as the intentional violation of a known legal duty. It is the cornerstone to any criminal prosecution, to the civil fraud penalty, and to the draconian 50% per year FBAR penalty. The government proves willfulness by looking at a taxpayers conduct. When I was a federal prosecutor, examples of conduct I looked to in order to infer willful behavior included using nominees, misleading the IRS, providing incomplete information to an accountant, dealing in cash, and maintaining a double set of books. Without some of these factors, it is very difficult to prove willfulness and without willfulness, there is no criminal case, no civil fraud penalty, and no 50% FBAR penalty.
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Rumors of Additional Grand Jury Subpoenas and John Doe Summonses Against Foreign Banks (9/10/11)

Jeff Neiman has a new blog entry, Reuters: Enforcement Action Against Ten Swiss Banks in the Works (9/10/11), here, reporting on a Lynnley Browning Reuters report of subpoena / John Doe summons action that are being prepared to blast information out perhaps 10 foreign banks. (Ms. Browning's report is here; as I get additional links for information I deem useful on this subject, I will post them below.) The reported rumor is that the request will be for accounts of "as low as $50,000." Jeff's discussion is excellent, so I encourage readers to go to that discussion. My comments are:

1. While assisting clients having a significant, sometimes, large number of foreign financial accounts scattered in relatively low amounts among a number of foreign financial institutions, the sheer number of accounts created logistical difficulties in making a proper assessment of the risks of not getting into the voluntary disclosure programs and, if the client entered the programs, then the processing of the information and documents for the final package. But when that significant or large number of accounts involved relatively small amounts and relatively small aggregate amounts, even beyond the logistics issues, the upfront decision was tilted in favor of joining the programs and will affect the decision whether to opt out. Specifically, the nonwillful penalty (up to $10,000) is per account per year. For example, in the worst cases (the criminal cases to date), the Government has demanded only a single FBAR willful penalty of 50% of the highest amount in the foreign financial account(s) in the highest year(which does not include foreign assets, such as real estate). This 50% willful penalty asserted in the criminal cases could be significant, but still represents a Government decision not to press for larger penalties by including more years otherwise permitted by the FBAR statute. (There could be some constitutional issues of Excessive Fines and perhaps due process in asserting higher FBAR penalties; see the tag below.) But, with a large number of accounts, the IRS could go for the nonwillful penalty, designed to punish less culpability, and easily extract the same or a larger penalty than the willful penalty depending upon a combination of the aggregate numbers and the number of accounts. The problem with trying to assess what the risks are with respect to the nonwillful penalty (assuming that the lawyer and client properly reach a conclusion of unlikelihood of criminal risk, civil fraud risk, and willfulness risks, which are all variations of the same them) is that we don't have enough of a populated data base to anticipate what the IRS will do in nonwillful cases. The nonwillful penalties are up to $10,000 per account per year and the IRS agent has a lot of discretion, even in cases where there is no reasonable cause, as to what to do -- including merely issuing a slap on the hand letter saying, in effect, go forth and sin no more. We just don't know based on real information data points (including the discussion in the IRM), so many clients in this profile were not willing to take the risk of going forth and sinning no more, but taking the audit risk for past years. They were pushed into the program, thus capping the civil penalties with the notion of perhaps opting out for audit after better information is available as to what might happen on audit.
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IRS Continues Mining the Gold from Voluntary Disclosures, and Picks Off a Liechtenstein Bank (9/10/11)

Lynnley Browning for Reuters reports today that USAO SDNY "are building a criminal-fraud case against Liechtenstein's oldest bank, Liechtensteinische Landesbank,"  Lynnley Browning, U.S. Probing Liechtenstein Bank Over Allegedly Helping Wealthy Tax Dodgers, (Huffington Post Reuters Report 9/9/11), here.

According to the article:

American officials learned of Liechtensteinische Landesbank's identity and alleged role through scores of voluntary disclosures made by `wealthy Americans in recent years to the U.S. Internal Revenue Service. The disclosures, which offer reduced fines and penalties in exchange for coming forward with secret offshore accounts, require U.S. taxpayers to provide detailed information about the network of banks, trusts, shell corporations and intermediaries they have used.

It has been clear for some time that the Government was picking up egregious enablers through the disclosures made in the special offshore voluntary disclosure programs.  The same database of information will produce the names and skullduggery of the egregrious financial institutions in this game as well.

In a similar vein, the Wall Street Journal reports today the the "golden age of offshore tax havens may be fading out." Robert Frank, 'Gold Mine' of Data Helps Officials Clamp Down on Offshore Tax Havens (WSJ 9/10/11), here. The Gold Mine is, of course, the data mentioned in the Browning article. Here are some excerpts:

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The Swiss Hogs Get Slaughtered, Perhaps (9/6/11)

The Swiss defense now is to have the pot (the Swiss) call the kettle black (more on the metaphor, here). The Swiss Bankers Association "chairman, Patrick Odier, urged the Swiss people and the government to 'put up a united front' and work out a solution that applies to all countries." See Swiss Banks Urge ‘United Front’ Against U.S. Pressure on Tax Evasion (NYT via AP 9/5/11), here.  The problem, of course, is that no other country is like Switzerland. In the past, Switzerland distinguished itself by out-cheating all other countries.  If there is any truth, in the adage that "Pigs Get Fat. Hogs get Slaughtered," the Swiss should just suck up and take their medicine.

Burden of Proof for Willfulness in FBAR Violations (9/6/11)

A key issue in considering the FBAR willfulness penalty is the standard standard of proof if the Government pursues the FBAR penalty. The Government is required to pursue the FBAR penalty by filing a suit and, if successful, obtaining judgment, rather than through the panoply of collection devices for tax assessments.

In United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), previously discussed here, the court said that it was applying a preponderance of the evidence standard but it is clear that it held the Government to a fairly strict standard of proof. For burden of proof afficionados, I should state that historically in Anglo-American jurisprudence, a party alleging fraud must prove the fraud at a higher level than preponderance of the evidence. See generally Grogan v. Garner, 498 U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy discharge because of the nature and context of that exception). For example, if the IRS asserts the civil fraud penalty under § 6663, the Code only says that the burden of proof is on the IRS (§ 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or clear and convincing. But the law is clear that the IRS must prove fraud by clear and convincing evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (“Tax Court Rule 142(b) echoes the statutory language but specifies the clear and convincing standard by which the government must carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of the broadly prevailing rule.”). The clear and convincing burden is conceptualized as heavier than preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal burden).
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Defense Witness Immunity: Prosecutor Discretion and Compelling Testimony of a Reluctant Witness in Criminal Cases (9/6/11)

In criminal cases, the prosecutors often bring charges where third party witnesses could give testimony that might be crucial to the prosecution or the defense. For example, the prosecutors' imagination for the ubiquitous conspiracy charge will often include unindicted co-conspirators, named in the indictment or not. It is not uncommon for those witnesses to be reluctant for a number of reasons, including fear of prosecution if they were to testify or fear of some other type of retribution if they testified. The former, of course, has constitutional dimensions.

At least in the example of unindicted co-conspirators, the prosecutors may be able to use and abuse hearsay statements under FRE 801(d)(2)(E). But, prosecutors may want actually live testimony of the unindicted co-conspirator(s). The prosecutors have a powerful tool to force such testimony by conferring statutory immunity. 18 USC Section 6003 (court "shall" issue the order of statutory immunity upon request of prosecutors). If the witness is important to the prosecutors' case against the named defendants, the prosecution will have the incentive to force the witness to testify upon penalty of contempt and incarceration if he or she does not testify. The prosecutors will often not want to confer immunity if the testimony is less important to the prosecution and the prosecutors want to hold open the possibility of prosecuting the witness in the future. (Technically, the grant of statutory immunity grants only derivative use immunity, but the difficulties of the Kastigar hearing may make prosecution unlikely after the witness testifies under compulsion of statutory immunity (use and derivative use immunity). )
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U.S. Ups the Pressure on the Swiss to Rat Out Their U.S. Clients (9/4/11)

In the continuing game of chicken between the Swiss government (perhaps better described for this purpose as the Swiss financial system) and the rest of the civilized world (at least the part that is serious about their income tax systems), the U.S. appears to ratcheting up the ante. As reported in the press (I give a Reuter's link below, but there are a number of other reports with similar hard facts (few) and speculations (many)).

The hard key fact is that U.S. Deputy Attorney General James Cole wrote a letter in which he demands that the Swiss turn over a lot of information related to U.S account owners.  The precise details of the letter are unclear, but there are speculations.  For a sample of the combination of facts and speculations, here is a sample the Reuters' article linked below:

The SonntagsZeitung quoted Swiss sources close to the talks as saying Washington is seeking details of all U.S. clients with accounts worth at least $50,000 between 2002 and 2010 at banks including Credit Suisse, private banks Julius Baer and Wegelin as well as the Zurich and Basel cantonal banks.

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What is the Amount for the 50% FBAR Penalty, What is the Violation and When Does it Occur (9/1/11)

The FBAR penalty, in part relevant to most individuals, imposes two penalty regimes - one for the willful actor and the other for the non-willful actor. Only the willful actor penalty is alternatively based upon an "amount" -- i.e., the greater of $100,000 (a set amount) or "50 percent of the amount determined under subparagraph (D)." 31 USC 5321(a)(5)(C). The referenced subparagraph (D) provides in relevant part:

(D) Amount.— The amount determined under this subparagraph is—

* * * *

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

The FBAR violation is the failure to file the report or the filing of a false report. The time of the violation thus would be July 1 ((The metaphysical moment in time when 6/30 ends and 7/1 begins is the time that the violation occurs.)) or, in the case of a false FBAR, on the date of filing the FBAR. See e.g., Exhibit 4.26.16-3 (07-01-2008) , in the LCCI initiative, stating: "the balance in the account at the time of the violation (the opening balance of the account on 7/1 of the subsequent year)."  The amount penalized under the 50% willful penalty thus is not the highest amount in the account during the year. This obviously can cut both ways.
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Taxpayer Advocate Service To Smooth the Rough Edges of OVDP 2009, OVDI 2011 and Offshore Accounts Generally (8/29/11)

Some readers have commented about the use of the Taxpayer Advocate Service ("TAS") of the IRS to intermediate differences between the IRS and the taxpayer regarding the seemingly rigid application of OVDP 2009 and OVDI 2011, thereby producing harsh results.  The TAS may also play a role in opt outs where the fear is that the IRS will be punitive or in audits for taxpayers who never joined either initiative where the same fear exists.  I thought it would be helpful to offer readers a blog and thread devoted to just the advantages and limitations of the Taxpayer Advocate Service in these IRS initiatives.  Readers thoughts and experiences are solicited.

The Taxpayer Advocate Service website is here.

I do encourage those who have submitted comments on the TAS to re-post them here, modified as appropriate for subsequent developments.  I can assure you all that you will be doing a service for a lot of people in stress.

IRS Extends OVDI Big Package Deadline Until 9/9/11 (8/26/11)

The announcement may be viewed in its full splendor here.  The pertinent portions are:

IRS Statement: OVDI Deadline Extension
(Aug. 26, 2011)

Due to the potential impact of Hurricane Irene, the IRS has extended the due date for offshore voluntary disclosure initiative requests until September 9, 2011. For those taxpayers who have not yet submitted their request and any documents, the following actions are necessary by September 9, 2011:

Identifying information must be submitted to the Criminal Investigation office. This includes name, address, date of birth, and social security number and as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible. This information must be sent to:
Offshore Voluntary Disclosure Coordinator
600 Arch Street, Room 6404
Philadelphia, PA 19106.

Send a request for a 90-day extension for submitting the complete voluntary disclosure package of information to the Austin campus. This request must be sent to:
Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741
ATTN: 2011 Offshore Voluntary Disclosure Initiative

Reliance on Attorney Good Faith Rejected as Defense to Guilt May Mitigate the Sentence (8/22/11)

In United States v. Renner, ___ F.3d ___, 2011 U.S. App. LEXIS 16331 (8th Cir. 2011), here, the defendant asserted a Cheek type good faith defense. The argument was that the defendant had relied upon his tax attorney. The tax attorney gave favorable testimony, but the jury did not accept the good faith defense. The tax attorney renewed his favorable testimony, by letter, for sentencing. The district judge apparently good faith related to the attorney consulation for sentencing.

The facts, highly summarized, were as follows: The taxpayer operated a business through a single-member LLC which was disregarded and treated as a Schedule C entity. The business he ran was to provide something like a debit card service for certain types of purchases. The business was not a bank and did not require that he do anything with his clients' cash deposits other than have a general obligation to apply them when the clients drew them. In other words, he could deposit them into the general business account and, herein lies the rub, use them in the interim as he saw fit. He did see fit and used them for various nonbusiness purposes (living expenses, etc.) The defendant was indicted for tax evasion for initially not filing and then filing delinquent returns omitted the income that he lived on from the customers' cash.
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Brady and Third Party Records / Databases (8/20/11)

In United States v. Gray, 648 F.3d 562 (7th Cir. 2011) (opinion here), Judge Posner rejects a defendant's argument that the Government had a Brady obligation to have a third party extract data from its databases that might potentially have helped the defendant. While the third party, EDS (a data service company), had the data in its databases, EDS would have had to create a program to extra the data and then run the program on its databases. Judge Posner held that Brady did not impose the obligation on the Government to extract the data from the third party that might be helpful to the defendant. He reasoned (several case citations and quotation marks omitted for readability):

If a prosecutor possesses exculpatory evidence that had it been disclosed to the defense might have induced a reasonable jury to acquit, failure to provide it to the defense would be a reversible error. Brady v. Maryland, 373 U.S. 83 (1963). The rule has been expanded to take in investigators and other members of the "prosecutorial team" broadly understood. Otherwise investigators assisting in a prosecution could conceal from the prosecutors exculpatory evidence that the investigation had revealed and then the evidence would never be revealed to the defense. But EDS was not a part of the prosecutorial team. It had been hired as we said to process and pay bills submitted to Indiana Medicaid. It was not a private detective agency hired by the state agency to assist state and federal prosecutors in prosecuting Medicaid fraud. Medicaid fraud investigators were part of the prosecutorial team, but EDS was not. Because it does the billing for Indiana Medicaid, the company has records that can be useful as evidence in fraud prosecutions. But the defense had the same access to those records as the prosecutors did, and so there was no suppression of evidence.

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Second Circuit Opinion on Derivative Liability (8/20/11)

I write today on a fascinating recent decision from the Second Circuit in a nontax case. United States v. Ferguson, ___ F. 3d ___, 2011 U.S. App. LEXIS 15811 (2d Cir. 2011). The opinion is here.  The opening paragraph introduces the case as follows:

This criminal appeal arose from a "finite reinsurance" transaction between American International Group, Inc. ("AIG") and General Reinsurance Corporation ("Gen Re"). That transaction (the "Loss Portfolio Transfer," or "LPT") reallocated risk in a way that shored up AIG's flagging loss reserves, which were feared to be dragging down its stock price. Finite reinsurance transactions, which entail some (usually low) risk, are acceptable accounting measures in the insurance industry, and have their uses; but in this instance it is charged that the transaction entailed no risk at all, and was a fraud. The defendants, four executives of Gen Re and one of AIG, appeal from judgments entered in 2008 and 2009 by the United States District Court for the District of Connecticut (Droney, J.), convicting them of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission ("SEC"). They were sentenced principally to prison terms ranging from one to four years, and are free on bail pending this appeal.

I write principally because of the Court's discussion of the theories of vicarious liability. I have previously discussed those theories in various blogs can be viewed by clicking on the key words that I assign to this page. (I am also currently returning soon to my draft article on this subject which I hope to wrap up soon and will post to a blog at some time.)
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9th Circuit Applies Required Records Doctrine to Defeat 5th Amendment Claim for FBAR Recordkeeping (8/19/11)

The Ninth Circuit today issued an opinion applying the required records doctrine to defeat a Fifth Amendment claim related to the FBAR record keeping requirement. The opinion is in In re: GRAND JURY INVESTIGATION M.H. and can be reviewed or downloaded here. I have not had time to analyze the opinion and so can just post it for readers now. If and when I have time, I may supplement this blog entry. 

Addendum 8/19/11:  Here is the conclusion (p. 20 of the slip opinoin):

IV

Because the records sought through the subpoena fall under the Required Records Doctrine, the Fifth Amendment privilege against self-incrimination is inapplicable, and M.H. may not invoke it to resist compliance with the subpoena’s command. See Doe M.D., 801 F.2d at 1167 (“Records that are required to be maintained by law are outside the scope of the privilege [against self-incrimination].”). Because M.H.’s Fifth Amendment privilege is not implicated, we need not address his request for immunity. Bouknight, 493 U.S. at 562 (declining to “define the precise limitations that may exist upon the State’s ability to use the testimonial aspects of Bouknight’s act of production in subsequent criminal proceedings”).

The district court’s order is AFFIRMED.

Addendum 8/20/11:  JAT comments on the decision:
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IRS Responds to Indian-American Community's Concerns Over OVDI (8/17/11)

I previously posted a blog on Indian American community requests for relief with respect to the OVDI initiative. See Indian American Groups Push for Foreign Account Relief (7/29/11) here.  I provide below a response from Heather Maloy, IRS Commissioner, LB&I. I do not yet have a public link to the letter itself, but will provide the link when I get it.  (Readers with access to Tax Notes Today can find it at 2011 TNT 159-16.)

-------------------------


August 4, 2011

Mr. Inder Singh
Chairman
GOPIO International
P.O. Box 560117
New York, NY 11356

Dear Mr. Singh:

I am responding to your letter to Secretary Geithner dated June 27, 2011. You asked about relief available to certain taxpayers under the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Thank you for your interest in the OVDI.

The OVDI provides a way for taxpayers with undeclared assets offshore to resolve their tax problems. The terms of the OVDI require taxpayers to pay the following penalties:

• A 20 percent accuracy-related penalty under section 6662 of the Internal Revenue Code (Code);
• A failure-to-file penalty under section 6651(a)(1) of the Code;
• A failure-to-pay penalty under section 6651 (a)(2) of the Code; and
• An offshore penalty equal to 25 percent of the highest aggregate balance in foreign bank accounts and entities or the value of foreign assets during the period covered by the voluntary disclosure in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.
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Tenth Circuit Decision on Unclaimed Deductions for Sentencing Tax Loss Calculations (8/16/11)

The Tenth Circuit recently rendered a very good decision on the issue of a convicted defendant using unclaimed deductions to reduce the tax loss for sentencing purposes. The decision is United States v. Hoskins, ___ F.3d ___, 2011 U.S. App. LEXIS 16636 (10th Cir. 2011) and may be viewed or downloaded here.  First a little background.

Tax crimes afficionados know, that the tax loss is the principal determinant in sentencing for tax crimes and the drill for the defendant and his or her lawyer is to get that number down.  But there is another key context in which a similar concept is used in tax crimes.  Tax evasion is the key tax crime where tax loss -- called tax due and owing -- is an element of the crime. The Government must actually prove a tax due and owing, basically the same as a sentencing tax loss. (I have discussed previously in this blog the issue of whether that tax due and owing must be substantial, but that is not the issue here; in all events there must be a tax due and owing.) In the case of an allegedly false return, the Government will usually make its proof usually by showing omitted income, falsely claimed deductions or falsely claimed credits, and make the resulting adjustments to the return to determine the tax allegedly due and owing. But the taxpayer may want to put in play unclaimed deductions, overreported income or unclaimed credits to offset the Government claims. The taxpayer can do that in the tax evasion case in chief as bearing on the issue of whether the Government has proved a tax due and owing. (There are some interesting burden of proof issues as to the unclaimed tax benefits, but I forego them for now.)  For example, in her now infamous criminal trial, Leona Helmsley (“only little people pay taxes”) asserted this defense by claiming that her husband's real estate empire generated far more depreciation deductions than they had claimed on their returns that so offended the Government. Indeed, she urged, the unclaimed deductions were more than sufficient to eliminate this element despite omission of large sums of income. It did not work for her, but it is an avenue that the experienced practitioner will explore. See United States v. Helmsley, 941 F.2d 71 (1991), cert denied, 502 U.S. 1091 (1991).
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Tax Notes Article on Practitioner Assessment of Offshore Initiatives (8/15/11)

Tax Notes has published an article, Marie Sapirie, Practitioners Assess Offshore Initiative as Deadline Approaches, 132 Tax Notes 664 (Aug. 15, 2011). With permission of Tax Analysts, I make it available to readers here.

The article is short and worth reading in its entirety. Some excerpts:

"The second voluntary initiative gives people a fair way to resolve their tax problems," IRS Commissioner Douglas Shulman said August 8 in a reminder that the 2011 OVDI is ending.

Not all practitioners agree. The standardized penalty structure of the OVDP and OVDI "has led to some incredibly disproportionate and painful results," said Michel.

* * * *

The program's inability to differentiate between taxpayers' conduct and their culpability is frustrating, said Jeffrey A. Neiman, who led the prosecution of Swiss bank UBS as an assistant U.S. attorney in the Southern District of Florida. "If the OVDI program were more fair for these taxpayers who were not acting willfully, you would not have an issue with quiet disclosures or opting out, and you would probably have more compliance as well," he said.

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Noises that Credit Suisse Is Ready to Surrender (8/15/11)

The news purveyors are reporting that Credit Suisse is ready to give it up -- including admitting wrongdoing and giving up $1 billion.  The actual details are not known, but the speculation is that the template for the deal will be the UBS arrangement with a deferred prosecutions agreement.

I will amend or supplement this blog entry as I become aware of additional material details.

Articles:

See David Voreacos, Credit Suisse May Settle U.S. Probe by Admitting Wrongdoing, Paying Fine (Bloomberg 8/14/11).

Some IRS Interpretations / Applications of OVDI 2011 (8/11/11)

A member of a group to which I belong has shared the following which are key items of his talk with an IRS Hotline OVDI person:

1. The 5%, 12% or 25% offshore penalty does not have to be submitted with the Submission Requirements that are due August 31.

2. The understatement of tax and related penalties thereon are due by August 31, but the interest on the tax and penalty does not have to be included. The IRS understands that most taxpayers don't have the capability to compute interest. If you attempt to compute the interest, then that is okay too.

3. The deadline to be precertified into the 2011 OVDI is August 31 (no extension available), but (as you know) the deadline for submitting the Submission Requirements can be extended, if request prior to August 31 and meet the elements in the 2011 OVDI Q&A number 25.1.

4. The Offshore Voluntary Disclosure Letter must be filed with Philadelphia to qualify for the 2011 OVDI, but you don't have to do both the precertified and the letter prior to August 31. Only one of the two needs to be done before August 31.  [SEE THE POST BELOW INDICATING THAT THE VDL MUST BE FILED BY THE EXTENDED DATE OF 9/9/11.]

See the post below of a comment dated 8/29/11:

Roy Berg said...

I just spoke with CI out of WA DC. The agent told me that the Voluntary Disclosure Letter MUST be filed with Philly by the (new) 9/9 deadline notwithstanding having made a timely pre-clearance request.

New York State Bar Comments to IRS to Make OVDI Fairer (8/10/11)

By letter dated August 5, 2011, the New York State Bar Tax Section submitted comments to the Commissioner, Chief Counsel and Acting Assistant Treasury Secretary on how to make the OVDI 2011 fairer and more administrable. I encourage readers to review or download the letter here.

The format is to comment on specific FAQs and we encourage readers to review the letter for those specific comments.. Preceding the specific comments is the following:

We recognize that the Service cannot evaluate the willfulness of every taxpayer who wishes to participate in the 2009 OVDP or the 2011 OVDI and that is why the Services has created a mechanism for taxpayers to opt out of the programs and undergo an audit. We agree that, given the large number of voluntary disclosures, this is an appropriate way to evaluate the culpability of particular taxpayers who believe that they did not act willfully. However, we are concerned that certain statements have been made by Service personnel that strongly encourage taxpayers to participate in the voluntary disclosure programs or face maximum criminal and civil penalties under the law. n5 In addition, FAQ 15 states that "[taxpayers are strongly encouraged to come forward under the 2011 OVDI . . . Those taxpayers making 'quiet' disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years." While these statements and procedures refer to taxpayers who have not made voluntary disclosures, taxpayers and practitioners have expressed concern that taxpayers who opt out of a voluntary disclosure program will face the same level of scrutiny and skepticism by the Service as if they had never participated in the program in the first place. Indeed, many revenue agents in the field have indicated that taxpayers who opt out of the voluntary disclosure programs will have a very difficult time convincing the Service not to impose maximum civil penalties.

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Yet another plea deal for UBS Depositor (8/6/11)

Taxpayer: Michael Reiss
Bank : UBS AG; two other unidentified Swiss bank, but one is pseudonymed "Swiss Bank No. 1"
Swiss Enabler: Beda Singenberger (see blogs here)
Entities: Yes (sham foundation and apparently sham corporation)
Guilt: By Plea Agreement - False FBAR (1 count)
Maximum Incarceration Period: 5 years.
Admits: Other false FBARs and failure to file FBARs
Tax Loss: $400,000 (at least)
FBAR Penalty: $1,200,000 + (FBAR penalty; perhaps 50% of highest balance for one year).
Court: SD NY
Judge Accepting Plea: Henry B. Pitman, Magistrate Judge, USDC SDNY
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Prominent Lawyer Pleads to Mainstream Tax Crimes (8/5/11)

I have spent a disproportionate number of blogs on the foreign account / asset issue (principally the offshore voluntary disclosure initiatives). But mainstream criminal tax issues proceed apace. I do not normally pay much attention to general failures to file, tax or pay evasion, tax perjury, Klein defraud conspiracies, except in those cases where there is something unusual.

So, today, I bring something that is mainstream but unusual. A lawyer has pled guilty to two counts of failure to file income tax returns and two counts of failure to pay income tax. The USAO SDNY press release is here.  The maximum sentence when these 1 year counts are stacked is 4 years. (The Sentencing Guidelines range will sure indicate a fulsome sentence.) The lawyer is not just any lawyer -- he was a partner during most of the years that he failed to file tax returns with a very prominent law firm, Sullivan & Cromwell LLP (website here). He is John J. O'Brien, formerly a partner specializing in mergers and acquisitions at Sullivan & Cromwell LLP. 

The guts of the press release (cut and paste) is :
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Another UBS Related Enabler is Indicted (8/5/11)

Yesterday brought another UBS enabler indictment against Gian Gisler, a resident of Zurich, Switzerland.  Here is the USAO SDNY Press Release.  I haven't had time yet to analyze the details and will probably wait until I get a copy of the indictment (if anyone has it please email it to me).  In the meantime, I just cut and paste the part of the press release summarizing the indictment:

From the mid 1990s until late 2008, Gisler was a client adviser at UBS. From early 2009 until at least 2010, Gisler was a client adviser at two different asset management firms (Swiss Asset Management Firm No. 1 and Swiss Asset Management Firm No. 2). From the mid-1990s through at least 2010, Gisler allegedly conspired with various U.S. taxpayers and others to ensure that his clients could hide their Swiss bank accounts and the income they generated from the IRS.

In 2001, UBS, one of the Swiss banks at which Gisler helped his U.S. taxpayer clients hide accounts, voluntarily agreed with the IRS to collect information from account holders concerning the true owners of accounts at those banks. In furtherance of the conspiracy, Gisler, together with his U.S. taxpayer clients and others, used sham entities created under the laws of countries other than the United States to hide from the IRS the Swiss bank accounts, and the income they generated, and to circumvent the commitments that UBS and, later, other Swiss banks, had made to the IRS.

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Foreign Corrupt Practices Act ("FCPA") Crimes and Tax Crimes (8/4/11)

The Foreign Corrupt Practices Act (commonly referred to as "FCPA") is much in vogue these days. Tax crimes often accompany FCPA violations. (See e.g., my prior blog The Giffen Plea -- The Cost of Justice (8/18/10)). Readers of this blog might appreciate reading Morgan R. Hirst and Elizabeth H. Jenkins, Adding Insult to Injury: Tax Consequences of FCPA Violations, 131 Tax Notes 1073 (June 6, 2011).  The authors discuss, inter alia, the Giffen case.

Class Action Suit by U.S. Depositors in UBS (8/4/11)

A class action suit has been filed against UBS in the North District of Illinois. The complaint is here. The class of plaintiffs includes certain U.S. depositors in UBS who held account(s) from 2002 - 2008 and who attempted to join an IRS voluntary disclosure program. The complaint contains the expected allegations of skullduggery. I have cut and paste below certain allegations regarding the class of plaintiffs and the plaintiff's lawyers (some of the formatting is not perfect).

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

MATTHEW THOMAS and HIMANSHU                                NO. 1 :11-cv-4798
PATEL, on their own behalf and on behalf
of all others similarly situated,
                                                                                                 PLAINTIFFS' ORIGINAL
                                                                                                 CLASS ACTION COMPLAINT
       PLAINTIFFS,

v.                                                                                              JURY TRIAL DEMANDED

UBS AG,

        DEFENDANT.

PLAINTIFFS' ORIGINAL CLASS ACTION COMPLAINT

* * * *

III.
CLASS ALLEGATIONS

9. Plaintiffs bring this action on their own behalf and, pursuant to Rule 23(b)(l)(A), (b )(2), and/or (b )(3) of the Federal Rules of Civil Procedure, as a class action on behalf of themselves and the nationwide class of all persons (the "Class Members," the "alleged class" or the "Class") defined below against Defendant:

[*3]

All United States citizens who held an account in Switzerland with UBS at any time from 2002 through 2008 and who have paid or offered to pay the United States Internal Revenue Service ("IRS") back-taxes and penalties and/or interest under the 2009 IRS Voluntary Disclosure Initiative or similar program as a result of not disclosing or declaring such Swiss account to the IRS or not paying income tax to the IRS derived from such Swiss Account. This Class is intended to include all persons who went to Switzerland to open the Swiss Account; opened the Swiss Account from the United States or any other place outside of Switzerland; inherited the Swiss Account; or came into ownership of possession of the Swiss Account through any other means or circumstances.

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Yet Another Plea Deal on UBS Offshore Accounts (8/3/11)

Taxpayer: Robert E. Greeley (prior blog here).

Bank : UBS AG
Swiss Enabler: Renzo Gadola (see blogs here)
Entities: Yes
Guilt: By Plea Agreement - tax perjury (Section 7206(1)) - 1 count for 2008.
Maximum Incarceration Period:  3 years.
Admits: Failure to File FBARs but not charged or pled
Unreported Income: $734,000 (Interest) (all relevant conduct years between 2002 and 2008)
Tax Loss: ?
FBAR Penalty: $6,800,000 + (FBAR penalty; unclear whether 50% of highest balance for one year).
Court: ND CA (San Francisco)
Judge: Charles R. Breyer

Article.
David Voreacos, Ex-UBS Client Greeley Admits to Concealing $13 Million in U.S. Tax Dodge (Bloomberg 8/3/11).

New Swiss Enabler Indictment (8/2/11)

Today brings a new Swiss enabler Indictment in the Southern District of Florida, a hotbed of the DOJ juggernaut against banks and enablers. Martin Lack, a citizen and resident of Switzerland, was indicted for the defraud / Klein conspiracy. The indictment is here. 

Lack operates Lack & Partner Asset Management AG in Zurich and is a confederate of Renzo Gadola, previously indicted and blogged here.

As is the way with defraud / Klein conspiracy indictments, Lack's indictment is flowered up with a lot of detailed allegations of skullduggery presented as overt acts. These are just variations on the themes of how far the -- at least some -- Swiss bankers went to accommodate the U.S. clients' needs to hide their tax evasion (for a share of the ill-gotten gains, of course). For example, it is alleged that Lack solicited cash deposits in the U.S. in furtherance of the scheme and further failing to file the required Form 8300.  Thus, the following allegation:

26. It was further a part of the conspiracy that defendant MARTIN LACK and his conspirators would and did assist United States customers with undeclared Swiss accounts at Cantonal Bank in structuring the transfer of funds, including cash, within the United States without disclosing such transfers to the United States government on a Form 8300 as required by law.

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Of Fear and Hostages: A Mid-Sight Editorial on The OVDI Program and Extortion (8/1/11)

I write tonight an editorial comment on the OVDI program (and the OVDP program as well). Hindsight, they say, is always better than foresight. When the IRS designed these programs, the IRS did not have the benefit of hindsight. Nor, of course, do I have the benefit of hindsight. I must address the program mid-sight, which is where we are.

My mid-sight view of the OVDI (and its predecessor OVDP) is that it has some very rough edges -- some basic unfairness issues that the IRS should move affirmatively to address and resolve. I doubt that the IRS will listen to me, but I offer my views anyway and hope that the IRS or Congress will listen -- not because this is my issue but because the concerns I address are the concerns of many people who are hurting because of the way the IRS is administering the program and because of fears as to the way the IRS will administer the program.
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To OVDI or not to OVDI - Part 2 (7/31/11)

I write today on the analytic process I use in stepping through with clients their consideration of their decision whether (i) to OVDI or not to OVDI and (ii) if OVDI is chosen, whether to opt out.

I assume a simple fact pattern (set forth below) to illustrate the process.  My discussion does not deal with complex fact patterns.  With more complex fact patterns, a similar analytic process can be used but the process must then deal with the complexities which make conclusions harder to draw. Whether complex or not, the analytic process is not for the faint-hearted or risk-averse or for clients who do not have experienced counsel to make the judgment calls required by the procss. Hence I write this blog principally to generate discussion among tax professionals who are readers of this blog. I caution readers who are not tax professionals to seek individualized help from tax professionals before implementing any strategy they think they may perceive in this blog.
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Indian American Groups Push for Foreign Account Relief (7/29/11)

There are reports that major Indian American community groups are lobbying the Secretary of the Treasury to bring relief to Indian Americans caught in the vise of the tax and FBAR rules and the OVDI 2011. I link to some articles below.  The Indian American U.S. taxpayer community seems to have been hit particularly hard because of a confluence of circumstances - including, but not limited to, their industrious as recent U.S. immigrants, their willingness to save, their love of their native country and relatives in the native country, their lack of knowledge of the scope of U.S. tax filing and related FBAR filing obligation, and their general desire to play by the rules.  Many in fact innocently underpaid their U.S. tax liabilities by not reporting relatively modest Indian accounts and failing to file the FBARs, yet feel that they inappropriately being punished disproportionately to their conduct by having to pay the 25% in lieu of penalty inside OVDI 2011. Having met with a number of these and having read still others' comments on the blogs, I do think that the IRS is being a bit harsh.  Perhaps the safety valve will be the opt out, provided that it is administered reasonably to make the punishment fit the crime.

Articles:

Indian Americans seek relief from US tax rules for foreign accounts (The Times of India | U.S. Canada News 7/28/11).

Joseph Septimus, Indian-American Community Seeks Relief From Draconian FBAR Penalties (Yeshiva World 7/29/11).

Credit Suisse, Bank Sarasin and Julius Baer in the News (7/24/11; 7/27/11)

Reuters reports that there is little appetite in the Swiss Government to help Credit Suisse avoid the U.S. juggernaut the way it assisted UBS by authorizing turnover of information and documents on U.S. depositors.

The report also says that "The [U.S.] investigation against Credit Suisse has also prompted Swiss private banks Bank Sarasin and Julius Baer to ban staff from travelling to the United States." Bank Sarasin spokesman is quoted as saying: "It's about protection. So the bank and its employees will be protected from investigations and arrests."

Articles:
Reuters Report: Credit Suisse unlikely to get help over U.S tax probe (Reuters 7/24/11).

Addendum 7/27/11:  A commenter posted this article: Marie-Christine Bonzom in Washington, Credit Suisse “worse off” than UBS in the US, (sissinfo.ch 7/27/11).  The author of the article paints a gloomy picture for Credit Suisse.  Among the items covered are:

“The very serious allegations against Credit Suisse relate to a wider range of conduct extending beyond a tax conspiracy into a broader range of criminal activity,” Michel of the Washington firm Caplin & Drysdale told swissinfo.ch.
“These are not just allegations that a Swiss bank opened accounts that they knew would not be reported to the IRS [Internal Revenue Service], there are also allegations that employees of the bank lied to the Federal Reserve, engaged in destruction of records, helped people try and evade DOJ [Department of Justice] investigation and provided unlicensed banking services to customers,” the lawyer representing some 30 Credit Suisse clients said.

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Is FBAR Venue Criminal Venue for the Convenience of the Government or in No District for the Convenience of the Filer? (7/23/11)

In United States v. Bradley, ___ F.3d ___, 2011 U.S. App. LEXIS 13260 (11th Cir. 13260), a decision of considerable length (195 pages), the Court addressed inter alia, venue in a case involving an FBAR violation. In a nutshell, the FBAR form permits filing at the Detroit Service Center or any IRS office. There is no special venue provision for FBAR charges, so the general rule applies which makes venue in any district where the crime was committed. Since the filer could file in any district, does that make his or her failure to file a crime that occurred in any district, giving the Government choice of any venue? Without deciding whether that sweeping opportunity for venue choice was available to the Government at its whim, the Court sustained venue for the FBAR charges based on the district court's inquiry into the convenience of that district for trial of the charges, even though the defendant resided elsewhere. 

I have linked the opinion above, but because of its length, I am just cutting and pasting it below for readers' easier access (pp. 56-60 of the pdf slip opinion):

Count 284 alleged that Bradley III failed to disclose an interest in a foreign financial account while committing mail fraud, wire fraud, and money laundering, in violation of 31 U.S.C. §§ 5314 and 5322(b). Section 5314 authorizes the Secretary of the Treasury to require a taxpayer to keep records and file reports "when th[at] resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial institution." 31 U.S.C. § 5314(a). The Secretary has exercised that authority by requiring all persons subject to the jurisdiction of the United States to disclose whether he or she has "an interest in, or a signature or other authority over, a bank, securities or other financial account in a foreign country." 31 C.F.R. § 103.24(a). If a person owns such an account, he is obligated by 31 C.F.R. § 103.24 to file Form 90-22.1 with "the Commission of the Internal Revenue." That form instructs the person that the filing may be accomplished "by mailing this report to the Department of the Treasury . . . or by hand-carrying it to any local office of the Internal Revenue Service for forwarding to the Department of the Treasury" in Detroit, Michigan.

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Acceptance of Responsibility, Relevant Conduct and the Fifth Amendment (7/23/11)

Tax crimes fans know the critical role that acceptance of responsibility plays in the tax enforcement system. A very high number of criminal tax indictments are resolved by plea agreement. The plea agreement has two salutary effects based on acceptance of responsibility. First, S.G. 3E1.1 gives a reduction for acceptance of responsibility. Second, acceptance of responsibility, when credible, puts the sentencing judge in the right frame for the exercise of Booker discretion.

Acceptance of responsibility requires that the defendant admit at least the criminal conduct related to the offense of conviction. This can be a delicate exercise if, in the course of providing a full admission of the offense of conviction, the defendant must disclose information that could potentially convict him or her of another as yet uncharged crime. Perhaps the most commonly encountered situation is with regards to relevant conduct which, as readers will recall, is uncharged criminal conduct related to the offense(s) of conviction. Relevant conduct, a key concept in the Guidelines, can be used to increase the Guidelines range but does not allow incarceration beyond that allowed by the offense(s) of conviction. For example, in tax cases, tax losses in years other than the year(s) of conviction can increase the base offense level and thus increase the Guidelines range. While the defendant must be forthcoming to the Probation Office and the Court about the conduct underlying the offense of conviction, what about the relevant conduct? Must the defendant be forthcoming and admit relevant conduct which, after all, is conduct for which he is not convicted?
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What Was This Good Doctor Thinking? (7/22/11)

Here is the press release from USAO WD MO for the conviction of Dr. Leslie Robert MacLaren, an optometrist. The press release is short; I recommend it for some light reading. 

Dr. MacLaren was convicted of five counts of evasion (hiding assets and the whole nine yards) and two counts of bankruptcy fraud. Even after being investigated, he took various steps to interfere and then filed an income tax return claiming $40 million in deductions.

The press release says that the jury deliberated for a little over an hour. So, that's seven felony counts in a little over an hour. Perhaps about 10 minutes per count, but less than that to actually consider each count because they had to do some predicate business.  Certainly not the record for the shortest deliberations.
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Criminal Charges for More Swiss Bank Enablers (7/21/11)

Criminal Charges surfaced today for more offshore bank account enablers.  The first involves Credit Suisse and the second involves UBS.

1. Credit Suiss Related Indictments,

In a superseding indictment, the following were charged with one count of conspiracy:

Markus Walder
Marco Parenti Adami
Susanne D. Ruegg Meier
Roger Schaerer
Emanuel Agustoni
Michele Bergantino
Andreas Bachman (aka Andrew Bachman and aka Andy Bachman)
Josef Dorig

The original indictment named only Adami, Agustoni, Bergantino and Schaerer. (I discussed the original indictment in a prior blog, More enablers indicted (2/23/11).) The superseding indictment is 47 pages long. According to my prior blog, the International Bank identified in the original indictment was Credit Suisse. Presumably that is the case with the superseding indictment as well.
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Bad Act Evidence Relevant to the Elements of the Crime (7/21/11)

Federal Rules of Evidence ("FRE") 404 provides:

Rule 404. Character Evidence Not Admissible To Prove Conduct; Exceptions; Other Crimes

(a) Character evidence generally. Evidence of a person's character or a trait of character is not admissible for the purpose of proving action in conformity therewith on a particular occasion, except:

(1) Character of accused. In a criminal case, evidence of a pertinent trait of character offered by an accused, or by the prosecution to rebut the same, or if evidence of a trait of character of the alleged victim of the crime is offered by an accused and admitted under Rule 404(a)(2), evidence of the same trait of character of the accused offered by the prosecution;

(2) Character of alleged victim. In a criminal case, and subject to the limitations imposed by Rule 412, evidence of a pertinent trait of character of the alleged victim of the crime offered by an accused, or by the prosecution to rebut the same, or evidence of a character trait of peacefulness of the alleged victim offered by the prosecution in a homicide case to rebut evidence that the alleged victim was the first aggressor;

(3) Character of witness. Evidence of the character of a witness, as provided in Rules 607, 608, and 609.

(b) Other crimes, wrongs, or acts. Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident, provided that upon request by the accused, the prosecution in a criminal case shall provide reasonable notice in advance of trial, or during trial if the court excuses pretrial notice on good cause shown, of the general nature of any such evidence it intends to introduce at trial.

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HSBC Retreats, Abandoning Its U.S. Tax Cheat (And Probably Some Other) Private Banking Customers (7/19/11)

The Wall Street Journal reports that HSBC is sounding a retreat from the U.S. tax cheat enabler business. Dan Fitzpatrick, Evan Perez and Laura Saunders, HSBC Acts on Offshore Cash: As U.S. Cracks Down on Tax Evasion, U.K. Bank Drops American Residents Keeping Money Abroad (WSJ 7/20/11).  Here are some excerpts:

HSBC Holdings PLC is moving to mollify federal authorities investigating how the banking industry has helped U.S. clients evade taxes.

The global banking giant is cutting ties with wealthy American clients who bank offshore, as U.S. prosecutors turn up the heat on the bank to produce information about account holders who may be evading taxes, people familiar with the matter say.

A spokeswoman said the global banking giant will "no longer offer wealth-management services to U.S. resident private clients from locations outside the U.S.," and that American clients "will be better served by our private banking teams in the United States." At issue are hundreds of clients with accounts totaling as much as $100 million, said a person familiar with the situation. U.S. clients need roughly $5 million in assets to qualify for an HSBC private-client account, another person familiar with the situation said.

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U.S. Is Reported to Have Abandoned Negotiations with Swiss (7/18/11)

Rumors previously circulated that the Swiss Government and the U.S. were negotiating to reach their own version of the "grand bargain" over Swiss skullduggery in secret bank accounts for U.S. depositors. See U.S. Swiss Negotiations for Multi-Bank Settlement on Swiss Bank Enabled U.S. Tax Evasion (6/11/11). Now the rumors are that U.S. terminated the negotiations. (One could have speculated as much from the announcement that the U.S. is stepping up its investigation of Credit Suisse. See DOJ Investigating Credit Suisse (7/15/11) .

The following are excerpts from a Reuters report (Swiss-US tax talks flounder as CS probed-paper (Reuters 7/17/11)) which cites a Swiss newspaper.  The key points are (although I remind readers that this is probably the Swiss spin on matters):

1. "Citing unnamed banking sources, the Tages-Anzeiger daily said that negotiations between Switzerland and the United States had stalled because the U.S. Department of Justice was not particularly interested in a deal."
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Swiss Court OKs UBS Initial Turnover of 255 U.S. Depositor Information (7/16/11)

The Swiss Federal Supreme Court has approved the initial turnover of 255 UBS depositor information approved by FINMA, thus overturning a prior holding of a lower court. The Swiss press release is here (in German on pp. 1&2 and in English on pp. 3&4.  I quote the English translation of the press releave in full:

Press Release of the Swiss Federal Supreme Court

Judgment of 15 July 2011 (2C_127/2010)

Disclosure of UBS customer data by FINMA to the US Department of Justice ruled lawful

On February 18, 2009, FINMA, the Swiss Financial Market Supervisory Authority, ordered that the data of 255 UBS customers be disclosed to the US Department of Justice. In its public deliberation of July 15, 2011, the Swiss Federal Supreme Court ruled that FINMA’s actions were lawful. In doing so, it reversed the ruling handed down by the Swiss Federal Administrative Court and upheld FINMA’s order.

FINMA ordered that the data of 255 UBS customers be disclosed to the US Department of Justice as a protective measure pursuant to articles 25 and 26 of the Banking Act. In doing so, it proceeded on the assumption that if this data hadn’t been disclosed, the US Department of Justice would have filed an indictment against UBS, which would arguably have caused the bank’s ruin and consequently have had serious repercussions for the Swiss economy.

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Another UBS client Pleads Guilty (7/15/11)

Taxpayer: Anton Ginzburg
Banks : UBS AG
Entities: ?
Guilt: By Plea Agreement - failure to file FBAR (maximum incarceration 5 years).
Tax Loss: Not specified in the press release.
FBAR Penalty: $1,552,606.50 (50% of highest amount (which readers will recall is standard for plea deals).
Court: ED NY
Judge: U.S. Magistrate Judge Robert Levy

The USAO ED NY press release is here. 

News Reports:
Thorn Weidlich, Ex-UBS Customer Pleads Guilty to Hiding Swiss Bank Account (Bloomberg 7/14/11)

I will try to get the court documents and supplement this information and the spreadsheet later.  I will also probably post links to other news reports or comments.