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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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.

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.

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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TRAC November Statistics

TRAC has November statistics for prosecutions and convictions of interest to readers of this blog:

Prosecutions on cases referred by IRS

Convictions on cases referred by IRS

White collar crime prosecutions

White collar crime convictions

Offshore Charges / Convictions Spreadsheet

I offer readers a spreadsheet (see links at right for the current version) where I have attempted to compile certain data regarding the Government's charges and convictions in the offshore account initiative.  I caveat the use of this spreadsheet in that the information is incomplete and perhaps even wrong in some of the particulars.  I request that my readers to email me at jack@tjtaxlaw.com to advise any additional information needed to make it more complete and accurate.  As I am advised or have my own updates, I will post new versions.  Also, I am adding some statistical analyses periodically as I refine the spreadsheet.

I recommend that users download the file rather than just open it from the web.  Downloading it and using it on your local computer is the best way to use all the features (particularly the sorting and database functions in the excel table on page 1 of the file and reviewing the statistics on page 2 of the file).

Thanks in advance for those of you who help me make this spreadsheet more accurate and complete.

State of IRS Criminal Investigations

I previously blogged here the TIGTA annual state of the universe on IRS's Criminal Investigation Function (that report is here). I supplement with some bullet points of interest (all relating to FY 2009 unless otherwise indicated:

1. CI spent , stated as a percentage,of "52.4 percent of its time on legal source tax and 72 percent on total tax investigations, both at a 10-year high." Those familiar with how statistics lie (or at least are misleading, should have some questions) may be able to question the desired conclusion from these statistics.

2. "[T]he number of legal source tax investigation initiations increased by 13.3 percent and the number of tax-related initiations increased by 14.4 percent. In addition, the percentage of all initiations that were legal source tax and tax-related increased by 1.3 and 2.5 percentage points, respectively. "

3. I found this statistic interesting because I now represent someone who should not have been investigated in the first place (fairly typical of my clients).  In this case, the IRS listened to an informant with misinformation and was unable to assess the credibility of the informant.  Here is the statistic: "the FY 2009 average of 413 days to discontinue a legal or illegal source investigation exceeded the 386 day average in FY 2008 by 7 percent." Draw your own conclusions as to the bare numbers of days the IRS' futzes around with bull shit investigation (OK, that's too harsh). But at least some of those being investigated should not have been in the first instance and it seems to me a bit harsh for subject them to an IRS criminal investigation for 413 days is just about 412 days too many. (OK, I will compromise at, say, 206 days too many). That period (whatever it is) is a period of unnecessary anxiety and costs that are, well, let's just say unfair.

4. "The number of subjects convicted of legal source tax crimes increased 2 percent from FY 2008 and has increased 17.5 percent since FY 2004."

5. "The overall publicity rate for prosecutions in FY 2009 was 81.9 percent." "Research suggests that higher levels of criminal sentences lead to greater tax compliance." And, just what research would that be? TIGTA does not identify the research.

6. CI "did not meet the long-term goal noted above or its revised conviction goal for FY 2009 of 2,135, reporting that it received only 2,105 convictions." And, here is what it says about that (footnotes omitted):

Despite not meeting some of its goals, the Division exceeded its FY 2009 goal of 4,000 by initiating 4,121 subject investigations. The FY 2009 initiations represent a 9.9 percent increase over the FY 2008 total of 3,749. In addition, the number of subject investigations open in inventory increased 7.7 percent over the FY 2008 total of 3,691 investigations. According to the FY 2009 Business Performance Review (BPR) document, the Division plans to complete 3,900 investigations and obtain 2,135 convictions in FY 2010. Division management expects that the 9.9 percent increase in initiations it experienced this fiscal year will provide for a future increase in completions and resulting convictions. Since the Division reported that it takes, on an average, less than 1 year (341 days) to refer a case for prosecution, n18 we believe the anticipated increase in initiations will likely result in an increase in completions and may allow the Division to meets it completion goals next fiscal year.

7. And here's the discussion of fraud referrals.

. The number of fraud referrals received by the Division decreased for a second consecutive year. The Division reported receiving 505 fraud referrals in FY 2009, a 13.4 percent decrease from the 583 received in FY 2008, and a 19.2 percent decrease from the FY 2005 high of 625. n25 Since fraud referrals remain a viable and important source of legal source tax investigations, we are concerned that the number of fraud referrals received has trended downward since FY 2005. During a February 2010 meeting, the Chief, Criminal Investigation, advised that this trend may change in the future since the operating divisions now have a performance commitment relating to fraud referrals.

What exactly is the "performance commitment related to fraud referrals?"

New TIGTA Report on Trends in IRS CI Investigation Activities

TIGTA has released a report, titled Trends in the Criminal Investigation Division's Enforcement Activities Showed Improvements; However, Some Goals Were Not Attained (Reference Number: 2010-30-074), which may be viewed here. The Report has some amazing information, much of it compiled in very informative charts. The following is from the Highlights section:

Highlights
Final Report issued on July 1, 2010
Highlights of Reference Number: 201030030 to the Internal Revenue Service Chief, Criminal Investigation.
IMPACT ON TAXPAYERS
The Criminal Investigation Division's (the Division) primary resource commitment is to develop and investigate legal source tax crimes. The prosecution of these cases is key to supporting the Internal Revenue Service's (IRS) overall compliance goals, enhancing voluntary compliance with the tax laws, and promoting fairness and equity in our tax system.
WHY TIGTA DID THE AUDIT
This audit was initiated as part of TIGTA's Fiscal Year (FY) 2010 Annual Audit Plan and addresses the IRS' major management challenge of Tax Compliance Initiatives. The overall objective of this review was to provide a statistical portrayal with trend analyses of the Division's enforcement activities for FYs 2000 through 2009.
WHAT TIGTA FOUND
The Division achieved its goal, spending 52.4 percent of its time on legal source tax and 72 percent on total tax investigations, both at a 10-year high. The Division also reported that the number of legal source tax investigation initiations increased by 13.3 percent and the number of tax-related initiations increased by 14.4 percent. Further, the number of subjects convicted of legal source tax crimes increased 2 percent from FY 2008 and has increased 17.5 percent since FY 2004. Similarly, the number of subjects sentenced for legal source tax crimes also increased 10.5 percent from FY 2008 and has increased 40.6 percent since FY 2004. These percentages validate that tax cases are a priority for the Division.
However, the Division did not meet its goal to complete 3,900 investigations, and instead only completed 3,848 investigations during FY 2009. According to Division management, increased resources that were devoted to the prosecution of investigations in the pipeline inventory during FY 2008 resulted in a significant decrease in FY 2008 subject investigation initiations and a related decrease in case completions during FY 2009. The Division also uses the number of convictions and the conviction rate as budgetary performance measures. The Division did not meet either of its established goals for these measures, reporting declines in both the number of convictions and the conviction rate in FY 2009. Increased numbers of dismissals during FY 2009 (resulting from efforts to reduce the pipeline inventory) caused the drop in the overall conviction rate.
In addition, the Division continues to work on increasing its special agent staffing and coordinating with the operating divisions to strengthen the Fraud Referral Program.
WHAT TIGTA RECOMMENDED
Although TIGTA made no recommendations in this report, IRS officials were provided an opportunity to review the draft report. IRS management did not provide any report comments.

The Charts are:

Figure 1 -- Special Agent and Field Special Agent Staffing at the End of Each Fiscal Year

Figure 2 -- Special Agent Direct Investigative Time Expended Each Fiscal Year

Figure 3 -- Percentage of Direct Investigative Time Spent on Legal Source Tax and Total Tax Investigations Each Fiscal Year

Figure 4 -- Number of Subject Investigations Initiated and the Number Initiated per Field Agent Each Fiscal Year

Figure 5 -- Number of Subject Investigations Initiated Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 6 -- Number of Subject Investigations Initiated Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 7 -- Number of Subject Investigations Initiated Each Fiscal Year by Source of the Allegation or Information

Figure 8 -- Number of Fraud Referrals Received Each Fiscal Year and the Percentage Accepted

Figure 9 -- Number of Open Subject Investigations and the Total of All Investigations at the End of Each Fiscal Year and the Average Number of Each per Special Agent

Figure 10 -- Number of All Types of Investigations Open at the End of Each Fiscal Year

Figure 11 -- Number of Open Subject Investigations Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 12 -- Number of Open Subject Investigations Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 13 -- Average Elapsed Days of Subject Investigations Discontinued and Referred for Prosecution Each Fiscal Year

Figure 14 -- Number of Subject Investigations Referred for Prosecution Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 15 -- Number of Subject Investigations Referred for Prosecution Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 16 -- Number of Subjects Convicted and Sentenced for a Crime Each Fiscal Year

Figure 17 -- Number of Subjects Convicted of a Crime Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 18 -- Number of Subjects Sentenced for a Crime Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 19 -- Number of Subjects Sentenced for a Crime Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 20 -- Average Number of Months a Subject Is Incarcerated Each Fiscal Year by Compliance Strategy Program

Figure 21 -- Percentage of Investigations That Received Publicity Each Fiscal Year by Compliance Strategy Program

Rumors that Downing May Leave DOJ Tax for More Gainful Employment

Kevin Downing who made such headlines in the KPMG tax shelter criminal case and in the offshore account initiative may be leaving DOJ Tax for more gainful employment. See this WSJ Article - Evan Perez, Prosecutor in UBS Case May Depart (6/24/10). 

TIGTA Reports on IRS Criminal Tax Administration - Effects of Pipeline Inventory

The Treasury Inspector General for Tax Administration ("TIGTA") recently issued a report titled: Criminal Investigation Division Resources Devoted to Supporting Recommended Prosecutions Can Be Enhanced With a Stronger Strategic Focus (TIGTA Reference Number: 2010-30-036). The report discusses issues with respect to administration of CI resources for assistance prosecution pipeline cases inventory(cases after referral to DOJ Tax) in relation to its ordinary cirminal tax investigation case load (pre-referrral).

Since on the subject of TIGTA reports, TIGTA does annually produce a report with a statistical "portrayal) of CI acvitity over a multi-year period. The most recent report is titled Statistical Portrayal of the Criminal Investigation Division’s Enforcement Activities for Fiscal Years 2000 Through 2008 (TIGTA Reference Number 2009-30-053).  This report has a number of charts and graphs with useful information and analyses, particularly trends because of the multi-year information.  Among the items discussed is the effects of the increase in pipeline inventory which is the subject of the most recent TIGTA report noted above.  This annual report is dated March 26, 2009, so a new one with fye 2009 data should be forthcoming shortly.

FFETF Establishes New Financial Fraud Website

DOJ announces here a new website called Stopfraud.govhttp://www.stopfraud.gov/ established by the Financial Fraud Enforcement Task Force ("FFETF"). The press release touts the FFETF as "the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud" but urges citizens to do their part. FFETF includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The website offers information to the citizenry about how to identify and report financial fraud, as well as news of enforcement activities related to financial crimes. According to the web site: "Financial Fraud encompasses a wide range of illegal behavior - from mortgage scams to Ponzi schemes, credit card theft to tax fraud. Everyone is affected by financial fraud."

DOJ Tax Release on its Tax Enforcement Resuilts

For DOJ Tax's most recent pat on its own back, see its release titled Justice Department Highlights Tax Enforcement Results.

Downing Warns Taxpayers and Tax Practitioners

Tax Notes Today for 3/8/10, in an article titled Jermiah Coder, Practitioners Handling Offshore Account Cases Warned About Sanctions for Nondisclosure, 2010 TNT 44-4, reports the following noises by the Government's apparent DOJ Tax chief mouthpiece for the Offshore Account full court press:

Kevin Downing, an attorney in the DOJ's Tax Division, said that under 18 U.S.C. 3506, individuals must provide the U.S. attorney general with notice if they challenge a U.S. request for evidence from a foreign government or agency.

Downing, who spoke at the 34th annual Federal Bar Association Section on Taxation Tax Law Conference in Washington, said that attorneys who represent clients in these matters without filing with the DOJ a copy of their opposition motion will be referred to the IRS Office of Professional Responsibility. There is no Fifth Amendment right not to comply with the statute, as filing with a foreign court waives that right, Downing said.

Two referrals for not filing copies with the government have already been made, he said.

Downing emphatically warned taxpayers who think they can use the voluntary disclosure program if their court challenges fail that the DOJ will not honor that disclosure. He added that he hopes Congress will enact penalties to provide greater enforcement of the provision.

Downing said some taxpayers who have yet to come clean are continuing to engage in felonious behavior by filing false returns not listing foreign accounts or by failing to file foreign bank account reports. The "treasure trove" of information the government has received on foreign professionals as a result of pursuing more banks means the DOJ will be able to bring 100 to 200 criminal cases a year for a long time, he said.

The United States is using tools other than treaty requests and the voluntary disclosure program to gather more information on offshore tax evasion, Downing said. For example, the IRS whistleblower program is proving useful, he said, and there is no prohibition on the U.S. government using account information it did not directly procure from a foreign bank.

All of the comments ascribed to Mr. Downing are quite interesting, but I do call specifically to the attention of the readers the assertion that "DOJ will be able to bring 100 to 200 criminal cases a year for a long time." Practitioners have speculated for some time about what level of criminal enfrocement the Government could really pursue, given limited systemic resources (including investigative (whether IRS or grand jury), court, probation office and bureau of prisions resourece). Apparently, 100 to 200 is about it, and is consistent (within a range) with the speculations I have heard and even made myself. One could further speculate that the Government will pick only the more egregious cases to focus its criminal angst upon (although there might have to be smattering of the less egregious cases to send the message that taxpayers don't get a pass simply by being not as bad as the really bad guys).

DOJ Tax Budget Request - The Criminal Parts #11 - Civil/Criminal Coordination

More on the DOJ Tax Budget Request

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Civil/Criminal Coordination

Finally, as part of its effort to stop abusive tax scheme promotions, the Division uses parallel civil and criminal proceedings. To ensure that the IRS and Division attorneys make maximum use of all available legal remedies, the Division has created a Special Counsel for civil/criminal coordination, who provides agents and attorneys with one-on-one assistance in handling parallel civil and criminal proceedings, and who also conducts training for IRS and Division attorneys and participates in various bar panels. The Division also maintains an online resource library on criminal tax prosecutions and parallel proceedings.

JAT Note: The End. That is all the cutting and pasting.

DOJ Tax Budget Request - The Criminal Parts #10 - Illegal Source Income

More on the DOJ Tax Budget Request

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Illegal Source Income

Tax Division attorneys also play significant roles in investigating and prosecuting tax violations committed in the course of other criminal conduct. Where criminals evade taxes on income from illegal sources, tax charges provide a valuable complement to charges for the underlying criminal activity. One area where this frequently occurs is narcotics trafficking cases generated by the Organized Crime and Drug Enforcement Task Force program, which the Tax Division actively supports. Tax Division attorneys also fight against international terrorism, and litigate tax charges related to health care fraud, securities fraud, mortgage fraud, public corruption, and money laundering.

In October 2009, in United States v. Sims Lawson, Jr. (N.D. AL), Lawson was sentenced to 70 months in prison for three counts of filing false tax returns in connection with an embezzlement scheme. In June 2009, Lawson pleaded guilty to willfully failing to report income embezzled from an estate that he managed. Lawson was hired in 2002 to co-manage the estate and that his duties included managing the books and records of the estate, collecting on loans made by the estate, and determining the estate’s value for tax purposes. In 2005, the estate received an ex parte court order removing Lawson from his responsibilities as trustee. It was later determined that, from 2002 until 2004, Lawson had misappropriated at least $721,417 and failed to report that income on his personal tax returns. The estate also paid Lawson an additional $297,352, which he failed to report on his personal tax return.
International Cooperation to Investigate Evasion of U.S. Taxes

The Tax Division regularly provides advice and assistance to United States Attorneys, Tax Division attorneys, and IRS agents seeking extradition, information, and cooperation from other countries for both civil and criminal investigations and cases. Occasionally, the Tax Division provides assistance to attorneys from other agencies and offices of the United States government, including the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Department of Homeland Security. The Tax Division is also working closely with IRS Criminal Investigation - International to develop a nationwide continuing professional education class for Special Agents concerning international tax matters.

[*21]

The Tax Division also works to increase cooperation with foreign nations, recognizing that reciprocal engagements ultimately further the Division’s mission. For example, the Division has participated in consultations both with France and Canada in an effort to improve the exchange of information under our income tax treaties with those countries. The Division periodically hosts visiting delegations of tax officials from countries interested in learning more about federal tax enforcement in the United States. The Division continues to work to increase cooperation between the United States and countries in Latin America and the Caribbean by providing instructors for the International Law Enforcement Academy in El Salvador.

The Tax Division is an important partner in the U.S. negotiating team for Double Taxation Conventions, Tax Information Exchange Agreements, and other international agreements concerning tax information. Recently, the Tax Division participated in the historic negotiations that led to the signing of Tax Information Exchange Agreements with the Principality of Liechtenstein and with Gibraltar. The Tax Division is also involved in negotiations with the governments of Switzerland and Luxembourg concerning historic changes to the exchange of information provisions in our income tax treaties with those countries. Other negotiations are ongoing.

DOJ Tax Budget Request - The Criminal Parts #9 - Corporate Fraud and other Financial Crimes

More on the DOJ Tax Budget Request

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Corporate Fraud and other Financial Crimes

Through the President’s Financial Fraud Enforcement Task Force, the Tax Division investigates and prosecutes financial crimes such as corporate fraud and mortgage fraud. The Division also participates in the formulation of national policies, programs, strategies and procedures in cooperation with other law enforcement components in a coordinated attack on financial crime. Prosecutions of the promoters of fraudulent tax schemes include cases involving accountants and attorneys at national firms. In May 2009, in United States v. Robert Coplan, et al. (S.D. N.Y.), Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, each a current or former partner of the accounting firm Ernst & Young (E&Y), were found guilty following a ten-week jury trial of conspiracy, tax evasion and other charges relating to the design, marketing and implementation of tax shelters sold by E&Y. All four defendants, as members of E&Y’s national individual tax shelter group, led an effort to design and market tax shelter transactions used by wealthy individuals to eliminate, reduce or defer tax liabilities on annual income that generally exceeded $10 or $20 million. Between 1999 and 2002, tax shelter transactions implemented by the defendants and their co-conspirators generated billions of dollars in non-economic or paper tax losses that were used to offset actual income or gain recognized by the firm’s clients. The defendants and their co-conspirators, which included tax, accounting and financial industry professionals, and law firms, worked to design, implement and defend the tax shelter transactions in ways intended to conceal the true facts and circumstances of the transactions from the IRS. In June 2009, in United States v. Charles W. Bee, Jr. (S.D. N.Y.), the former head of International Tax at BDO Seidman and the leader of its Tax Solutions Group, Charles Bee, pleaded guilty to conspiracy to defraud the IRS with respect to BDO's tax shelter promotions, tax evasion with respect to a BDO short options strategy client, and perjury for his false testimony in a 2005 deposition in the Jade Trading case in the Court of Federal Claims. Bee, along with co-conspirators Michael Kerekes and Adrian Dicker who have already pleaded guilty, as well as other members of the Tax Solutions Group, helped to design, sell, and implement the short sale and short options tax shelter strategies with lawyers from Jenkens & Gilchrist and a broker at a bank. Bee earned more that $20 million in profit distributions and bonuses from the tax shelter sales. The tax loss is estimated to be more than $200,000,000.

[*20]
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In April 2009, two former partners at KPMG and an attorney were sentenced to prison for criminal tax fraud, in United States v. Robert Pfaff, et al. (S.D.N.Y.). Robert Pfaff, a former KPMG tax partner, was sentenced to 97 months in prison; John Larson, a former senior KPMG tax manager was sentenced to 121 months in prison; and Raymond J. Ruble, a former partner at the law firm Brown and Wood, was sentenced to 78 months in prison, for federal charges related to the sale of illegal shelters that helped wealthy clients evade hundreds of millions of dollars in taxes. In March 2009, in United States v. Adrian Dicker (S.D.N.Y.), a former Vice-Chairman of the BDO Seidman accounting firm, pled guilty to conspiracy to defraud the IRS in relation to the promotion of false and fraudulent tax shelter transactions and one count of tax evasion related to the taxes of a client. In January 2009, in United States v. Charles Bolton (S.D.N.Y.), the defendant pled guilty to a one-count information charging him with conspiracy to impede and impair the IRS and to commit offenses against the United States, including making false and fraudulent statements to the IRS and obstructing and impeding the due administration of the internal revenue laws. Bolton, through a group of financial companies he owned and operated, implemented two tax shelter transactions marketed and sold by the accounting firm Ernst & Young. The tax shelters, known as CDS and CDS Add-On, were used by wealthy taxpayers to fraudulently convert ordinary income into capital gains, and to improperly defer the tax liability on the capital gains.

DOJ Tax Budget Request - The Criminal Parts #7 - Return Preparer Fraud

More on the DOJ Tax Budget Request

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Return-Preparer Fraud

Corrupt accountants and unscrupulous tax return preparers present a serious law enforcement concern. Some accountants and return preparers dupe unwitting clients into filing fraudulent returns, while others serve as willing “enablers,” providing a veneer of legitimacy for clients predisposed to cheat. In either case, the professionals often commit a large number of frauds, and their status as professionals may be perceived as legitimizing tax evasion, thereby promoting disrespect for the law. Tax Division attorneys vigorously investigate and prosecute such cases.

For example, in August 2008, in United States v. Dennis B. Evanson, et al. (D. Utah), Evanson, an attorney, was sentenced to 10 years in prison and three accountant co-defendants were also sentenced to prison for their $20 million tax fraud scheme. After a trial in February 2008, Evanson was convicted of conspiracy to commit mail and wire fraud, tax evasion, and other tax crimes. Evanson and his codefendants conspired to conceal portions of their customers’ income from the IRS and to create false deductions for the purpose of reducing the income taxes paid by their customers.

DOJ Tax Budget Request - The Criminal Parts #6 - Prosecuting Abusive Promotions

More on the DOJ Budget Request

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Prosecuting Abusive Promotions

The Division is actively engaged in prosecuting the promotion or use of fraudulent tax shelters and other schemes to evade taxes and hide assets. The number of taxpayers who use these bogus schemes to improperly reduce, or totally evade, their federal income tax liabilities has increased [*17] significantly in recent years. Some schemes involve the use of domestic or foreign trusts to evade taxes. Promoters of these schemes often use the internet to aggressively market these trusts to the public, and rely upon strained, if not demonstrably false, interpretations of the tax laws. Employing what they often call “asset protection trusts” (ostensibly designed to guard an individual’s assets from legitimate creditors, including the IRS), these promoters are in fact assisting taxpayers to fraudulently assign income and conceal ownership of income-producing assets in order to evade paying their taxes.

In October 2009, in United States v. Roderick Prescott (D. Ore.) Roderick Prescott, a former principal of National Trust Services (NTS) was sentenced to 30 months in prison for pleaded tax evasion. Prescott and his former business partner Leroy Fritts earned significant income from the nationwide promotion and sale of abusive trusts through NTS. Prescott and Fritts deposited approximately $3.5 million into various bank accounts through the sale of such trusts. They also earned income from recruiting clients of NTS to invest in Fountainhead Global Trust (FGT), a purported offshore investment that promised returns as high as 50 percent per year. FGT was a Ponzi scheme which collected approximately $20 million in investors’ funds from 1995 through 1999. FGT transferred some of the money to an offshore account in the Cayman Islands at the Bank of Bermuda, ostensibly to be invested in high-interest debt through a Florida entity called “Cash 4 Titles.” Prescott and Fritts then funneled part of the money in the account back to themselves. Prescott and Fritts used an array of purported trusts and related bank accounts, including numerous offshore bank accounts at the Bank of Bermuda in the Cayman Islands, to conceal their income from the IRS. Prescott and Fritts also used false or fictitious taxpayer identification numbers and offshore credit cards in fake names issued to them by the Bank of Bermuda in the Cayman Islands.

In May 2008, in United States v. Michael A. Vallone, et al. (N.D. Ill.), a jury convicted six defendants of a $60 million tax fraud conspiracy for participating in a scheme to market and sell to wealthy taxpayers sham domestic and foreign trusts through “The Aegis Company.” The Chicago-based investigation has resulted in nationwide convictions of more than 30 defendants, with charges pending against approximately 30 other defendants around the country. All six defendants were sentenced to at least 10 years in prison. In October 2009, Vallone was sentenced to more than 18 years in prison. In March 2009, co-defendant Edward B. Bartoli was sentenced to 10 years in prison.

DOJ Tax Budget Request - The Criminal Parts #5 - Combatting Offshore Tax Schemes

More on the DOJ Tax Budget Request

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Combating Offshore Tax Schemes

The Tax Division continues to play a lead role in investigations and prosecutions involving the use of foreign tax havens. Increased technical sophistication of financial instruments and the widespread use of the internet have made it easy to instantly move money in and out of the United States, around the world, irrespective of national borders. Using tax havens facilitates evasion of U.S. taxes and the commission of related financial crimes.

Offshore tax schemes are often difficult to detect and prosecute, so the IRS has allocated resources to target taxpayers who engage in offshore activity for the purpose of underreporting income. Income tax evaders and other criminals use banks located in countries that have strict bank secrecy laws and that will not, or cannot, provide assistance to investigators for the United States. Sophisticated criminals may also use non-traditional tax haven countries, such as Latvia. Despite these difficulties, the Division has been successful in prosecuting these tax cheats.

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In February 2009, in United States v. UBS AG (S.D. Fla.), UBS AG, Switzerland’s largest bank, entered into a deferred prosecution agreement, admitting guilt on charges of conspiring to defraud the United States by impeding the IRS. As part of the agreement, UBS, based on an order by the Swiss Financial Markets Supervisory Authority, agreed to immediately provide the United States with the identities of, and account information for, certain United States customers of UBS’s cross-border business. Under the agreement, UBS also will expeditiously exit the business of providing banking services to United States customers with undeclared accounts and will pay $780 million in fines, penalties, interest, and restitution.

The Division has also obtained the return of indictments and convictions of individuals associated with offshore schemes. For example, in August, 2009, in United States v. Bradley Birkenfeld, et. al., (S.D. Fla.), Birkenfeld, a former UBS banker, was sentenced to 40 months in prison following his June 2008 guilty plea to conspiring with an American billionaire real estate developer, Swiss bankers, and his co-defendant, Mario Staggl, to help the developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein. In his plea Birkenfeld admitted that between 2001 and 2006, while employed as a director in the private banking division of Swiss bank UBS, he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership in assets held offshore and evade paying taxes on the income generated from those assets. In November, 2008, in United States v. Raoul Weil (S.D. Fla.), an indictment was returned charging Weil with conspiracy to defraud the United States and the IRS. Weil was allegedly the senior UBS executive in charge of the wealth management business and private banking, who supervised unlawful cross-border activities carried out by bankers and their managers that helped wealthy Americans conceal their income and assets from the IRS. In January 2009, the District Court declared Weil to be a fugitive.

The Division has begun the prosecution of UBS clients, using information obtained through the deferred prosecution agreement. For example, in June 2009, in United States v. Steven M. Rubinstein (S.D. Fla.), Rubinstein, an accountant for an international company, pleaded guilty to filing a false tax return for 2004 that failed to report he had a financial account at UBS in Switzerland and failed to report the income he earned on the accounts. In April 2009, in United States v. Robert Moran (S.D. Fla.), Moran pleaded guilty to filing a false income tax return. Moran concealed more than $3 million in assets in a secret bank account at UBS. In July 2009, in United States v. Jeffrey P. Chernick (S.D. Fla.), Chernick, another UBS client from Stanfordville, N.Y., pleaded guilty to charges of filing a false tax return.

The prosecution of UBS clients has included cases all over the country. In August 2009, in United States v. John McCarthy (C.D. Cali.), McCarthy, a UBS client, agreed to plead guilty to one count of wilfully failing to file a Foreign Bank and Financial Accounts report (FBAR). In September 2009, in United States v. Jorgen Homann, (D.N.J.) Jorgen Homann, of Saddle River, New Jersey, pleaded guilty to failure to file a Report of Foreign Bank or Financial Accounts. Homann accepted responsibility for concealing more than $5 million in Swiss bank accounts. On October 5, 2009, in United States v. Roberto Cittadini, (W.D. Wash.) Roberto Cittadini, of Bellevue, Washington, pleaded guilty to one count of filing a false tax return. Cittadini concealed nearly $2 million in Swiss bank accounts.