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Choice of OVDP Program- Irrevocable?

Several taxpayers sued the IRS to remove them from the OVDP program and allow them entrance into the streamline program, an alternative program open to taxpayers after July 1, 2014.  The government moved to bar the suit under the Anti-Injunction Act.  The U.S. Court of Appeals for the D.C. Circuit agreed with the government, finding the OVDP / Streamline switch would “restrain” the government’s ability to collect tax if allowed.

The taxpayers raised a number of alternative arguments including that the alternative relief provisions of the OVDP (i.e., the transitional relief) violated the Administrative Procedure Act, for failure to provide proper notice and comment as well as equal treatment of similarly situated taxpayers.  It is notable that the IRS offshore voluntary disclosure programs did not receive publishing or commentary before being issued, changed and revised since their first issuance in 2009.  The argument did not persuade the Court.  The case is Maze v. IRS, D.C. Cir., No 16-05265.  Questions regarding the various IRS Offshore Voluntary Disclosure Programs can be directed to Jim Mastracchio, (james.mastracchio@dentons.com).  Mr. Mastracchio’s comments to Bloomberg BNA regarding the decision can be found in the July 17, 2017 issue of the Daily Tax Report.

Supreme Court Agrees to Review Sweeping Tax Obstruction of Justice Decision

In a decision that could have far reaching consequences in both the civil and criminal tax realms, on June 27th, the U.S. Supreme Court agreed to review the conviction of Carlo Marinello, who was found guilty of obstructing justice by failing to maintain proper books and records and failing to file tax returns.

The Supreme Court will likely settle a dispute that emerged among the lower courts about the proper scope of the obstruction statute under the Internal Revenue Code. The Supreme Court’s decision will have obvious consequences in the criminal tax world.  That is plain.  What is less apparent, is the power the decision could have in a civil audit.  Depending on how the Supreme Court rules, it could provide the IRS a substantial criminal hammer to wield against taxpayers who dispose of, or fail to maintain, business records, even if they have no knowledge that a criminal investigation has begun.

The Supreme Court will likely hear argument on this case in the fall and issue a decision sometime after that. We will keep you updated on the case, so be sure to check back.

Background

The below facts come from the opinion of the U.S. Court of Appeals for the Second Circuit.

In 1990, Carlos Marinello founded a freight service company that couriered packages between the United States and Canada. He kept little documentation of his income and expenses, and shredded or threw away any documentation that he may have had.  From 1992 onward, Mr. Marinello did not file personal or corporate tax returns.

In 2004, the IRS received an anonymous tip and opened a criminal investigation into Mr. Marinello and his company. That criminal investigation was closed the next year because the IRS could not determine if the unreported income was significant.  Mr. Marinello had no knowledge of that investigation.  Around that same time, he consulted with an attorney and an accountant who advised him he must file returns and maintain proper business records.  Despite that advice, Mr. Marinello did not do so.

The IRS was not done with Mr. Marinello yet. In 2009, the IRS re-opened the investigation and interviewed him. Mr. Marinello admitted to not filing returns and to shredding most of his business records.

The United States charged Mr. Marinello with nine counts of tax-related offenses. The conduct alleged in the indictment occurred prior to Mr. Marinello’s interview with the IRS in 2009.  One of the offenses charged was for obstruction of justice under 26 U.S.C. § 7212(a).  Section 7212(a) makes it a crime to “obstruct or impede . . . the due administration of this title.”  The government alleged that Mr. Marinello violated this section by, among other things, “failing to maintain corporate books and records for [his company]” and “destroying, shredding and discarding business records of [his company].” Mr. Marienllo was found guilty of the offense.

Decisions Below

Before the trial court, Mr. Marinello argued that to commit obstruction of justice under section 7212, one must have knowledge of a pending IRS investigation. The trial court rejected such an argument, holding that all that was necessary was for the jury to find that Mr. Marinello intended to obstruct the due administration of the Internal Revenue laws.  He appealed to the U.S. Court of Appeals in New York City.

Before the Appeals Court, Mr. Marinello again argued that the obstruction statute requires knowledge of a pending investigation. A panel of the Second Circuit disagreed, holding that the statute “criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation.”  In doing so, the Second Circuit aligned itself with 3 other appeals courts.  It also reinforced a circuit split, as the Sixth Circuit in Cincinnati, Ohio had reached a different conclusion on the same question.

Mr. Marinello sought review before the full Second Circuit. While the court declined to review the decision of the panel, two judges dissented from the denial of review and warned of the consequences of the court’s decision.  Judge Jacobs wrote ominously that if this decision was allowed to remain the law of the land, “nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant.”  The decision affords, he wrote, “oppressive opportunity for prosecutorial abuse.”

Potential Consequences

As Judge Jacobs warned, should the Supreme Court uphold the decision, a taxpayer should be weary about engaging in any of the conduct, such as disposing of business records, that landed Mr. Marinello in jail. As Judge Jacobs so succinctly put it, “How easy it is under the panel’s opinion for an overzealous or partisan prosecutor to investigate, to threaten, to force into pleading, or perhaps (with luck) to convict anybody” (emphasis in the original).  Now, more than ever, it is important that taxpayers in civil cases are represented by competent counsel aware of the potential criminal pitfalls an otherwise cautious taxpayer may find themselves in.

Contact Jeff Erney for questions about this post.  Jeffry.Erney@dentons.com

OVDP Campaign – Declines and Withdrawals

In January, the IRS released a list of 13 audit campaigns designed to focus resources on areas of concern for the IRS examination teams.  Since that time, additional campaign areas have been added to the list of IRS priorities.  Most recently, comments regarding the Offshore Voluntary Disclosure Program campaign have clarified the focus of this particular initiative.  Taxpayers selected for review will include those taxpayers who made an application for pre-clearance into one of the OVDP programs available since 2009, but were denied entry.  Historically, a denial occurred if the taxpayer was under civil examination, criminal investigation, or the foreign account activity was already known to the IRS or DOJ Tax Division.

The second prong of the campaign focuses on those taxpayers who withdrew from participation after receiving pre clearance but before acceptance into one of the OVDP programs.  Recent clarifications revealed that an “opt out” was not part of the campaign- given the fact that opt-outs or IRS removals made once the taxpayer was accepted into the OVDP, receive almost immediate civil examinations as part of the on-going OVDP procedure.

“While we have represented taxpayers who were denied entrance into the OVDP programs over the past eight years, a renewed focus on those individuals raises the stakes for this class of taxpayer,” said Jim Mastracchio, Chair of Dentons U.S. Tax Controversy Practice.  Under the campaign audit process, taxpayers will be evaluated as (i) subsequently compliant, (ii) requiring soft-letters for immaterial noncompliance, or (iii) regular examination process.  “It is the latter group of taxpayers with the most exposure to civil and possible criminal referral,” added Mastracchio.

We will provide additional information as this particular campaign progresses.  Questions regarding the OVDP process, Streamline program, or litigation of FBAR penalties can be forwarded to James.Mastracchio@Dentons.com, (202) 496-7251.

The Dirty Dozen – Top Concerns For 2017

With the tax filing season now open, the IRS has listed its top 12 tax scams and warned U.S. taxpayers that participation in these prohibited activities could result in civil and criminal tax exposure.

In addition to false refund claims, once again, Abusive Tax Shelters and Offshore Tax Avoidance made the list.  Below is a copy from the text of the release:

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2017-31)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations. (IR-2017-35)

The IRS Offshore Voluntary Disclosure programs offer a range of filing options, with many taxpayers qualifying for low or no penalties when coming into compliance.  If you have questions about the IRS programs and U.S. filing obligations, please contact, Jim Mastracchio (202-496-7251) or james.mastracchio@dentons.com.

IRS Announces 13 Campaigns – New Focus

The Large Business and International division of the IRS has restructured its approach to examinations.  Yesterday, it released its list of 13 focus areas for issue- based examinations and concerns for compliance.   One of those areas involves the IRS Offshore Voluntary Disclosure Program.  Entitled, “OVDP Declines-Withdrawals Campaign,” this area of focus involves taxpayers who have applied for the offshore voluntary disclosure program through the pre-clearance process, but were either denied access to the program or withdrew from the program.

What happens next?  “The IRS will address continued noncompliance through a variety of treatment streams including examination.”  Examining those taxpayers who could not enter the program, because they are under civil audit, criminal investigation, or the IRS is otherwise aware of the account(s) at issue in the disclosure, is expected. Further, those who violated the law intentionally might expect a criminal tax investigation or possible referral for prosecution, depending on the circumstances and reasons for denial into the program.

We have seen an uptick in audits and FBAR inquiries associated with taxpayers who have not come forward, and certainly anyone who opts-out of the OVDP program is subject to an immediate audit of their tax returns and FBAR filings.  “Making this effort a ‘campaign’ certainly raises the awareness of the programs and need to quickly come into compliance and assures that resources are available to support the audits and other investigations,” says Jim Mastracchio, Co-Chair of Dentons National Tax Controversy Practice.

DOJ and IRS Expanding Offshore Enforcement Efforts: Financial Institutions and Individual Taxpayers Beware

A few months ago, we posited that the DOJ and IRS were expanding offshore enforcement efforts beyond Europe, with a likely new target of those efforts being Singapore. Recent developments confirm as much, and suggest that financial institutions and individual taxpayers alike should take heed.

A DOJ representative recently commented at a meeting of the Tax Section of the American Bar Association that the DOJ and IRS are in the process of identifying new targets and areas with potential criminal tax exposure. No specific jurisdictions were identified, but the data and information at the government’s disposal is vast. It has been amassing information from multiple sources, including the Swiss bank program, the offshore voluntary disclosure program (OVDP), and John Doe summonses.

On top of that, a number of countries have been automatically exchanging information with the U.S. government under intergovernmental agreements (IGAs) to implement the Foreign Account Tax Compliance Act (FATCA). The list of countries with IGAs is growing – Singapore, for example, will soon be among them. In August 2016, the United States and Singapore announced they will enter into a TIEA and an IGA, possibly as early as the end of 2017.

Those U.S. persons with bank accounts in foreign jurisdictions who have yet to come into compliance with U.S. tax filing requirements have very little time.  In addition to the increased level of material being sent to the U.S., the DOJ has announced that it will be adding approximately 40 more “facilitators” to a list of banks and institutions that trigger the higher 50-percent penalty under the OVDP.  As we have previously noted, the IRS has a series of voluntary disclosure programs and other options to come into compliance with U.S. filings, some of which can give rise to zero penalties.  The primary program imposes a penalty at 27.5% – with the higher 50% penalty being associated with the institutions on the list.  According to DOJ, taxpayers can avoid this higher penalty for the 40 new facilitators, if they make a voluntary disclosure by November 15, 2016.

If you have questions about this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Israel Cleared to Implement FATCA and Report on U.S. Persons

A recent decision by the Israeli Supreme Court has cleared the way for FATCA implementation by lifting a temporary injunction on the disclosure of information to U.S. authorities under Israel’s intergovernmental agreement (IGA). In connection with the decision, the Israeli government has agreed to give individual taxpayers at least thirty days to object to the inclusion of their information in data transferred to U.S. authorities under the IGA.

The government also agreed to delay the implementation of the IGA to September 30, 2016. Israeli financial institutions now have until September 20, 2016, to provide the Israeli Tax Authority with the required data on U.S. taxpayers. This is a notable development in Israel where, reportedly, as much as five percent of the population – upwards of 300,000 people – holds U.S. citizenship.

The decision arose from Republicans Overseas-Israel, et al. v. Israel, et al, where the plaintiffs challenged the constitutionality of FATCA implementation under Israeli law, claiming that the IGA’s required reporting to U.S. authorities violated Israel’s sovereignty. Earlier in September, the Israeli Supreme Court issued a temporary injunction preventing the disclosure of financial information to U.S. authorities under the IGA. In its more recent decision, however, the Court rejected the challenge to Israeli sovereignty and analyzed the claim as an issue of privacy. The Court considered whether the privacy of U.S. taxpayers was being infringed and, if so, whether the harm was reasonable. It assumed that there was some infringement on privacy, but found that the privacy concerns were outweighed by the need for Israel to abide by its agreement to provide international financial cooperation, and that Plaintiffs failed to show that the State did not limit the impact on privacy as much as was possible.

For those U.S. persons with Israeli bank accounts who have yet to come into compliance with U.S. tax filings, there is little time remaining. The IRS has announced a series of voluntary disclosure programs and options, some of which can give rise to zero penalties. Should you have questions regarding this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Is the Yates Memo Impacting Internal Investigations? The Importance of Individual Representation

Since it’s release more than ten months ago, the so-called Yates Memo has stirred up its fair share of commentary. The memo, which requires prosecutors to pursue – and companies seeking cooperation credit to identify – individual bad actors, generated concern that the new requirement would make investigations more difficult and even discourage companies from cooperating at all. Now that the Yates Memo is coming out of its infancy, some report that employees are more nervous about cooperating with corporate counsel, and requesting personal legal representation much earlier in the process, such that investigations are, in fact, becoming more challenging and more costly. Others, however, report seeing less of an impact and do not perceive the Yate Memo as (at least as of yet) having had the dire consequences that were feared.

Even with this divide, there seems to be agreement on at least one thing: the Yates Memo has highlighted – and perhaps increased – the need of individual representation in corporate investigations. Cooperation of in-house employees is important to corporate counsel’s ability to conduct a thorough and objective investigation. Since the Yates Memo, companies and their employees are more aware of and sensitive to the possibility that prosecutors will pursue individuals suspected of wrongdoing. It is a tense dynamic, but one that can be allayed by providing employees with individual representation. This has long been a good practice of companies and their corporate counsel, and while it does increase costs, in a post-Yates Memo world, it can go along way toward reassuring employees that their personal interests are being taken into account and foster internal cooperation that will, in turn, help the company pursue its goals.

Next Up: Singapore? Summonses Could Hit More Global Financial Institutions

A recent summons showdown with UBS shows that DOJ and the IRS are far from done with offshore enforcement efforts, and are expanding those efforts beyond Europe Among the most likely of new targets is Singapore, and since there is no Tax Information Exchange Agreement (TIEA) or other tax treaty between the United States and Singapore, foreign financial institutions could see IRS summonses being served on their U.S. branches.

Such summonses often are referred to as Bank of Nova Scotia summons. In the recent case involving UBS, the IRS served a third-party summons on a branch of UBS AG in the United States seeking records for an account at UBS in Singapore held by a U.S. citizen living in Hong Kong UBS refused to turn over the records on grounds that Singapore’s bank secrecy laws prohibited disclosure without permission from the accountholder. The IRS sought to enforce the summons in federal court – and the case was teed up for litigation – until the accountholder consented to release of the records and UBS complied with the summons. The IRS thereafter withdrew the enforcement action.

We cannot know whether UBS or the government ultimately would have won the day in court. Many factors are taken into consideration in such enforcement actions, and past cases have had varied results. What we do know is that the government maintains the summons served on UBS was enforceable, and was willing to go the distance. With Singapore – and potentially other jurisdictions without TIEA’s or tax treaties – on the enforcement horizon, more global financial institutions are likely to see IRS summonses coming their way.

“Strategies for Managing Parallel Proceedings with Fifth Amendment Implications,” Inside the Minds: Strategies for Criminal Tax Cases

The DOJ Tax Division has long recognized the efficacy of parallel criminal and civil proceedings and actively pursues them in its current endeavor at increased enforcement. Parallel proceedings often present complicated issues that create additional challenges for taxpayers and their attorneys. When a parallel proceeding is pending, the invocation of the Fifth Amendment by either the taxpayer, a tax advisor, or other non-party witness can create adverse implications in a subsequent proceeding.  Taxpayers and their attorneys must carefully navigate the risk of an adverse inference against the taxpayer under the circumstances of the particular case.  The well-informed attorney can prepare to face all of these issues and effectively navigate the specific facts of his or her case.  The following discussion will explain and analyze: the effect of a party’s invocation in independent proceedings, the effect of a party’s invocation in parallel proceedings, the implications of a non-party’s invocation, and whether an invoker can waive the privilege and later testify.

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The Erosion of the Fifth Amendment Privilege

“You’d have to be living in a hole not to know that the U.S. government is really focused on offshore tax evasion,” IRS Commissioner Shulman told Bloomberg News earlier this year. The Bank Secrecy Act of 1970 (“BSA”) permits civil and criminal penalties for U.S. taxpayers who fail to report interests in foreign financial accounts. In the past, however, civil and criminal enforcement was rare; between 1996 and 2002 only twelve indictments were reported. In 2001, heightened financial reporting requirements were enacted under the Patriot Act, which is expressly designed to help prosecute international crimes. The government’s formal declaration of war on foreign tax evasion was commemorated in 2008 when a district court authorized the IRS’s John Doe Summons on Swiss bank UBS, demanding documents identifying U.S. taxpayers with unreported accounts. This order followed the indictments and guilty pleas of a high-profile UBS customer and his private UBS banker. In 2009, the DOJ charged UBS with aiding U.S. taxpayers in tax evasion. The bank avoided prosecution by paying $780 million and disclosing account data. Shulman promised severe penalties as the government pursued “criminal avenues” for these targeted individuals. Criminal charges have since been filed against numerous taxpayers, bankers, financial advisers, and lawyers linked to the data. Still, earlier this year, the IRS threatened offshore bank account holders with the increasing risks of criminal prosecution.

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