If you thought that federal and state law enforcement officials have more important things to do these days than prosecute tax offenders, think again.  This multi-page post outlines recent cases involving Californians who have paid the price – in jail time, fines and restitution – for defrauding the government out of their share of tax revenue. 

If you have found yourself the subject of a criminal investigation or if you are worried about such problem for under-reporting income, failing to file tax returns, tax crimes resulting from illegal behavior, submitting false tax documents to the government, or failing to report an off-shore account, we can help.  Legal advice is always individual, considering the unique facts and circumstances of each client and shaping legal advice and strategy for the particular client.    We have over thirty years of experience defending clients against the government in criminal tax cases and we want to use this experience in your case. 

You can learn more about our criminal tax defense services here:  http://stevemoskowitz.com/Criminal-Tax-Defense/

The Round-Up: 

Undisclosed Offshore Accounts Leads to $6.8 Million Penalty

San Francisco resident Robert E. Greeley agreed to pay $6.8 million is civil penalties for failing to report his interest in and control over two UBS Switzerland bank accounts through the Report of Foreign Bank and Financial Accounts (FBAR) procedures.  In a classic tax evasion scheme, Greeley created two Cayman Island shell corporations and, between 2002 and 2004, dumped over $13 million in assets from these corporations into his Swiss bank accounts.  Greely then failed to disclose to the IRS these multi-million dollar overseas accounts and the interest of $734,000 earned in these accounts from 2003 to 2008. 

You can read the entire August 3, 2011 Department of Justice Press Release about Mr. Greeley here: http://www.justice.gov/tax/txdv111003.htm

Mom of 19 Non-Existent Children Indicted For Tax Fraud

In August, 2011, the IRS reported that Norma Coronel of Livermore faced up to 143 years in prison and fines totaling $5.6 million for falsely claiming deductions for 19 non-existing children.  According to the IRS, Coronel stated she gave birth to 19 children all on December 11, 2002, obtained social security numbers for them all, and claimed them as dependents on her tax returns from 2004 to 2007.  Coronel had truthfully only given birth to one boy.  Coronel was arrested in Livermore and remains in custody in Los Angeles where she committed the fraud.     

You can read the entire article about this case here:  http://www.mercurynews.com/breaking-news/ci_18687613

 

Audit Reveals $1.2 Million in Unpaid Taxes

Owen Charles, a 77 year old Pleasant Hill resident, was found guilty of tax evasion by a jury after an IRS audit revealed that Charles failed to pay more than $1.2 million in taxes between 2001 and 2003.  According to the United State Department of Justice, not only did Charles fail to pay taxes, interests and penalties on his real property income, but he dug himself a deeper hole when he attempted to remove over $900,000 from of his real estate properties and hide the money in offshore accounts rather than pay the IRS. 

You can read the full July 29, 2011 Press Release about Mr. Charles here:
http://www.justice.gov/usao/cae/news/docs/2011/07-29-11CharlesSentence.html 

 

Failure to Report $1.5 Million in Ponzi Scheme Income Leads to Federal Indictment

A 49 year old Vallejo man was indicted by the United State Department of Justice for mail fraud, wire fraud and money laundering after he was caught running a Ponzi scheme that defrauded hundreds of people out of $17 million.  The indictment alleges that Duane Allen Eddings did not declare $1.5 million in income he made from the Ponzi scheme based out of Vallejo.  Eddings faces a maximum of five years in prison and up to a $250,000 fine if convicted of tax evasion.  This case proves that the IRS expects all income, legal or otherwise, reported to them.

You can read the full May 12, 2011 press release here: http://www.justice.gov/usao/cae/news/docs/2011/05-12-11EddingsSuperseedingIndictment.html

 

$102 Million Bribery Scheme Involves Former County Supervisor and Staff

On May 10, 2011, several former and current San Bernardino County officials were indicted on charges of bribery, filing fraudulent tax returns and failing to file a tax return.  The indictment centered upon a $102 million dollar settlement between a prominent developer, Jeffrey Burum, and the San Bernardino County Board of Supervisors that involved threats, extortion, inducements and bribery in order to secure supervisor’s votes for the settlement.  According to reports, after a substantial sum of the $102 million settlement was paid out to the County, Burum distributed out $100,000 bribery payments to four high-ranking county officials.  The defendants then concealed the bribes with the help of political action committees and did not report the illegal income to the IRS. 

You can read the full news article here: http://oag.ca.gov/news/press_release?id=2085&

 

Several Bay Area Residents Convicted in Fraudulent Tax Return Scheme

In August, 2011, IRS Criminal Investigation agents executed search warrants on nine Northern California residents that maintained the bank accounts in a scheme that netted $6.2 million in fraudulent tax funds.  According to reports, the defendants used other people’s identity to file false tax returns and then deposited the refunds connected to these false returns into their personal bank accounts. 

One of the Bay Area defendants, Sparkle Jernigan, 32 of Pittsburg, California admitted to IRS agents that she obtained other peoples’ personal information for the purpose of filing false returns and transmitted this information to others via text messages.  Jerigan was sentenced to 21 months in prison and ordered to pay $31,786 in restitution for her crimes. 
 
You can read the entire August 12, 2011 press release here:  http://www.justice.gov/usao/can/press/2011/2011_08_12_jernigan.sentenced.press.html

 

Under-Reporting of Commission Leads to Six Month Prison Sentence

Jack Aaron Nissim of San Rafael was sentenced to six months in prison last month after he admitted he underreported $518,563 in income on his tax returns. 

According to the government, from 2003 through 2007, Nissim omitted a large sum of the Schedule C gross receipts he earned from a company he owned and from another for which he served on the board, and provided false information to his bookkeeper by under-reporting commissions he earned during those taxable years.  In addition to prison time, Nissim agreed to pay restitution of $173,292 to the IRS and $31,153 to the State of California.

You can read the full August 2, 2011 press release about Mr. Nissim here: http://www.justice.gov/usao/can/press/2011/2011_08_02_nissim.sentenced.press.html

 

Owners of El Balazo Restaurant Plead to Immigration, Social Security and Tax Charges

Husband and wife Mario and Nicole Sandoval, owners of bay area restaurant chain, El Balazo, plead guilty in Federal court this month of underreporting employment taxes, employing illegal aliens and misusing employees’ social security numbers.

The couple admitted to knowingly hiring undocumented aliens in their restaurant, even after a search by Immigration and Customs Enforcement revealed approximately sixty three illegals working at different El Balazo restaurants in the bay area.  They also admitted that they underreported to their accountant the correct wages earned by El Balazo employees which resulted in an understatement of employment taxes to the IRS.  Finally, Nicole Sandoval admitted to providing false social security numbers to the Social Security Administration on behalf of her employees to cover up the fraud.  The couple will be sentenced in December.

Read the September 9, 2011 press release here: http://www.justice.gov/usao/can/press/2011/2011_09_09_sandovals.guiltyplea.press.html

 

Trusted Bookkeeeper Embezzles Thousands from Long-time Client

Ann Ray, 67, of Antioch, plead guilty in July to embezzling millions from her client of 34 years and concealing her illegally-obtained riches from the IRS. 

According to the plea agreement, beginning in 1998 and carrying through May, 2009, Ray embezzled approximately $4,760,000 from her employer who owned several bay area businesses.  Ray did this by writing checks to herself from the companies’ bank accounts, used company credit cards for personal expenditures, and by increasing the amounts of her payroll checks.  She then concealed her embezzlement from the company accountants by falsifying the company records, bank statements and bookkeeping.  Ray plead guilty to six counts of tax evasion in July. 
Read the full July 19, 2011 press release about this case here:  http://www.justice.gov/usao/can/press/2011/2011_07_19_ray.guiltyplea.press.html 

 

Health Care Fraud Proves Costly for Physician and His Wife

John Han, 63, a physician from Norwalk, California, and his wife, Sonya Han, 58, were sentenced to five years probation and agreed to pay $2.7 million in restitution after they plead guilty in state court to filing false state income tax returns. 

Los Angeles County Court documents show that from 2001 to 2007, Dr. Han received over $14 million in Medicare and Medi-Cal payments.  Then from 2002 to 2007, the Hans underreported the income on their personal income tax returns by more than $5 million and underreported the income tax returns of the corporation, John S. Han, MD, Inc., by more than $7 million. 

You can read the full news article here: http://www.ftb.ca.gov/aboutFTB/press/2011/Release_19.shtml

 

Advisor Steals Millions from Chairman/CEO Client

Former Pleasanton resident, Ranni K. Hillyer Oceana, 57, plead guilty in July to three counts of tax evasion after she embezzled approximately $3,880,800 from her employer and failed to report the funds to the IRS.

According to the government, Hiller Oceana used her signatory authority over the business bank accounts of her client to write checks to vendors who worked on her home, purchase real estate, pay for business expenses and loan others money.  By failing to report these funds on her returns from 2002 to 2004, Hiller Oceana owes the IRS $1,387,294.  She will be sentenced in October.

You can read the entire press release here: http://www.justice.gov/usao/can/press/2011/2011_07_13_hillyeroceana.guiltyplea.press.html 

 

Business Owner Uses Company Money for Hawaii Vacation, Boat and Dodge Viper

Former owner of Ripp It Earth Movers, Jay Scott Soberling, 53, of Hidden Valley Lake, California, was indicted last month on one count of tax evasion.

According to court documents, Soberling attempted to evade the payment of federal income and employment tax for the years 1995 through 2004 by placing assets in other people’s names, dealing in cash, submitting false information to the IRS, and using funds from a company bank account to pay for personal expenses such as a Hawaii vacation, a boat and a Dodge Viper.  While Soberling was able to save $161,155 in tax payment under this scam, he now faces as much as five years in prison, a fine of $250,000 and restitution. 

You can read the full September 8, 2011 press release about this case here:  http://www.justice.gov/usao/can/press/2011/2011_09_08_soderling.charged.press.html

Introduction

The recent crackdown by the Internal Revenue Service (IRS) on United Sates taxpayers with previously undisclosed foreign bank accounts and unreported foreign income has resulted in an unprecedented wave of criminal prosecutions. The IRS’ initiative may also result in criminal convictions and deportations of many United States noncitizen taxpayers.

This article discusses the immigration consequences of a tax crime conviction associated with failing to disclose an offshore account and failing to disclose foreign interest income.

This article begins with a brief history of federal prosecutions of U.S. citizens with unreported foreign accounts foreign accounts; it then discusses the typical federal tax crimes U.S. citizens and noncitizen taxpayers could be charged with when foreign bank accounts and foreign source income is not disclosed on a U.S. tax return; the article goes on to discuss how noncitizen taxpayers could potentially face deportation in connection with failing to disclose an offshore account and any applicable foreign interest. The article concludes with the importance of selecting a competent criminal tax attorney and potential strategies that may be utilized by a defense counsel to reduce the risk of deportation of a noncitizen in the context of an undisclosed foreign accounts and undisclosed foreign income.

Background

In July of 2008, the IRS issued a John Doe summons on United Bank of Switzerland AG (UBS) in Switzerland. The summons was a demand to UBS to receive information on United States taxpayers who held foreign accounts with that bank. On February 18, 2009, UBS entered into a deferred prosecution agreement with the U.S. Department of Justice. As part of the agreement, UBS has agreed to turn over in regards to approximately 500 U.S. holders of UBS accounts. The United States Department of Justice has opened criminal investigations of many of these account holders. On August 19, 2009, the United States and the Swiss government entered into an agreement in which to turn over information relating to additional U.S. holders of UBS accounts. The agreement reach on August 19, 2009 interprets the current United States and Switzerland tax treaty to allow the Swiss Government to turn over to the Department of Justice information in cases of “continued and serious tax offenses.” This agreement was approved by the Swiss Parliament and is expected to result in the disclosure of an additional 4,450 U.S. holders of UBS accounts.

During the 2010 calendar year, the IRS and the Department of Justice announced it will begin to pressure other foreign banks to disclose the names of U.S. account holders. The turnover of this information will likely result in the criminal prosecution by the U.S. Department of Justice of many individuals who previously failed to properly disclose offshore accounts and foreign source income.

On March 24, 2011, California’s “Voluntary Compliance Initiative II” was enacted as part of Bill 86, which was signed by Governor Jerry Brown. Under the terms of the Voluntary Compliance Initiative II, certain taxpayers with “hidden or disguised offshore accounts” are encouraged to amended their previously filed state tax returns and pay all tax interest in exchange from relief of certain California civil and criminal penalties. California residents who fail to participate in the amnesty program and are ultimately caught with unclosed foreign accounts or income are subject to criminal prosecution.

Reporting Requirements and Federal Tax Obligations of Noncitizens along with Potential Criminal Penalties

We will begin by discussing the income tax obligations of all noncitizen residents in the United States. Internal Revenue Code Section 7701(a)(30) provides a broad definition of the term “United States persons.” Section 7701(a)(30) provides that “United States persons” shall include all citizens of the United States as well as all residents of the United States. If a noncitizen of the United States resides in the United States, he or she can be characterized for federal income tax purposes as a “United States person.” The Internal Revenue Code goes on to say that all “United States persons” are required to disclose all their worldwide income, including income from all foreign sources. This includes interest income earned from foreign bank or financial accounts.

The Internal Revenue Code requires “United States persons” to disclose interests in foreign bank accounts and foreign source interest income on a Form 1040. For example, Part III of Schedule B of Form 1040 requires “United States persons” to check a box “yes” or “no” in regards to whether the individual at any time during the calendar year had “an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account. This question then directs the individual to the form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

If a “United States person” fails to report income from a foreign financial account and fails to report the existence of an offshore financial account either on the Form 1040 and/or the FBAR, he or she is subject to a list of potential criminal penalties. First, an individual could be prosecuted for federal tax evasion. Tax evasion is defined as the willful attempt to defeat or evade a federal tax due and owing, or evasion of the payment of a tax assessed.¹ (Later in this article we will discuss the immigration law consequence if it is determined that the tax loss to the United States Government exceeds $10,000).

Second, the filing of a false tax return or making a false statement on a tax return may result in prosecution for filing a false tax return.² In order to be convicted of filing a false tax return, the IRS or Department of Justice must prove that an individual willfully signed and filed a tax return, or other document such as an FBAR that he or she did not believe to be true and correct in a material matter.³ A defendant may also be prosecuted for filing of a false tax return if the prosecution proves that the individual willfully aided or assisted in the preparation of a tax return, affidavit, claim, or other document that is fraudulent or false as to any material matter with knowledge that the document would be submitted to the IRS.⁴

Third, an individual could be charged in a conspiracy to defraud the United States. An individual can be charged in a conspiracy to defraud the United States if two or more persons agree to commit a substantive offense against the United States or to defraud the United States, and if the commission of the overt act was in furtherance of the conspiracy.⁵

Fourth, an individual may be criminally prosecuted for the willful failure to file an FBAR.⁶ If the failure to file occurs during the violation of another law or is part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, there are increased criminal penalties.⁷

Finally, nonresident taxpayers that fail to disclose offshore income are subject to various penalties determined under state law.

Immigration Consequences of Federal Convictions for Tax Offenses

Individuals who are not United States citizens, including those lawfully admitted for permanent residence (green card holders) are subject to deportation from the United States based on certain criminal convictions, including a conviction for “aggravated felony.”⁸ An “Aggravated felony” is defined to include offenses that “(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or (ii) is described in section 7201 of Title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.”⁹ Aliens in the United States, regardless of status, who are convicted of an aggravated felony are not eligible for review from deportation or asylum.¹⁰

As discussed above, a nonresident or alien residing in the United States must disclose their offshore account and income generated from that account on a U.S tax return annually. Failure to do so may result in the alien being convicted of at least one federal or state tax crime. If an alien were to suffer a criminal conviction for not disclosing a foreign account and/or foreign source income, not only could the alien face incarceration and serious fines, such a criminal conviction can result in loss of child custody, termination of pension benefits, and even deportation from the United States. Clearly, there are far broader implications for an alien convicted of a tax crime than for U.S. citizens. Consequently, it is crucial for all noncitizens with previously undisclosed foreign bank accounts or foreign source income to have proper competent legal counsel that can advise them about the immigration consequences of a criminal conviction associated with a tax crime.

Importance of Competent Counsel

Unfortunately, in many cases, criminal attorneys representing noncitizen taxpayers are not properly equipped with knowledge of immigration law to competently assist their clients. Such a case was highlighted in Padilla v. Kentucky, 130 S Ct. 1473 (2010). In Padilla v. Kentucky, a long-time lawful permanent resident was charged with drug offense. The defendant was charged with the transportation of marijuana in Kentucky state court. The defendant accepted a plea bargain after the defendant’s attorney assured that he did not have to worry about immigration status since he had been in the country so long.¹¹ In reality, the defendant’s plea bargain rendered him deportable with no opportunity for relief. The defendant attempted to challenge his guilty plea. The Kentucky court refused to allow the defendant to change his guilty plea and concluded that deportation was collateral to the plea and refused to allow the defendant to change his plea. The United States Supreme Court disagreed and overturned the lower state court.

What needs to be taken away from the Padilla is an attorney representing a noncitizen in felony type case needs to be well versed in immigration law. This is particularly the case when such an attorney is negotiating a plea agreement for his or her client and is advising the client in regards to a guilty plea. There are legitimate practical objections which require a defense counsel to tell noncitizen clients about when making a decision to plead guilty. These consequences tend to be scattered randomly throughout a jurisdiction’s code and regulations, and all too many criminal attorneys are unfamiliar with them. Justice Stevens, writing for a five-justice majority, held that “our law has enmeshed criminal convictions and the penalty of deportation… And, importantly, recent changes in our immigration law have made removal nearly an automatic result for a broad class of noncitizen offenders.”¹² As such, there is now a duty imposed on every criminal defense attorney representing noncitizen clients that pending criminal charges may result in deportation from the United States. Preserving the “client’s right to remain in the United States may be more important to the client than any potential jail sentence.”¹³ Criminal attorneys that represent noncitizens in matters involving the failure to properly disclose offshore bank accounts or foreign income must have a full understanding of immigration law.

Only criminal defense attorneys with an understanding of immigration law can best serve assure a positive outcome of such a case. Such an attorney can bring in the potential consequence of deportation in the process so the interests of his client are best served. In particular, defense counsel “may be able to plea bargain creatively with the prosecutor in order to craft a conviction and sentence that reduces the likelihood of deportation.”¹⁴

The lesson learned from the Padilla case is that all attorneys representing clients before the IRS, department of justice, or state taxing agency in matters involving previous undisclosed offshore accounts or foreign source income should inquire about the citizenship of their clients. In cases where an attorney is representing a noncitizen, the attorney should either be well versed in immigration law or associate with counsel who is competent in immigration law. The attorney must be prepared to immediately discuss the consequences of a criminal conviction with his or her client.

Defining Aggravated Felony

As discussed above, an aggravated felony results in automatic removal from the United States without any possibility of discretionary review by the immigration court. Generally, in the past, the immigration court was limited to looking to the language of the statute under which the defendant was convicted to determine whether the offense is an aggregated felony. The immigration court could not consider the underlying facts and circumstances of the case in which the defendant was convicted. Such a review was known as the “categorical approach.”¹⁵ Recently, the United States Supreme Court seemed to have relaxed this rule somewhat in Nijhawan v. Holder, 129 S. Ct 2294, 2300 (2009). In Nijhawan v. Holder, the United States Supreme Court discussed whether a defendant’s conviction for conspiracy to commit fraud was an aggravated felony under 8 U.S.C. Section 1101 Section 1101(a)(43)(M)(i). The Court ultimately decided that it was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim. The Court went on to say “the requirement that the offense was “in which was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim.¹⁶ Accordingly, in decided whether to remove a noncitizen, the immigration court will now look to the statutory language of the offense to determine whether it involved “fraud or deceit,” and then will analyze the record of the criminal proceeding to determine whether the offense involved a loss to the government of more than $10,000.

Applying this view of statutory interpretation, the Supreme Court has unambiguously classifies a conviction under Section 7201 in which a loss to the government exceeds $10,000. Consequently, if a noncitizen is convicted of the tax crime of willful attempt to defeat or evade tax due and owing, or evasion of the payment of a tax assessed, the immigration court will determine that the noncitizen committed an “aggravated felony.” With that said, the Supreme Court is silent as to whether any other tax crimes could be classified as an “aggravated felony. The Ninth Circuit Court of Appeals has weighed in on this controversy.

In Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010), the Ninth Circuit Court of Appeals stated that the filing of a false return or the willful aiding or assisting in the preparation of a return or any other material matter to the IRS under Sections (1) and (2) of 26 U.S.C. Section 7206 necessarily involves fraud or deceit “because the provisions require the government to prove either that the defendant ‘willfully’ subscribed to a statement in a tax return he did not believe to be true, or that the defendant ‘willfully’ aided and assisted in the making of a false or fraudulent return”¹⁷ Given that 8 U.S.C. Section 1101(a)(43)(M)(i) has defined an “aggravated felony” to include an offense that involves “fraud or deceit,” noncitizens that are convicted under 26 U.S.C. Section 7206 which involves a loss of $10,000 or more in the 9th Circuit will likely be found guilty of an aggregated felony in the 9th Circuit.

Following the Ninth Circuit Court of Appeal’s position in Kawashima v. Holder, in the offshore context, the offense of failure to file an FBAR under 31 U.S.C. Section 5322 may also appear to involve fraud or deceit. The mens rea required for a conviction under Section 5322 is willfulness.¹⁸ The element of 8 U.S.C. Section 1101(a)(43)(M)(i) is likely satisfied of “fraud or deceit” because the knowing and intentional failure to file an FBAR can be characterized as the deceitful attempt to hide information from the government. Given that the mens rea required under Section 5322 seems to be in line with Section 1101(a)(43)(M)(i), it is possible a court in the Ninth Circuit will find a conviction under Section 5322 amounts to a aggravated felony.

How is Counsel to Proceed in Tax Cases?

The first step defense counsel should ask when representing nonresident in potential prosecution of a tax crime or the failure to disclose a foreign bank account is does the loss to the government exceed $10,000. If the tax loss involves tax loss to the government that exceeds $10,000 and relates to an offense described in Section 7201 or Section 7206 in the Ninth Circuit, counsel should be prepared to engage the prosecution early may attempt to structure a plea accordingly to avoid removal. Parties frequently agree on tax loss during plea negotiations, and under appropriate circumstances may be able to stipulate to a tax loss of not more than $10,000.¹⁹

Defense counsel will face a far more difficult task in representing a noncitizen defendant accused of other federal or state tax crimes that could be characterized as Section 1101(a)(43)(M)(1) offense. This is because defense counsel must be prepared to determine if the charged offense could be classified as an “aggravated felony.” In order to determine which if any federal or state tax crimes could be classified as an “aggravated felony” under 8 U.S.C Section 1101(a)(43)(M), we must look more closely at the statutory language of subsection (M). The Third Circuit Court of Appeals took the position determining whether any tax offense can be classified as an “aggravated felony” cannot “be answered solely by looking at the language (of subsection (M) itself.”²⁰ The Third Circuit went on to say subsection (M)(ii) clearly and unambiguously classifies a conviction under Section 7201 as an aggravated felony, but is silent as to any other tax offenses.

The Appeals Court than asked:

Why does subsection (M) include both a general provision encompassing “fraud and deceit” and a specific provision directed solely at the offense of federal tax evasion? If subsection (M)(i) applies to tax offenses(s), what is the purpose of subsection (M)(ii)? Does the juxtaposition of subsections (M)(i) and (M)(ii) signal an intent to exclude other tax offenses from the definition of aggravated felonies in (M)(i).²¹

The Third Circuit of Appeals determined that subsection (M)(i) is a general provision and subsection (M)(ii) is a specific provision that only applies to federal tax offenses. Under this analysis, specific provisions of the statute govern the general provisions of the statute. The majority in Third Circuit Court of Appeals stated in no uncertain terms tax evasion is the “capstone” of tax law.²² Consequently, in the view of the Third Circuit, only a Section 7201 offense could be characterized as an aggravated felony.²³

Then Appeals Court Judge Samuel Alito dissented from the majority on the ground that he believed subsection (M)(i) was unambiguous and that the offense of filing a false return is an act involving fraud or deceit. Judge Alito stated if Congress had not intended subsection (M)(i) to apply to tax offenses, Congress would have provided so in the statute. The Ninth Circuit Court of Appeals went on to follow Judge Alito’s dissent and determined that the filing of false tax returns under Section 7206 is an aggravated felony under subsection M(i). The Ninth Circuit Court of Appeals explained that “Congress has often realized its inability to anticipate every possible type of case, and may have added subsection (M)(i) to ensure that no tax evasion case fell outside subsection (M)’s definition of an aggravated felony.”

The lesson to be learned from Judge Alito’s dissent and the Ninth Circuit’s recent opinion in Kawashima v. Holder opinion is simple, unless defense counsel is representing a noncitizen taxpayer in the Third Circuit, counsel must be cognizant of the fact that any federal or even state tax crime involving a tax loss of over $10,000 can be determined to be an aggravated felony. As such, defense counsel should carefully consider whether the particular offense charged involves fraud or deceit and a tax loss of $10,000. This is the case for both federal and state tax crimes charged. In cases where the defendant has been charged with willfully failing to file an FBAR, defense counsel should attempt to avoid an aggravated felony designation by arguing that the act itself did not cause any loss to the government.

Only after defense counsel has closely examined all the facts of the case, should defense counsel begin meaningful dialogue with the prosecution. If possible, defense counsel should be prepared to distinguish the mens rea of the offenses that his or her client faces from that of Sections 7201 and 7206 of Title 26. Only after defense counsel has adequately prepared his or her defense should begin negotiations with the government.

1. See 26 U.S.C. Section 7201.
2. Unlike tax evasion under Section 7201, this federal tax crime does not have an element requiring a tax deficiency.
3. See 26 U.S.C. Section 7206(1).
4. See 26 U.S.C. Section 7206(2).
5. See 18 U.S.C. Section 371.
6. See 31 U.S.C. Section 5322(a).
7. See 31 U.S.C. Section 5322(b).
8. See 8 U.S.C. Section 1227(a)(2)(A)(iii).
9. See 8 U.S.C. Section 1101(a)(43)(M).
10. It should be noted that an alien may also be subject to deportation from the United States if he or she committed a felony involving moral turpitude within five years after the date of admission to the United States. See 8 U.S.C. Section 1227(a)(2). Some federal courts have held that tax fraud or tax evasion involves moral turpitude. However, unlike in situations of an aggravated felony, there is a specific date upon which an alien may no longer face deportation. In addition, an alien may petition the immigration court requesting a “cancellation of removal.”
11. 130 S.Ct at 1478.
12. 130 S. Ct. at 1481.
13. 130 S. Ct. at 1483.
14. 130 S. ct. at 1486.
15. See Singh v. Ashcroft, 383 F.3d 144, 147-48 (3d Cir. 2004).
16. 130 S. Ct. 736 (2009).
17. Id. At 983.
18. Willfulness means that the defendant acted with the knowledge that the conduct in question was unlawful.
19. This approach is limited by the need for the stipulation of facts accompanying a plea agreement to accurately portray the facts underlying the offense. See U.S.S.G. Section 6B1.4(a) (Stipulation of facts must “not contain misleading facts”). 
20. Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004).
21. Id. At 222.
22. Id at 224.
23. Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010).

If you searched for IRS OVDI, you are aware that the Department of Justice and the Internal Revenue Service have instituted massive campaignes in the last couple of years to find and collect tax on worldwide income, ivnestment, and assets.     As a result of these campaigns the DOJ and IRS designed the 2011 Offshore Voluntary Disclosure Initiateive.     The State of California has recently developed its own program.   

The federal program offers benefits to encourage taxpayers to disclose foreign accounts now, including but not limited to ownership interests in foreign entities such as corproations, partnerships, trusts, wire transfers, annuitities or life insurance plans, etc.  By participating, individuals may avoid the risk of IRS detection and criminal prosecution and mitigate severe monetary penalties.  The deadline for particiaption in this program is August 31, 2011.     

This 2011 OVDI may provide an excellent opportunity for individuals to come into ttax compliance and void serious punishments.   However, participation in the program may also result in an investigation and/or audit by the criminal investiagtion division of the IRS, in which full and complete dislosure and ooperation is essential in order to utilize this OVDI and not invite other possible criminal and civil actions.    Note that participation in OVDI does not offer amnesty for other crimes uncovered in the investigation.     Further absent full and complete disclosure and cooperation, the government may find cause for failure to supply information, false statements, etc.    Finally, while non-participation in the program may be a calculated avenue for some, it potentially leaves individuals vulnerable to criminal prosectuion for counts including but not limited to, FBAR violation, consipiracy, perjury, tax evasion, failure to supply information, etc.  

We are currently representing many individuals in light of the offshore disclosure inititatives and we invite you to contact us.

The U.S. Department of Justice has a mission statement:  To enforce the law and defend the interests of the United States according to the law; to ensure public safety against threats foreign and domestic; to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.

While the intention of the Department of Justice is to protect American citizens, many honest U.S.  residents may be targeted for criminal tax fraud.  The Tax Division of the Department of Justice is pursuing  U.S. foreign account holders as criminal tax evaders, regardless of their intent to defraud the government of owed taxes.  In 2008, a report from the Senate determined that these unreported accounts cost the U.S. Treasury in excess of $100 billion annually.

 

In August 2009, an agreement was negotiated between the Swiss government and the U.S. Tax Division that eliminated the secrecy of foreign accounts held by U.S. taxpayers in Swiss banks. Under the agreement, the IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore company nominee accounts through which an individual indirectly holds beneficial ownership in the accounts. Continuing the crackdown on secret accounts, in April 2011 the U.S, government received permission to authorize the IRS to request information from HSBC Bank USA, N.A. about U.S. residents who may be using accounts at The Hong Kong and Shanghai Banking Corporation in India (HSBC India) to evade federal inc ome taxes.  HSBC Bank will continue to be  closely scrutinized, as account holders living in the U.S. have entered tax evasion guilty pleas in recent weeks.

 

Published statistics from the Justice Department show that 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. Those who assisted clients with hiding assets are not immune to the law and many been indicted, charged, and await trial.  Further, the governement is uncovering additional cases by investigating and prosecuting OVDI cases and hold outs.

 

All of the civil and criminal litigation publicity has not gone unnoticed by U.S. taxpayers with foreign bank accounts.  With Swiss bank secrecy gone, a voluntary initiative to “come clean” brought in close to 18,000 taxpayers in 18 months and hundreds of millions of dollars to the U.S. Treasury. The success of that initiative ending in February 2011 prompted the IRS to announce a second voluntary disclosure program that will end on August 31, 2011.  

 

The voluntary disclosure programs combined with the Tax Division’s civil and criminal litigation efforts have given the IRS the opportunity to procure significant additional information about tax fraud and those that promote it. The government is aggressive and will only be increasing efforts to find those who believe they are above the law in tax matters.

 

Individuals and companies in the United States are required to account for income and pay appropriate taxes on foreign investments.  This is not a new tax requirement, just one that readily enforced by the Internal Revenue Service. The Department of Justice is seeking maximum enforcement.  

The Commissioner of the IRS continues to reiterate that combating international tax evasion is of top importance and that pursuit of those who use international borders to cheat honest taxpayers will continue.  The tax treaty between the U.S. and Swiss governments finalized in August 2009 disabled the secrecy of many foreign banks thus making account holder information readily available to the U.S. Treasury and IRS.  

As a result, on February 8, 2011, the Internal Revenue Service (IRS) announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI) for taxpayers with unreported foreign financial accounts, entities, or income. This initiative is the second compliance program administered by the IRS; the previous amnesty successfully brought in hundreds of millions of dollars and over 1500 particapants avoided criminal prosecution.

Taxpayers that wish to participate in the 2011 OVDI have only until August 31, 2011 to complete all requirements of the program. Participants in the OVDI will be required to disclose all foreign income, foreign bank accounts, and ownership interests in foreign entities to the IRS for the 2003 through 2010 tax years. There is a formal disclosure process, including but not limited to, filing amending tax returns and filing all required information tax returns. The information returns must disclose all foreign bank accounts and interests in foreign entities such as corporations, partnerships, and trusts. The participant must also pay the tax, interest, and penalties by August 31, 2011. If an individual cannot pay all tax, interest, and penalties for the 2003 through 2010 tax years, in certain circumstances, the IRS may be willing accept monthly payment arrangements. 

There are many requirements to qualify for this program, including but not limited to, a timely disclosure.   This 2011 OVDI is not for all U.S. individuals with foreign bank accounts and assets.  Upon consultation we can determine if participation would be beneficial and further advise you as to your situation.  

 

We have many years of substantial experience with the voluntary disclosure program, international tax issues, and related matters in advice, execution, and legal defense. If you have any questions or concerns regarding foreign business or investments, foreign bank accounts, reporting issues and amnesty programs please contact us.

 

IRS TARGETS HSBC

Recently, the Justice Department requested a federal court to force the London-based bank, Hongkong and Shanghai Banking Corporation (HSBC), to disclose the names of account holders who they suspect are evading taxes by hiding their money in offshore accounts in India. The Justice Department wants information regarding 9,000 U.S. residents holding high-value accounts through HSBC India from 2002 to 2010. The federal district court granted the Justice Department’s request on April 7th and the IRS was given permission to serve a “John Doe” summons on HSBC Bank USA. A John Doe summons is used when the government does not know the true name of the taxpayer under investigation and therefore substitutes his name for John Doe.

Other Banks the Target of IRS

HSBC is not the only foreign banking institution being currently scrutinized by the IRS and Justice Department. Swiss Cantonal Banks and Credit Suisse are also on the government’s list, and we believe that there are more to come. Due to the loss of tax revenue owed to the recession, the IRS has recently expended more resources to enforce disclosure and tax payments from foreign account holders.

UBS was Focus of IRS in 2009

Swiss bank UBS was the target of the IRS’ legal action in 2009. UBS paid $780 million in a legal settlement after the IRS accused it of assisting thousands of Americans with committing tax fraud. It also furnished information regarding thousands of its account holders. Some of those and other account holders were given the opportunity to participate in voluntary disclosure programs rather than be subject to investigation and/or prosecution.

Offshore Accounts Must Be Disclosed

Residents of the United States are not committing a crime by keeping their wealth in offshore accounts. However, offshore account holders are violating the law if they do not make the appropriate annual disclosures to the IRS and fail to pay annual taxes on any income from such accounts. Specific accounts holding certain amounts of money must be disclosed, generally on IRS Form 90-22.1 (Report of Foreign Bank and Financial Accounts, “FBAR”), and any person with money in a foreign bank account should be sure to know what is required of them to avoid any wrongdoing.

In addiition to the filing of the FBAR (see what is an FBAR), the US Department of Treasury also requires individuals holding interests in certain foreign assets with an aggregate value of over $50,000 will have to attach to their tax returns an addtional disclosure statement.  Additional penalties will be assessed for failure to make the required disclosures.

Amnesty Programs for Offshore Holdings

One option that foreign account holders have is taking advantage of the 2011 Offshore Voluntary Disclosure Initiative (see Unreported Offshore Accounts post) created by the IRS, which will run through the end of August 2011. California’s Franchise Tax Board was also given authority to institute a voluntary compliance initiative (see Voluntary Compliance Initiative) for the months of August, September and October of this year. California’s initiative will have important differences from the federal 2011 Offshore Voluntary Disclosure Initiative and disclosure under both programs should be completed only after extensive research or consultation with a legal tax professional.

We have represented and currently represent hundreds of clients with offshore accounts. Special reporting and disclosure requirements exist for offshore investments. The IRS is currently offering an Amnesty Program (2011 OVDI). The 2011 OVDI may limit criminal prosecution and civil penalty exposure to taxpayers with undisclosed offshore accounts and assets. Absent a disclosure agreement, taxpayers discovered with unreported foreign bank accounts, unreported foreign income, and certain undisclosed foreign assets face the possibility of paying harsh penalties such as: 1) a penalty for failing to report a foreign account which could be as high as the greater of $100,000 or 50 percent of the total balance of a foreign account in each year held; 2) a fraud penalty equal to 75 percent of an unpaid tax; and 3) penalties for the failure to file information returns. Furthermore, individuals with undisclosed foreign income and accounts face the possibility of criminal prosecution. Relevant processes and procedures seem to change frequently and timing is critical as certain programs will likely not be available after August 31, 2011.

Many taxpayers will decide to participate in the OVDI based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others recognize an opportunity to repatriate stagnant foreign funds into a domestic recessionary economy or may simply want to move on with their lives. The ability to properly advise a client regarding participation in the 2011 OVDI requires an understanding of the potentially applicable foreign-related penalties for nonparticipants, the historic IRS and Department of Justice voluntary disclosure practice and policies, and a healthy respect for the ongoing governmental international tax enforcement efforts within a shrinking global community.

Understand and benefit from your rights. If you have any questions or concerns regarding foreign income, foreign bank account(s), reporting issues, the amnesty program, or any other legal issue, we urge you to call (415) 394-7200 and schedule a complimentary attorney-client privileged consultation.

 

In March, 2011, California passed legislation to allow a program similar to the federal 2011 Offshore Voluntary Disclosure Initiative (OVDI).    Senate Bill 86 was passed by the California legislature, signed by Governor Brown, and entered into California law.  While SB 86 amends several sections of the Revenue and Taxation Code, one important change is the authorization of a new voluntary compliance initiative.  The legislation authorizes the Franchise Tax Board to develop and administer a voluntary compliance initiative to be conducted between August 1, 2011 and October 31, 2011.  SB 86 represents the first voluntary disclosure program in California since the first quarter of 2004.

This initiative is similar to the 2011 Offshore Voluntary Disclosure Initiative from the federal government that encourages disclosure of offshore financial arrangements.  See previous blog post regarding OVDI.  In addition to overseas money, California’s voluntary compliance initiative will include provisions for the disclosure of abusive tax shelters—an important distinction discussed below.

Procedures for Compliance and Disclosure

Under the compliance initiative, a taxpayer will may be eligible to minimize penalties and avoid criminal prosecution for unreported or underreported income gained by abusive tax shelters or from foreign financial arrangements in previous tax years if he or she complies with the disclosure program.  To comply with the program, a taxpayer must:

1. file an amended tax return for each year that abusive tax shelter income or overseas money was not previously included; and
2. fully pay all taxes and interest due according to the amended returns.

The amended returns must not contain deductions from any transaction costs associated with the previously-unreported income.  Also, the taxpayer will not be credited or refunded any money from any penalties the taxpayer paid in prior years.  Fortunately for many taxpayers, installment plans are authorized to be available so long as final payment is paid by June 15, 2012.

Certain taxpayers are not eligible for the voluntary compliance initiative, including those who, with regards to the abusive tax avoidance transaction or income from the offshore financial arrangement, are the subject of criminal investigation or have had a criminal complaint filed against them on or before July 31, 2011.

Federal OVDI and CA program - An Important Difference

It is imperative to understand the difference between the federal disclosure initiative and California’s voluntary compliance initiative.  Taxpayers will be protected from criminal penalties associated with abusive tax schemes under California’s initiative but abusive tax schemes are not protected under the federal program.  Should the Internal Revenue Service receive information disclosed to the Franchise Tax Board regarding a taxpayer’s participation in an abusive tax scheme, he or she may not be provided the same protection from the federal government.  All circumstances should thus be examined carefully with Steve Moskowitz, LLP before participating in any disclosure or compliance program to determine if it is right for you.

You can read SB 86 in its entirety by selecting the this link.

We work to defend your rights, your loved ones rights, and you assets.   For over thirty years we have defended individuals and businesses accused of tax and financial crimes and advised others how to legally benefit from doing business outside the United States with legal tax savings and avoiding the problems that can arise, even inadvertently when you enter the extremely complex and often time times tricky foreign area. Our law firm has the knowledge and the skills to aggressively defend your rights and provide you with sound, reliable, and practical advice. We have substantial tax experience with the voluntary disclosure program, international tax issues, and related matters in advice, execution, and legal defense.  Avoid having the government build a case against you.

Understand and benefit from your rights.  If you have any questions or concerns regarding foreign income, foreign bank account(s), reporting issues, the amnesty program, or any other legal issue, we urge you to call (415) 394-7200 and schedule a complimentary attorney-client privileged consultation.

San Francisco’s Real Estate Watchdog Program

In an effort to recover some of the millions of dollars lost to San Francisco from tax evasion, City Supervisors passed an ordinance in 2006 to award those who report others who are cheating on their property taxes.  While the historic Proposition 13 protects property owners from large increases in property taxes each year, it still allows for a tax reassessment when property changes hands.  The amount of property tax due can skyrocket when property ownership changes after several years because of rising property values.  Some new property owners commit tax evasion by avoiding disclosing a change of ownership so they don’t pay higher property taxes. 
The “Real Estate Watchdog Program,” instituted in 2006, provides a process whereby people can report on those evading property taxes and potentially be awarded 10% of the money reclaimed, up to $500,000.  The largest payout during the past five years was $60,000 to a person who reported an apartment building owner who evaded $1.34 million in property taxes.  The program expired on February 16th of this year but Supervisor David Chiu introduced an ordinance on January 25th to continue the program and reduce the maximum award amount from $500,000 to $100,000.  That ordinance passed on March 8, 2011.

Should Others Adopt Whistleblower Programs?

The Internal Revenue Service (“IRS”) has a whistleblower office that processes tips from individuals who are aware of potential tax evasion by business or individuals.  Whistleblowers may be awarded up to 30% of the amount the IRS collects if the amount in dispute exceed $2 million or, in the case of an individual tax evader, his or her annual income exceeds $200,000.

Last week, the IRS awarded a check for $3.24 million to a small-town CPA as payment under the tax whistleblower program.  The check represents an award of $4.5 million with about 28 percent withheld for taxes.  While the whistleblower remains unidentified, his attorney Eric L. Young, from the law firm of Egan Young in Pennsylvania, announced this monumental award and shared the relevant details.

While working at a financial services firm, the in-house CPA discovered an underpayment of taxes of more than $20 million due to accounting errors.  The CPA reportedly noted this discrepancy first to the management of the company but after no action was taken, he reported the situation to the IRS’ Whistleblower Office.

The Whistleblower Office was created in 2006 under Internal Revenue Code § 7623 in order to receive and process tips from informants regarding individuals, companies, or organizations that failed to pay taxes.  Previously, the IRS had discretion to determine whether or not it would bestow a monetary award on an informant.  Now however, if specific requirements and parameters are met and money is recovered, the informant is legally entitled to receive an award.

While the maximum amount to be awarded any informant is 30 percent of the collected proceeds, attorney Eric Young reports that the 22 percent received by this unidentified whistleblower is actually a large percentage for a qui tam case (those in which an individual assists in prosecution and receives an award himself).  Since this is the first award coming from the Whistleblower Office, it is undetermined whether this amount will be high or low in comparison with any future payments.   The Whistleblower Office has received thousands of tips for underpayment of taxes amounting to hundreds of millions of dollars in some cases, and has fewer than twenty employees available to process such tips.  Perhaps this is the reason for the delay in making awards.  But it is also possible that the IRS waits until the two-year window for taxpayers to dispute their payments has ended. 

The now-millionaire whistleblower first filed a Form 211 without an attorney in April of 2007.  More than two years had passed and he did not receive any communication from the IRS.  It was then that he contacted attorney Eric Young who began a dialogue with the Whistleblower Office and helped disclose the information that exposed the fraud committed by the CPA’s employer.  If handled correctly, whistleblower cases have the potential to be very lucrative for both the government and the informant.

Effectively, the IRS whistleblower program or its various titles/identities with federal and state taxing agencies, acts like a police reward for information leading to an arrest.     The implications of the reward as well as the program itself are important to consider when building a defense in a tax crime case.   Since both the prosecution and the defense will be utilizing the information the wistleblower provides, it may be in fact very important for the wistleblower to be represented by counsel.   

We can see far reaching implications of the IRS and taxing authorities utilizing such a program.  For instance, implications will be seen in the employment law aspects of various individuals, and very well could impact professional ethical considerations as well.   For instance, the whistleblower in this case was a CPA with professional ethical responsibilities to uphold.   
Before you decide to join the IRS Whistleblower Reward Program you should carefully evaluate the risks of your own exposure to potential criminal liability. Under the IRS Whistleblower Program, the IRS might deny the tax whistleblower reward if the tax whistleblower was involved.  It is important to evaluate your exposure to criminal liability before a decision is made to join the Tax Whistleblower Reward Program.    Further, if a tax whistleblower is a current or former employee who learned of the taxpayer’s financial and tax information while employed by the taxpayer, you should consider any civil liability you may be exposed to by filing a claim. 
To that end, if you are governed by professional standards, i.e., if you are an attorney, accountant, or financial/investment advisor, you have additional considerations to consider in order to protect your professional license or fiduciary duties.  
We represent many individuals and businesses from many industries, including but not limited to, real estate management, construction, professional service firms, medical practices, manufacturing, retail, technology development, etc.   We provide comprehensive tax litigation, planning, and defense representation.   We invite you to contact our tax law firm to discuss your legal questions.   Please feel free to use our contact form or phone us at (415) 394-7200.

As individuals and companies take advantage of international tax benefits or previously undetected avenues of sheltering money from taxes and creditors, the Internal Revenue Service (IRS) is now concentrating more of its efforts on overseas tax compliance and collection.   IRS Commissioner Douglas H. Shulman called global tax administration efforts a “critical area for our nation,” and promised that “[i]nternational is going to stay a top priority at the agency.”  This is probably in part because billions of tax dollars are lost to the IRS each year as individuals and businesses create international structures to minimize or evade taxes.

In the past few years, the federal government has taken several major steps to administer international tax collection and enforcement more effectively.  Recently, (early in 2010), Congress passed the Foreign Account Tax Compliance Act (FATCA) which imposes a 30% withholding tax on foreign institutions that withhold information about accounts owned by citizens of the U.S.  Early in 2011, the IRS announced a new Offshore Voluntary Disclosure Initiative (OVDI), which is a program to provide taxpayers a chance to disclose money hidden overseas in exchange for no criminal prosecution and greatly reduced penalties.  You can view a previous blog on the new OVID by selecting the following link: OVDI 2011 Voluntary Disclosure for Offshore Bank Accounts and Investments.  Finally, the IRS formed the Large Business and International division (LB&I) in 2010 to create a central body to process and enforce international tax matters. 

Large Business and International Division

The LB&I was created through a realignment of the Large and Mid-Size Business division and the addition of about 875 employees to the existing 600.  While the LB&I will still focus on “large and mid-size business” (i.e., corporations, S Corporations and partnerships with assets greater than $10 million and high-worth individuals), the IRS feels that the new realignment will do several things to strengthen international tax compliance, including:

• helping the IRS identify emerging international tax compliance issues
• Increasing specialization amongst the IRS staff in the LB&I
• making management more efficient through centralization
• consolidating international information reporting and programs  
• enabling the IRS to better address transfer pricing issues

Taken together, these developments mean that the IRS will be more efficient and better prepared to handle international tax matters.  This is good news for those who are participating in the OVDI or communicating about FATCA compliance because they can look forward to a more streamlined processing.  But this development also means that for those hiding money overseas, hoping to avoid the IRS collection process, the gamble will not be as promising as it was before.       

We work to defend YOUR rights, YOUR loved ones rights, and YOUR ASSETS.   For over thirty years we have DEFENDED individuals and businesses accused of tax and financial crimes and advised others how to LEGALLY benefit from doing business outside the United States with LEGAL tax savings and avoiding the problems that can arise, even inadvertently when you enter the extremely complex and often time times tricky foreign area.     Our law firm has the knowledge and the skills to aggressively defend your rights and provide you with sound, reliable, and practical advice.    We have many years of substantial experience with the voluntary disclosure program, international tax issues, and related matters in advice, execution, and legal defense.  Avoid having the government build a case against you.   Understand and benefit from your rights.
If you have any questions or concerns regarding foreign income, foreign bank account(s), reporting issues, the amnesty program, or any other legal issue, we urge you to call (415) 394-7200 and schedule a complimentary attorney-client privileged consultation.