The Pennsylvania Department of Revenue has announced the details of its new tax amnesty program. The program will run from April 21 to June 19,2017. All taxes administered by the Department are eligible for amnesty. Significant penalty and interest relief is available to all who participate, and taxpayers not known to the Department can avoid all taxes, penalties and interest for periods before 2010. Continue reading
A new Pennsylvania tax amnesty program is coming. It was enacted as part of the state’s 2016–2017 budget process. Taxpayers with unfiled state tax returns or returns that need to be amended will be able to pay the tax and half of the interest they owe, with the balance of the interest and all penalties being forgiven. Depending on individual circumstances, there may be only a five-year look back with all prior year tax liabilities forgiven. The effective date has not yet been announced, but when it is there will be a 60-day window to take advantage of the program.
The Amnesty Program
Any tax administered by the Department of Revenue that is delinquent as of December 31, 2015, will be eligible for the tax amnesty program, which will go into effect for 60 consecutive days beginning on a date to be established by the Governor. Under the amnesty program, one-half of all interest and 100 percent of all penalties on eligible taxes that are delinquent as of December 31, 2015, will be waived for taxpayers who file tax amnesty returns and pay delinquent taxes and one-half the interest that is due within the amnesty period.
A taxpayer with “unknown” liabilities who participates in the program and complies with all of its requirements will not be liable for any taxes of the same type that were due prior to January 1, 2011. “Unknown” means that either no return has been filed, no payment has been made, and the taxpayer has not been contacted by the Revenue Department concerning the unfiled returns or unpaid tax, or if a return has been filed, the tax was underreported and the taxpayer has not been contacted by the Revenue Department concerning the underreported tax.
A taxpayer with liabilities known to the Revenue Department may participate in the amnesty program and get the benefit of the waiver of all penalties and half the interest, but must file or amend all unfiled or deficient tax returns.
A taxpayer under criminal investigation or that is the subject of a criminal complaint or a pending criminal action for an alleged violation of any law imposing an eligible tax may not participate. A taxpayer who participates in the program is not eligible to participate in any future amnesty program. Additionally, if within two years after the end of the program a taxpayer that is granted amnesty becomes delinquent for certain periods in payment of any taxes that are due or in the filing of any required returns, the Department of Revenue may assess and collect all penalties and interest waived through the amnesty program.
The Department of Revenue is expected to publish guidance on participation in the amnesty program by no later than mid-September. Until then, many of the details of the program will not be available. For more information please click here.
On June 2, 2016, the United States Tax Court issued Guralnik v. Commissioner denying a Motion to Dismiss for Lack of Jurisdiction the Internal Revenue Service (IRS) filed on the ground that the taxpayer’s petition was not timely filed. As these motions are typically granted or denied by the court through a simple order, it seemed strange that the court would issue a division opinion, which is generally reserved for cases involving an issue of first impression or an important legal issue or principle. The court, however, used this case as a means to change precedent related to the date on which a petition must be filed in Tax Court to be considered timely. Continue reading
On July 21, 2016, the Ninth Circuit in United States v. Hom, No. 14-16214 D.C. No. 3:13-cv-03721-WHA (9th Cir. 2016), determined that a taxpayer who held an online poker account with PokerStars and PartyPoker was not required to report those accounts on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR). The taxpayer, however, was required to report his FirePay account on an FBAR.
The Ninth Circuit overturned the decision of the United States District Court for the Northern District of California, in part, which had held that all these three accounts were reportable on an FBAR.
The key issue was whether either PokerStars, PartyPoker or FirePay was a financial institution.
The Ninth Circuit stated that:
“[F]inancial institution” is in turn defined to include a number of specific types of businesses, including “a commercial bank,” “a private banker,” and “a licensed sender of money or any other person who engages as a business in the transmission of funds.” 31 U.S.C. § 5312(a)(2).
Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. See 31 U.S.C. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5) (2006). FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.” See 31 C.F.R. § 103.11(uu)(5) (2006). Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.See IRS, FBAR Reference Guide, https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf (last visited July 19, 2016) (“Typically, a financial account that is maintained with a financial institution located outside of the United States is a foreign financial account.”).
In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.
May 25, 2016
The U.S. Department of Justice’s filing of criminal charges against a Chicago restaurant owner who failed to pay state sales tax demonstrates the perils business owners face if they underreport their gross receipts to avoid paying sales tax. Hu Xiaojun, who owns and operates nine restaurants in the Chicago area, was charged with federal wire fraud and money laundering offenses arising from his failure to pay Illinois sales tax on nearly $10 million in cash transactions occurring at his restaurants over a four-year period. On May 16, 2016, Xiaojun pleaded guilty to one count of wire fraud and one count of money laundering. He faces a prison sentence of 41 to 51 months, and must pay restitution of over $1 million to the Illinois Department of Revenue as well as forfeit an additional amount as punishment for his misconduct. Sentencing is scheduled for Aug. 22, 2016.
The Offense Conduct
According to the publicly filed guilty plea agreement, between January 2010 and September 2014, Xiaojun failed to pay sales tax on transactions in which customers paid cash. To conceal cash sales, he instructed restaurant managers and employees to provide him with daily summaries of restaurant sales, which he would in turn alter to conceal cash sales. Xiaojun and others would destroy the daily summary reports and cash transactions receipts, replacing them with incorrect reports that omitted the bulk of each restaurant’s cash sales. To hide cash sales from the state tax authorities, the defendant instructed employees to withhold cash generated from the restaurants from the corporate bank accounts to avoid creating financial records for those cash sales. The defendant instead used the cash to pay restaurant employees and suppliers without recording those expenses in the corporate books and records. The defendant also deposited a portion of the cash into his personal bank account, which he then used to pay personal expenses.
During the 2010 to 2014 time period, the defendant instructed others to submit fraudulent sales figures to the Illinois Department of Revenue on monthly sales tax returns. Each month, the defendant directed his employees to provide false sales figures to his accountants, who in turn provided those figures to the state. In all, the defendant underreported his sales to the state by nearly $10 million, resulting in his underpayment of sales taxes by more than $1.1 million.
The wire fraud charge to which the defendant pleaded guilty is based upon his sending of an email containing false sales figures for the month of May 2014. The money laundering charge to which the defendant pleaded guilty is based upon a series of financial transactions that he conducted using proceeds of his scheme to defraud the Illinois Department of Revenue. Specifically, the defendant deposited over $72,000 in cash into his personal bank account, which he knew consisted of funds derived from cash sales at his restaurants that were concealed from the state tax authorities. The defendant thereafter withdrew $60,000 from that account and purchased an official bank check, which he then deposited into a different business account. The defendant used the funds in that second bank account to purchase a restaurant and equipment, which he subsequently operated.
At first glance, the facts of United States v. Xiaojun read like a typical criminal tax case and include the all-too-common attributes of tax fraud in the restaurant industry: the concealment of cash sales and the use of diverted cash to pay employees, purveyors and personal expenses of the restaurant’s owners. Indeed, the Justice Department’s website is replete with press releases announcing criminal tax charges against restaurant owners who engaged in conduct similar to that of Xiaojun, mostly commonly filing of false income tax returns in violation of 26 U.S.C. § 7206 or tax evasion in violation of 26 U.S.C. § 7201.
For example, in United States v. Happy Asker, the owner of a chain of pizza restaurants in the Detroit area engaged in what the government called “a systematic and pervasive tax fraud scheme to defraud the IRS” by substantially underreporting gross sales and payroll amounts on corporate income tax returns and employment tax returns filed for nearly 60 restaurant locations. Over a three-year period, the defendant and his co-conspirators diverted for personal use more than $6.1 million in cash gross receipts and failed to report approximately $3.84 million of gross income and pay approximately $2.39 million in payroll taxes. A portion of the unreported income was shared among the defendant and most of his franchise owners, in a weekly cash “profit split.” As a result of this conduct, the defendant was charged with, and later convicted of, typical Title 26 offenses: filing false personal income tax returns, aiding and assisting in the filing of false corporate income and employment tax returns for several pizza restaurants, and obstructing and impeding the administration of the Internal Revenue Code.
In another fairly typical case, United States v. Ramon S. Arias, the defendant owned numerous Little Caesars pizza franchises in Alabama, Georgia and Louisiana. In a written plea agreement, the defendant admitted that between 2010 and 2013, he “skimmed” hundreds of thousands of dollars of cash from his restaurants and concealed these cash receipts from his accountant. As a result, the S corporation tax returns underreported gross receipts from the restaurants, and those omissions flowed through to the defendant’s personal income tax returns. The defendant pleaded guilty to one count of filing a false 2013 personal income tax return in violation of 26 U.S.C. § 7206(1) and agreed to pay restitution to the Internal Revenue Service for the years 2010 through 2013.
What makes United States v. Xiaojun notable is that the Justice Department chose not to assert a single federal tax charge against the defendant. Based upon admissions in his plea agreement, the defendant presumably failed to report as taxable income the concealed cash receipts, thereby likely exposing him to multiple federal income tax charges during the five tax years at issue (2010 through 2014). In addition, the defendant’s payment of his employees in cash presumably could have led to employment tax-related charges. But instead of charging Title 26 offenses, the government transformed this garden-variety criminal tax case into a wire fraud and money laundering case by focusing on the defendant’s failure to pay state sales taxes.
Tax Division Directive No. 128
The government’s case against Xiaojun appears to be premised upon a relatively obscure Justice Department policy entitled Tax Directive No. 128, “Charging Mail Fraud, Wire Fraud or Bank Fraud Alone or as Predicate Offenses in Cases Involving Tax Administration.” This directive provides federal prosecutors with significantly expanded authority to use the mail and wire fraud statutes to charge additional crimes, and seek correspondingly increased penalties, in tax-related cases. Under a preceding policy, prosecutors were generally not permitted to use the fraud statutes where the use of the mails or wires was only incidental to a violation arising under the Internal Revenue laws.
Under Tax Directive No. 128, prosecutors may now use mail and wire fraud offenses and, more importantly, state tax violations where the mails or wire communication facilities are used, to transform cases that traditionally would be prosecuted under the tax laws into fraud and money laundering prosecutions. By charging mail and wire fraud in tax cases, the government can significantly change the charging and plea bargaining process. The mere threat of a mail fraud or money laundering charge may well cause targets of government investigations to plead guilty more willingly, and to agree to cooperate against other targets, than would have been likely under the prior policy where the charges were likely limited to federal tax offenses absent exceptional circumstances. In addition, the ability to include mail or wire fraud charges in a tax-related case provides prosecutors with an additional tool not previously available in traditional tax cases — the ability to seek forfeiture of the proceeds of the fraudulent scheme.
By relying upon the authority conferred by Tax Directive No. 128, the government could significantly ratchet up the pressure on the defendant in United States v. Xiaojun. By bringing charges under Title 18 rather than Title 26, the government was able to seek a longer prison sentence: the statutory maximum sentences available for mail fraud and money laundering, 20 years each, are significantly higher than the statutory maximum sentences available for tax fraud or tax evasion, which are three years and five years, respectively. In addition, the United States Sentencing Guidelines for mail fraud and money laundering crimes typically call for longer sentences than those applicable to tax offenses.
Charging mail fraud and money laundering also enabled the government to seek restitution to be paid to the state agency that was defrauded. Had the government only charged federal tax crimes under Title 26, restitution could only have been ordered to the Internal Revenue Service, as occurred in United States v. Asker and United States v. Arias. The government was also able to seek forfeiture of the funds that constitute proceeds of the mail fraud and money laundering offenses, an additional punishment that is not available for tax offenses. As part of his plea agreement, Xiaojun agreed to pay at least $1 million in restitution to the Illinois Department of Revenue and to entry of a forfeiture judgment in an amount to be determined by the court at sentencing. The defendant also agreed as part of his plea agreement to cooperate with the civil tax audit that will inevitably follow his conviction, thereby ensuring that the IRS will be able to assess any tax, interest and penalties that are determined to be due and owing.
United States v. Xiaojun illustrates well how Tax Directive No. 128 provides federal prosecutors with significantly more leeway in charging offenses in what are viewed as traditional tax cases. No longer confined to the criminal offenses enumerated in Title 26, federal prosecutors can significantly increase the pressure on defendants by charging mail fraud and money laundering, seeking longer sentences and extracting substantial financial penalties by requiring defendants to pay both restitution and forfeiture.
 See United States v. Hu Xiaojun, No. 16-cr-316 (N.D. Ill.).
 See U.S. Department of Justice Press Release, “Happy’s Pizza Founder Convicted of Multi-Million Dollar Tax Fraud Scheme” (Nov. 19, 2014).
 See U.S. Department of Justice Press Release, “Owner of Pizza Franchises Pleads Guilty to Submitting False Tax Return That Omitted Income From Skimmed Cash” (May 24, 2016).
On May 9, 2016, the Justice Department announced that Gregg R. Mulholland, a dual U.S. and Canadian citizen and owner of an offshore broker-dealer and investment management company based in Panama and Belize, pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly-traded companies and then laundering more than $250 million in profits through at least five offshore law firms. This prosecution is notable in that it represents the first time the Justice Department has brought criminal charges against individuals for conspiring to violate reporting requirements under the Foreign Account Tax Compliance Act (FATCA).
Mulholland and several other defendants were indicted in 2014 by a grand jury in the Eastern District of New York. The indictment alleges that between 2010 and 2014, Mulholland controlled a group of individuals (the Mulholland Group) who together devised three interrelated schemes to: (1) induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) circumvent the IRS’s reporting requirements under FATCA; and (3) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through five offshore law firms.
According to the indictment, the defendants’ scheme also enabled U.S. clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. For example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, one of the defendants forwarded an IRS Form signed by a co-defendant as the nominee for the shell company which had been set up at the request of the client.
The indictment further alleges that in order to carry out these interrelated schemes, the Mulholland Group used shell companies in Belize and Nevis, West Indies, which had nominees at the helm. This structure was designed to conceal the Mulholland Group’s ownership interest in the stock of U.S. public companies, in violation of U.S. securities laws, and enabled the Mulholland Group to engage in more than 40 “pump and dump” schemes.
With respect to FATCA, the indictment alleges as follows:
13. The Foreign Account Tax Compliance Act (“FATCA”) was a federal law enacted in March 2010 that targeted tax non-compliance by U.S. taxpayers with foreign accounts. Although enforcement did not commence until July 2014, FATCA required U.S. persons to report their foreign financial accounts and offshore assets. Additionally, FATCA required foreign financial institutions to report to the Internal Revenue Service (“IRS”) certain financial information about accounts held by US. taxpayers or foreign entities in which U.S. taxpayers held a substantial ownership interest. FATCA also targeted the non-reporting and the non-withholding (30% on certain U.S. source payments made to foreign entities) by U.S. financial institutions based on material misrepresentations about the beneficial owners of the foreign accounts.
The indictment reveals that law enforcement authorities employed undercover agents and wiretaps to record numerous conversations involving the defendants. In one recorded meeting, two of the defendants bragged that their strategy enabled clients to evade FATCA’s requirements:
During this meeting, BANDFIELD and GODFREY touted, inter alia, IPC CORP’s success in establishing fraudulent corporate structures, including six IBCs and two LLCs for the Undercover Agent in order to conceal the Undercover Agent’s true beneficial ownership of the brokerage accounts at LEGACY, TITAN, UNICORN and two additional broker-dealers. BANDFIELD explained that this “slick” structure was specifically designed to counter U.S. President Barack Obama’s new laws, a reference to FATCA.
On a recorded telephone call, one of the defendants told a client that the use of offshore nominee companies was specifically intended to evade FATCA’s reporting requirements:
On or about May 19, 2014, GODFREY called Corrupt Client 6, an individual whose identity is known to the Grand Jury, and stated that IPC CORP’s fraudulent scheme using sham IBC and LLC structures was created to evade the IRS, specifically FATCA.
Although the Justice Department has been aggressively targeting offshore tax evasion by U.S. taxpayers since 2009, this case represents the first time that the government has brought criminal charges based upon alleged violations of FATCA. With FATCA’s provisions only becoming effective on July 1, 2014, and with the Justice Department’s offshore crackdown showing no signs of slowing down, we expect to see more criminal prosecutions in the future alleging violations of FATCA’s provisions.
With Comprehensive Panama Papers Database to Be Released Today, and White House Call for Comprehensive Action to Combat Offshore Tax Evasion, Affected Individuals Should Consider Immediate Action to Mitigate the Risk of Criminal Prosecution
May 2016 (No. 2)
White Collar Defense and Investigations
Action Item: Today at 2:00 p.m. (EDT), a massive database of information from the leaked “Panama Papers” files will be made public for the first time, identifying the real owners behind over 200,000 offshore companies set up by the Panamanian law firm Mossack Fonseca. The database release today follows closely on the heels of President Obama’s call to tighten U.S. laws and regulations to combat tax evasion through the illicit use of secret offshore bank accounts and shell companies. Individuals who believe they may be identified in the Panama Papers as the beneficial owner of an offshore company should consider prompt action to mitigate the risk of criminal prosecution and harsh financial penalties. The Internal Revenue Service (“IRS”) currently offers a number of voluntary disclosure programs for individuals with unreported foreign financial assets, but time is of the essence and immediate action is required in order to qualify for such programs in light of the imminent release of more “Panama Papers” files.
At 2:00 p.m. (EDT) today, the International Consortium of Investigative Journalists (“ICIJ”) will release a searchable database containing information on more than 200,000 offshore entities that are part of the “Panama Papers” investigation. The database is believed to be the largest ever release of records regarding the creation and maintenance of secret offshore companies and the identities of the individuals behind those companies. The information in this database comes from the Mossack Fonseca law firm in Panama and, according to ICIJ, includes “information about companies, trusts, foundations and funds incorporated in 21 tax havens, from Hong Kong to Nevada in the United States” and “links to people in more than 200 countries and territories.” The database is expected to offer an unprecedented window into the previously-secret world of offshore tax evasion and the use of shell or nominee entities to conceal the identity of the real owner of the underlying assets.
The first release of Panama Papers records on April 3, 2016, which comprise over 11 million Mossack Fonseca files, sparked a global outcry over offshore tax evasion. In the United States, the Justice Department has opened a criminal investigation into the offshore tax schemes believed to be exposed by the Panama Papers leak, and New York’s Department of Financial Services has ordered 13 foreign banks to turn over records regarding their dealings with the Mossack Fonseca firm. Last Thursday, the Obama Administration announced significant steps to crack down on money laundering, corruption, and tax evasion in the wake of the Panama Papers leak, and called upon Congress to quickly act to pass legislation addressing these issues. In particular, the White House announced the following:
- New rules to increase transparency and disclosure requirements that will enhance law enforcement’s ability to detect, deter, and disrupt money laundering, terrorist financing, and tax evasion, including long-awaited final regulations on “Customer Due Diligence” that require financial institutions to know and keep records on who actually owns the companies that use their services;
- New regulations that expand upon existing law by adopting “Customer Due Diligence” requirements for certain prepaid credit and debit cards;
- New rules that close a loophole allowing foreigners to hide assets or financial activity behind anonymous entities established in the United States; and
- New legislation that would increase transparency into the “beneficial ownership” of companies formed in the United States by requiring that companies know and report their true owners.
The Obama Administration also called upon the Senate to finally approve tax treaties that have been pending for several years that would help crack down on offshore tax evasion.
The Panama Papers database to be released today by ICIJ is expected to include the names of thousands of offshore entities formed by Mossack Fonseca and, most importantly, the identities of the true owners behind such companies. ICIJ has stated that the database will not, however, include bank account records, emails and other correspondence, passports, or telephone numbers.
Individuals who have used offshore companies and believe they may be implicated by today’s data release by ICIJ should consider taking immediate corrective action. The Internal Revenue Service has long maintained a number of well-publicized voluntary disclosure programs that afford non-compliant U.S. taxpayers the opportunity to avoid criminal prosecution by self-disclosing their non-compliance to the IRS, explaining the facts and circumstances of non-compliance, and paying back taxes, interest, and penalties. The most popular voluntary disclosure program offered by the IRS is the Offshore Voluntary Disclosure Program (“OVDP”), which is directed at non-compliant taxpayers with secret offshore assets. U.S. individuals identified as beneficial owners of secret offshore companies may take advantage of the OVDP to avoid criminal prosecution, but only if they commence the voluntary disclosure process before the IRS learns of their non-compliance from third-party sources, including whistleblowers. The IRS may take the position that a voluntary disclosure occurring after public release of an individual’s name through the Panama Papers disclosure is too late and deem them ineligible for OVDP protection. Thus, time is of the essence, and individuals concerned about being named in the Panama Papers database should act quickly and consider whether a voluntary disclosure to the IRS is warranted. Inaction is not a viable option.
Since 2009, the United States has undertaken an aggressive enforcement campaign to combat offshore tax evasion using secret bank accounts in Switzerland and other tax havens, and the use of offshore structures to obscure the identity of the real owner of financial assets held outside of the United States. The following statistics tell the story:
- The Justice Department has criminally charged more than 100 U.S. accountholders that evaded U.S. tax laws using hidden offshore accounts, and nearly 50 individuals (mostly foreign nationals) who assisted them.
- Due to aggressive law enforcement actions, 80 Swiss banks have admitted to engaging in criminal conduct and paid more than $1.3 billion in penalties.
- Under threat of prosecution, more than 54,000 individuals have come forward to disclose their offshore accounts to the IRS through the OVDP and other voluntary disclosure programs, paying more than $8 billion in tax, penalties, and interest.
- Under the Foreign Account Tax Compliance Act signed into law by President Obama in 2010, more than 150,000 foreign financial institutions have agreed to report customer information to the United States, in an effort to ensure that tax cheats cannot hide assets offshore.
Blank Rome’s Offshore Tax Compliance Team regularly advises clients as to the U.S. tax consequences of maintaining undisclosed offshore assets, and the compliance options available to such individuals to mitigate risk. Our team includes former federal prosecutors and Justice Department trial attorneys and experienced tax attorneys well-versed in the intricacies of the OVDP and other IRS voluntary disclosure options. Please contact a member of our team should you have any questions regarding the Panama Papers or any other aspect of offshore tax compliance.