More Tax Lessons from Reality Stars on What Not to Do, Plus Lionel Messi

We discussed last week the surprise when a highly visible reality star is charged with or convicted of tax evasion or other financial crimes (see last week’s post here about The Situation and referencing Richard Hatch). This week, stars of the Real Housewives of New Jersey Teresa and Giuseppe (Joe) Giudice were sentenced to 15 and 41 months’ imprisonment, respectively, for having pleaded guilty to conspiracy and bankruptcy fraud charges. Comments made by the federal judge at sentencing indicate that the Giudices were less than forthright in their pre-sentence submissions and that, perhaps more than anything, factored into Teresa receiving a jail sentence, rather than probation. Let these reality stars be a reminder to all defendants to be truthful with the court, including at sentencing, or risk the consequences.

The Giudices were named in a 39-count indictment that described a number of schemes that generally allowed them to live beyond their means for years, beginning in 2001. The schemes involved submitting false documents and making fraudulent statements to lenders, banks, and a bankruptcy court, and, in Joe’s case, failing to file tax returns. Anyone who watches this show and the franchise would agree that the stars’ means often (if not always) is a part of the storylines, though that is no excuse for criminal conduct.

Yesterday, documents and information provided by the Giudices prior to sentencing (required in every case and utilized to assess the defendant and assist in determining an appropriate sentence, including what amounts are appropriate to order in terms of restitution and criminal penalties) were allegedly false and incomplete. According to the government (as reported by ABC News here), Teresa failed to note as assets “several cars, ATVs, and [construction equipment], claimed no jewelry, and said her $3 million home is filled with just $25,000 worth of furniture” (though the couple holds a $1 million insurance policy for household furnishings). These alleged omissions did not please United States District Court Judge Esther Salas, who stated that, “it feels like things have been hidden.” As her further statements make clear, this obfuscation might have been the tipping point in ultimately ordering that Teresa be incarcerated:

For a moment, I thought about probation until I read the government’s report. What you did in the financial disclosure really sticks in my craw. It’s what the court has a problem with. It shows blatant disrespect for the court. I’ve seen a lot, but I’ve never seen the confusion and work that went into these financial documents. The conduct which you piece-mealed, these financial documents, which I needed for this case were harder to decipher than any I’ve encountered.

(As reported by UsMagazine here). In addition, Joe was required by his plea agreement to file accurate personal returns for the years 2000 through 2011, which he had not yet done, and to pay back taxes and penalties amounting to $240,000, which neither he nor his lawyer seemed to know if he had yet repaid.

These sentences also reflect the high degree of discretion a judge retains in fashioning an appropriate sentence because the sentences were ordered to be served consecutively. Teresa will be incarcerated first, beginning January 5, so that she may spend the holidays with her four young daughters. Joe’s period of incarceration will begin once Teresa is released (which, based upon good time credit and other factors, could be less than one year), so that one parent remains available to care for the children. It is likely that the Court intentionally staggered the sentences in this manner, with Teresa being incarcerated first, because Joe is not a U.S. citizen and faces the likelihood of deportation to Italy upon completing his prison sentence.

At least one other former star of the Real Housewives franchise has also recently found herself in criminal trouble. Dana Wilkey, who appeared on the Real Housewives of Beverly Hills and was best known for announcing the cost of whatever she was wearing, including a pair of $25,000 sunglasses, was arrested in June 2014 for wire fraud conspiracy and wire fraud. She allegedly paid $360,000 in kickbacks through her advertising agency for internet marketing work performed for Blue Shield of California to two named defendants, one of whom was a Blue Shield employee who assisted in having the contract awarded to Ms. Wilkey’s agency and thereafter also concealed the inflated invoices submitted by Ms. Wilkey for payment. Ms. Wilkey has pleaded not guilty.

In celebrity tax evasion news abroad, BBC News is reporting today that Lionel Messi will face tax evasion charges in Spain. Mr. Messi is widely considered the world’s best soccer player and, now, the highest paid, following a $50 million deal earlier this year with his Spanish club, FC Barcelona, and a reported $20 million in endorsement deals. Last year, Mr. Messi and his father Jorge Messi were accused of defrauding the Spanish tax authorities of $5.4 million by utilizing companies in Belize and Uruguay from 2007 through 2009 to conceal income earned in endorsement deals with Adidas, Pepsi-Cola, and others. In defense, Mr. Messi argued that his father controlled his finances to such a degree that he should not be held culpable for any tax fraud, and his father caused a “corrective payment” of over $6.2 million to be made to satisfy the unpaid tax with interest. The Spanish prosecutors thereafter recommended that the charges be dropped, reasoning that Mr. Messi was not involved in the decisions relating to his finances or fully aware of the implications of utilizing foreign entities as it related to his tax obligations in Spain. Today, the court rejected this prosecutors’ request, explaining that Mr. Messi can still be charged with tax fraud, even if he did not “have complete knowledge of all the accounting and business operations nor the exact quantity” but was only “aware of the designs to commit fraud and consent to them.”

Lessons from The Situation: Pay your Taxes and Do Not Alter your Accounting Records

Reality stars being charged with tax evasion is always surprising, because not only does the whole television audience see you making money, but the government does, too. The first notable instance was the first winner of the CBS reality show Survivor, Richard Hatch, who was accused of not paying taxes on his million dollar prize and was later found guilty of filing a false tax return (among other crimes) for the year he won the competition.

Another reality star, Michael Sorrentino (aka “The Situation”), formerly of MTV’s Jersey Shore, now finds himself in a similar situation. Yesterday, Mr. Sorrentino and his brother, Marc Sorrentino, were indicted by a federal grand jury in New Jersey for filing false tax returns for 2010 and 2012, as well as conspiracy to defraud the United States. “The Situation” was also charged with failure to file a tax return for 2011. The Sorrentinos allegedly failed to report over $8.9 million earned through promotional and other activities, including publishing a comic book (featuring The Situation as a superhero, of course), owning a vodka company, and endorsing products such as vitamins and sunglasses. (See Indictment here). The Situation also allegedly improperly claimed deductions for business expenses that were really for personal use, including “personal grooming expenses.” U.S. Attorney Paul J. Fishman released this statement yesterday:

According to the indictment, Michael and Marc Sorrentino filed false tax returns that incorrectly reported millions made from promotions and appearances. The brothers allegedly also claimed costly clothes and cars as business expenses and funneled company money into personal accounts. The law is absolutely clear: telling the truth to the IRS is not optional.

(See Press Release here). Telling the truth to your accountant is not optional, either. According to the Indictment, the Sorrentino brothers allegedly provided their (unnamed) accounting firm with false information. In addition, the Indictment alleges that after the accounting firm received a grand jury subpoena for its QuickBooks software that contained the Sorrentinos’ books and records for 2012, entries in the software were “altered” whereby certain taxable payments were “reclassified” as non-taxable payments. It is not clear from the Indictment who directed that those changes be made, but the IRS obviously discovered the “reclassifications” during the criminal investigation, and the act of altering corporate book and records to cover up a crime almost certainly influenced the decision to prosecute in this case.

High Court Opens Door To IRS Personnel Examination

Today’s blog was first published in the June 19, 2014 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.

The U.S. Supreme Court issued a unanimous opinion Thursday in United States v. Clarke (No. 13-301) addressing the standard that must be satisfied before a taxpayer can question Internal Revenue Service personnel about its reasons for issuing a summons. The standard announced by the court, in an opinion authored by Justice Elena Kagan, requires a taxpayer to show “specific facts or circumstances plausibly raising an inference of bad faith” before a taxpayer may examine IRS officials.

“Naked allegations of improper purpose are not enough,” the court held. Instead, “[t]he taxpayer must offer some credible evidence supporting his charge.”

The case arose out of an IRS examination of Dynamo Holdings Limited Partnership focusing on interest expenses reported on the 2005 through 2007 income tax returns. When the three-year statute of limitations was about to expire, Dynamo agreed to a one-year-long extension, and later to a second one-year extension with the IRS. Dynamo refused, however, to grant the IRS a third extension.

Shortly after being refused the third extension, the IRS issued summonses to five individuals seeking information about Dynamo’s tax liabilities. Four of the five individuals refused to comply with the summonses. Two months later, the IRS issued a Final Partnership Administrative Adjustment that increased Dynamo’s tax liability, and Dynamo filed suit in Tax Court contesting the adjustment. Three months later, the IRS initiated summons enforcement proceedings in the district court.

The enforcement proceedings focused on whether the IRS acted in good faith in issuing the summonses. An IRS agent submitted an affidavit that attested to the required factors to obtain enforcement of an IRS summons pursuant to United States v. Powell, 379 U.S. 48 (1964): (1) there was a legitimate purpose for the investigation; (2) the summons inquiry is relevant to the purpose; (3) the IRS does not already have the information sought; and (4) administrative steps required by the Internal Revenue Code have been followed.

Seeking to demonstrate that the IRS acted in bad faith, the summoned individuals claimed that the IRS issued the summonses for two improper purposes: (1) as retribution for Dynamo’s refusal to agree to a third statute of limitations extension; and (2) as an inappropriate end-around the limited discovery rules in Tax Court in order to obtain additional evidence to use against Dynamo in that proceeding. The individuals argued that they were entitled to question IRS personnel to explore these issues.

The district court denied the taxpayers’ requests and ordered them to comply with the summonses. On appeal, the Eleventh Circuit reversed, holding that the district court abused its discretion in refusing to allow the IRS agents in question to be examined.

Following established circuit precedent, the court of appeals reasoned that “requiring the taxpayer to provide factual support for an allegation of an improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden, creating an impermissible ‘Catch 22.’” The individuals therefore could “question IRS officials concerning the Service’s reasons for issuing the summons[es].”

Notably, the appellate court’s ruling was an anomaly, as every other circuit addressing the issue (including the First, Third, and Seventh Circuits) had held that bare allegations of improper motive were insufficient to justify examination of an IRS agent. The Supreme Court granted certiorari to resolve the conflict, and firmly guided the Eleventh Circuit back into the fold by holding that “some credible evidence” of alleged improper motive must be adduced before IRS agents may be examined.

Specifically, the taxpayer must come forward with “specific facts or circumstances plausibly raising an inference of bad faith.” Because direct evidence will rarely be available, circumstantial evidence is sufficient, but “[n]aked allegations” are not. This standard, the court reasoned, should sufficiently protect a summons dispute from turning into a fishing expedition. Because the Eleventh Circuit never assessed the facts and circumstances submitted by the summoned individuals in support of their bad-faith claims, the court vacated the decision and remanded for further proceedings.

The Supreme Court’s decision is not surprising in that it aligned the Eleventh Circuit with other federal circuits, but it is surprising in that it adopted a formulation of the summons enforcement standard that is different from the standards already in use by other circuits. Crafting its own standard, the court now requires a showing that “plausibly rais[es] an inference of bad faith” or improper motive.

Justice Kagan’s opinion also provided guidance regarding the appropriate standard of review for appellate courts in summons enforcement proceedings. First, a court of appeals must review for abuse of discretion a trial court’s decision as to whether an examination of IRS agents is warranted. But, the court cautioned, a district court’s decision in this regard is entitled to deference only if based upon the correct legal standard. Second, the district court is not entitled to deference as to legal issues as to what qualifies as an improper purpose for issuance of an IRS summons.

The court’s limited opinion focused almost entirely on the legal standard and refrained from deciding any other aspect of the case. For example, the court did not opine as to whether issuing a summons to gain an unfair advantage in Tax Court litigation or to retaliate against a taxpayer for refusing to further extend the statute of limitations are improper motives for issuing a summons. Instead, the court left those issues to be decided by the court of appeals on remand, noting that both are legal issues for which no deference is due the district court.

The court also chose not to opine as to whether the evidentiary proof of bad faith submitted by the individuals (primarily, two sworn declarations) would satisfy the new standard.

One declaration set forth the timeline of Dynamo’s refusal to extend the statute of limitations and the issuance of the summonses, thereby implying the retributive nature of the summonses. The other described how IRS attorneys who were handling the Tax Court litigation were present when the one individual complied with the summons, and the initial investigating agents were not, tending to show the summons’ purpose was to support the Tax Court litigation.

Whether these are in fact improper motives, and whether declarations of this type are a sufficient basis to meet the new standard, will have to be addressed on remand as well as by lower courts now that the legal standard for challenging a summons enforcement has been clarified by the Supreme Court.

DOJ Offshore Enforcement Update: In Landmark Case, Credit Suisse Pleads Guilty, Agrees to Pay $2.6 Billion Penalty; Swiss Bank Program Continues to Move Forward

Yesterday, the Department of Justice announced that Credit Suisse AG pleaded guilty to having assisted U.S. taxpayers in evading the payment of U.S. taxes and agreed to pay a penalty of $2.6 billion. Deputy Attorney General James M. Cole described this announcement as “an historic guilty plea” and “the largest monetary penalty of any criminal tax case ever.”

Attorney General Eric Holder described the conduct of Credit Suisse as follows:

The bank actively helped its account holders to deceive the IRS by concealing assets and income in illegal, undeclared bank accounts.   These secret offshore accounts were held in the names of sham entities and foundations.   This conspiracy spanned decades. In the case of at least one wholly-owned subsidiary, the practice of using sham entities to conceal funds began more than a century ago.   Credit Suisse not only knew about this illegal, cross-border banking activity; they willfully aided and abetted it.  Hundreds of Credit Suisse employees, including at the manager level, conspired to help tax cheats dodge U.S. taxes.

 In the course of these activities, Credit Suisse deceived the IRS, the Federal Reserve, the Securities and Exchange Commission, and the Department of Justice.   The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served from accountability for their criminal actions.   They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds.   They failed to take even the most basic steps to ensure compliance with tax laws.   And when the bank finally began to feel pressure to correct illegal practices and comply with the law – as a result of the Justice Department’s investigation, of which they were notified in 2010 – Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed, and conducted a shamefully inadequate internal inquiry.

The Statement of Facts can be found here; the plea agreement can be found here. Credit Suisse must now disclose all evidence and information about its U.S. accounts that is required by the Program for Non-Prosecution Agreements of Non-Target Letters for Swiss Banks (“Swiss Bank Program”). This includes, among other things, information on how its cross-border business operated; how Credit Suisse attracted and serviced its account holders; and the total number of accounts held by U.S. persons with the maximum dollar value. Credit Suisse must also supply the number of U.S. persons affiliated with each account, identify whether each account was held by an individual or entity, disclose the name of any financial advisor, attorney or other representative associated with the account, and reveal detailed information about what funds were transferred into and out of the account. The DOJ may then make treaty requests to Switzerland for actual account records that would reveal the names of those U.S. account holders. Unlike the situation with UBS where UBS agreed to pay $780 million and turned over the names of approximately 4,000 U.S. account holders after being specifically authorized to do so by the Swiss government, Switzerland has not enacted legislation that would specifically permit Credit Suisse to turn over U.S. account holder names to the DOJ without violating Swiss banking secrecy laws.

Regarding the Swiss Bank Program, Kathryn Keneally, Assistant Attorney General of the Department of Justice’s Tax Division, spoke at an American Bar Association Section of Taxation meeting last week and stated that Swiss banks that are participating in the program are making disclosures to the DOJ about accounts held by individual U.S. taxpayers. She urged anyone who has not yet come clean to make a disclosure through the U.S. Offshore Voluntary Disclosure Initiative (OVDI) but noted that it may be too late for some people who have already been identified as a result of the information provided via the program. She also noted that some Swiss banks in the program are offering to pay part of the penalty on behalf of its account holders who apply and are accepted to the OVDI. She also mentioned that the DOJ has expanded its efforts beyond Switzerland, with activities in Israel, India, and in the Caribbean. See Allison Bennett, Nonprosecution Program for Swiss Banks Providing Significant Amount of Information (Bloomberg BNA 5/13/2014). [Our full breakdown of the Swiss Bank Program can be found here].

Recent Sentences for Federal Tax Crimes in 2014 – Part 3

Today we conclude our review of recent sentences imposed in federal tax crime cases in 2014. In our two previous posts here and here, we reviewed sentences relating to Foreign Bank Account, Tax Evasion, Employment Tax, False Tax Returns, and Tax Return Preparer crimes. In this post, we review sentences imposed for crimes for Returns Submitted via Identity Theft. Merely based upon the number of sentences detailed here, you can easily see how this area of the law has become a focus for the Justice Department.

Returns Submitted via Identity Theft

As the leader of a multi-state fraud conspiracy based in Alabama, Christopher Davis had pleaded guilty to conspiracy to defraud the U.S., wire fraud, and aggravated identity theft. Mr. Davis and co-conspirator Kenneth Blackmon would utilize personal identifying information, obtained from a number of sources, including from an Alabama medical facility, to file false tax returns that claimed refunds. Mr. Davis would receive the refunds from the IRS on prepaid debit cards and then direct runners to travel to Georgia and South Carolina to make cash withdrawals using the debit cards and return the cash to Mr. Davis. At one point, Mr. Davis had over 600 stolen identities and 200 prepaid debit cards. Mr. Davis was sentenced to 60 months in prison and was ordered to forfeit over $300,000. [DOJ press release here].

Another ringleader of a tax refund conspiracy run out of a Bronx apartment from 2011 to 2012, Jose Angel Quilestorres (a/k/a Carlos Jose) had pleaded guilty to several counts, including making a false claim, aggravated identity theft, and conspiracy to defraud the government. The tax refund fraud mill operated by Mr. Quilestorres caused false tax returns to be filed utilized personal identifying information from individuals living in Puerto Rico, who are issued Social Security Numbers but do not have to pay income tax unless they receive income from a U.S. company or the U.S. government. Using more than 8,000 stolen identities, Mr. Quilestorres obtained the fraudulent refund checks sometimes by bribing mail carriers to intercept the checks and deliver them to at least a dozen other individuals who were involved in this scheme. Mr. Quilestorres was sentenced to nine years in prison and ordered to pay $10.1 million in restitution. [Quilestorres complaint found here].

David Haigler, of Alabama, had pleaded guilty for a stolen identity tax refund fraud scheme. He had obtained 263 tax refund checks totaling over $600,000, obtained fictitious powers of attorneys for the individuals named on the checks, and then cashed the checks. He paid a portion of the proceeds to those who provided him with the fraudulent checks. Mr. Haigler was sentenced to 37 months in prison and three years of supervised release and ordered to pay $606,781 in restitution. [DOJ press release here].

Noemi Rubio Baez, of California, had pleaded guilty to having conspired in a scheme from 2008 to 2012 to electronically filing false tax returns using false income information and falsely claiming refunds through false tax credits. She had also pleaded guilty for aggravated identity theft because some of the filers had been unaware that she had filed returns using their names. Ms. Baez was sentenced to 30 months in prison and three years of supervised release and ordered to pay $703,536.86 in restitution. [DOJ press release here].

Former Alabama bank teller LaQuanta Clayton had pleaded guilty to crimes related to her opening five bank accounts in the names of another individual, without his knowledge, in order to receive fraudulent tax refunds. She then made withdrawals for the refund amounts and provided them to others who were involved in a larger scheme of submitting false returns for fraudulent refunds. Ms. Clayton was sentenced to 21 months in prison and three years of supervised release and ordered to pay $185,730 in restitution. [DOJ press release here].

An Alabama husband, wife, and son, Christian Young, Mary Young, and Octavious Reeves, had pleaded guilty to conspiring to obtain stolen identities in order to file false tax returns claiming refunds that were issued on prepaid debit cards, which proceeds, totaling over $400,000, were withdrawn by the family. All received sentences that included imprisonment – Ms. Young for 87 months, Mr. Young for 70 months, and Mr. Reeves for 51 months – and three years of supervised release. Mr. and Ms. Young were ordered to pay over $400,000 in restitution. Mr. Reeves was ordered to pay $42,257 in restitution. [DOJ press release here].

Ricky Lee Greenwood, of Oregon, had pleaded guilty to aggravated identity theft, wire fraud, and filing a false return. He had filed at least 66 false returns using fictitious wage and dependent information, including of unemployed individuals, in order to maximize credits to claim false refunds. Mr. Greenwood was sentenced to 40 months in prison and three years of supervised release and ordered to pay $296,106 in restitution. [DOJ press release here].

Virginia Parks-Bert, of Virginia, had pleaded guilty to defraud the government and aggravated identity theft. She had false returns for herself and others that contained false wage and tax withholding information in order to obtain false refunds, intentionally in small amounts so as to avoid IRS detection. Ms. Parks-Bert was sentenced to 42 months in prison and three years of supervised release and ordered to pay over $135,000 in restitution. [DOJ press release here].

Recent Sentences for Federal Tax Crimes in 2014 – Part 2

On Friday, we posted a review here of sentences imposed on defendants in 2014 for Foreign Bank Account, Tax Evasion, and Employment Tax crimes. In this post, we review sentences imposed on defendants in cases involving False Tax Returns and Tax Return Preparers.

False Tax Returns

Liquor store operator Bashar Saroki had pleaded guilty to filing a false tax return for 2009 and offering drug paraphernalia for sale. Despite reporting very little income in 2009, from 2007 to 2011 Mr. Saroki had sold more than $1 million in cutting agents used to dilute narcotics from his home and the Golden Star Party Store in Detroit. Mr. Saroki was sentenced to 30 months in prison and one year supervised release. [DOJ press release here].

Benjamin Green, III, had been convicted by a Connecticut jury of making a false claim against the U.S. and obstructing the administration of internal revenue laws. Mr. Green filed his 2008 individual tax return claiming a fraudulent Original Issue Discount (“OID”), where he claimed significant amounts of OID interest income and federal tax withholdings in order to obtain a tax refund of over $600,000. Mr. Green later attempted to hinder the IRS’s efforts to collect the wrongly-issued refund by, among other things, hiding property in a nominee entity. Mr. Green was sentenced to 51 months in prison with three years of supervised release and ordered to pay $582,074.50 in restitution. [DOJ press release here].

New Jersey roofing contractor Kenneth Morton, of Kenal Enterprises LLC, had pleaded guilty for filing a false return in tax years 2007, 2008, and 2009. Rather than deposit checks for his business in a business account, Mr. Morton cashed approximately $1 million in checks per year at a check cashing agency. Mr. Morton was sentenced to one year and one day in prison and one year of supervised release and ordered to pay $241,412 in restitution. [DOJ press release here].

Steven Frank Boitano, of Boitano, Sargent & Lily in California, had pleaded guilty to failing to file tax returns for 2005 through 2007 and then was found guilty by a jury for filing false returns for 2001 through 2003. Despite being a tax return preparer and certified public accountant, Mr. Boitano failed to file personal tax returns from 1991 through 2007. Only after an IRS audit was commenced did he file returns for the years 2001, 2002, and 2003, and in those returns, Mr. Boitano claimed to have made tax payments, which he never actually made, that resulted in a false claim for a refund. Mr. Boitano was sentenced to 41 months in prison and ordered to pay over $180,000 in restitution. [DOJ press release here].

Tax Return Preparers

Massachusetts tax return preparer Michael Edwards, of Boston Financial Associates, had pleaded guilty to obstruction and wire fraud for misleading an IRS auditor who was reviewing one of his client’s returns. He had given the auditor false documentation that would appear to support the returns that were being investigated. Mr. Edwards also pleaded guilty to having misappropriating nearly $800,000 in tax refunds from two of his clients. Mr. Edwards was sentenced to 36 months in prison and three years of supervised release and ordered to pay restitution of $573,518. [DOJ press release here].

New York tax return preparer Ranti Azeez-Taiwo, of Lot Associates Inc. in Staten Island, was found guilty by a jury of 16 counts of assisting in the preparation of false income tax returns for clients for the tax years 2006 through 2010. Without his clients’ knowledge, Mr. Azeez-Taiwo prepared returns that claimed false expenses and charitable donations, which caused, in some cases, the clients to pay fines and interest to the IRS because of the false returns prepared by Mr. Azeez-Taiwo. Mr. Azeez-Taiwo was sentenced to 18 months in prison and one year of supervised release and ordered to pay $24,802 in restitution. [DOJ press release here].

Georgia tax return preparer Irene Tamika Smith, of Quick Tax, conspired to file false tax returns by purchasing other people’s identities that she then sold to others who used the identities to claim false dependents on tax returns in order to obtain a higher refund. Ms. Smith was sentenced to 33 months in prison and ordered to pay $566,171 in restitution.   [DOJ press release here].

Detrick and Natashia Tucker, husband and wife owners of T&T Express Tax, a tax return preparation business in Georgia, had pleaded guilty to assisting in the preparation of false returns and conspiring to defraud the government by filing false returns. As the main tax preparer at the business, Ms. Tucker prepared returns with inflated refunds by incorrectly claiming the Earned Income Tax Credit and creating false business information, for the purpose of securing more clients for the business. Mr. Tucker had obtained an IRS electronic filing number for the business and allowed Ms. Tucker to use this number to file false returns. Ms. Tucker was sentenced to 46 months in prison and ordered to pay over $1.4 million in restitution. Mr. Tucker was sentenced to one year and one day in prison and ordered to pay about $66,000 in restitution. [DOJ press release here].

Arizona tax return preparer Margarita Gomez, of M & M Tax Service, had pleaded guilty to impeding the administration of internal revenue laws. Ms. Gomez had caused to have filed, sometimes without identifying herself as the return preparer, returns that claimed false refunds, which she had directed to be transmitted to her. She intentionally solicited clients who did not have a legal status to work or live in the U.S. and prepared false W-7 forms and other documentation. Ms. Gomez was sentenced to 30 months in prison and ordered to pay $200,408 in restitution. [DOJ press release here].

Recent Sentences for Federal Tax Crimes in 2014 – Part 1

As we reported in posts here and here, the Justice Department’s Tax Division and the IRS each issued press releases over the past two days touting their accomplishments over the past year in an effort to warn would-be tax cheats in advance of Tax Day. We take the opportunity here to review sentences imposed on defendants in 2014 for tax crimes. The cases mentioned here were not included in the two recent government press releases.

In this post, we review recent sentences relating to Foreign Bank Account, Tax Evasion, and Employment Tax crimes. We will cover sentences in cases involving False Tax Returns, Tax Return Preparers and Returns Submitted via Identity Theft in subsequent posts.

Foreign Bank Account

California attorney Christopher M. Rusch had pleaded guilty to conspiracy to defraud the government and failing to file a Report of Foreign Bank and Financial Accounts (FBAR) and testified against his two Arizona clients at their trial. Mr. Rusch had established nominee foreign entities and corresponding secret accounts at the Swiss banks of UBS AG and Pictet & Cie for his clients, which were used to conceal their ownership in the stock and income deposited into the accounts. Mr. Rusch also routed some of the money from the secret foreign accounts through his Interest on Lawyer’s Trust Account before disbursing it to his clients. This allowed his clients to evade reporting more than $6.6 million in income over the years 2007 and 2008. Mr. Rusch was sentenced to 10 months in prison (the same sentence each of his clients received) and three years of supervised release. [DOJ press release here].

Also in California, consultant Christopher B. Berg had pleaded guilty to failing to report a foreign bank account. From 2001 to 2005, Mr. Berg transferred over $600,000 in income to a secret bank account at UBS in Switzerland and did not report the account or the income to his accountants or to the IRS. Prior to sentencing, Mr. Berg paid $200,000 in restitution and an FBAR penalty of $287,896. Mr. Berg was sentenced to imprisonment for one year and one day and three years of supervised release. [DOJ press release here].

Tax Evasion

Jimmie Duane Ross had been convicted by a Utah jury for five counts of tax evasion for failing to pay taxes on an $840,000 arbitration award. To conceal the award proceeds, Mr. Ross had filed a false mortgage on his home, a false lien on his vehicle, dealt extensively in cash, and directed funds to an offshore account. In addition, Mr. Ross earned commission income in 2004-2007 and concealed that income by placing it in nominee entities. Mr. Ross was sentenced to 51 months in prison and three years of supervised release, and ordered to pay $532,389 in restitution. [DOJ press release here].

New Mexico farmer Bill Melot had been convicted by a jury for tax evasion, program fraud, and other crimes for failing to file tax returns since 1986, owing the IRS over $25 million in taxes. Mr. Melot also had provided false information – a false SSN and employer identification number – to the Department of Agriculture in order to obtain more than $225,000 in federal farm aid. He also had caused documents to be forged in order to conceal 250 acres that he owned in New Mexico and maintained an undisclosed Swiss bank account since 1992. Mr. Melot was sentenced to 14 years in prison and three years of supervised release and was ordered to pay over $18 million in restitution. [DOJ press release here].

Colorado contractor Michael Destry Williams, of Greenview Construction, Inc., had been convicted by a jury for tax evasion, structuring, bank fraud, and interfering with internal revenue laws. From 2005 through 2008, he failed to file income tax returns and pay income and employment tax. He utilized trusts to conceal income he earned in his construction business. He also structured a number of deposits totaling over $90,000 in 2008. When investigated, Mr. Williams sent frivolous correspondence to the IRS and made complaints about state court judges involved in other litigations. Mr. Williams was sentenced to 71 months in prison and five years of supervised release and ordered to pay over $60,000 in restitution. [DOJ press release here].

Former president of an Idaho highway construction company, Elaine Martin, of MarCon, Inc., was convicted by a jury of 22 criminal counts, including filing false tax returns, wire fraud, conspiracy, and obstruction. Ms. Martin concealed business income by diverting payments into a separate bank account, failing to reveal that account to corporate accountants, and destroying business records relating to those payments. She did not pay taxes on that income, referred to it as her “slush fund,” and lied to the IRS when questioned about MarCon’s business income. Ms. Martin also engaged in program fraud, by making false statements and taking actions to effectively lower her net worth in order to be eligible for federal- and state-sponsored construction programs. A co-owner of MarCon, Darrell Swigert, also was convicted of obstructing the IRS audit and subsequent criminal investigation into MarCon. Ms. Martin was sentenced to 84 months in prison and three years of supervised release. She was also ordered to pay restitution of over $98,000 and agreed to forfeit over $3 million. Mr. Swigert was sentenced to three months in prison and two years of supervised release and ordered to perform 100 hours of community service. [DOJ press releases here and here].

Employment Taxes

            An Indiana ear, nose and throat surgeon, Ronald Eugene Jamerson, had pleaded guilty to one count of failing to account for and pay employment taxes to the IRS from 2003 through 2008. Dr. Jamerson deducted amounts from his employees’ paychecks for federal income tax and unemployment tax but failed to pay that amount over to the IRS and also failed to file employment tax returns. Dr. Jamerson was sentenced to 12 months and one day in prison and ordered to pay $541,083 in restitution. [DOJ press release here].

DOJ Offshore Enforcement Update: Swiss Bank Program Moves Forward and Former Credit Suisse Banker Pleads Guilty

Earlier this week, Kathryn Keneally, Assistant Attorney General of the Department of Justice’s Tax Division, spoke at the 2nd Annual International Tax Enforcement Conference in Washington and said that the Tax Division will be strictly enforcing the deadlines of its program available to Swiss banks.  See Lydia Beyoud, DOJ Will Hold Firm on Deadlines for Swiss Banks to Make Disclosures (Bloomberg BNA 3/19/2014).

The next deadline in the process for the Swiss bank program is April 30 where Swiss banks that have indicated their interest in participating in the program must provide a plan to the DOJ of how each bank will become compliant with respect to its U.S. accountholders.  More specifically, Swiss banks have to provide information on how it structured, operated, and supervised its cross-border business, including the name and function of the individuals responsible for that business; how account holders were attracted and serviced by the bank; and the total number of U.S. accounts and the maximum aggregate dollar value of each account in existence on August 1, 2008, opened between August 1, 2008 and February 28, 2009, and opened after February 28, 2009.  [Our full breakdown of the program can be found here]. 

The DOJ has received 106 letters from Swiss banks requesting to participate in the program, although some banks may drop out as they move through this process.  In her remarks yesterday, Ms. Keneally emphasized that locating those who use foreign bank accounts to evade taxes will be a main priority of the Tax Division for the foreseeable future:

If you have people who come to you and are doing anything other than coming into compliance at this point, I simply can’t imagine what they’re thinking because we’re going to be on this for a while.

Along these lines, President Obama is seeking a substantial boost to the IRS’s budget for fiscal year 2015, proposing to increase its budget by $1.2 billion for a total of $12.5 billion.  See Obama Budget Seeks $12.5 Billion for IRS to Combat Fraud, Boost Taxpayer Services (Bloomberg BNA 3/18/2014).  While part of the increase is directed to reduce fraudulent returns filed using information obtained from identity theft, an increasing trend in this area, it would also be utilized to increase tax law enforcement activities, a focus of this administration in its effort to reduce the estimated $450 billion tax gap.

Finally, last week, the DOJ announced that a Swiss banker pleaded guilty to conspiring to defraud the IRS through his banking and investment services provided to U.S. customers on behalf of Credit Suisse Group AG, one of the 14 Swiss banks currently under U.S. criminal investigation. 

In a statement of facts accompanying the plea, Swiss citizen Andreas Bachmann admitted that between 1994 and 2006, he engaged in a conspiracy to assist U.S. customers in evading U.S. tax laws by concealing assets and income in secret Swiss bank accounts.  Mr. Bachmann would conduct two annual trips to the U.S., which were sanctioned by executive management of the bank, to meet with U.S. customers for banking and investment purposes.  Apparently, Mr. Bachmann had been told by the CEO that his actions would violate U.S. law and that “[y]ou know what we expect of you – don’t get caught.”  During his meetings with U.S. customers, he counseled them from retaining paper statements of their secret accounts and advised making transfers of amounts smaller than $10,000 to avoid reporting requirements.  He also would conduct cash transactions among U.S. customers.  Mr. Bachmann also worked with another individual, co-defendant Josef Dörig, who formed his own company specializing in the formation and management of nominee tax haven entities for U.S. customers.  Between 20 and 30 U.S. customers, who were not yet identified, were serviced by Mr. Bachmann.

Mr. Bachmann is scheduled to be sentenced on August 8, 2014, and he potentially could receive a sentence of five years’ imprisonment.  In his plea agreement, Mr. Bachmann has agreed to cooperate with the U.S. regarding any criminal activity known to him, including providing testimony, documents, and debriefings with the U.S. on this and other matters.  Should he cooperate to the degree sought by the U.S., then the U.S. has the right to seek a §5K departure at the time of Mr. Bachmann’s sentencing.  This guilty plea now places additional pressure on Credit Suisse to resolve the U.S. criminal investigation so as to avoid or mitigate what appears to be significant exposure for aiding and abetting the violation of U.S. tax laws by account holders.

FATCA Update: Latest Intergovernmental Agreements: Finland, Chile, and (Coming Soon) Luxembourg

Finland and Chile became the latest nations to sign agreements pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), bringing the total of such intergovernmental agreements to 24.   According to Law360, an agreement with Luxembourg will be announced soon, once a French translation of the agreement can be validated.  (Drew Singer, Chile, Finland Sign FATCA Agreements, Luxembourg Next, Law360 (March 7, 2014)).  Luxembourg has announced that its anticipated FATCA agreement will be a Model 1 agreement.

FATCA requires U.S. financial institutions to withhold 30% of certain payments made to foreign financial institutions (“FFI”) unless that FFI agrees to report U.S. taxpayer account information to the IRS.  FATCA currently goes into effect on July 1, 2014.

Finland has agreed to a Model 1A agreement where FFIs in Finland will report information to the Finnish Ministry of Finance, which will subsequently exchange information with the IRS.  This agreement is reciprocal, meaning that the U.S. will also report account information about Finnish individuals and entities in the U.S. to Finland.

Chile has agreed to a Model 2 agreement where FFIs in Chile will report information about consenting U.S. accounts directly to the IRS.  Information on non-consenting U.S. accounts can be reported government-to-government through a treaty request.

All FATCA intergovernmental agreements can be found here.

Justice Department Criticized for Not Sufficiently Pursuing Offshore Tax Evaders, and IRS-Criminal Investigation Reports Its FY2013 Accomplishments

The Senate Permanent Subcommittee on Investigations released a report earlier this week entitled “OFFSHORE TAX EVASION: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.”  The report is generally critical of the Justice Department’s efforts in pursuing individuals who hold offshore accounts that have not yet been disclosed to the IRS.  Although we have not yet fully digested the lengthy report, here are some findings that are noteworthy:

  • “Switzerland has continued to severely restrict the ability of Swiss banks to disclose the names of U.S. customers with undeclared Swiss accounts.  As a result, the United States has obtained few U.S. names and little account information.”
  • The Justice Department has sought documents from Credit Suisse and the other 14 Swiss banks currently under criminal investigation only through treaty requests.  The request for Credit Suisse was derailed by a Swiss Supreme Court ruling that found that part of the treaty request was unenforceable.  As a result, “the United States has obtained the names of only about 230 U.S. clients with hidden accounts at Credit Suisse,” which is “less than 1 percent of the over 22,000 U.S. accountholders with Swiss accounts at Credit Suisse.”  For the other 14 Swiss banks, the Justice Department has made treaty requests for at least two of the banks and that yielded “few U.S. client names and little account information.”
  • “By relying on the restrictive treaty process and refraining from using U.S. remedies enforceable in U.S. courts to obtain information directly from the 14 Swiss banks, DOJ essentially ceded control of the document process to Swiss regulators and Swiss courts that value bank secrecy and are willing to prohibit disclosure of bank information essential to effective U.S. investigations and prosecutions of U.S. tax evasion involving Switzerland.”
  • While a total of 34 Swiss bankers and professionals have been indicted “for aiding and abetting U.S. tax evasion, the vast majority of those defendants have yet to stand trial. Most continue to reside in Switzerland, without facing any public U.S. extradition request to require them to face U.S. criminal charges.” None of the seven indicted Credit Suisse bankers have been prosecuted. 
  • The Justice Department’s “decision to refrain from taking enforcement action against Credit Suisse over the past five years is part of a larger failure by the United States to obtain from the Swiss the names of the tens of thousands of U.S. persons who opened undeclared accounts in Switzerland and have not yet paid taxes on their hidden assets.”
  • “Despite constructing a 2013 program to enable hundreds of Swiss banks to apply for non-prosecution agreements or non-target letters, DOJ did not obtain any agreement in return from the Swiss Government to permit any of those Swiss banks to furnish U.S. client names to the United States.”
  •  While the implementation of FATCA will cause information on current accountholders to be disclosed to the U.S., there are a number of loopholes that reduce its effectiveness.  For instance, “the FATCA regulatory loopholes will require disclosure of only the largest dollar accounts; they will permit banks to ignore, in most cases, bank account information that is kept on paper rather than electronically; they will allow banks to treat accounts opened by offshore shell entities as non-U.S. accounts even when the entity is owned by a U.S. taxpayer; and the remaining disclosure requirements can be easily circumvented by U.S. persons opening accounts below the reporting thresholds at more than one bank.”

Yesterday, Deputy Attorney General James M. Cole and Assistant Attorney General, Tax Division, Kathryn Keneally appeared before that Subcommittee to respond to the criticism.  Cole noted that currently approximately 400 and 500 people per month are being entered into the IRS’s voluntary disclosure program, which has already caused over 43,000 taxpayers to pay over $6 billion in back taxes and penalties since 2009.  In addition, the Subcommittee should “expect additional developments in the coming months” on other ongoing cases.  See Tom Schoenberg and David Voreacos, Senate Hearing Likely to Flush Out More U.S. Tax Evaders (Bloomberg, Feb. 26, 2014).  Also, according to their prepared joint statement, the Justice Department is not only focused on activities in Switzerland but has now expanded its investigation to banking activities in India, Israel, Liechtenstein, Luxembourg, Barbados, and other Caribbean countries.

Finally, also this week, the IRS released its Criminal Investigation Annual Business Report for fiscal year 2013.  In general, CI reported more investigations, more recommended prosecutions, more indictments and informations filed, more convictions, and more custodial sentences.  The conviction rate was reported at 93.1%, of which 80.1% received a sentence that included incarceration.  Other noteworthy statistics for 2013 include:

  • Those convicted of tax fraud by way of the use of identity theft are sentenced to an average of 38 months in prison.
  • There were 207 convictions of tax return preparers, who were sentenced to an average of 27 months in prison.
  • Over 2,500 money laundering and Bank Secrecy Act investigations were initiated.
  • Nearly $1 billion in assets were seized or forfeited.
  • A Cyber Crime Unit was established “that will allow CI to proactively identify and pursue tax, money laundering, identity theft and other financial crimes in the virtual world.”