Justice Department Opens 2016 Tax Season With Stern Warning to Taxpayers

The Internal Revenue Service announced that the 2016 individual income tax filing season opened on January 19, 2016, with more than 150 million returns expected to be filed. The IRS expects more than 70 percent of taxpayers to again receive tax refunds this year. Last year, the IRS issued 109 million refunds, with an average refund of $2,797.

Simultaneously sending a stern warning to would-be tax cheats, the Justice Department’s Tax Division announced that a business owner in Alexandria, Virginia, had pleaded guilty to a multi-million dollar conspiracy to defraud the IRS that could land the defendant in jail for four to five years. In that case, the defendant owned and operated a gas station and multiple Subway restaurant franchises. According to court documents, the defendant admitted that between 2008 and 2014, he and his managers failed to deposit all of the gas station and Subway franchises’ gross receipts into corporate bank accounts. Instead, the defendant and his co-conspirators skimmed those receipts and retained them for their personal use, and failed to report those funds to the IRS. IRS investigators built their case by reviewing point-of-sales records for the Subway franchises, which showed total sales of $20 million for this period, but the corporate and partnership tax returns only reflected sales of $14 million. Compounding the problem, certain of the defendant’s businesses did not file returns at all in some years. The defendant also acknowledged filing false individual income tax returns. In his guilty plea, the defendant admitted that his illegal conduct caused a tax loss to the IRS of between $1.5 million and $3.5 million.

Using this defendant’s guilty plea as an opportunity to promote general deterrence and tax compliance, the Justice Department’s press release contains the usual cautionary language typically seen around April 15:

“As we start the 2016 filing season, this case serves as a reminder that the Justice Department, working with its partners at the IRS, remains committed to identifying, investigating and prosecuting businesses and individual taxpayers who willfully fail to file accurate tax returns and pay the taxes due,” said Acting Assistant Attorney General Ciraolo. “Every taxpayer owes a duty to their fellow citizens to pay their fair share and those who choose not to do so will face the consequences.”

“Today’s plea of Obayedul Hoque for conspiracy to defraud the United States sends a clear message to would-be tax cheats,” said Chief Richard Weber of IRS-Criminal Investigation (CI). “Whether you fail to file and pay your corporate taxes or your personal income taxes, IRS-CI special agents work diligently to uncover all kinds of fraud and hold everyone accountable. U.S. citizens expect and deserve a level playing field when it comes to paying taxes and there are no better financial investigators in the world when it comes to following the money.”

It is well-known that the Justice Department’s Tax Division typically increases the frequency of its press releases announcing enforcement activity in the weeks leading up to April 15. Academic research confirms that the DOJ issues a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

With the opening of the 2016 tax filing season, we can expect a steady drumbeat of DOJ press releases with increasingly stronger warnings as April 15 approaches.

Justice Department Announces Historic Conclusion of Swiss Bank Program for Category 2 Institutions

DOJ logoThe Justice Department achieved a historic milestone in its ground-breaking Swiss Bank Program with its announcement today of the final Category 2 bank resolution. The Justice Department executed its 80th and final agreement with HSZH Verwaltungs AG, which agreed to pay a civil penalty of more than $49 million. All told, the 80 Category 2 Swiss banks which resolved their criminal tax exposure with the U.S. government will pay more than $1.36 billion in penalties. Perhaps even more importantly, every Category 2 bank in the Swiss Bank Program is required to cooperate in any future related criminal or civil proceedings, thereby ensuring that the Justice Department will have the complete assistance from each bank as the U.S. government pursues leads throughout the world.

By all accounts, the Swiss Bank Program appears to have been an incredible success for the Justice Department (and IRS) in its efforts to combat offshore tax evasion. Never before had the U.S. government offered an amnesty program to the entire banking industry in a particular country, and at the time the program was unveiled in 2013, it was not clear that the program would be a success or that Swiss banks would be interested. But given the overwhelming demonstration of interest from Swiss banks, the substantial monetary penalties collected, and the wealth of information shared with the U.S., the program can fairly be declared a significant win for the U.S. government. Given the success of the Swiss Bank Program, it will be interesting to see whether the Justice Department offers a similar program to banks in other countries or regions.

Today’s press release included the following quote from the Attorney General thanking the Swiss government for its efforts in making the Swiss Bank Program so successful:

“The Department of Justice is committed to aggressively pursuing tax evasion, and the Swiss Bank Program has been a central component of that effort,” said Attorney General Loretta E. Lynch. “Through this initiative, we have uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts. We have improved our ability to return tax dollars to the United States. And we have pursued investigations into banks and individuals. I would like to thank the Swiss government for their cooperation in this effort, and I look forward to continuing our work together to root out fraud and corruption wherever it is found.”

Other Justice Department officials echoed the Attorney General’s sentiments, and noted that the Swiss Bank Program has provided the DOJ and IRS with a wealth of information that is being mined for leads that are being pursued civilly and criminally throughout the world:

“The department’s Swiss Bank Program has been a successful, innovative effort to get the financial institutions that facilitated fraud on the American tax system to come forward with information about their wrongdoing – and to ensure that they are held responsible for it,” said Acting Associate Attorney General Stuart F. Delery. “As we have seen over the last year, Swiss banks are paying an appropriate penalty for their misconduct, and the information and continuing cooperation we have required the banks to provide in order to participate in the program is allowing us to systematically attack offshore tax avoidance schemes.”

“The completion of the agreements under Category 2 of the Swiss Bank Program represents a substantial milestone in the department’s ongoing efforts to combat offshore tax evasion, and we remain committed to holding financial institutions, professionals and individual taxpayers accountable for their respective roles in concealing foreign accounts and assets, and evading U.S. tax obligations,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. “Using the flood of information flowing from various sources, the department is investigating this criminal conduct, referring appropriate matters to the Internal Revenue Service for civil enforcement and pursuing leads in jurisdictions well beyond Switzerland. Individuals and entities engaged in offshore tax evasion are well advised to come forward now, because the window to get to us before we get to you is rapidly closing.”

Top officials from the Internal Revenue Service similarly commended today’s announcement, noting that more than 54,000 taxpayers have come forward to voluntarily disclose their previously-undisclosed offshore assets:

“Today’s resolution with HSZH Verwaltungs AG brings to a close this phase of DOJ’s Swiss Bank Program,” said acting Deputy Commissioner International David Horton of the IRS Large Business & International Division. “The comprehensive success of this program sends a powerful message to those who might think they can evade their tax obligations by going offshore. A whole sector of financial institutions, 80 banks in all, has been held accountable for aiding the use of secret accounts and circumventing U.S. law. In addition to the more than $1.3 billion in penalties from these resolutions, more than 54,000 taxpayers have come forward to the IRS to pay more than $8 billion in taxes, interest and penalties.”

“The bank agreement with HSZH announced today may bring an end to one phase of the Swiss Bank Program, but more importantly it brings us closer to our overall goal of compliance and accountability for financial institutions and U.S. taxpayers,” said Chief Richard Weber of IRS-Criminal Investigation. “The data received from each agreement on the accounts, schemes and linkages is extremely valuable in combating international tax evasion. I could not be more proud of the effort of our special agents who worked tirelessly to make this program a success in coordination with the Department of Justice.”

The Swiss Bank Program, which was announced on Aug. 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program, banks are required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

Taxpayers who have still not “come clean” and declared their offshore assets may still take advantage of various IRS programs, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, but the price of admission has now increased if they had accounts at HSZH:

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts. On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement. With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at HSZH must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

IRS Criminal Investigation Annual Report Confirms Devastating Impact of Budget Cuts

Today the IRS Criminal Investigation Division released its annual report, summarizing its activities and accomplishments during fiscal year 2015. One of the key takeaways from the report is the devastating impact of budget cuts on the IRS as a whole, and on the criminal investigation function in particular. The report acknowledges that CI hired only 45 new special agents over the last three years, and staffing levels hit their lowest levels since the 1970s. In virtually all categories of enforcement activity – investigations initiated, prosecution recommendations, indictments, convictions, and sentencings – CI’s results for FY2015 were dramatically reduced. In FY2015, CI had only 2,316 special agents, down from a historical high of 3,363 special agents in FY1995.  A Bloomberg article published today neatly summarized this news:

Tax cheats can breathe a little easier. The gun-toting Internal Revenue Service investigators who send felons to prison are retiring in droves and there’s no one to replace them.

The IRS press release announcing the release of the report follows below:

WASHINGTON — The Internal Revenue Service today announced the release of its IRS Criminal Investigation (CI) annual report, reflecting significant accomplishments and enforcement actions taken in fiscal year 2015.

Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015.

“Our criminal investigators continue to bring complex and meaningful cases that have a significant impact on tax administration,” said John Koskinen, IRS Commissioner. “This work also plays an important deterrent effect on would-be criminals, helping ensure fairness for taxpayers and protecting voluntary compliance in our tax system. The report is a tribute to the important work done by IRS Criminal Investigation.”

“This report reflects the extremely high level of commitment that CI agents bring to the job and the great case work accomplished in the past year,” said Richard Weber, Chief, IRS Criminal Investigation. “But the story that the report tells this year is that fewer agents do mean fewer cases. I’m extremely proud of all that we accomplished in spite of our budget challenges, but the inability to hire is really taking a toll.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted the highest conviction rate in all of federal law enforcement — 93.2%. CI is routinely called upon by prosecutors across the country to be the lead financial investigative agency on a wide variety of financial crimes including international tax evasion, identity theft and transnational organized crime.

“While our highest priority is to enforce the nation’s tax laws, we cannot underestimate the deterrent effect we are having on would-be criminals and the impact we are having on tax administration,” said Weber. “I’m certain that a majority of Americans who follow the law would tell you that they want consequences for those who do not.”

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The 50-page report summarizes a wide variety of IRS CI activity throughout the fiscal year and includes case summaries on a range of tax crimes, money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes.

The cases in this year’s report represent the diversity and complexity of CI investigations. They touch almost every part of the world and were again some of the most successful in the history of CI. In May, indictments were unsealed in the FIFA investigation, a case that continues to this day. At the time, the investigation involved coordination with police agencies and governments in 33 countries and was one of the most complicated international white-collar cases in recent memory. Ross Ulbricht, the creator and owner of the “Silk Road” website, was sentenced to life in prison and ordered to forfeit more than $183 million. A Michigan man, Dr. Farid Fata, was sentenced to 540 months in prison and ordered to forfeit $17 million for his role in a health care fraud scheme. Fata purposefully misdiagnosed people with cancer, pumping their bodies with chemotherapy that they did not need, in order to get rich.

“I’m proud of IRS CI and the reputation that this agency has as the best financial investigators in the world. We have a long and storied history and we continue to write new chapters to that history each year,” said Weber. “Regardless of our budget situation, I am proud that we have not lost sight of our impact or mission and that the quality of our cases remains high.”

Three More Swiss Banks Have Secured Non-Prosecution Agreements with the DOJ

Since our last update, three more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program –Valiant Bank AG, Schroder & Co. Bank AG, and Hypothekarbank Lenzburg AG. To resolve their respective tax-related criminal offenses, Valiant Bank agreed to pay a penalty of $3.3 million, Schroder Bank agreed to pay a penalty of $10.3 million, and HBL agreed to pay a penalty of $560,000.

In press releases, the DOJ described the relevant conduct of each of the banks in relation to their U.S. accountholders as follows:

Valiant Bank (announced yesterday)

Valiant traces its origins to 1824 and is headquartered in Bern, the capital of Switzerland.  Today, Valiant is the successor of 40 banks.

Valiant offered hold mail services and numbered accounts to its U.S. clients, including some U.S. clients who had not provided Valiant with an Internal Revenue Service (IRS) Form W-9.  Valiant also accepted funds from 19 UBS accountholders who exited UBS.  Eleven of these 19 U.S. persons provided a signed Form W-9.  The remaining eight U.S. persons who did not were later forced to close their Valiant accounts.

For 26 accountholders who refused to sign a Form W-9, Valiant cashed out or converted into gold hundreds of thousands (and even millions) of dollars in account balances.  In late November 2011, one accountholder withdrew more than one million Swiss francs in various currencies and 114,000 Swiss francs in gold coins, gold bars and precious metal.  Another accountholder withdrew $2 million in cash and wired 400,000 Swiss francs to a U.S. bank.  In both instances, the accountholders refused to sign a Form W-9.  Other accountholders withdrew only amounts under $10,000 either by U.S. dollar cash withdrawals or by check or wire transfer to the United States, or transferred large sums to non-U.S. institutions.  For example, one accountholder transferred over 435,000 euros to France and $350,000 to Luxembourg.  Two other accountholders each transferred 75,000 Swiss francs to Dubai and closed their accounts with cash withdrawals of over 300,000 Swiss francs.

In 2009, an accountholder refused to sign a Form W-9 and requested that Valiant ignore the accountholder’s U.S. status.  The accountholder’s non-U.S. spouse later opened a separate account at Valiant, and the accountholder transferred more than $1 million into that account.  According to an “Agreement of Donation” between the accountholder and the accountholder’s non-U.S. spouse, the purpose of the transfer was “to make a donation” and “without any consideration.”  The agreement provided that the donation was “irrevocable.”  The non-U.S. spouse then transferred the funds to UBS and instructed Valiant to close the account.

Some U.S.-related accounts at Valiant were held in the name of non-U.S. entities with one or more U.S. beneficial owners.  In one case, a British Virgin Islands entity opened an account at Valiant through a third-party Swiss entity assigned to manage the account.  The entity holding the account designated four U.S. persons as beneficial owners, but signed a Valiant form declaring that the account was for the benefit of non-U.S. persons.

Since Aug. 1, 2008, Valiant had 330 U.S.-related accounts, out of a total of 600,000 accounts.  The maximum aggregate dollar value of the U.S.-related accounts was $147.4 million.  Valiant will pay a penalty of $3.304 million.

Schroder Bank (announced 9/3/2015)

Schroder Bank was founded in 1967 and received its Swiss banking license in 1970.  Since 1984, Schroder Bank has had a branch in Geneva.  The bank has two wholly owned subsidiaries, Schroder Trust AG (domiciled in Geneva) and Schroder Cayman Bank & Trust Company Ltd. (domiciled in George Town, Grand Cayman).  Schroder Cayman Bank & Trust Company Ltd. provides services to clients such as the creation and support of trusts, foundations and other corporate bodies.  Both subsidiaries also acted in some cases as an account signatory for entities holding an account with the bank.  Schroder Bank is in the process of closing the operations of Schroder Trust AG and Schroder Cayman Bank & Trust Company Ltd.

Schroder Bank opened accounts for trusts and companies owned by trusts, foundations and other corporate bodies established and incorporated under the laws of the British Virgin Islands, the Cayman Islands, Panama, Liechtenstein and other non-U.S. jurisdictions, where the beneficiary or beneficial owner named on the Form A was a U.S. citizen or resident.  In addition, a small number of accounts were opened for U.S. limited liability companies (LLCs) with U.S. citizens or residents as members, as well as for U.S. LLCs with non-U.S. persons as members.  Schroder Bank communicated directly with the beneficial owners of some accounts of trusts, foundations or corporate bodies, and it arranged for the issuance of credit cards to the beneficial owners of some such accounts that appear in some cases to have been used for personal expenses.

Schroder Bank also processed cash withdrawals in amounts exceeding $100,000 or the Swiss franc equivalent.  For at least three U.S.-related accounts, a series of withdrawals that in aggregate exceeded $1 million were made.  In addition, at least 26 U.S.-related accountholders received cash or checks in amounts exceeding $100,000 on closure of their accounts, including in at least three cases cash or checks in excess of $1 million.

Between 2004 and 2008, four Schroder Bank employees traveled to the U.S. in connection with the bank’s business with respect to U.S.-related accounts.  In 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the Internal Revenue Service (IRS) and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  Between Aug. 1, 2008, and June 30, 2009, Schroder Bank opened eight U.S.-related accounts with funds received from UBS, which was then under investigation by the U.S. government.

Since Aug. 1, 2008, Schroder Bank had 243 U.S.-related accounts with approximately $506 million in assets under management.  Schroder Bank will pay a $10.354 million penalty.

Hypothekarbank Lenzburg AG (announced 8/27/2015)

HBL offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  For example, HBL, upon client request, did not send mail associated with some U.S.-related accounts to the United States.  In addition, HBL offered numbered accounts to its clients, a service by which access to information about an account, including the identity of the accountholder, was limited to only certain employees of HBL.  In a handful of instances, the accountholders of U.S.-related accounts who refused to provide a Form W-9 or who admitted that they were not tax compliant withdrew significant amounts of cash or physical assets when HBL forced these accounts to be closed.

In or about 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the IRS and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  HBL opened one account for a U.S. person who exited UBS.  For another long-standing holder of a U.S.-related account, HBL received a transfer of funds from an account held at UBS into a pre-existing account at HBL.

Another accountholder who resided in the United States for many years had two accounts, one of which was a numbered account.  In 2012, the accountholder’s relationship manager requested a Form W-9 for the numbered account and the accountholder refused to provide one.  As a result, the relationship manager directed the accountholder to close the numbered account.  Thereafter, the accountholder came to Lenzburg to close the numbered account.  The accountholder withdrew 240,000 Swiss francs and 12,000 euros and purchased precious metals in the amount of 318,000 Swiss francs.

Since Aug. 1, 2008, HBL had 96 U.S.-related accounts with an aggregate value of $69.8 million.  HBL’s average annual revenue attributable to U.S.-related accounts in the form of fees, commissions and earnings on client funds that were loaned out by HBL was $198,000, or a total of $1.2 million since Aug. 1, 2008.  HBL will pay a penalty of $560,000.

Under the Swiss Bank Program, eligible Swiss banks that had notified the DOJ by December 31, 2013 of an intent to participate in the Program were eligible to resolve any potential criminal liabilities in the U.S. by completing the following:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of these non-prosecution agreements, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department released the following documents with each of these announcements:

  • The Valiant Bank non-prosecution agreement and statement of facts (available here).
  • The Schroder Bank non-prosecution agreement and statement of facts (available here).
  • The HBL non-prosecution agreement and statement of facts (available here).

Ninth Circuit Reverses Tax Fraud Conviction Where Returns Were Not “Filed” With Internal Revenue Service

Yesterday the Ninth Circuit addressed the question of whether an individual can be convicted of filing false tax returns pursuant to 26 U.S.C. 7206(1) where the tax returns in question were tendered to an IRS agent during an audit, and were not filed with an IRS Service Center in the normal course. See United States v. Boitano, No. 14-10139 (slip opinion available here). The defendant (who was also an accountant) had been convicted following a jury trial of making a false statement under penalty of perjury on personal income tax returns, and he appealed his conviction to the Ninth Circuit.

The Ninth Circuit’s opinion summarizes the pertinent facts as follows:

During the period relevant to this appeal, Boitano was a partner in Boitano, Sargent & Lilly, an accounting firm. His responsibilities included preparing tax returns and representing clients during IRS audits, but Boitano did not file his own income tax returns for the years 1991 to 2007.

The IRS undertook an examination in 1992/1993 and in 2004. Boitano still did not file any returns, and his case was referred to the IRS’s Special Enforcement Program.

In June 2009, Special Enforcement Program Agent Nick Connors requested a meeting with Boitano regarding his failure to file returns for 2001 through 2007. Connors and Boitano ultimately met three times. During the third meeting, Boitano handed Connors income tax returns for 2001, 2002, and 2003. The returns were signed under penalty of perjury by Boitano and his wife. Connors stamped the first page of the returns “Internal Revenue Service, SB/SE – Compliance Field, Sep 04, 2009, Area 7, San Francisco, CA,” and hand wrote “delinquent return secured by exam” on the first page of each. Per Boitano’s request, Connors copied the first page of the returns and gave the copies to Boitano as receipts.

The returns Boitano handed to Connors reported “estimated tax payments” that had not been made. The 2001 return reported a $26,000 payment, the 2002 return reported a $38,000 payment, and the 2003 return reported a $57,000 payment. In fact, the government calculated that Boitano owed the IRS $52,953.80 for 2001, $72,797.00 for 2002, and $104,545.94 for 2003.

Agent Connors quickly realized that the IRS did not have record of receiving the claimed estimated tax payments. Therefore, instead of sending the returns to the IRS service center for processing, he confronted Boitano with the discrepancy. According to Connors, Boitano “physically got a little pale and said that he was not sure why there [were] differences.” Soon thereafter, Connors sent Boitano a letter asking that he substantiate the estimated tax payments, or, if those estimates were not correct, that he identify the correct estimated amounts with “a written statement dated and signed explaining in detail why you believed the estimated payments to be the amounts reported on the delinquent returns filed on 9/4/09.” Boitano never responded.

Boitano was indicted and charged with three counts of making false statements under 26 U.S.C. § 7206(1). Section 7206(1) establishes that it is a felony for any person to “[w]illfully make[] and subscribe[] any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” Boitano was also charged with three misdemeanor counts of failure to file taxes under 26 U.S.C. § 7203. He pleaded guilty to the three misdemeanors, but proceeded to trial on the felony charges.

The defendant argued at trial that filing is an essential element of § 7206(1) and that his act of handing the returns to Agent Connors did not constitute “filing” within the applicable IRS statute and regulations. The government agreed that filing is an element of the charged offense, but argued the filing element was satisfied by the uncontradicted evidence showing that the defendant handed fraudulent returns to Agent Connors. The district court agreed with the government. Over objection, Connors was permitted to testify that the defendant “filed 2001, 2002, and 2003 delinquent tax returns with me.” Connors provided additional foundational testimony that the IRS “treat[ed] the[] returns as having been filed” on September 4, 2009, the day the defendant handed them to Connors.

The Ninth Circuit’s opinion notes that the defendant’s opening appellate brief reiterates the position he argued unsuccessfully in the district court – that the evidence did not show the subject returns were “filed” within the meaning of the applicable IRS statutes and regulations when he handed them to Agent Connors. The court of appeals noted, however, that the government’s response brief contained an “unusual twist”:

Reversing its prior position, the government now concedes that “there is a single definition of ‘filing’ that applies in both the civil and criminal context,” and that “the record does not support that the returns here were filed.” The government agrees with Boitano that Connors’s testimony that the returns were “filed” when Boitano handed them to him was incorrect. The government’s new argument is that filing is not an element of the charged offense because, “by its own terms, [§] 7206(1) does not require the government to prove ‘filing’ as defined by the IRS regulations to establish a violation of the statute.” The government reasons, “under a correct understanding of Section 7206(1), [Boitano’s] actions violated the statute by his completing a return, signing it, and taking actions by which he gave up any right of self-correction.” (Emphasis added.) Notably, the government concedes that if it had to prove the returns were filed within the meaning of the IRS regulations, then Boitano’s convictions must be reversed.

The Ninth Circuit quickly dispensed with the government’s new argument, concluding that binding precedent supported the defendant’s position:

Our court has long held that “filing” is an element of a § 7206(1) violation. In United States v. Hanson, we affirmed a conviction for making false statements in violation of § 7206(1) where the defendant “fil[ed] false IRS forms that reported payments [defendant] had never made and claimed a tax refund [defendant] was not due.” 2 F.3d 942, 944 (9th Cir. 1993). In so ruling, we stated that “[t]o prove a violation of § 7206(1), making false statements, the government must prove that the defendant (1) filed a return, statement, or other document that was false as to a material matter . . . .” Id. at 945.

The government cites numerous reasons for its new contention that § 7206(1) does not require filing, but it offers no intervening authority for its argument that it should only be required to show that Boitano gave up the right of selfcorrection. It argues: (1) the statute, by its own terms, does not require proof of filing; (2) the Supreme Court has not identified filing as an element of the offense; (3) interpreting the statute not to require filing makes sense because the statute is not limited in its scope to tax returns; (4) the statute’s legislative history does not establish that filing is an element of the offense; and (5) filing a document is one way, but not the only way, to satisfy the statute. We are bound, however, by Hanson’s plain and explicit identification of “filing” as an element of a § 7206(1) offense. Id. (“To prove a violation of § 7206(1) . . . the government must prove that the defendant (1) filed a return. . . .”); see also United States v. Tucker, 133 F.3d 1208, 1218 (9th Cir. 1998).

The Ninth Circuit concluded that because binding circuit precedent establishes that “filing” is an element of a conviction under § 7206(1), and the government conceded on appeal that the record does not support that the returns here were filed, the defendant’s felony convictions must be reversed.