Tax Day Brings Barrage of Criminal Tax Charges and Warnings

With “Tax Day” upon us, the Justice Department’s Tax Division and U.S. Attorney’s Offices around the country have unleashed an avalanche of press releases warning would-be tax cheats of the severe criminal and civil consequences they may face.

From the U.S. Attorney’s Office for the Northern District of Illinois comes a press release entitled “Federal Prosecutions Serve as Reminder to Comply with Tax Obligations as Filing Deadline Approaches” announcing criminal charges against four Chicago-area residents for a variety of alleged income tax frauds.  Two Chicago-area tax preparers were charged with assisting clients in obtaining hundreds of thousands of dollars in fraudulent refunds.  The preparers fraudulently reduced their clients’ tax liabilities by misrepresenting their eligibility to claim tax credits, such as dependent exemptions, education and child credits.  In addition, two individuals were indicted for filing hundreds of fraudulent income tax returns that claimed refunds totaling more than $2.1 million.

The U.S. Attorney’s Office for the Eastern District of California has issued a similar press release entitled “Federal Tax Enforcement Is a Focus of Prosecutions in the First Quarter of 2016.”  This release catalogues five new tax indictments so far in 2016, five convictions so far in 2016, and the sentences handed down in tax cases to date this year.  The press release concludes with this statement:  “More criminal tax investigations are underway.”

The U.S. Attorney’s Office for the Middle District of Pennsylvania has issued a lengthy press release entitled “U.S. Attorney And IRS Announce Message To Potential Tax Cheats That Tax Crimes Result In Criminal Prosecution And Lengthy Prison Sentences And Fines And Issue a Fraud Notice To Taxpayers.”  This announcement summarizes recent prosecutions of taxpayers for tax evasion and tax fraud and stolen identity refund fraud.  The release concludes with a “Tax Scam Warning” urging taxpayers to exercise caution during tax season to protect themselves against tax scams.  In particular, taxpayers are warned to avoid the following common tax schemes:

•           Identity Theft

•           Phone Scams

•           Phishing

•           Return Preparer Fraud

•           Offshore Tax Avoidance

•           Inflated Refund Claims

•           Fake Charities

•           Falsely Padding Deductions on Returns

•           Excessive Claims for Business Credits

•           Falsifying Income To Claim Credits

•           Abusive Tax Shelters

•           Frivolous Tax Arguments

In Sacramento, California, the U.S. Attorney announced on April 15 that four individuals, including two current IRS employees, were criminally charged in tax cases.  The two IRS employees, who are married to each other, were arrested when they came to work and were charged with aiding others in the preparation of false tax returns and filing false tax returns themselves.  Separately, an individual was charged with two counts of tax evasion for tax years 2009 and 2010.  Finally, an individual was criminally charged with failing to file tax returns for 2009 through 2012.  In addition to these cases, so far in 2016, eight individuals have been indicted, five have been convicted and 14 were sentenced for either submitting false claims for refunds or evading taxes.

In Alaska, the U.S. Attorney’s Office announced that a criminal defense attorney, who operated a law practice in Anchorage, was sentenced to 14 months in prison following his guilty plea in June 2014 to three counts of willful failure to file income tax returns.  The defendant in that case admitted that he failed to file federal income tax returns with the Internal Revenue Service for the years 2006, 2008, and 2009, causing a tax loss to the government of $886,058.  According to a sentencing memorandum filed by the government, the defendant still has not paid the more than $800,000 in income taxes that he owed for the years 2006, 2008 and 2009.  At the same time that he failed to file his tax returns and pay the taxes due, the defendant made personal expenditures for gambling, cars, and property.  The defendant also failed to file timely income tax returns for the years 2000 through 2004, 2007, 2010 and 2011, failed to file employment tax returns during the years 2004 through 2008, and failed to pay employment taxes to the IRS.  According to documents filed with the court, the defendant also submitted a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to the IRS in 2009.  A Form 433-A is used by the IRS to obtain financial information from a taxpayer to determine his ability to pay an outstanding tax liability.  On the Form 433-A, which he signed under the penalties of perjury, the defendant failed to disclose certain retirement assets.  In a press release announcing the sentencing, the Tax Division’s Acting Assistant Attorney General made the following statement:

“This case is a reminder that no one is above the law,” said Acting Assistant Attorney General Ciraolo.  “Indeed, as an attorney who has defended individuals charged with financial crimes, Mr. Stockler was particularly aware of his obligations under the tax laws and the consequences of violating them.  Taxpayers who willfully disregard their legal responsibilities will be held to account.”

In the Northern District of Ohio, the U.S. Attorney announced today that a businessman was charged with four counts of tax evasion, based upon taking improper tax write-offs and not reporting more than $2 million in taxable income. The defendant is alleged to have diverted corporate funds for his own use to benefit his personal lifestyle, such as to construct a waterfront residence, maintain his yacht, and pay for luxury travel. It was further alleged that the defendant falsely described these expenses as business-related, and provided false information to his accountants about the nature of these expenses. The government alleges that the defendant underreported his taxable income by more than $2 million during tax years 2007, 2008, 2009 and 2010, and owes at least an additional $611,000 in taxes for those periods. According to the IRS Special Agent in Charge, “[a]s this tax filling season comes to a close, we are reminded of our collective duty to accurately file and pay our taxes. Those who willfully abscond from this duty will be pursued and brought to justice.”

Finally, as part of its ongoing efforts to combat return preparer fraud, the Justice Department filed a federal court lawsuit today seeking to shut down a tax return preparer in South Florida.  The civil complaint alleges that the preparer prepares income tax returns that fraudulently understate his customers’ tax liabilities by falsely claiming deductions for business expenses his customers never incurred, fraudulently overstating his customers’ claims for refunds by falsely claiming education or fuel tax credits to which his customers are not entitled, or both.  According to the complaint, the Internal Revenue Service IRS audited 340 of the more than 3,132 returns he prepared since 2009 and found that the preparer understated the tax owed on all but five of the 340 returns—a total of more than $1.8 million in understatements.  As a result of these fraudulent activities, many of the preparer’s customers are now liable for significant tax deficiencies, penalties and interest.

All of these announcements should serve as a reminder, and a stern warning, that taxpayers should take care to ensure that their tax returns are accurate, complete, and filed on time.  Each of the cases described above demonstrate that taxpayers who deliberately understate their income, overstate their deductions,  or otherwise file inaccurate tax returns may subject themselves to criminal liability.  Taxpayers who are unable to file on time today should file for an automatic six month extension of the deadline.

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.

New Law Authorizes State Department to Revoke U.S. Passports of Tax Delinquents

This afternoon, President Obama signed into law a five-year, $305 billion highway funding bill that includes several controversial tax measures designed to help fund the legislation. One provision in the legislation authorizes the State Department to revoke U.S. passports of taxpayers who owe the U.S. Treasury more than $50,000 in tax liabilities. Another provision authorizes the Internal Revenue Service to use private debt collectors. In this blog post, we address the passport revocation provision, which now provides the IRS with a powerful tool to force tax compliance.

The law adds a new provision to the Internal Revenue Code (section 7345) which authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” A “seriously delinquent tax debt” is defined as a federal tax liability which been assessed and is greater than $50,000, and for which the IRS has either filed a lien or levy. (This dollar amount will be adjusted for inflation after 2016.)

Upon receipt of such certification, the Secretary of State is authorized to take action with respect to denial, revocation, or limitation of such taxpayer’s U.S. passport. The law prohibits the Secretary of State from issuing a passport to any individual who has a “seriously delinquent tax debt,” with exceptions provided for emergency circumstances or humanitarian reasons. The law authorizes the Secretary of State to revoke a passport previously issued to an individual with a “seriously delinquent tax debt.” If the Secretary of State decides to revoke a passport under these circumstances, he or she is authorized to limit such passport to return travel to the United States only. The Secretary of State may also deny any passport application submitted without a Social Security number.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from this new law. If the Treasury Secretary has already certified a taxpayer to the Secretary of State, such certification must be revoked within 30 days of the taxpayer making full payment and obtaining release of lien; requesting for innocent spouse relief; entering into an installment agreement; or making an offer-in-compromise which is accepted. In the event that the Treasury Secretary issues an erroneous certification, such certification must be revoked as soon as practicable.

The law does includes certain provisions to safeguard taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. Such notice must specify that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certification. The court may determine that the certification was erroneous and, if so, order the Treasury Secretary to so notify the Secretary of State. Taxpayers who are serving in a combat zone are granted relief from the law’s provisions.

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation, or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences.

Finally, the law amends the Internal Revenue Code provision addressing confidentiality of tax returns and return information in order to permit the sharing of such information with the Secretary of State. In particular, for each taxpayer certified as having a “seriously delinquent tax debt,” the law authorizes the Treasury Secretary to share information regarding the taxpayer’s identity and the amount of the tax debt.

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.”