Significant Setbacks to U.S. War on Offshore Tax Evasion with Two Not Guilty Verdicts for Offshore Bankers

As reported in this blog and elsewhere over the past few weeks, Raoul Weil was on trial in Florida for conspiring with U.S. taxpayers to hide their assets from the IRS through secret accounts held at UBS AG. Weil was the former third-ranked officer at UBS and head of its wealth management division. He claimed that he was never told about the tax shelters and that he believed that the accounts that he was aware of complied with U.S. laws.

The government put on a number of witnesses, primarily lower-level former UBS employees who had obtained immunity in exchange for testimony and were shown to be unreliable under cross-examination. On Monday morning, defense counsel announced that they were resting their case without calling any witnesses, and closing arguments immediately were heard. The jury deliberated for 90 minutes and returned a not guilty verdict. For more discussion of the case, see Nathan Hale, Ex-UBS Exec Found Not Guilty in Tax Evasion Trial (Law360, 11/03/2014), available here.

Commentators have subsequently suggested that the government erred by charging one single conspiracy involving Weil and all of UBS’s U.S. clients who held secret accounts. Another government error was not appropriately considering the Weil’s ability to re-direct blame to lower-level employees, who directly manage the relationship with the bank’s U.S. clients, and to the U.S. clients themselves, who filed false tax returns with the IRS. See Jack Townsend, Raoul Weil Found Not Guilty, (Federal Tax Crimes, 11/3/14), available here, and Ex-UBS Executive Weil Acquitted in Tax Probe (, 11/04/2014), available here.

The other offshore banker to beat federal charges within the past week is Shokrollah Baravarian who was found not guilty on Friday. Mr. Baravarian, a former senior vice president at Mizrahi Bank, was on trial in Los Angeles for conspiring to conceal undeclared bank accounts held by Iranian Jewish exile customers in the U.S. The witnesses marshaled by the government for this trial included several individuals who had been indicted for tax evasion for hiding assets in accounts at Mizrahi Bank but pleaded guilty only to conspiracy, which then allowed the government to charge Mr. Baravarian with conspiracy. The government’s case unraveled when those witnesses testified that there was no agreement with Mr. Baravarian to hide assets from the IRS. After four hours of deliberation, the jury returned a not guilty verdict. For more reporting on the verdict, see Daniel Siegal, Banker Beats Israeli Account Tax Fraud Charges at Trial (Law360, 10/31/2014), available here.

While the government will likely continue to prosecute offshore banks and its bankers, it is unknown how these losses will affect the government’s overall strategy going forward. There are approximately 30 bankers and advisers who have been indicted by the Justice Department living in Switzerland, successfully avoiding extradition. And, approximately 100 Swiss banks had applied to the Justice Department’s amnesty program for Swiss banks, many of which recently pushed back on the obligations the Justice Department was requiring to obtain a non-prosecution agreement. Whether some of those banks drop out of the program in light of the government’s failure in these trials will soon be seen.

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.”

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 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.

Court’s Ruling Holding Corporate Officer Responsible for Trust Fund Recovery Penalty Illustrates Risk of Personal Liability for Unpaid Employment Taxes

A district court in the Northern District of California has held that the officer of a now-defunct corporation is personally responsible for the Trust Fund Recovery Penalty based upon the company’s failure to collect, account for, and pay over federal withholding taxes. See United States v. Guerin, 113 AFTR 2d 2014 (N.D. Cal. April 28, 2014). In 1994, Fitz William Guerin, the defendant, purchased an existing software development and advertising firm that he renamed Orbit Network, Inc. Mr. Guerin served as the company’s president and chief executive officer, and also was a minority shareholder. He was also an authorized signer on the company’s bank accounts and checks, and he also signed the company’s quarterly employment tax returns (Forms 941).

Beginning on June 1, 1998, Mr. Guerin became aware that Orbit was not making timely payments of federal employment taxes. Despite that knowledge, Mr. Guerin thereafter authorized payments to company creditors other than the U.S. Treasury, and he personally signed checks payable to creditors other than the government during that time period.

Pursuant to IRC § 6672, the IRS thereafter assessed liabilities against Mr. Guerin personally for the company’s unpaid employment taxes for numerous quarters between 1996 and 1999. The total amount of the assessments exceeded $600,000.

Section 6672(a) provides, in relevant part, that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall … be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Under § 6672(a), an individual may be held liable for unpaid withholding taxes if (1) he or she was a “responsible person” for collection and payment of the employer’s taxes; and (2) he or she “willfully” failed to pay the tax. United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1999). For purposes of § 6672, a “person” includes “an officer or employee of a corporation … who … is under a duty to perform the act in respect of which the violation occurs.” 26 U.S.C. § 6671(b).

Responsible Officer Analysis

The Court first addressed the question of whether Mr. Guerin was a “responsible officer.” The Court observed that district courts employ a number of factors to determine whether a person is a “responsible person” for purposes of imposing liability. Although no single factor is dispositive in evaluating whether an individual is a “responsible person” within the meaning of § 6672(a), “the most critical factor is whether a person had significant control over the enterprise’s finances.” United States v. Chapman, 7 Fed. App’x. 804, 807 (9th Cir. 2001) (citations omitted). An individual is more likely to be found responsible if he or she: (1) holds corporate office; (2) has check-signing authority; (3) can hire and fire employees; (4) manages the day-to-day operations of the business; (5) prepares payroll tax returns; (6) signs financing contracts; and (7) determines financial policy. Jones, 33 F.3d at 1140–41; Jordan v. United States, 359 F. App’x 881, 882 (9th Cir. 2002). Importantly, more than one person may be held liable under § 6672(a); an individual need not be “the most responsible.” Chapman, 7 Fed. App’x. at 806–07.

Applying these factors, the Court easily concluded that Mr. Guerin was a responsible officer based upon the following facts:

  • Defendant was a founder of the company and served as President and Chief Executive Officer until October 5, 1999, when he resigned.
  • Defendant was also a minority shareholder and a member of the senior management team that ran the company.
  • Defendant supervised senior management, but never had a supervisor himself.
  • Defendant could hire and fire employees, and was solely responsible for hiring and terminating members of Orbit’s senior management.
  • Defendant was an authorized signer on Orbit’s bank accounts, there were no restrictions on his ability to sign checks on Orbit’s behalf, and he signed checks on Orbit’s behalf. While others were also authorized signers on Orbit’s bank accounts, Defendant alone was authorized to issue checks without a co-signer.
  • Defendant managed the day-to-day operations of the business, such as “[d]irect[ing] an executive management staff;” “managing employees;” “signing or countersigning corporate checks;” “making or authorizing bank depots;” and “dealing with major customers.”
  • Defendant had the authority to, and did, sign quarterly employment tax returns (Forms 941) on behalf of Orbit. Among others, Defendant was responsible for collecting, accounting for, and paying over federal withholding taxes for Orbit.
  • Defendant had the authority to sign contracts and agreements binding Orbit, including a Binding Letter of Intent which contemplated a merger of two companies.
  • Defendant represented Orbit in meetings with financial backers and potential investors.
  • Defendant, among others, had the authority to, and did, determine to whom corporate disbursements would be made on behalf of Orbit, and to direct that such disbursements be made.
  • Defendant testified that he was responsible for making decisions about the strategic direction of Orbit; and that he had the “final say” with respect to acquisitions.


The Court next turned to the question of whether Mr. Guerin willfully failed to collect, account for, or remit payroll taxes. A responsible person may not be held personally liable under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. Winter v. United States, 196 F.3d 339, 345 (2d Cir. 1999). Willfulness involves a “voluntary, conscious and intentional act to prefer other creditors over the United States.” Buffalow v. United States, 109 F.3d 570, 573 (9th Cir. 1997). Thus, “[i]f a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, … our precedents require that the failure to pay withholding taxes be deemed “willful.””Phillips v. I.R.S., 73 F.3d 939, 942 (9th Cir. 1996).

The Court also easily found that the defendant acted with the requisite level of willfulness, based upon Mr. Guerin’s admission that he was aware that federal withholding taxes were not being paid in 1998, but nevertheless continued to pay other creditors. The Court found that “Defendant’s deliberate decision to use corporate revenues received after he first became aware of the delinquency to pay other creditors, including himself, rather than to diminish Orbit’s tax debt falls within the literal terms of the Ninth Circuit’s definition of willfulness. Klotz v. United States, 602 F.2d 920, 923 [44 AFTR 2d 79-5709] (9th Cir. 1979) (“Willfulness” is defined as a “voluntary, conscious and intentional act to prefer other creditors over the United States.”).”

Joint and Several Liability

Finally, the Court addressed an argument advanced by Mr. Guerin that the IRS should have sought payment of the company’s unpaid employment taxes before pursuing him. Under IRC § 6672, liability may extend to more than one corporate officer, not just the most responsible. In particular, the responsible officer penalty is distinct from and in addition to the employer’s liability for these taxes.  The Court rejected this argument, finding that even if there were entities or individuals other than the defendant through whom the IRS could have collected Orbit’s unpaid trust fund taxes, Mr. Guerin could not escape liability on those grounds because the government is not required to pursue collection against every responsible person, or against the corporation itself, before attempting to collect from a responsible person under § 6672.


The Court’s decision in United States v. Guerin is illustrative of the personal risks that corporate officers face when companies fail to timely deposit employment taxes. Responsible officers can face personal liability for their company’s unpaid employment taxes if the failure to pay over the taxes is determined to be willful. As the Guerin decision demonstrates, willfulness is not a difficult legal standard for the government to satisfy, especially when it is undisputed that the corporate officer in question was aware of the unpaid employment taxes and authorized payments to other creditors. In small businesses, corporate officers will almost always be aware of the fact that employment taxes are not being paid, and that company funds are being used to pay other creditors.

In addition to being held personally responsible for unpaid corporate employment taxes, corporate officers may also face criminal liability for failing to pay withholding taxes. The IRS describes the fraudulent practice of withholding taxes from employees but intentionally failing to pay over the taxes as “pyramiding”:

“Pyramiding” of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.

The IRS Criminal Investigation Division, in its most recent annual report, states that one of its top enforcement priorities in the employment tax area is combating the illegal practice of withholding employment taxes and failing to pay over those taxes to the U.S. Treasury. Two recent criminal cases illustrate the efforts of the IRS and the Justice Department in the employment tax fraud area.

On April 30, 2014, the Justice Department announced that an attorney in Oklahoma had pleaded guilty to willfully failing to pay employment taxes in connection with his law practice. See United States v. Larry Douglas Friesen (W.D. Oklahoma) (DOJ press release here). In that case, the defendant failed to pay over to the IRS the federal income and FICA taxes due and owing during three tax quarters in the 2007 calendar year in the amount of approximately $320,000.

In another case, the Justice Department announced on April 11, 2014, that a physician in Indiana had been sentenced to a prison sentence of one year and a day for failing to pay employment taxes in connection with his medical practice. See United States v. Ronald Eugene Jamerson (N.D. Indiana) (press release here). According to court pleadings, Jamerson deducted and collected from his employees’ paychecks federal income taxes and employment taxes in the amount of $63,929 over 11 tax quarters between 2006 and 2008, but failed to file the employment tax returns and pay over the related employment taxes. The defendant was ordered to pay restitution to the IRS in the amount of $541,083 for unpaid individual income taxes and employment taxes, which represented the total tax loss owed for all tax periods from 2003 through 2008, according to the plea agreement.



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 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].

2014 Opens with More Actions Against Tax Return Preparers

At the end of 2013, we summarized several actions taken by the Justice Department against tax return preparers at the end of the year.  Indeed, on Tuesday, the Justice Department issued a press release touting their enforcement efforts in this area, noting that it obtained over 60 permanent injunctions against tax return preparers in 2013 alone.  Assistant Attorney General Kathryn Keneally for the Tax Division stated that “[d]uring the time when honest taxpayers are preparing their returns, the Tax Division will work tirelessly to challenge those who would abuse the tax laws and take advantage of their customers,” and therefore the DOJ and IRS “are working hard to shut down these abusive schemes and scams and punish the perpetrators where appropriate.”  Since 2014 began, a number of significant actions against tax preparers have occurred, indicating that the trend established at the end of 2013 continues into 2014.

Two tax return preparers in Georgia and one in North Carolina have recently been permanently barred from preparing tax returns for others: 

  • Lakesia Michelle Mills, of Willis Tax Service, was alleged in a complaint to have prepared at least 455 tax returns that claimed $3.6 million in overstated refunds based primarily upon false documentation (settlement statements and proof of insurance) to support the First-Time Homebuyer Credit.  In an injunction, Ms. Mills was permanently barred from the tax return preparation business, must provide the government a list of persons she prepared returns for as of January 1, 2009, notify her customers of the injunction, and publish the injunction in the local newspaper.  [U.S. v. Lakesia Michelle Mills, No. 13-101, Southern District of Georgia]. 
  • Joan Leger, of The 1804 Tax Group Inc. (formerly J & Company) now doing business as Liberty Tax Service, was alleged in a complaint to have fabricated income, deductions and credits in order to claim the earned income tax credit, among others, for her customers.  Ms. Lever also created false losses and expenses for non-existent business or businesses not owned by the taxpayer.  She also filed returns without her tax preparer identification number or with someone else’s number.  The nearly 6,000 returns she prepared resulted in an alleged loss to the government of over $2 million.  In an injunction, Ms. Leger was permanently barred from the tax return preparation business, must provide the government a list of persons she prepared returns for as of December 1, 2012, notify her customers of the injunction, and publish the injunction in the local newspaper.  [U.S. v. Leger, et al., No. 13-3153, Northern District of Georgia].
  • Sharon D. Rhodes, of R&S Freedom Tax Services and Changing Faces Anointed Tax Services, was alleged to have prepared returns that claimed false charitable deductions and other credits.  She also listed fictitious businesses and fabricated expenses and losses for them.  For the over 600 returns she prepared, the government alleged a nearly $3 million loss.  In an injunction, Ms. Rhodes was permanently barred from the tax return preparation business and must provide the government a list of persons she prepared returns for from the 2008 tax year to present.  [U.S. v. Rhodes, No. 13-759, Eastern District of North Carolina].

In addition, within the last month, the DOJ initiated four new civil suits against tax preparers, seeking permanent injunctions: 

  • A complaint against Keisha Stewart and her business, Professional Tax Services, Inc., alleged that returns she prepared contained inflated or fictitious income in order to receive the earned income tax credit.  She also claimed improper and false deductions and credits, head of household status, false dependents.  For the 2,222 tax returns she prepared for tax years 2010, 2011, and 2012, the government estimated a $1.6 million loss.  [U.S. v. Stewart, et al., No. 14-60219, Southern District of Florida]. 
  • A complaint against Barbara L. Garrett alleged that she prepared returns that contained fake business deductions and other improper deductions, including for charitable contributions, child care expenses, property taxes, medical expenses, and education expenses.  In one example, Ms. Garrett included a fake claim for childcare expenses falsely identifying herself as the childcare provider.  She also lists others as having prepared returns that she prepared, and she encouraged one taxpayer to lie during the government investigation.  For nearly all of the tax returns she prepared that were audited, the IRS determined a tax loss of $400,000.  [U.S. v. Garrett, No. 14-859, Northern District of Illinois].
  • Carmen J. Martinez, of CJM Bookkeeping and Taxes, LLC, has been alleged in a complaint to have prepared more than 7,800 tax returns since 2010.  Ms. Martinez allegedly prepared returns with false deductions and credits by improperly claiming children as dependents when they were not U.S. citizens or U.S. residents.  This activity allegedly resulted in a loss to the government of as much as $25 million.  [U.S. v. Martinez, No. 14-165, District of Delaware].
  • Rulon Sandoval and Andrea R. Acosta Hernandez, husband and wife owners of Latinos Office LLC, have been alleged in a complaint to have prepared false returns with false credits and deductions, including improperly claimed business expenses and incorrect filing status, as well as having submitted returns using false or incorrect tax return preparer identification numbers.  Following an audit of only 47 of the 6,514 returns filed, the government estimated that its loss could be at least $1.3 million.  [U.S. v. Sandoval, No. 14-cv-85, District of Utah].

Finally, a 33-count indictment was unsealed that charged Russell Burroughs, of Computer Services, a tax return preparation business, with allegedly preparing and filing 33 false tax returns between tax years 2008 to 2011.  Mr. Burroughs caused to have included false business income, energy credits, American Opportunity credits, education credits, as well as a number of others.  [U.S. v. Burroughs, No. 13-cr-317, Middle District of Alabama;  press release here].

FATCA Update: Italy Signs Intergovernmental Agreement and District Court Upholds New Reporting Regulation

On Friday, Italy became the latest nation to sign an agreement pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), which requires U.S. financial institutions to withhold certain payments made to foreign financial institutions (“FFI”) that do not agree to report U.S. taxpayer account information to the IRS.

Italy signed a Model 1A agreement, where FFIs will provide account information to the Italian government, which will report that information to the IRS.  The U.S. has agreed to reciprocity with Italy such that the U.S. will provide similar account information about Italian individuals who have accounts in the U.S.  Nineteen countries have entered into FATCA compliance agreements, which can all be found here.

On the home front, Judge James E. Boasberg of the United States District Court for the District of Columbia rejected a challenge by the Florida and Texas Bankers Associations to new income-reporting regulations issued by the IRS.  The new regulations require U.S. banks to report the amount of interest earned by accountholders who reside in a foreign country where the U.S. has an exchange agreement.  Part of the impetus for the new reporting requirements was to ensure that the intergovernmental agreements entered into with foreign countries will be respected.  Indeed, FATCA’s success depends upon the exchange of information with foreign financial institutions.  And, since the IRS has obligations under some of the FATCA intergovernmental agreements, like the one with Italy discussed above, it must have the ability to gather the necessary information within the U.S. to disclose to the participating country.

Below is a portion of Judge Boasberg’s opinion where he sets forth (citations omitted) a portion of the IRS’s reasoning for the new expanded reporting regulation:

Expanded reporting was, [the IRS] claimed, “essential to the U.S. Government’s efforts to combat offshore tax evasion.”  Since exchange agreements require mutuality, the regulations “ensure that the IRS is in a position to exchange such information reciprocally with a treaty partner.” Such reciprocity also aids overseas compliance with the Foreign Account Tax Compliance Act, which “require[s] overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS.”   Finally, the IRS observed,              “[R]eporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation.”

The opinion can be found here.