On June 2, 2016, the United States Tax Court issued Guralnik v. Commissioner denying a Motion to Dismiss for Lack of Jurisdiction the Internal Revenue Service (IRS) filed on the ground that the taxpayer’s petition was not timely filed. As these motions are typically granted or denied by the court through a simple order, it seemed strange that the court would issue a division opinion, which is generally reserved for cases involving an issue of first impression or an important legal issue or principle. The court, however, used this case as a means to change precedent related to the date on which a petition must be filed in Tax Court to be considered timely. Continue reading
May 25, 2016
The U.S. Department of Justice’s filing of criminal charges against a Chicago restaurant owner who failed to pay state sales tax demonstrates the perils business owners face if they underreport their gross receipts to avoid paying sales tax. Hu Xiaojun, who owns and operates nine restaurants in the Chicago area, was charged with federal wire fraud and money laundering offenses arising from his failure to pay Illinois sales tax on nearly $10 million in cash transactions occurring at his restaurants over a four-year period. On May 16, 2016, Xiaojun pleaded guilty to one count of wire fraud and one count of money laundering. He faces a prison sentence of 41 to 51 months, and must pay restitution of over $1 million to the Illinois Department of Revenue as well as forfeit an additional amount as punishment for his misconduct. Sentencing is scheduled for Aug. 22, 2016.
The Offense Conduct
According to the publicly filed guilty plea agreement, between January 2010 and September 2014, Xiaojun failed to pay sales tax on transactions in which customers paid cash. To conceal cash sales, he instructed restaurant managers and employees to provide him with daily summaries of restaurant sales, which he would in turn alter to conceal cash sales. Xiaojun and others would destroy the daily summary reports and cash transactions receipts, replacing them with incorrect reports that omitted the bulk of each restaurant’s cash sales. To hide cash sales from the state tax authorities, the defendant instructed employees to withhold cash generated from the restaurants from the corporate bank accounts to avoid creating financial records for those cash sales. The defendant instead used the cash to pay restaurant employees and suppliers without recording those expenses in the corporate books and records. The defendant also deposited a portion of the cash into his personal bank account, which he then used to pay personal expenses.
During the 2010 to 2014 time period, the defendant instructed others to submit fraudulent sales figures to the Illinois Department of Revenue on monthly sales tax returns. Each month, the defendant directed his employees to provide false sales figures to his accountants, who in turn provided those figures to the state. In all, the defendant underreported his sales to the state by nearly $10 million, resulting in his underpayment of sales taxes by more than $1.1 million.
The wire fraud charge to which the defendant pleaded guilty is based upon his sending of an email containing false sales figures for the month of May 2014. The money laundering charge to which the defendant pleaded guilty is based upon a series of financial transactions that he conducted using proceeds of his scheme to defraud the Illinois Department of Revenue. Specifically, the defendant deposited over $72,000 in cash into his personal bank account, which he knew consisted of funds derived from cash sales at his restaurants that were concealed from the state tax authorities. The defendant thereafter withdrew $60,000 from that account and purchased an official bank check, which he then deposited into a different business account. The defendant used the funds in that second bank account to purchase a restaurant and equipment, which he subsequently operated.
At first glance, the facts of United States v. Xiaojun read like a typical criminal tax case and include the all-too-common attributes of tax fraud in the restaurant industry: the concealment of cash sales and the use of diverted cash to pay employees, purveyors and personal expenses of the restaurant’s owners. Indeed, the Justice Department’s website is replete with press releases announcing criminal tax charges against restaurant owners who engaged in conduct similar to that of Xiaojun, mostly commonly filing of false income tax returns in violation of 26 U.S.C. § 7206 or tax evasion in violation of 26 U.S.C. § 7201.
For example, in United States v. Happy Asker, the owner of a chain of pizza restaurants in the Detroit area engaged in what the government called “a systematic and pervasive tax fraud scheme to defraud the IRS” by substantially underreporting gross sales and payroll amounts on corporate income tax returns and employment tax returns filed for nearly 60 restaurant locations. Over a three-year period, the defendant and his co-conspirators diverted for personal use more than $6.1 million in cash gross receipts and failed to report approximately $3.84 million of gross income and pay approximately $2.39 million in payroll taxes. A portion of the unreported income was shared among the defendant and most of his franchise owners, in a weekly cash “profit split.” As a result of this conduct, the defendant was charged with, and later convicted of, typical Title 26 offenses: filing false personal income tax returns, aiding and assisting in the filing of false corporate income and employment tax returns for several pizza restaurants, and obstructing and impeding the administration of the Internal Revenue Code.
In another fairly typical case, United States v. Ramon S. Arias, the defendant owned numerous Little Caesars pizza franchises in Alabama, Georgia and Louisiana. In a written plea agreement, the defendant admitted that between 2010 and 2013, he “skimmed” hundreds of thousands of dollars of cash from his restaurants and concealed these cash receipts from his accountant. As a result, the S corporation tax returns underreported gross receipts from the restaurants, and those omissions flowed through to the defendant’s personal income tax returns. The defendant pleaded guilty to one count of filing a false 2013 personal income tax return in violation of 26 U.S.C. § 7206(1) and agreed to pay restitution to the Internal Revenue Service for the years 2010 through 2013.
What makes United States v. Xiaojun notable is that the Justice Department chose not to assert a single federal tax charge against the defendant. Based upon admissions in his plea agreement, the defendant presumably failed to report as taxable income the concealed cash receipts, thereby likely exposing him to multiple federal income tax charges during the five tax years at issue (2010 through 2014). In addition, the defendant’s payment of his employees in cash presumably could have led to employment tax-related charges. But instead of charging Title 26 offenses, the government transformed this garden-variety criminal tax case into a wire fraud and money laundering case by focusing on the defendant’s failure to pay state sales taxes.
Tax Division Directive No. 128
The government’s case against Xiaojun appears to be premised upon a relatively obscure Justice Department policy entitled Tax Directive No. 128, “Charging Mail Fraud, Wire Fraud or Bank Fraud Alone or as Predicate Offenses in Cases Involving Tax Administration.” This directive provides federal prosecutors with significantly expanded authority to use the mail and wire fraud statutes to charge additional crimes, and seek correspondingly increased penalties, in tax-related cases. Under a preceding policy, prosecutors were generally not permitted to use the fraud statutes where the use of the mails or wires was only incidental to a violation arising under the Internal Revenue laws.
Under Tax Directive No. 128, prosecutors may now use mail and wire fraud offenses and, more importantly, state tax violations where the mails or wire communication facilities are used, to transform cases that traditionally would be prosecuted under the tax laws into fraud and money laundering prosecutions. By charging mail and wire fraud in tax cases, the government can significantly change the charging and plea bargaining process. The mere threat of a mail fraud or money laundering charge may well cause targets of government investigations to plead guilty more willingly, and to agree to cooperate against other targets, than would have been likely under the prior policy where the charges were likely limited to federal tax offenses absent exceptional circumstances. In addition, the ability to include mail or wire fraud charges in a tax-related case provides prosecutors with an additional tool not previously available in traditional tax cases — the ability to seek forfeiture of the proceeds of the fraudulent scheme.
By relying upon the authority conferred by Tax Directive No. 128, the government could significantly ratchet up the pressure on the defendant in United States v. Xiaojun. By bringing charges under Title 18 rather than Title 26, the government was able to seek a longer prison sentence: the statutory maximum sentences available for mail fraud and money laundering, 20 years each, are significantly higher than the statutory maximum sentences available for tax fraud or tax evasion, which are three years and five years, respectively. In addition, the United States Sentencing Guidelines for mail fraud and money laundering crimes typically call for longer sentences than those applicable to tax offenses.
Charging mail fraud and money laundering also enabled the government to seek restitution to be paid to the state agency that was defrauded. Had the government only charged federal tax crimes under Title 26, restitution could only have been ordered to the Internal Revenue Service, as occurred in United States v. Asker and United States v. Arias. The government was also able to seek forfeiture of the funds that constitute proceeds of the mail fraud and money laundering offenses, an additional punishment that is not available for tax offenses. As part of his plea agreement, Xiaojun agreed to pay at least $1 million in restitution to the Illinois Department of Revenue and to entry of a forfeiture judgment in an amount to be determined by the court at sentencing. The defendant also agreed as part of his plea agreement to cooperate with the civil tax audit that will inevitably follow his conviction, thereby ensuring that the IRS will be able to assess any tax, interest and penalties that are determined to be due and owing.
United States v. Xiaojun illustrates well how Tax Directive No. 128 provides federal prosecutors with significantly more leeway in charging offenses in what are viewed as traditional tax cases. No longer confined to the criminal offenses enumerated in Title 26, federal prosecutors can significantly increase the pressure on defendants by charging mail fraud and money laundering, seeking longer sentences and extracting substantial financial penalties by requiring defendants to pay both restitution and forfeiture.
 See United States v. Hu Xiaojun, No. 16-cr-316 (N.D. Ill.).
 See U.S. Department of Justice Press Release, “Happy’s Pizza Founder Convicted of Multi-Million Dollar Tax Fraud Scheme” (Nov. 19, 2014).
 See U.S. Department of Justice Press Release, “Owner of Pizza Franchises Pleads Guilty to Submitting False Tax Return That Omitted Income From Skimmed Cash” (May 24, 2016).
On May 9, 2016, the Justice Department announced that Gregg R. Mulholland, a dual U.S. and Canadian citizen and owner of an offshore broker-dealer and investment management company based in Panama and Belize, pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly-traded companies and then laundering more than $250 million in profits through at least five offshore law firms. This prosecution is notable in that it represents the first time the Justice Department has brought criminal charges against individuals for conspiring to violate reporting requirements under the Foreign Account Tax Compliance Act (FATCA).
Mulholland and several other defendants were indicted in 2014 by a grand jury in the Eastern District of New York. The indictment alleges that between 2010 and 2014, Mulholland controlled a group of individuals (the Mulholland Group) who together devised three interrelated schemes to: (1) induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) circumvent the IRS’s reporting requirements under FATCA; and (3) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through five offshore law firms.
According to the indictment, the defendants’ scheme also enabled U.S. clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. For example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, one of the defendants forwarded an IRS Form signed by a co-defendant as the nominee for the shell company which had been set up at the request of the client.
The indictment further alleges that in order to carry out these interrelated schemes, the Mulholland Group used shell companies in Belize and Nevis, West Indies, which had nominees at the helm. This structure was designed to conceal the Mulholland Group’s ownership interest in the stock of U.S. public companies, in violation of U.S. securities laws, and enabled the Mulholland Group to engage in more than 40 “pump and dump” schemes.
With respect to FATCA, the indictment alleges as follows:
13. The Foreign Account Tax Compliance Act (“FATCA”) was a federal law enacted in March 2010 that targeted tax non-compliance by U.S. taxpayers with foreign accounts. Although enforcement did not commence until July 2014, FATCA required U.S. persons to report their foreign financial accounts and offshore assets. Additionally, FATCA required foreign financial institutions to report to the Internal Revenue Service (“IRS”) certain financial information about accounts held by US. taxpayers or foreign entities in which U.S. taxpayers held a substantial ownership interest. FATCA also targeted the non-reporting and the non-withholding (30% on certain U.S. source payments made to foreign entities) by U.S. financial institutions based on material misrepresentations about the beneficial owners of the foreign accounts.
The indictment reveals that law enforcement authorities employed undercover agents and wiretaps to record numerous conversations involving the defendants. In one recorded meeting, two of the defendants bragged that their strategy enabled clients to evade FATCA’s requirements:
During this meeting, BANDFIELD and GODFREY touted, inter alia, IPC CORP’s success in establishing fraudulent corporate structures, including six IBCs and two LLCs for the Undercover Agent in order to conceal the Undercover Agent’s true beneficial ownership of the brokerage accounts at LEGACY, TITAN, UNICORN and two additional broker-dealers. BANDFIELD explained that this “slick” structure was specifically designed to counter U.S. President Barack Obama’s new laws, a reference to FATCA.
On a recorded telephone call, one of the defendants told a client that the use of offshore nominee companies was specifically intended to evade FATCA’s reporting requirements:
On or about May 19, 2014, GODFREY called Corrupt Client 6, an individual whose identity is known to the Grand Jury, and stated that IPC CORP’s fraudulent scheme using sham IBC and LLC structures was created to evade the IRS, specifically FATCA.
Although the Justice Department has been aggressively targeting offshore tax evasion by U.S. taxpayers since 2009, this case represents the first time that the government has brought criminal charges based upon alleged violations of FATCA. With FATCA’s provisions only becoming effective on July 1, 2014, and with the Justice Department’s offshore crackdown showing no signs of slowing down, we expect to see more criminal prosecutions in the future alleging violations of FATCA’s provisions.
With Comprehensive Panama Papers Database to Be Released Today, and White House Call for Comprehensive Action to Combat Offshore Tax Evasion, Affected Individuals Should Consider Immediate Action to Mitigate the Risk of Criminal Prosecution
May 2016 (No. 2)
White Collar Defense and Investigations
Action Item: Today at 2:00 p.m. (EDT), a massive database of information from the leaked “Panama Papers” files will be made public for the first time, identifying the real owners behind over 200,000 offshore companies set up by the Panamanian law firm Mossack Fonseca. The database release today follows closely on the heels of President Obama’s call to tighten U.S. laws and regulations to combat tax evasion through the illicit use of secret offshore bank accounts and shell companies. Individuals who believe they may be identified in the Panama Papers as the beneficial owner of an offshore company should consider prompt action to mitigate the risk of criminal prosecution and harsh financial penalties. The Internal Revenue Service (“IRS”) currently offers a number of voluntary disclosure programs for individuals with unreported foreign financial assets, but time is of the essence and immediate action is required in order to qualify for such programs in light of the imminent release of more “Panama Papers” files.
At 2:00 p.m. (EDT) today, the International Consortium of Investigative Journalists (“ICIJ”) will release a searchable database containing information on more than 200,000 offshore entities that are part of the “Panama Papers” investigation. The database is believed to be the largest ever release of records regarding the creation and maintenance of secret offshore companies and the identities of the individuals behind those companies. The information in this database comes from the Mossack Fonseca law firm in Panama and, according to ICIJ, includes “information about companies, trusts, foundations and funds incorporated in 21 tax havens, from Hong Kong to Nevada in the United States” and “links to people in more than 200 countries and territories.” The database is expected to offer an unprecedented window into the previously-secret world of offshore tax evasion and the use of shell or nominee entities to conceal the identity of the real owner of the underlying assets.
The first release of Panama Papers records on April 3, 2016, which comprise over 11 million Mossack Fonseca files, sparked a global outcry over offshore tax evasion. In the United States, the Justice Department has opened a criminal investigation into the offshore tax schemes believed to be exposed by the Panama Papers leak, and New York’s Department of Financial Services has ordered 13 foreign banks to turn over records regarding their dealings with the Mossack Fonseca firm. Last Thursday, the Obama Administration announced significant steps to crack down on money laundering, corruption, and tax evasion in the wake of the Panama Papers leak, and called upon Congress to quickly act to pass legislation addressing these issues. In particular, the White House announced the following:
- New rules to increase transparency and disclosure requirements that will enhance law enforcement’s ability to detect, deter, and disrupt money laundering, terrorist financing, and tax evasion, including long-awaited final regulations on “Customer Due Diligence” that require financial institutions to know and keep records on who actually owns the companies that use their services;
- New regulations that expand upon existing law by adopting “Customer Due Diligence” requirements for certain prepaid credit and debit cards;
- New rules that close a loophole allowing foreigners to hide assets or financial activity behind anonymous entities established in the United States; and
- New legislation that would increase transparency into the “beneficial ownership” of companies formed in the United States by requiring that companies know and report their true owners.
The Obama Administration also called upon the Senate to finally approve tax treaties that have been pending for several years that would help crack down on offshore tax evasion.
The Panama Papers database to be released today by ICIJ is expected to include the names of thousands of offshore entities formed by Mossack Fonseca and, most importantly, the identities of the true owners behind such companies. ICIJ has stated that the database will not, however, include bank account records, emails and other correspondence, passports, or telephone numbers.
Individuals who have used offshore companies and believe they may be implicated by today’s data release by ICIJ should consider taking immediate corrective action. The Internal Revenue Service has long maintained a number of well-publicized voluntary disclosure programs that afford non-compliant U.S. taxpayers the opportunity to avoid criminal prosecution by self-disclosing their non-compliance to the IRS, explaining the facts and circumstances of non-compliance, and paying back taxes, interest, and penalties. The most popular voluntary disclosure program offered by the IRS is the Offshore Voluntary Disclosure Program (“OVDP”), which is directed at non-compliant taxpayers with secret offshore assets. U.S. individuals identified as beneficial owners of secret offshore companies may take advantage of the OVDP to avoid criminal prosecution, but only if they commence the voluntary disclosure process before the IRS learns of their non-compliance from third-party sources, including whistleblowers. The IRS may take the position that a voluntary disclosure occurring after public release of an individual’s name through the Panama Papers disclosure is too late and deem them ineligible for OVDP protection. Thus, time is of the essence, and individuals concerned about being named in the Panama Papers database should act quickly and consider whether a voluntary disclosure to the IRS is warranted. Inaction is not a viable option.
Since 2009, the United States has undertaken an aggressive enforcement campaign to combat offshore tax evasion using secret bank accounts in Switzerland and other tax havens, and the use of offshore structures to obscure the identity of the real owner of financial assets held outside of the United States. The following statistics tell the story:
- The Justice Department has criminally charged more than 100 U.S. accountholders that evaded U.S. tax laws using hidden offshore accounts, and nearly 50 individuals (mostly foreign nationals) who assisted them.
- Due to aggressive law enforcement actions, 80 Swiss banks have admitted to engaging in criminal conduct and paid more than $1.3 billion in penalties.
- Under threat of prosecution, more than 54,000 individuals have come forward to disclose their offshore accounts to the IRS through the OVDP and other voluntary disclosure programs, paying more than $8 billion in tax, penalties, and interest.
- Under the Foreign Account Tax Compliance Act signed into law by President Obama in 2010, more than 150,000 foreign financial institutions have agreed to report customer information to the United States, in an effort to ensure that tax cheats cannot hide assets offshore.
Blank Rome’s Offshore Tax Compliance Team regularly advises clients as to the U.S. tax consequences of maintaining undisclosed offshore assets, and the compliance options available to such individuals to mitigate risk. Our team includes former federal prosecutors and Justice Department trial attorneys and experienced tax attorneys well-versed in the intricacies of the OVDP and other IRS voluntary disclosure options. Please contact a member of our team should you have any questions regarding the Panama Papers or any other aspect of offshore tax compliance.
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
• 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.
With “Tax Day” fast approaching, the Justice Department’s Tax Division has issued a stern warning of its own to taxpayers thinking of cheating on their taxes. In a press release entitled “Justice Department Reminds Taxpayers That Willful Failure to Comply with Our Nation’s Tax Laws is a Crime,” the Tax Division cites numerous examples of recent criminal tax prosecutions over the past year, including failure-to-file and failure-to-pay cases; filing false tax return cases; cases involving the concealment of income and assets through nominee entities and offshore bank accounts; cases involving the use of businesses to pay personal expenses; and obstructing IRS efforts to assess and collect taxes. The full text of the press release follows.
Justice Department Reminds Taxpayers That Willful Failure to Comply with Our Nation’s Tax Laws is a Crime
Highlights Focus on Traditional Tax Enforcement
With the annual tax return filing deadline approaching, the Justice Department’s Tax Division reminds U.S. taxpayers that willful failure to comply with our nation’s tax laws is a crime. Whether they willfully fail to file returns, file false returns, or evade tax due, taxpayers who cheat will face serious consequences including prison and monetary sanctions.
“Our nation depends on all taxpayers, regardless of age, profession or economic status, to file accurate returns and promptly pay their taxes,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. “Individuals and businesses that willfully fail to comply with their legal responsibilities harm not only the U.S. Treasury, but also all Americans who are paying their fair share. The department is committed to continuing to aggressively prosecute those individuals who seek to circumvent U.S. tax laws.”
“Paying taxes is not a choice but a responsibility,” said Chief Richard Weber of the Internal Revenue Service-Criminal Investigation (IRS-CI). “IRS-Criminal Investigation works with our partners at the Department of Justice to enforce our nation’s tax laws and ensure that we are all playing by the same rules. IRS-CI special agents are specifically trained to investigate complex financial fraud, and bring their considerable skill and experience to these investigations. Those who think they can evade our efforts will find they are terribly mistaken.”
Over the past year, the Tax Division and the U.S. Attorney’s Offices have worked closely with the IRS and other law enforcement partners to enforce the nation’s tax laws fully, fairly and consistently through criminal investigations and prosecutions across the country.
Failure to File Tax Returns and Failure to Pay Taxes
- In April 2016, James Redding, the president of an interior construction business in the District of Columbia and Maryland, was sentenced to two years in prison for failing to pay over $1.4 million in income and employment taxes. Redding also filed false tax returns on behalf of himself and his wife and on behalf of his business. Instead of paying his company’s employment taxes, Redding used company funds to pay the company’s creditors and for the benefit of himself and his family members. This case was prosecuted by the U.S. Attorney’s Office for the District of Columbia.
- In September 2015, Thomas Tilley, a businessman in North Carolina, was sentenced to 32 months in prison and ordered to pay more than $7 million in restitution to the IRS for a decades-long scheme, which included his failure to file returns despite earning a substantial income, sending fraudulent financial instruments to the IRS in an effort to discharge his tax debt, using nominee entities and sham trusts to purchase and sell real estate and placing false liens on his properties to prevent the IRS from collecting his taxes. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Middle District of North Carolina.
- In June 2015, Ronald Martin, the former owner and operator of a New Hampshire construction company, pleaded guilty to three counts of tax evasion. Martin failed to file corporate or individual tax returns despite the fact that his company generated more than $1 million in gross revenue over a three year period. Martin also attempted to conceal the business revenue from the IRS by directing that payments be made in his nephew’s name, depositing only a fraction of the business receipts into the business’s bank accounts, and diverting a significant portion to his personal use. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of New Hampshire.
Filing False Tax Returns
- In March 2016, Lorenzo Shane Stewart, the owner of an excavation and construction business in Illinois, was sentenced to 30 months in prison following his guilty plea to tax evasion. Stewart failed to report his business income on his tax returns and failed to pay more than $1.12 million in income taxes. This case was prosecuted by the U.S. Attorney’s Office for the Central District of Illinois.
- In February 2016, Avan Nguyen, the owner of a wholesale beauty supply business in Texas, was sentenced to three years in prison, ordered to forfeit $1.1 million, and ordered to pay restitution to the IRS for aiding and assisting in the filing of a false tax return. Nguyen caused a tax return to be filed for his company that omitted nearly $5 million of income. This case was prosecuted by the U.S. Attorney’s Office for the Northern District of Texas.
- In November 2015, Tammy Denise Westbrooks, a Texas resident and manager of a tax return preparation business in Charlotte, North Carolina, was convicted for filing false tax returns and attempting to obstruct the IRS. Westbrooks underreported her net business profit by inflating her business expenses, paid workers in cash, and failed to file the required Forms W-2 and 1099 to report workers’ compensation to the government. This case was prosecuted by the Tax Division.
Concealing Income and Assets Through Nominee Entities and Offshore Bank Accounts
- In April 2016, Michael D. Brandner, an Alaska plastic surgeon, was sentenced to four years in prison for wire fraud and tax evasion. After his wife filed for divorce, Brandner collected millions of dollars in marital assets and drove from Tacoma, Washington, to Costa Rica, where he opened two bank accounts into which he deposited over $350,000 in cash and hid a thousand ounces of gold in a safe deposit box. He then traveled to Panama where he opened an account under the name of a sham corporation and in 2008, deposited $4.6 million into the account. Brandner concealed both the existence of the accounts and the interest income earned on those accounts from the court in the divorce proceedings and from the IRS. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of Alaska.
- In January 2016, Gregory Claxton, a Michigan certified public accountant and tax return preparer, pleaded guilty to tax evasion after he concealed assets from the IRS to avoid paying nearly $150,000 in taxes. Claxton admitted he deposited the proceeds of his business into bank accounts in his wife’s name to avoid the appearance that he had the ability to pay his income taxes. Claxton also admitted that, just two days prior to meeting with the IRS to discuss his ability to pay his outstanding tax bill, he transferred title to his house to a trust in his wife’s name in an effort to thwart IRS collection efforts. This case was prosecuted by the U.S. Attorney’s Office for the Western District of Michigan.
- In October 2015, Terry Myr, a Michigan mechanic, who specialized in repairing classic and rare cars, including Ferraris, was sentenced to two years in prison for tax evasion and failure to file tax returns. Myr attempted to prevent the IRS from collecting nearly $200,000 in taxes by transferring property to third parties, using nominee companies and dealing in cash. Myr also failed to file tax returns for multiple years to report his income to the government. This case was prosecuted by the Tax Division.
Using Businesses to Pay Personal Expenses
- In March 2016, Faiger Blackwell, the owner of a North Carolina funeral home and other businesses, was sentenced to two years in prison for tax fraud and bankruptcy fraud. Blackwell filed for bankruptcy after accumulating more than $300,000 in federal taxes and more than $1 million in other debts. During the bankruptcy proceedings, Blackwell concealed rental income and used the money to pay for business and personal expenses. After the IRS levied one of Blackwell’s business bank accounts, he set up another company and corresponding bank accounts to divert and conceal funds and circumvent the levy. Blackwell used these funds to pay business and personal expenses, including paying for a cruise. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Middle District of North Carolina.
- In September 2015, Sheila Mohammed, a doctor in Florida, was sentenced to one year in prison and ordered to pay restitution for filing false income tax returns for herself and her medical practice. Mohammed used the more than one million dollars she failed to disclose to the IRS to purchase vehicles and properties in Florida, Hawaii and New Mexico. This case was prosecuted by the U.S. Attorney’s Office for the Northern District of Florida.
Obstructing IRS Efforts to Assess and Collect Taxes
- In January 2016, James S. Faller II, a former private investigator and legal consultant in Kentucky, was sentenced to serve three years in prison for obstructing the IRS, tax evasion and failing to file tax returns. Faller failed to file tax returns to report his income, which ranged from $126,000 to $289,000 per year, and attempted to hide his income from the IRS by having his income paid to a nominee and using nominee bank accounts. Faller also signed and submitted a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to an IRS revenue officer as part of the IRS’s efforts to collect his unpaid taxes. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Eastern District of Kentucky.
- In August 2015, F. William Messier, a Maine businessman who earned income by leasing telecommunications towers located on his property, was sentenced to one year and one day in prison for conspiracy to defraud the United States and corruptly endeavoring to impair and impede the due administration of the internal revenue laws. Messier attempted to obstruct the IRS by, among other things, providing false tax documents to customers, submitting a fake money order and other false documents to the IRS, and dealing extensively in cash. This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of Maine.
- In April 2015, John Fall, a Rhode Island real estate consultant, was sentenced to 30 months in prison for obstructing the IRS, tax evasion, and aiding in the filing of false corporate tax returns. Fall used nominee entities and business names to conceal his business and financial transactions, caused false tax returns to be filed in the name of his wife’s dental practice, and attempted to obstruct an IRS audit by encouraging his wife’s accountant not to provide information to the IRS and providing false documents during the audit. This case was prosecuted by the Tax Division.
“The Justice Department, along with our colleagues in the IRS, will continue to identify and vigorously pursue those engaged in tax crimes,” said Acting Assistant Attorney General Ciraolo. “These efforts are critical to the continued integrity of our national tax system and send a strong message to those individuals who make good faith efforts to comply with their tax obligations that we will hold accountable those who do not. If someone suspects or knows of an individual or a business that is not complying with the tax laws, we encourage them to report that information to the IRS.”
More information about the Tax Division’s civil and criminal enforcement efforts in these and other areas is on the division’s website. The IRS website also has information about how to report tax fraud.
March 23, 2016
In its first-ever conviction of a non-Swiss financial institution for tax evasion conspiracy, the U.S. Department of Justice’s Tax Division announced on March 9, 2016, that two Cayman Islands firms pleaded guilty in a U.S. court to conspiring to hide more than $130 million in Cayman bank accounts. The two financial institutions, Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), admitted that they helped U.S. clients hide assets in offshore accounts, and agreed to provide files of noncompliant U.S. account holders to the U.S. government.
The Tax Division’s announcement of the conviction of these Cayman Islands financial institutions follows on the heels of the conclusion in January 2016 of its highly successful Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into nonprosecution agreements and paid more than $1.3 billion in penalties, and the announcement, in February 2016, of a deferred prosecution agreement with another Swiss bank, Julius Baer. In a recent speech, Acting Assistant Attorney General Caroline D. Ciraolo of the DOJ Tax Division warned that “[o]ur investigations of both individuals and entities are well beyond Switzerland at this point, and no jurisdiction is off limits.” With the Justice Department actively conducting criminal tax investigations around the globe, speculation has swirled about which country or region would be the next target in the U.S. government’s offshore tax evasion crackdown.
“The guilty pleas of these two Cayman Island companies today represent the first convictions of financial institutions outside Switzerland for conspiring with U.S. taxpayers to evade their lawful and legitimate taxes,” said U.S. Attorney Preet Bharara of the Southern District of New York in a press release. “The plea agreements require these Cayman entities to provide this office with the client files, because we are committed to finding and prosecuting not only banks that help U.S. taxpayers evade taxes, but also individual taxpayers who find criminal ways not to pay their fair share. We will follow them no matter how far they go to hide their accounts, whether it is Switzerland, the Cayman Islands, or some other tax haven.”
“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Stuart Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe — there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.”
The two Cayman Islands financial institutions provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States. CNS and CNT pleaded guilty to a criminal information charging them with conspiring with their U.S. clients to hide more than $130 million in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts. CNS and CNT entered their guilty pleas pursuant to plea agreements requiring the companies to, among other things, produce through the treaty process account files of noncompliant U.S. taxpayers who maintained accounts at CNS and CNT, and pay a total of $6 million in financial penalties.
The Offense Conduct
According to a Justice Department press release, from at least 2001 through 2011, CNS and CNT assisted their U.S. account holders in evading their U.S. tax obligations and otherwise hiding accounts held at CNS and CNT from the IRS. CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT in the following manner:
- CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts, thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.
- CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities.
- CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’ obligations under its qualified intermediary agreement (QI) with the IRS.
- After learning about the investigation of Swiss bank UBS in 2008 for assisting U.S. taxpayers in evading their U.S. tax obligations, CNS and CNT continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012.
The sham Caymanian structures that CNT set up for its U.S. clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. clients; managed companies, for which CNT ostensibly provided direction and management services, but were shell companies that served only to hold the assets of the U.S. clients; and registered office companies, which were shell companies for which CNT supplied a Caymanian mailing address. CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. clients to trade in U.S. securities, without requiring them to submit Forms W-9, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities. CNS and CNT agreed to maintain these structures for U.S. clients after many of them expressed concern that their accounts would be detected by the IRS.
In April 2008, it became publicly known that the Justice Department was investigating UBS for assisting U.S. taxpayers in evading their U.S. tax obligations. Thereafter, despite the public disclosure of the UBS case, and CNS’ awareness of it, CNS continued to assist its U.S. clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Forms W-9. Likewise, up through at least 2010, CNT continued to rely on account opening documentation that, rather than barring the creation of non-tax-compliant structures, simply assigned higher “risk” points to such structures. In or about June 2011, CNT hired a new president, who ordered a review of CNT’s files. In the course of that review, not a single file was found to be complete and without tax or other issues. Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance.
At their highest point in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. clients. From 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.
Cooperation by CNS and CNT
As part of their plea agreements, CNS and CNT agreed to cooperate fully with the Justice Department’s investigation of their criminal conduct. To date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by: (1) facilitating interviews of CNS and CNT employees, including top-level executives; (2) voluntarily producing documents in response to DOJ requests; (3) providing, in response to a treaty request, unredacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and (4) committing to assist in responding to a treaty request that is expected to result in the production of unredacted client files for approximately 90 to 95 percent of the U.S. clients who maintained accounts at CNS and CNT.
In connection with their guilty pleas, CNS and CNT have agreed to pay the United States a total of $6 million, which consists of the forfeiture of gross proceeds of their illegal conduct, restitution of the outstanding unpaid taxes from U.S. taxpayers who held undeclared accounts at CNS and CNT, and a fine.
The Tax Division’s announcement of guilty pleas by these two Cayman Islands financial institutions represents yet another milestone in the government’s crackdown on offshore tax evasion, and confirms Ciraolo’s warning that “no jurisdiction is off limits.” Federal prosecutors and IRS agents are actively pursuing investigations across the globe, in countries such as Belize, the British Virgin Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands and Panama, among others. Foreign banks and financial institutions that serve U.S. customers would be well-advised to heed the lessons of the Swiss Bank Program and other Justice Department enforcement actions commenced to date. Foreign financial institutions with potential U.S. criminal tax liability can greatly mitigate their exposure by taking immediate actions, such as making voluntary disclosures of potential illegal activity to the Tax Division and implementing compliance measures to avoid further violations of U.S. tax law. At the same time, U.S. citizens and residents with unreported offshore accounts should take immediate action to resolve their noncompliance by taking advantage of one of the IRS voluntary disclosure programs, as the window of opportunity for self-reporting is rapidly closing. As the U.S. government’s latest enforcement action involving the Cayman Islands demonstrates, inaction is not an option in the current environment.