Facebook and IMs Provide Key Evidence to Prosecutors in Criminal Cases

Two recent events demonstrate how prosecutors are increasingly turning to other forms of electronic information to construct their cases. First, Francisco R. Legaspi, now 61, who had been a fugitive for the past 22 years, was sentenced on Monday to 21 months’ imprisonment after the government located him this year in Canada after finding him through his Facebook page. Mr. Legaspi had been indicted in August 1992 on three counts of assisting in the preparation of false tax returns for allegedly having submitted false quarterly Forms 941 for Mission Childcare Consortium, Inc., a San Francisco day care center, in 1988 and 1989. He pleaded guilty to one count in November 1992 but did not appear for his sentencing in January 1993, and he was thereafter indicted for failing to appear, to which he also pleaded guilty this year.

In addition, the New York Times reported yesterday that the Justice Department is investigating a number of foreign and American banks for having colluded to influence the price of foreign currencies and is specifically aiming to indict individual bank employees, in addition to seeking guilty pleas from the banks themselves. The key evidence that is allegedly being utilized to incriminate those individual bank employees is their instant messages. (Protess, Ben and Silver-Greenberg, Jessica, Big Banks Face Another Round of U.S. Charges, The New York Times).

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.”

Second Circuit Reverses Probation Sentence in Unique Case

On July 9, 2014, the U.S. Court of Appeals for the Second Circuit issued a significant sentencing decision in United States v. Park. In doing so, the appellate court handed the United States a rare, albeit hollow sentencing victory by vacating a probationary sentence. The facts of the case are rather unique. The defendant, Young Park, entered a guilty plea to one count of willfully filing a false corporate tax return in violation of 26 U.S.C. § 7206(1). The tax loss in the plea agreement was $133,601. Given Park’s prior conviction for conspiracy to commit mail fraud, his advisory Guidelines range yielded a recommended term of incarceration.

The defendant appeared before the district court for sentencing on October 11, 2013, during the two-week government shut-down. At sentencing, the district court made the following statements:

Look, I would not put this person in jail if not for the fact that he spent …eight months in jail and he comes out and he commits another crime years later…I have a hard time swallowing that.

However, the district court expressed significant concern with the costs of incarceration. Speaking directly to the prosecutor, the judge said:

One of the things that…I think concern me and my colleagues, especially when we get these messages from the administrative offices in Washington about cutting costs, terminating the employment of parole officers and probation officers; to what extent, given the economic dynamics in the country today, should the federal court Judge consider the economics of things in terms of sentencing to save the government needed money. Do you think that’s a factor that’s worthy of consideration today?… I will have to come to work without getting paid. Do you think that’s something that a Judge should consider, yes or no?

Over the prosecutor’s objections, the district court judge answered the question in the affirmative:

I’m going to say that I would probably give a period of incarceration if not for the financial pressures that the Court has, the court system and the government has. Especially low‐level federal employees at the present time. And we really can’t afford the luxury of paying another $28,000 to keep this person in jail under the circumstances and I encourage you to appeal.

The Court then expressly reaffirmed that its decision not to impose a sentence of incarceration was based solely on the government shut‐down, asserting:

I’m making the record that I am not going to put him in jail only because of the economic plight that we are facing today….If we have to resentence him, we will later.

The Court, varying from the advisory Guidelines range of 15 to 21 months, then imposed a sentence of three years’ probation which included six months of home confinement.

The government took the district court up on its suggestion and appealed. The Second Circuit in a detailed per curiam opinion took the uncommon step of reversing the district court on two separate bases – procedural error and substantive error. However, the government’s victory may just be fleeting as the Second Circuit provided the district court with sufficient guidance to impose a probationary sentence again if it so desires on remand.

Procedural Unreasonableness

The Second Circuit found that the district court committed procedural error by failing to consider the six factors set forth in 18 U.S.C. § 3553(a). The appellate court explained the role of a district court generally. First, the district court needs to properly compute the advisory Guidelines range for a criminal defendant. Second, after computing the advisory Guidelines range, the district court must consider the factors set forth in Section 3553(a). In this case, the Second Circuit found that the district court committed procedural error because the only factor that the district court considered was the cost of the government and the “economic problems” allegedly caused by the “government shut-down.” The Second Circuit took umbrage with the district court statement “if we have to resentence him, we will later.” It also noted that the district court stated that it would consider all of the Section 3553(a) factors on a remand. As such, the Second Circuit concluded that by failing to consider the Section 3553(a) factors, the trial court committed procedural error.

The Second Circuit also concluded that the district court committed procedural error by considering the cost of incarceration. The Second Circuit noted that 18 U.S.C. § 3553(a) sets forth the factors that any district court should consider when it imposes a fine in a criminal case. Section 3572(a) states: “in determining whether to impose a fine…the court shall consider, in addition to the factors set forth in § 3553(a)…the expected cost of the government of any imprisonment.” As such, the Second Circuit found that a district court cannot consider the cost of imprisonment when deciding a defendant’s term of imprisonment.

Park had argued that Section 3553(a) does not prohibit a district court from considering the cost of incarceration as an additional factor. However, the Second Circuit found that it was not going to “expand relevant sentencing considerations beyond those [already] enumerated in § 3553(a).” The Second Circuit further found that “[p]ermitting consideration of cost as an additional factor would be particularly inappropriate in view of ‘the express conclusion of cost of imprisonment as a consideration’ ” in a different sentencing statute.

In sum, the Second Circuit found that by failing to consider all of the Section 3553(a) factors and by considering a factor outside of Section 3553(a), the district court committed procedural error.

Substantive Unreasonableness

The Second Circuit could have reversed the decision solely on procedural unreasonableness but it did not stop there. It proceeded to reverse the sentence on substantive unreasonableness grounds as well. It explained that “[a]ppellate review of whether a sentence is truly exceptional within the scheme of federal sentencing law is no more based on an algorithm or calculus than is the decision of a district court judge to impose that particular sentence in the first place.” The Second Circuit added: “ ‘Reasonableness’ is inherently a concept of flexible meaning generally lacking precise boundaries” and “it cannot be precisely explained.” In short, this is what the term “abusive-discretion” means. In a footnote, the Second Circuit explained how a judge should view abusive discretion by quoting a former Chief Judge:

I know of no formula in this kind of case except to live with the record until one breathes it, to gain what one can from similar cases, to brood over the consequences, and, finally, if one’s sense of rawness becomes blunted over time, affirm. But if the redness remains after days and weeks, take a big breath and reverse.

In the final analysis, the Second Circuit concluded: “in determining whether a sentence shocks the judicial consensus or as otherwise insupportable, we use our lodestar the parsimony clause of 18 U.S.C. § 3553(a), which directs a sentence in court impose a sentence sufficient but not greater than necessary[,] to comply with the factors set forth in 18 U.S.C. § 3553(a)(2) – namely retribution, deterrence, and incapacitation.” This panel no doubt had that chafing redness.

In this case, the appellate court found that with respect to the factors set forth in § 3553(a)(2), the district court failed to articulate a sufficient justification for the sentence. The Second Circuit cited to a Guidelines’ advisory note that discussed the limited number of criminal tax prosecutions relative to the likely high frequency of undetected violations, leading to a need for general deterrence. The appellate court further explained the “heightened need” for a term of incarceration because of Park’s prior conviction for financial crimes noting that he had already served eight months in prison for fraud. The Second Circuit was particularly concerned by the district court’s comment that “but for” the government shut-down, it would have imposed a term of incarceration. The Second Circuit quoted the district court as saying “I have a ‘hard time swallowing’ that Park spent eight months in jail and he comes out, and he commits another crime years later.” Based on all of this, the Second Circuit, concluded that the decision to impose a probationary term was unreasonable. In sum, the government shut-down did not create a “blank check for the district court to impose whatever sentence suited its fancy.” As such, the probationary sentence was substantively unreasonable.

Guidance for remand

Despite this favorable outcome for the government, its victory may be pyrrhic. The Second Circuit’s decision was based almost entirely on the district court’s findings at the October 2013 hearing. It was “the district court’s view that, if the government were not shut‐down, a term of incarceration would have been needed to satisfy” 18 U.S.C. § 3553(a)(2). In making this statement, the Second Circuit gave a not so subtle wink and a nod to the district court judge. The appellate panel added: “We thus do not foreclose the possibility that the imposition of a probationary sentence on remand, after appropriate consideration of the § 3553(a) factors thus far left unaddressed, could be substantively reasonable as well.” (emphasis in original).

Even after a resounding victorious appeal, the district court is still free to impose a term of probation.

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].

Paying Employees in Gold Coins or through Shell Corporations – Both Are Tax Evasion Schemes

Everyone knows that paying employees under the table is a classic tax evading scheme, but what if you do so through a separate company?  What if you pay your employees in silver dollars – can you claim that you paid them $1 rather than the value of the silver?  Recent cases out of the First and Ninth Circuits confirm that it is tax evasion to (1) operate shell corporations in order to pay employees without withholding taxes and (2) pay employees in coins based upon their face value rather than their fair market value.

In Massachusetts, husband and wife Catherine Floyd and William Scott Dion and co-conspirator Charles Adams were found guilty of having organized and operated three companies for the purposes of conducting two tax evasion schemes.  In the first scheme, the defendants offered a payroll service to clients where the clients could pay their employees through one of two companies operated by defendants.  Clients could funnel money to be paid as wages to employees through defendants’ company Contract America, which paid employees without withholding taxes.  Employees would then appear to be employed by Contract America, thereby allowing the client firm to be shielded from the IRS.  For those employees who did not want to participate in the tax avoidance scheme, defendants offered a solution:  clients could pay money to Talent Management, another company of the defendants, that would pay the employees and comply with withholding requirements, and the client could still be shielded from the IRS.  Contract America and Talent Management were offered together as a tax avoiding arrangement to defendants’ clients.  The second scheme involved another entity operated by defendants, Your Virtual Office.  With Your Virtual Office, defendants offered banking services for the purpose of hiding client assets from the IRS.  For instance, defendants would commingle funds from a number of clients in the same bank accounts in order to conceal the source of funds.  One piece of evidence highlighted by the appellate court here was that Your Virtual Office “advertised repeatedly in the newsletter of Save-a-Patriot – an organization dedicated to resisting the IRS.” The appellate court found there was sufficient evidence to affirm the convictions and also upheld the sentences – Dion (84 months), Floyd (60 months), and Adams (48 months).  [This case is United States v. Dion et. al, Nos. 12-2229, 12-2231, and the opinion can be found here].

In Nevada, Robert Kahre, Lori Kahre, and Alexander Loglia were found guilty of having conducted a payroll service where they paid employees in coins that were then immediately exchanged for cash.  The defendants calculated the wages paid based upon the face value of the coin given to the employee, as opposed to its fair market value.  For instance, for an employee who received 10 silver dollars, the defendants claimed he had received $10 in wages.  But because each silver dollar had a market value of $50, the government contended that the wages should have been calculated as $500 (10 x $50).  When calculated by the coin’s face value, the wages paid were below the filing thresholds, such that W-2s were not issued and tax returns were not filed.  Not only did the defendants conduct this “payroll service” at the business owned by Robert Kahre, Wright Painting and Drywall, but they also offered this “payroll service” to other companies for a fee.  The amounts at issue were significant.  The total tax loss for the payroll service was nearly $52 million.  Kahre also faced a personal liability of $16 million for unpaid taxes, which included over $14 million in fees he collected from other employers that participated in the payroll system.  The appellate court flatly rejected this system on the singular, nearly unchallengeable premise that “coins are taxable as property when their fair market value exceeds their face value.”  The appellate court also upheld Kahre’s sentence of 190 months imprisonment and three years of supervised release.  Kahre had also been ordered to pay restitution of over $16 million, of which Lori Kahre (72 months imprisonment) and Alexander Loglia (26 months imprisonment) were jointly and severally liable for nearly $11 million.  [This case is United States v. Kahre et. al, Nos. 09-10471, 09-10528, 09-10529, and the opinion can be found here].

Latest IRS Statistics Show Decline in Audit Rates, Uptick in Criminal Investigations

The Internal Revenue Service has released its FY 2013 “Enforcement and Service Results” (available here), which provide statistics as to the agency’s audit, collection, and enforcement activities.  FY 2103 began on Oct. 1, 2012, and ended on Sept. 30, 2013.  A number of interesting conclusions can be drawn from the data.

Audit Activity

The audit rate for individual tax returns in FY2013 was .96 percent, the lowest such rate since FY2006.  The total number of audits during FY2013 was 1.4 million, with over 1 million of that number consisting of correspondence audits.

The audit rate based upon amount of income also decreased in 2013 in all categories reported by the IRS.  For taxpayers with income of under $200,000, the FY2013 audit rate was .88 percent (as comparied to 1.04 percent in FY2010, 1.02 percent in FY2011, and .94 percent in FY2012).  For taxpayers with income between $200,000 and $1 million, the audit rate dropped to 3.26 percent (as compared to 3.93 percent in FY2011 and 3.70 percent in FY2012).  For taxpayers with income in excess of $1 million, the audit rate in FY2013 again decreased, to 10.85 percent (as compared to 12.48 percent in FY2011 and 12.14 percent in FY2012). 

For businesses, the audit rate also declined.  For all entity returns, the FY2013 audit rate was .61 percent (as compared to .63 percent in FY2011 and .71 percent in FY2012).  Audit rates also dropped in each category of business returns, as shown below:

  • Small corp returns (assets under $10 million):  .95 percent (FY2012 1.12 percent)
  • Large corp returns (assets over $10 million):  15.84 percent (FY2012 17.78 percent)
  • S corp returns:  .42 percent (FY2012 .48 percent)
  • Partnership returns:  .42 percent (FY2012 .47 percent)

Enforcement Results

The IRS collected over $53 billion in “enforcement revenue” in FY 2013, which includes taxes, interest, and penalties.  This was an increase over FY2012 ($50 billion) but a decrease as compared to FY2011 ($55 billion) and FY2010 ($57 billion).  A likely explanation for this decline in enforcement revenue is steadily decreasing levels of IRS enforcement personnel (revenue officers, revenue agents, and special agents).  In FY2013, the IRS had a total of 19,531 enforcement personnel, the lowest number in a decade.  Enforcement positions at the IRS have been diminishing as a result of budget cuts, retirements, attrition, and the like, as the following figures demonstrate:

  • FY2010 enforcement personnel:  22,710
  • FY2011 enforcement personnel:  22,184
  • FY2012 enforcement personnel:  20,868

In FY2013, the IRS undertook fewer collection activities as well, again likely due to staffing reductions, as the following figures demonstrate:

  • Levies:  1.8 million (compared to 2.9 million in FY2012)
  • Liens:  602,005 (compared to 707,768 in FY2012)
  • Seizures:  547 (compared to 733 in FY2012)

On the criminal investigation side, the statistics generally show an uptick in activity by the IRS.  In FY2103, there was a spike in the number of criminal prosecutions recommended, to 4,364, as compared to 3,701 in FY2012.  The overall conviction rate for tax and tax-related cases remained generally flat, at 93.1 percent.  The average jail sentence for tax and tax-related case also remained flat, at 31 months.  Finally, the total number of criminal investigations initiated in FY2013 increased to 5,314 (as compared to 5,125 in FY2012) and the total number of taxpayers who were criminally charged in FY2013 also increased, to 3,865 (as compared to 3,390 in FY2012).

District Court Imposes Unusual Sentence in Latest UBS Criminal Case

Yesterday a federal district court judge handed down a highly unusual sentence in a criminal case involving a UBS accountholder.  See United States v. Curran (S.D. Fla.).  The defendant was a 79-year-old widow who inherited more than $43 million in bank accounts at UBS in Switzerland following her husband’s death.  The defendant pleaded guilty and was facing up to 37 months in prison.  She also paid a penalty of $21.6 million, which to date is the single largest civil penalty imposed in any of the offshore bank account prosecutions brought by the Justice Department.  The defendant attempted to make a voluntary disclosure of her UBS accounts to the IRS as part of the Offshore Voluntary Disclosure Program, but her disclosure was too late because the IRS had already obtained her name and account information from the Swiss government.

In sentencing the defendant, United States District Court Judge Kenneth Ryskamp imposed a sentence of one year of probation, and then immediately revoked the sentence, resulting in a probation sentence of no more than a few seconds.  The judge then went further and criticized the government for bringing criminal charges in this case, noting, “This is really a tragic situation.  It seems to me the government should have used a little more discretion.”  The judge suggested that the defendant seek a presidential pardon and added, “[i]f the government doesn’t join in that, it’s just spiteful.” 

While the DOJ has to date criminally charged a significant number of UBS account holders (as well as bankers, attorneys, and investment advisors who assisted U.S. taxpayers in opening and maintaining offshore accounts), this latest case is yet another example of relatively light sentences being imposed by judges in these cases.  In a prior post, we noted that the sentences in the offshore bank account criminal cases have largely been probation-only sentences, with few judges requiring defendants to serve jail time.

DOJ Offshore Compliance Initiative: Summary of Enforcement Activity To Date

The Department of Justice Tax Division, which is responsible for the criminal and civil enforcement of the tax laws, has created an “Offshore Compliance Initiative” which is focused on cracking down on offshore tax evasion by U.S. taxpayers using secret foreign bank accounts.  This initiative began with the landmark deferred prosecution agreement involving Swiss banking giant UBS AG announced in February 2009.  Since that time, the Tax Division has been aggresively investigating and prosecuting offshore tax evasion cases.  The “Offshore Compliance Initiative” maintains a frequently updated web page which summarizes the results of its efforts to date, as follows:

  • Approximately 150 investigations of offshore account holders are underway since 2009;
  • 49 account holders have been criminally charged;
  • 41 guilty pleas have been entered;
  • 3 individuals have been convicted after trial;
  • 5 individuals are awaiting trial;
  • A number of facilitators who helped clients hide assets offshore at UBS and other banks have been indicted, including 19 bankers and 2 attorneys;
  • Two bankers have entered guilty pleas;
  • The remaining bankers and attorneys are awaiting trial; and
  • 8 independent financial advisors have been charged, one of whom was convicted and the rest are awaiting trial.

The DOJ also reports that investigations have been opened into numerous additional offshore banks around the world, and that one bank has been indicted and has pleaded guilty.  The bank that has been indicted and pleaded guilty is Wegelin & Co., Switzerland’s oldest private bank.  On March 4, 2013, Wegelin was sentenced and ordered to pay approximately $58 million to the U.S. “for conspiring with U.S. taxpayers and others to hide approximately $1.5 billion in secret Swiss bank accounts, and the income generated in the accounts, from the Internal Revenue Service” (DOJ press release here).  The Justice Department press release further states that “[t]his case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea and sentencing of such a bank.”

It has been widely reported in the media that the other foreign banks under investigation by the Justice Department consist of the following:  HSBC, Basler Kantonalbank, Zuercher Kantonalbank, Julius Baer, Bank Leumi, Bank Hapoalim, and Mizrahi-Tefahot Bank, Liechtensteinische Landesbank AG, and NZB AG.

What the DOJ omits from its summary is that the sentences in the criminal cases have largely been probation-only sentences, with very few judges requiring the defendants to serve jail time.  The most recent sentence, involving an 83 year old individual who maintained accounts at Credit Suisse and Wegelin & Co. in Switzerland, was handed down on March 5.  In that case, the district court imposed a sentence of six months of probation, including three months of home confinement, and a civil penalty of over $2.8 million.

In a subsequent post, we will address options for U.S. taxpayers with unreported offshore bank accounts, including the Internal Revenue Service’s Offshore Voluntary Disclosure Program.