IRS Criminal Investigation Division Announces New Priorities

Carlos F. Ortiz, Bridget M. Briggs, and Jeffrey M. Rosenfeld

At the ABA Section of Taxation’s 2017 May Meeting, Erick Martinez, the IRS Criminal Investigation Division’s Director of Field Operations – Northern Area, provided insight into the Division’s current priorities and strategies. Mr. Martinez indicated that the Division is concentrating on nationally coordinated investigations in conjunction with the Justice Department Tax Division and the IRS Large Business and International Division, such as cases involving renewable fuel credits.

The Criminal Investigation Division is also increasing its focus on data-driven cases such as beneficial owner cases, given the plethora of information resulting from the Swiss bank program and offshore voluntary disclosure programs. Mr. Martinez further noted an increased emphasis on cybercrime with two new cybercrime units in Los Angeles and Washington investigating failure to report income earned through the use of technology.

DOJ Tax Division Chief Outlines Enforcement Priorities for 2016

DOJ logoIn speech delivered on January 29, 2016, at the American Bar Association’s Tax Section Midyear Meeting, Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division recapped her agency’s successes during 2015, and outlined its priorities for 2016. A number of key details regarding the government’s criminal and civil tax enforcement agenda were disclosed during the speech, as follows:

  • Offshore tax enforcement remains among the Tax Division’s top priorities.  Since 2008, DOJ has publicly charged more than 100 accountholders and nearly 50 individuals who have aided and assisted U.S. taxpayers in concealing foreign accounts and evading their U.S. tax obligations.  The government has also reached final criminal resolutions with six foreign financial institutions, including UBS and Credit Suisse, the two largest bank in Switzerland.
  • The Tax Division recently concluded the Swiss Bank Program, with 80 banks reaching resolutions and paying over $1.3 billion in penalties.
  • More than 54,000 individual taxpayers have made voluntary disclosures to the IRS regarding undisclosed offshore assets, paying over $8 billion in taxes, penalties, and interest.
  • The Tax Division continues to pursue investigations of banks outside of Switzerland, including in countries such as Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands and Panama.
  • The Tax Division encourages “outreach by practitioners” and “encourage[s] financial institutions and individuals who have engaged in criminal conduct to contact the department to discuss their options.”
  • In addition to criminal enforcement, the Tax Division is using civil enforcement tools to pursue those who continue to conceal foreign accounts and assets and evade their U.S. tax obligations.  DOJ will continue to work with the IRS with respect to the examination and assessment of penalties for violations of the FBAR reporting requirements, file suits to collect outstanding FBAR penalties and defend against complaints for refund of FBAR penalties paid.
  • The Tax Division will continue to work closely with the IRS in its efforts to obtain foreign account records.  Using the “Required Records Doctrine,” DOJ has successfully challenged motions to quash grand jury subpoenas in criminal cases and obtained orders enforcing summonses in civil cases.  “At this point, the message is clear: taxpayers are required to maintain foreign records and produce them upon request.”
  • The DOJ will continue to make of “John Doe” summonses where the IRS is aware of possible violations of the internal revenue laws by individuals whose identities are unknown. In addition, the Tax Division will use Bank of Nova Scotia summonses and grand jury subpoenas, which seek to compel a domestic financial institution to produce records located in a foreign country.
  • The Tax Division is willing to assist treaty partners in their own tax enforcement efforts, as evidenced by a recent case, Dileng v. Commissioner.  In that case, the taxpayer had unpaid tax liabilities in excess of $2.5 million in Denmark. Under the U.S.-Denmark Tax Treaty, the Danish taxing authority submitted a collection assistance request and a revenue claim to the IRS, requesting that the IRS assist in collecting Mr. Dileng’s Danish liabilities.  Mr. Dileng filed suit, seeking to enjoin collection efforts by the IRS. The district court dismissed that suit, finding that an accepted revenue claim must be treated like a U.S. tax assessment for collection purposes within the United States, even though Mr. Dileng is prohibited from challenging those liabilities in U.S. courts.
  • In 2016, we can expect additional civil enforcement actions and ongoing and new criminal investigations and prosecutions.  Taxpayers participating in the OVDP or Streamlined programs may be contacted and interviewed by the IRS/DOJ as part of their ongoing cooperation.  Taxpayers who filed returns and FBARs pursuant to the streamlined filing procedures or the Delinquent International Information Return or FBAR submission procedures should be “very concerned if they falsely claimed to have engaged in non-willful conduct or acted with reasonable cause.”
  • “[F]inancial institutions and individuals who have facilitated the concealment of offshore accounts and the evasion of U.S. tax obligations would be well advised to anticipate an investigation and consider voluntarily disclosing any criminal activity to the department before they become the subject of an investigation.”
  • In the past year, the Tax Division has hired more than 80 new attorneys.  Currently, the Tax Division has more than 200 civil trial attorneys, more than 100 prosecutors and approximately 50 appellate attorneys. The Tax Division has established an international training series to ensure that its attorneys are familiar with the relevant issues and available tools in offshore enforcement and are working very closely with the IRS to identify those U.S. taxpayers failing to comply with their tax obligations.
  • “Those who underestimate the ability of the United States to pursue offshore tax evasion do so at their own peril.”

The text of the Acting Assistant Attorney General’s speech is set forth below.

Thank you for that kind introduction.  Let me begin by saying how nice it is to return to the American Bar Association (ABA) Tax Section meetings.  I’d like to focus my remarks this afternoon on the Justice Department Tax Division’s offshore enforcement efforts.  As you know, it has been a very busy year for the Tax Division, and I’m happy to report on our accomplishments and discuss what lays ahead in 2016.

First, a bit of history for those of you who may not have spent your summer in Switzerland or encouraging countless numbers of clients to participate in the Internal Revenue Service (IRS) offshore voluntary disclosure programs.  Offshore tax enforcement has been and remains among the department’s top priorities.  Since 2008, the department has publicly charged more than 100 accountholders and nearly 50 individuals who have aided and assisted U.S. taxpayers in concealing foreign accounts and evading their U.S. tax obligations.  We also reached final criminal resolutions with six foreign financial institutions, including Credit Suisse, which pleaded guilty in May 2014 and agreed to pay $2.6 billion for its role in assisting U.S. taxpayers to evade their U.S. reporting and tax obligations.

On Aug. 29, 2013, the department announced the Swiss Bank Program, which provided a path for Swiss banks to resolve potential criminal liabilities in the United States.  Banks already under criminal investigation related to their Swiss-banking activities, identified as Category 1 banks, and all individuals were expressly excluded from the program.

Under the program, Swiss banks about which we had little or no information came forward and self-identified as having helped U.S. taxpayers to hide foreign accounts and evade their U.S. tax obligations.  In exchange for a non-prosecution agreement, these institutions, identified as Category 2 banks, made a complete disclosure of their cross-border activities, provided detailed information on accounts in which U.S. taxpayers have a direct or indirect interest, are cooperating in treaty requests for account information, are providing detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed and must cooperate in any related criminal and civil proceedings for the life of those proceedings.  Additionally, the Category 2 banks have paid appropriate penalties, which were mitigated with proof that the U.S. taxpayer declared the account, the account was reported by the bank or the U.S. taxpayer came into a voluntary disclosure program at the bank’s urging.

On March 30, 2015, the department signed the first non-prosecution agreement with BSI SA and announced its goal to complete the Category 2 bank agreements by year end.  I’m very proud to announce that earlier this week, the department signed the final Category 2 bank non-prosecution agreement with HSZH, imposing a penalty in excess of $49 million.  For those who are counting, in the last 10 months, the department executed 78 agreements with 80 banks and imposed more than $1.3 billion in Swiss Bank Program penalties.

The department also signed a non-prosecution agreement with Finacor, a Swiss asset management firm, reflecting the department’s willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.

The conclusion of the Category 2 agreements is a significant milestone in our continuing effort to shut down offshore tax evasion.  Swiss banks have revealed the names of thousands of U.S. accountholders, a substantial number of whom have voluntarily disclosed their accounts to the IRS, and are providing information for treaty requests to obtain the names and account records of those individuals who have refused to waive Swiss bank secrecy.  The program has driven thousands of taxpayers into the IRS voluntary disclosure programs.  In October 2015, the IRS reported more than 54,000 voluntary offshore disclosures and the collection of more than $8 billion in taxes, penalties and interest.  These figures have substantially increased since the program was announced in August 2013, due in part to the pressure applied by the Swiss banks on their accountholders to come into compliance.

Critical to the success of the program, in addition to the unwavering support of the department’s leadership, was the substantial assistance of IRS-Criminal Investigation and the Large Business & International Division.  Special agents, revenue agents and analysts have been dedicated to the program for two years, working side by side with the Tax Division’s civil trial attorneys, prosecutors and support staff to carefully review and consider the tremendous volume of information produced by the Category 2 banks.  I cannot begin to tell you how proud I am of those involved in this program and the rest of the Tax Division, which stepped up to the plate to handle more work and larger dockets, while their colleagues continued this pursuit.

While I am pleased that we have completed the agreements with the Category 2 banks, it is important to note that our work is far from done, and we do not rest on our laurels.  Tax Division attorneys and IRS personnel are reviewing the information received from Swiss banks that, under Category 3 and Category 4 of the program, maintain that they did not commit any violations of U.S. law, but seek a non-target letter after providing information required by the program.  We are also reviewing the information provided by the Category 2 banks, responses to our treaty requests and information from whistleblowers and cooperators to pursue criminal investigations and work with our colleagues at the IRS on civil enforcement efforts.

Outside the program, we continue to pursue pending Category 1 bank investigations.  We are looking well beyond Switzerland, to jurisdictions that many of you have added to your passports – for example: Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands and Panama, just to name a few.  We encourage this outreach by practitioners and encourage financial institutions and individuals who have engaged in criminal conduct to contact the department to discuss their options.

While much attention has been paid to our criminal enforcement efforts, we are also using civil enforcement tools to pursue those who continue to conceal foreign accounts and assets and evade their U.S. tax obligations.  For example, we will continue to work with our colleagues at the IRS with respect to the examination and assessment of penalties for violations of the Foreign Bank and Financial Account (FBAR) reporting requirements, file suits to collect outstanding FBAR penalties and defend against complaints for refund of FBAR penalties paid.

We are also working closely with the IRS in its efforts to obtain foreign account records.  Under the Required Records Doctrine, the department has successfully challenged motions to quash grand jury subpoenas in criminal cases and obtained orders enforcing summonses in civil cases.  At this point, the message is clear: taxpayers are required to maintain foreign records and produce them upon request.

Where the IRS is aware of possible violations of the internal revenue laws by individuals whose identities are unknown, the department has sought and will continue to seek orders authorizing the issuance of “John Doe” summonses.  For instance, this past September, the U.S. District Court for the Southern District of Florida authorized the issuance of summonses to Citibank and Bank of America to produce records identifying U.S. taxpayers with accounts at Belize Bank International Limited, Belize Bank Limited or their affiliates, including other foreign banks that used these two banks’ correspondent accounts to service U.S. clients.  The court also granted the IRS permission to seek records related to Citibank’s and Bank of America’s correspondent accounts for Belize Corporate Services and information related to its deposit accounts at Bank of America.  Belize Corporate Services is incorporated and based in Belize and offers, among other things, the purchase of “shelf” Belizean international business companies.

The government’s offshore enforcement arsenal also includes Bank of Nova Scotia summonses and grand jury subpoenas, which seek to compel a domestic financial institution to produce records located in a foreign country.  These summonses or grand jury subpoenas have been utilized and upheld by courts despite the fact that producing the records in the United States would cause the financial institution to violate the laws of a foreign country.  In appropriate circumstances the department will use – and enforce – such subpoenas and summonses.

We also stand ready to assist our treaty partners in their own tax enforcement efforts, as evidenced in Dileng v. Commissioner.  Mr. Dileng has unpaid tax liabilities in excess of $2.5 million in Denmark, which he has challenged in Danish courts.  Like many tax treaties, the U.S.-Denmark Tax Treaty contains a provision allowing a treaty partner to request that the counterpart assist in pursuing collection of domestic taxes in the counterpart jurisdiction.  Pursuant to a collection assistance provision in the U.S.-Denmark Tax Treaty, the Danish taxing authority submitted a collection assistance request and a revenue claim to the IRS, requesting that the IRS assist in collecting Mr. Dileng’s Danish liabilities.  Mr. Dileng filed suit, seeking to enjoin collection efforts by the IRS.

The U.S. District Court for the Northern District of Georgia dismissed the suit, finding that an accepted revenue claim must be treated like a U.S. tax assessment for collection purposes within the United States, even though Mr. Dileng is prohibited from challenging those liabilities in U.S. courts.  The court found that the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act barred him from bringing his claim to stop the IRS from collecting and that the United States had not waived sovereign immunity for his suit.  The court further found that collection under the circumstances did not implicate Mr. Dileng’s due process rights because he is indeed challenging his tax liabilities in Danish courts.

The Dileng case, like similar orders obtained from seven federal courts in 2013 authorizing the IRS to serve John Doe summonses on certain U.S. banks and financial institutions seeking information about persons who used specific credit or debit cards in Norway, demonstrate that the IRS and the department take the United States’ treaty responsibilities seriously.  We will continue to use the collection assistance provisions in our tax treaties to ensure U.S. taxpayers abide by their tax obligations in the United States, and we will continue to do our best to uphold our reciprocal obligations to our treaty partners.

So what can you expect in 2016?  Additional civil enforcement actions and ongoing and new criminal investigations and prosecutions.  Taxpayers who have participated in the IRS voluntary disclosure programs may be contacted and interviewed by the IRS and the department as part of their ongoing cooperation.  Taxpayers who filed returns and FBARs pursuant to the streamlined filing procedures or the Delinquent International Information Return or FBAR submission procedures should be very concerned if they falsely claimed to have engaged in non-willful conduct or acted with reasonable cause.  And financial institutions and individuals who have facilitated the concealment of offshore accounts and the evasion of U.S. tax obligations would be well advised to anticipate an investigation and consider voluntarily disclosing any criminal activity to the department before they become the subject of an investigation.

In the past year, the Tax Division has hired more than 80 new attorneys.  We currently have more than 200 civil trial attorneys, more than 100 prosecutors and approximately 50 appellate attorneys working hard in support of the Tax Division’s mission to enforce the nation’s tax laws fully, fairly and consistently, through both criminal and civil litigation.  We have established an international training series to ensure that our attorneys are familiar with the relevant issues and available tools in offshore enforcement and are working very closely with our partners at the IRS to identify those U.S. taxpayers failing to comply with their tax obligations.  Those who underestimate the ability of the United States to pursue offshore tax evasion do so at their own peril.

In closing, it’s an honor to serve as Acting Assistant Attorney General of the Tax Division, and it’s a great time to be involved in tax enforcement.  I anticipate a very busy 2016, and I’m looking forward to continuing to work with each of you to bring your clients into compliance.  Thank you again for your time, and I hope each of you enjoys the rest of the meeting.

 

Justice Department Opens 2016 Tax Season With Stern Warning to Taxpayers

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

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

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

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

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

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

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

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

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

IRS Taxpayer Advocate Releases 2015 Annual Report to Congress

TASToday, the Internal Revenue Service’s National Taxpayer Advocate, Nina E. Olson, released her annual report to Congress. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that is dedicated to helping taxpayers and protecting taxpayer rights.  Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer Advocate to submit this report each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. The report released today is massive, spanning over 750 pages.

The full text of the press release announcing the National Taxpayer Advocate’s annual report follows:

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her 2015 annual report to Congress, expressing concern that the IRS may be on the verge of dramatically scaling back telephone and face-to-face service it has provided for decades to assist the nation’s 150 million individual taxpayers and 11 million business entities in complying with their tax obligations.  The report reiterates a recommendation the Advocate made in June that the IRS release its “Future State” plan documents, provide additional detail about their anticipated impact on taxpayer service operations, and solicit comments from the public.  The report also recommends that Congress conduct oversight hearings on the plan.

The Future State Plan.  Since 2014, the IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants, at a cost of several million dollars.  To date, the IRS has chosen not to make the plan public.

The Advocate’s report says there are many positive components to the plan, including the stated goal of creating online taxpayer accounts through which taxpayers will be able to obtain information and interact with the IRS.  The report also acknowledges that cuts to the IRS budget – about 19 percent in inflation-adjusted terms since fiscal year (FY) 2010 – have forced the IRS to explore cheaper service options.

Reduced Service Levels.  The Advocate expresses particular concern about IRS intentions regarding what is not stated in the plan.  “Implicit in the plan – and explicit in internal discussion – is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers,” the report says.  “The key unanswered question is by how much. . .It is incumbent upon the IRS to be much more specific about how much personal taxpayer assistance it expects to provide in its ‘future state.’”

The report says the IRS appears to presume taxpayer interactions with the IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers.  The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance – an approach that likely would increase compliance costs for millions of taxpayers who now obtain that assistance from the IRS for free.

The IRS Future State plan could transform the role the agency has long played in helping taxpayers comply with their tax obligations, the report says.  The IRS historically has maintained a robust customer service telephone operation that, in every year since FY 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.

Online accounts are likely to reduce taxpayer demand for telephone and face-to-face interaction to some degree but are unlikely to be useful in addressing complex account-specific matters, the report says. “This is true for several reasons, including that millions of taxpayers do not have Internet access, millions of taxpayers with Internet access do not feel comfortable trying to resolve important financial matters over the Internet, and many taxpayer problems are not ‘cookie cutter,’ thus requiring a degree of back-and-forth discussion that is better suited for conversation.”  Last year, more than 9 million taxpayers either received post-filing IRS notices proposing to adjust their tax or experienced refund delays, all matters that are account-specific.

Technology improvements often do not reduce demand for personal service to the extent expected, the report says. For example, the IRS over the past decade has increased the individual tax return e-filing rate from 54 percent to 85 percent, enhanced the Where’s My Refund? tool, and added substantial content to IRS.gov, yet the number of taxpayer calls to its customer service lines has increased by 59 percent.  Similarly, the report cites a recent Federal Reserve survey in which 72 percent of mobile banking customers reported they had visited a branch and spoken with a teller an average of two times within the preceding month. The report says customers often use online service as a supplement to, rather than a substitute for, personal service, particularly for complex matters.

In recent years, the IRS has already begun to reduce taxpayer services, including by declaring all but simple tax-law questions “out of scope” for the IRS to answer during the filing season; declaring it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); eliminating preparation of tax returns in its walk-in sites; and eliminating an online program that allowed taxpayers to submit questions electronically.

Need for Transparency.  “We believe it is critical that the IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, whether it will provide sufficient support for taxpayers – and how – as it transitions to its future state, and whether it has an adequate ‘Plan B’ if taxpayer demand for telephone and face-to-face service remains higher than the IRS anticipates,” the report says.

In releasing the report, Olson emphasized that Congress has repeatedly shown support for high-quality taxpayer service.  In the IRS Restructuring and Reform Act of 1998, Congress directed the IRS to “review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.”  Added Olson:  “The fact that Congress just last month provided the IRS with an additional $290 million in funding for taxpayer assistance and codified the provisions of the Taxpayer Bill of Rights, including The Right to Quality Service, demonstrates that Members of Congress continue to believe taxpayer service should be strengthened, not reduced,” Olson said.

“Pay to Play” Tax System.  Olson characterized the combination of reductions in personal service and the IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of user fees, discussed below) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.

Data Security Concerns.  Olson also warned about the consequences of giving tax return preparers more access to taxpayer accounts.  “When you give that access to unregulated preparers or to other third parties, I have significant concerns.  We already see the problems in this population of preparers relating to the Earned Income Tax Credit (EITC), where certain unregulated, untrained preparers prey on vulnerable taxpayers.  Why would we want to give these preparers even more access to taxpayer information?  And yet, if we don’t provide these preparers access to taxpayer accounts, it is very likely the tens of millions of taxpayers who use these preparers won’t be able to or won’t want to utilize their own online accounts, thereby carving a big hole in the IRS’s online strategy.  Thus, through a single-minded emphasis on online accounts, the IRS creates a situation where it will face enormous pressure to open up taxpayer account access to unregulated return preparers.”

Need for More Details and Public Discussion.  Because the contemplated reductions in service are significant yet undefined, Olson called on the IRS in her FY 2016 Objectives Report to Congress to release its plans and solicit taxpayer comments.  The new report again recommends that the IRS immediately publish its plan and seek public comments.  “U.S. taxpayers pay the bills for our government.  U.S. taxpayers deserve a say in how the tax collection agency will treat them,” the report says.

The report also recommends that Congress hold hearings on the future state of IRS operations so it can obtain more specific information about the IRS’s plans and have an opportunity to weigh in.

Said Olson:  “This has been a difficult report to write because while the intent to reduce telephone and face-to-face service has been a central assumption in the Future State planning process, little about service reductions has been committed to writing.  Therefore, it is impossible to describe the scope of contemplated reductions with specificity.  If there is good news here, it is that the IRS has not formally committed itself to the service reductions we understand to be contemplated.  I am hopeful the IRS will make the plan public, present its perspective on tradeoffs, seek public comments, and ultimately make a commitment to continue to maintain existing telephone and face-to-face services for the millions of U.S. taxpayers who rely on them.”

National Taxpayer Advocate to Hold Public Hearings on Taxpayer Service Needs.  “For the IRS to do its job well, it must start from the perspective of what government is about – namely, it is of the people, by the people, and for the people,” Olson wrote.  “The government is funded by taxes paid by the people.  Therefore, the future state vision of the IRS needs to be designed around the needs of the people.”  To assist the IRS in developing a plan that is responsive to the needs of U.S. taxpayers, Olson announced plans to conduct public hearings around the country in the coming months to which she plans to invite groups that represent the interests of individual taxpayers (including elderly, low income, disabled, and limited English proficiency taxpayers), sole proprietors, and other small businesses as well as Circular 230 practitioners and unenrolled tax return preparers to describe what they need from the IRS to help them comply with the tax laws.

OTHER KEY ISSUES ADDRESSED

Federal law requires the Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.  Overall, this year’s report identifies 24 problems, makes dozens of recommendations for administrative change, makes 15 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

The “most serious problems” discussed in the report are grouped into four sections:

(1) IRS Future State Vision: Implications for Today and Tomorrow; (2) Problems that Undermine Taxpayer Rights and Impose Taxpayer Burden; (3) Problems that Waste IRS Resources and Impose Taxpayer Burden; and (4) Problems that Contribute to Earned Income Tax Credit Noncompliance and Recommendations for Improvement.  The report says that as the IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden.

Among the problems addressed are the following:

IRS User Fee Decisions May Impose Heavy Taxpayer Burden.  Like other federal agencies, the IRS is required to consider charging for services that convey “special benefits.”  In the past, the IRS tried to avoid imposing fees that would impair its mission, particularly in the years before it was authorized to retain fee revenue.  Between FY 2010 and FY 2015, however, when the IRS’s appropriation was reduced by about 10 percent (nominally), its user fee revenue rose by 34 percent.  The report suggests that cuts to the agency’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes.

As an example, the IRS collects revenue when delinquent taxpayers agree to pay their liabilities voluntarily, even if they can only pay in installments over time rather than in a single lump-sum.  Under an installment agreement, tax is collected without draining IRS enforcement resources.  Yet the IRS charges taxpayers a user fee for entering into installment agreements and is actively considering increasing the fee.  The report says such fees exacerbate the “pay to play” aspects of the IRS Future State (discussed above) and expresses concern that increasing user fees may have the effect of deterring taxpayers from using IRS services that promote compliance, thereby reducing voluntary compliance and potentially costing the government more in tax than it would earn in user fees.

In a Dec. 4 memorandum to the Commissioner, the Advocate conveyed concerns about specific user fees that are under consideration; the memorandum is published in the report but has been substantially redacted at the request of the IRS.  The report recommends the IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.

Form 1023-EZ Process Allows Unqualified Entities to Obtain Tax-Exempt Status.  Since July 2014, the IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3).  Form 1023-EZ adopts a “checkbox approach” that requires applicants merely to attest, rather than demonstrate, that they qualify for exempt status.  In particular, Form 1023-EZ does not solicit any narrative regarding an organization’s planned activities, any organizing documents (such as articles of incorporation or bylaws), any financial data, or any explanatory material.  The IRS approves about 95 percent of applications submitted on Form 1023-EZ.  However, the IRS’s own data show it approves only about 77 percent of applications when it requests documentation.

Similarly, TAS conducted a research study, published in Volume 2 of the report, that examined a representative sample of organizations in 20 states that make articles of incorporation viewable online and whose Form 1023-EZ application had been approved by the IRS.  It found, among other things, that 37 percent do not meet the organizational test for qualification as a Section 501(c)(3) organization.  In other words, these organizations received favorable determination letters from the IRS even though they are not eligible for exempt status under the law.  The report recommends that the IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that the IRS review this information before deciding whether to approve exemption applications.

IRS Anti-Fraud Filters Delay Refunds for Hundreds of Thousands of Legitimate Taxpayers, with One Major Program Having a False Positive Rate of 36 Percent.  The IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft.  While these are critical programs, the filters have high “false positive” rates, causing substantial refund delays for hundreds of thousands of legitimate taxpayers.  For example, the false positive rate was about 36 percent during FY 2015 in the Taxpayer Protection Program (TPP), which freezes returns the IRS suspects may reflect identity theft.  The IRS sends notices to taxpayers whose returns have been flagged by TPP filters and instructs the taxpayers to authenticate their identities online or by phone.  Yet for three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of taxpayer calls on that telephone line, making it extra ordinarily difficult for affected taxpayers to get their returns unfrozen and receive their refunds.  For other anti-fraud programs, the IRS currently does not track the false positive rate.  The report recommends that the IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

Other issues analyzed in the “most serious problems” section of the report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, the IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

New TAS Research Studies. Volume 2 of the report contains four new research studies, including a study examining whether organizations that obtained Section 501(c)(3) status on the basis of Form 1023-EZ applications meet the requirements for exempt status and a study designed to gain a better understanding of the needs of underserved Hispanic taxpayers.  The report also contains two studies that look at IRS enforcement programs.

One study examined the impact of audits on the subsequent compliance of self-employed individuals.  The results of the study “provide robust evidence that audits have important long-term revenue implications,” the report says.  However, the study found a significant disparity in results when it attempted to differentiate the subsequent behavioral responses of (seemingly) compliant taxpayers and (seemingly) noncompliant taxpayers.  It found that (seemingly) non-compliant taxpayers who were audited increased their reporting compliance of taxable income by about 120 percent three years later, while (seemingly) compliant taxpayers who were audited subsequently reported less income.

A second study examined the IRS’s “collectability curve.”  The IRS generally assigns delinquencies to Taxpayer Delinquent Account (TDA) status within four to five months after it assesses a liability and sends the taxpayer a series of notices.  However, the volume of TDAs may delay collection actions from occurring for some time.  The study found that the IRS is most successful at collecting liabilities soon after TDA assignment.  While dollars continue to be collected throughout the life of the 10-year statutory collection period, the payment rate slows considerably.  These findings are similar to the results reported by private collection agencies, but run counter to some IRS procedures that prioritize collecting larger accounts, even though many “smaller accounts” become “larger accounts” simply because the IRS delays collection, allowing penalties and interest to continue to accrue and ultimately making them more difficult to resolve.

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Please visit http://www.taxpayeradvocate.irs.gov/2015AnnualReport for more information.

Related Items: 

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About the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS) that helps taxpayers and protects taxpayer rights.  Your local advocate’s number is in your local directory and at taxpayeradvocate.irs.gov.  You can also call TAS toll-free at 1–877–777–4778.  TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should.  And our service is free.  For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. You can get updates on tax topics at facebook.com/YourVoiceAtIRS, Twitter.com/YourVoiceatIRS, and YouTube.com/TASNTA.

Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents.  For more information on this publication, please click here.

 

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

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

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

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

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

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

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

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

Two More Banks Reach Resolutions Under Justice Department’s Swiss Bank Program

DOJ logoOn June 3, 2015, the Justice Department announced that two more Swiss banks, Rothschild Bank AG and Banca Credinvest SA, reached resolutions under the DOJ Swiss Bank Program. Yesterday’s announcement brings the total Swiss bank resolutions to date to nine. (See prior posts here, here, and here.)  More than 100 Swiss banks previously notified the Tax Division that they wished to enroll in the program.

In the press release announcing the resolutions, officials from both the Justice Department and the Internal Revenue Service issued stern warnings to taxpayers who continue to hide money offshore:

“The days of safely hiding behind shell corporations and numbered bank accounts are over,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Department of Justice’s Tax Division. “As each additional bank signs up under the Swiss Bank Program, more and more information is flowing to the IRS agents and Justice Department prosecutors going after illegally concealed offshore accounts and the financial professionals who help U.S. taxpayers hide assets abroad.”

“These resolutions with Credinvest and Rothschild are further examples of the commitment by the IRS and the Department of Justice to ensure that U.S. taxpayers report foreign bank accounts and pay taxes on all income earned from those accounts,” said Deputy Commissioner Douglas O’Donnell of the IRS Large Business and International Division. “We are encouraged by today’s progress and our ongoing work with the other Swiss banks that have entered the DOJ Swiss Bank Program.”

“The bank agreements announced today continue to change the landscape in the offshore banking world,” said Chief Richard Weber of IRS-Criminal Investigation. “With each additional agreement, the world where criminals can hide their money is becoming smaller and smaller. Those who circumvent offshore disclosure laws have little room to hide.”

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

In its press release announcing the resolutions, the Justice Department provided the following factual background regarding each bank’s banking practices in connection with U.S.-related accounts:

Rothschild Bank AG (Rothschild) was founded in 1968 and is headquartered in Zurich, Switzerland. Rothschild offered services that it knew could and did assist U.S. taxpayers in concealing assets and income from the Internal Revenue Service (IRS), including code-named accounts, numbered accounts and hold mail service, where Rothschild would hold all mail correspondence for a particular client at the bank. These services allowed certain U.S. taxpayers to minimize the paper trail associated with the undeclared assets and income they held at Rothschild in Switzerland. For a number of years, including after Swiss bank UBS AG announced in 2008 that it was under criminal investigation, and following instructions from certain U.S. taxpayers, Rothschild serviced certain U.S. customers without disclosing their identities to the IRS. Some of Rothschild’s U.S. clients had accounts that were nominally structured in the names of non-U.S. entities. In some such cases, Rothschild knew that a U.S. client was the true beneficial owner of the account but nonetheless obtained a form or document that falsely declared that the beneficial owner was not a U.S. taxpayer. Since Aug. 1, 2008, Rothschild had 66 U.S.-related accounts held by entities created in Panama, Liechtenstein, the British Virgin Islands, the Cayman Islands or other foreign countries with U.S. beneficial owners. At least 21 of these accounts had false IRS Forms W-8BEN in the file, which are used to identify the beneficial owner of an account. Rothschild knew it was highly probable that such U.S. clients were engaging in this scheme to avoid U.S. taxes but permitted these accounts to trade in U.S. securities without reporting account earnings or transmitting any withholding taxes to the IRS, as Rothschild was required to do. Rothschild also opened accounts for U.S. taxpayers who had left other Swiss banks that the Department of Justice was investigating, including UBS. Since Aug. 1, 2008, Rothschild had 332 U.S.-related accounts with an aggregate maximum balance of approximately $1.5 billion. Of these 332 accounts, 191 accounts had U.S. beneficial owners and an aggregate maximum balance of approximately $836 million. Rothschild will pay a penalty of $11.51 million.

Located in Lugano, Switzerland, Banca Credinvest SA (Credinvest) started operations as a fully licensed bank in 2005. Credinvest offered a variety of services that it knew could assist, and that did assist, U.S. clients in concealing assets and income from the IRS, including hold mail service and numbered accounts. Credinvest did not set up any formalized internal reporting regarding U.S. clients and did not adopt any procedures to ascertain or monitor the compliance of its U.S. clients with their U.S. tax obligations. In late 2008, an external asset manager referred 11 accounts to Credinvest, all of which were for U.S. clients who had left UBS. The bank delegated to that external asset manager the primary management of those accounts and failed to ascertain the compliance of those clients with their U.S. tax obligations. The bank thus aided and assisted those clients in concealing their accounts from U.S. authorities. Since Aug. 1, 2008, Credinvest had 31 U.S.-related accounts with just over $24 million in assets. Credinvest will pay a penalty of $3.022 million.

In accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations. While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

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

The Justice Department also released the following documents as part of its announcement: