Cooked Books: A Recipe for Representing a Client with a Potential Criminal Tax Problem Sanford Boxerman Sara Neill Justin Gelfand

Transcription

1 CAPES, SOKOL, GOODMAN & SARACHAN, P.C Forsyth Boulevard, Twelfth Floor St. Louis, Missouri Cooked Books: A Recipe for Representing a Client with a Potential Criminal Tax Problem Sanford Boxerman Sara Neill Justin Gelfand I. Overview of the Criminal Tax System a. Foundational matters i. Purpose of the criminal tax system 1. Purpose of overall tax system is to raise $ for the government 2. DOJ s CTM explains purpose of criminal tax enforcement: a. To protect the public interest in preserving the integrity of this nation s self-assessment tax system through vigorous. enforcement of the internal revenue laws. b. To expose the wrongdoer, thereby deterring other potential tax violators. c. Objective to get the maximum deterrent value from the cases prosecuted. To achieve this objective, government s tax enforcement activities must reflect uniform enforcement of the tax laws. ii. Mens rea requirement (willfulness): The highest in Federal Criminal Law 1. In Bryan, 524 U.S. 184 (1998) Supreme Court said in certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating. Cheek v. U.S., 498 U.S. 192 (1991) and Ratzlaf, 510 U.S II. Investigation and development of criminal tax cases a. The players i. IRS Revenue Agents enter at three points 1. Referrals to CI from IRS s civil examination side 2. After CI referral, Special Agents may be assisted by one or more agents 3. After resolution of the criminal case, control of the case returned to civil ii. IRS Special Agents iii. CT Counsel in house lawyers for CI iv. DOJ Tax 1. Controls whether the target will be prosecuted and, if so, for what 2. Two components a. DOJ Tax (Main Justice) i. Tax Division presided over by an Assistant Attorney General

2 ii. Tax Division has civil trial and appellate sections and a Criminal Enforcement Section (CES) b. US Attorney s Offices 3. DOJ generally has no role in administrative investigations section 6103 prohibits the IRS from sharing return information with DOJ personnel, unless and until the IRS has referred the case to DOJ for criminal prosecution or a high ranking DOJ official has made written request for information. EXCEPTION to general rule: If SA desires to obtain a S/W b. Cases Investigated through Administrative Process (very limited federal prosecutor involvement) or Grand Jury (spearheaded by a federal prosecutor) III. Tax Evasion Section 7201 a. Elements i. Affirmative act ii. Willfulness iii. Tax due and owing (or substantial tax depending on circuit) b. 5 year maximum prison sentence c. Affirmative act i. There must be an affirmative attempt to evade or defeat the tax due and owing ii. Spies v. U.S., 317 U.S. 492 (1943) 1. Spies prosecuted for tax evasion after he failed to file tax returns and pay tax. Defendant wanted court to instruct jury that non-filing and non- payment without more are not sufficient for evasion. 2. HELD: To have tax evasion, taxpayer must have done more than not file and not pay at least one affirmative act that was done in an attempt to evade or defeat tax in addition to non-filing. d. Willfulness i. Voluntary, intentional violation of a known legal duty ii. U.S. v. Pomponio, 429 U.S. 10 (1976): No requirement of proof of any motive other than an intentional violation of a known legal duty iii. Cheek v. U.S., 498 U.S. 192 (1991) 1. Cheek argued that his understanding, within the meaning of the tax laws, was that he was not required to file a return or pay income taxes and that wages were not taxable income 2. Trial court instructed that if Cheek believed he didn t have to pay taxes and belief was reasonable, then jury could find for Cheek 3. HELD: Claimed good faith belief need not be reasonable subjective, good faith belief is a defense; not an objective standard 4. So in Cheek, since he believed he did not have to pay taxes on his wages, it is a legal defense if the jury buys it (on remand, the jury did not) iv. Willful blindness or deliberate ignorance 1. If defendant deliberately avoided acquiring knowledge of a fact or the law, then the jury may infer that he actually knew it and that he was merely trying to avoid giving the appearance (and incurring the consequences) of knowledge v. Willfulness Reliance on Tax Preparer or Attorney Defense 1. Technically this is not a defense but rather an argument that the Government failed to meet its burden of proof. The Government thus has to show that the defendant did not rely upon the tax professional in

3 IV. order to show willfulness. But, as in Cheek, the defendant has to put the defense in play by introducing some evidence of reliance on the tax professional. Once the defendant does that, it is then the Government s burden to show that the taxpayer did not rely. e. Tax due and owing i. No tax, no tax evasion ii. Exclude from computation of tax any items as to which there is an uncertainty defense iii. Taxpayer may assert that she was entitled to additional tax benefits which she did not claim iv. Substantiality and materiality v. Criminal tax numbers versus civil tax numbers f. Ex Post Facto Solutions to Tax Evasion i. A taxpayer who commits tax evasion in Year One by filing a fraudulent return cannot avoid a 7201 charge for Year One by generating in a later year a NOL or other carryback that ex post facto wipes out the Year One liability ii. Filing an amended return after a fraudulent original return was filed will not purge the fraud as a matter of law; however, coming clean before the IRS examination may influence the Government to forgo criminal prosecution Other offenses a. Willfully Filing a False Tax REturn 7206(1) i. Criminalizes the making of a false statement under penalty of perjury ii. Elements 1. Defendant signed an income tax return that contained a written declaration that it was made under penalties of perjury (jurat) 2. Defendant made a false statement on the return 3. Defendant knew the statement was false 4. The false statement was material b. Aiding and Assisting False Return (2) i. Elements 1. Defendant aided in (assisted in, procured, counseled, advised) the preparation of a return (affidavit, claim) arising under (in connection with any matter arising under) the internal revenue laws; 2. Return falsely stated material matters asserted; 3. Defendant knew that the statement in the return was false; 4. The false statement was material; and 5. The defendant aided in the preparation of the false statement willfully, that is, with intent to violate a known legal duty c. Corruptly Impeding Tax Administration (a) i. (1) Corruptly or by force or threats of force trying to impede Government tax officials from performing their duties; or (2) in any other way corruptly or by force or threats of force obstructing or impeding or endeavoring to obstruct or impede the due administration of the IRC ii. Elements for (2) (commonly called The Omnibus Clause ) 1. The defendant in any way corruptly; 2. Endeavored to; 3. Obstruct or impede the due administration of the Internal Revenue laws d. Willful Failure to file, keep records, supply information, or pay tax

4 1. Misdemeanor 2. Elements: a. Defendant was required by law or regulation to file a tax return b. Defendant failed to file a return at the time required by law c. In failing to file the tax return, the defendant acted willfully e. Failure to collect and pay over : Felony provision applicable to willful failures by persons under the duty to collect, account for, and pay over tax (e.g. Employers) 2. Elements of 7202: a. Defendant was a person who had a duty to collect, truthfully account for, and pay over federal income and social security taxes that the defendant was required to withhold from wages of employees; b. Defendant failed to collect or truthfully account for and pay over federal income and social security taxes that the defendant was required to withhold from the wages of employees; c. Defendant acted willfully V. Related crimes outside the Internal Revenue Code a. Conspiracy 18 U.S.C. 371 i. Under 371, two types of conspiracies: 1. Conspiracy to commit an offense against the U.S.; and a. If a tax case is charged under this part of the statute, the offense is a Title 26 offense like tax evasion of filing a false tax return 2. Conspiracy to defraud the U.S. a. If a tax case is charged under this part of the statute, it is generally charged as a so-called Klein conspiracy, where U.S. alleges the defendant conspired to defraud the U.S. for the purpose of impeding, impairing obstructing, and defeating the lawful government function of the IRS in the ascertainment, computation, assessment and collection of the revenue: to wit, income taxes ii. Elements (regardless of the clause under which it is brought): a. An Agreement by the Defendant and one other person 2. Defendant s knowing and voluntary participation in the conspiracy; and 3. Commission of an overt act in furtherance of the conspiracy b. Filing false claims 18 U.S.C. s 286 and 287 i. 287 makes it a crime to file false claims against the Government ii. 286 covers conspiracies to file false claims iii. Elements of 287 (false claim for refund): 1. Defendant made or presented a claim to a department or agency of the U.S. for money or property (IRS is an agency ; refund is Money )); 2. Claim was false, fictitious, or fraudulent; and 3. Defendant knew at the time that the claim was false iv. Elements of 286 (conspiracy to file false claims): 1. An agreement, combination, or conspiracy to defraud the U.S.; 2. By obtaining or aiding to obtain the payment of any false, fictitious, or fraudulent claim

5 VI. VII. VIII. Voluntary disclosure a. An amended return will establish one of the key elements of tax evasion: tax due and owing; it will not by itself establish willfulness b. IRS voluntary disclosure policy (IRM) i. Does not apply to taxpayers with illegal source income ii. Must be timely, truthful and complete Direct, Indirect, and Hybrid Methods of Proof a. Direct Method (Specific Items) b. Indirect Methods (methodologies of circumstantial proof) 1. Net worth method 2. Expenditures Method 3. Bank Deposits Method 4. Percentage Mark-Up Method Sentencing a. Plea Bargaining i. Horse Trading 1. When defendant has information of value with regard to third parties who may be prosecuted, the defense has bargaining power can begin by requesting immunity in exchange for the information; more commonly the defendant provides the information in exchange for an agreement by the prosecutor to file a motion under U.S.S.G. 5K.1. ii. Criminal Tax Loss 1. Primary determinant of a sentence 2. Core of plea negotiations 3. Consider: a. Eliminating some of the purported criminal conduct by questioning the willfulness of the taxpayer on a specific item or items; b. Pointing out overlooked expenses or excessive inclusions of income in the SAR s calculation of tax loss; c. Eliminating certain years from relevant conduct by distinguishing the cause of tax losses computed for those years 4. May want to come to an agreement on tax loss before plea iii. Civil Tax Issues 1. Restitution not common in Title 26 tax cases because 18 U.S.C does not authorize it unless the defendant agrees or the judges makes it a condition of supervised release under 18 U.S.C Both prosecution and defense benefit from provision in plea agreement clarifying that the criminal tax loss number is a calculation determined under the Guidelines and is not the precise amount of civil tax liability due from the defendant for the years in issue Defendant should reserve the right to challenge the amount of liability and/or penalties b. Sentencing Guidelines in Tax Cases i. 2T1.1 if a tax crime (2B1.1 if a fraud crime) ii. Calculate base offense level using tax table in 2T4.1 iii. Per the guidelines, the tax loss (since 1993) is 20 or 28 percent for individuals and 25 and 34 percent for corporations unless a more accurate determination of the tax loss can be made

6 IX. iv. Tax loss is the total object of the offense (intended loss is what matters) v. Relevant conduct 1. Court may consider it including: tax loss from years barred by SOL, uncharged conduct, tax loss attributable to counts the defendant was acquitted of, and even state taxes that were evaded if those taxes would be part of the common scheme or plan of the federal counts of conviction 2. Tax loss calculation cannot include penalties or interest Civil Tax Considerations a. Civil-Criminal Coordination i. Timing 1. Historically Government has proceeded with criminal tax investigation and prosecution first, but parallel proceedings are more common than they used to be 2. Court could stay civil proceedings ii. Civil liability and pleas 1. Payment is not an admission of liability or an admission that the limitations period remains open 2. Restitution provision may be incorporated into plea agreement iii. Grand jury material and civil liability 1. FRCP 6(e) prohibits IRS from using GJ matters in developing its civil tax position as to the taxpayer s liability without a pending judicial proceeding and a Rule 6(e)(3) order 2. If taxpayer resolves his civil tax liability incident to the plea negotiation, GJ matters can be used b. Civil penalties i. Civil fraud penalty ( 6663(a)) 1. 75% of the understatement attributable to fraud 2. Once fraud is established, no SOL impediment to the assessment of the civil liabilities 3. A determination of fraud undercuts the possibility of the taxpayer discharging the liabilities in a later bankruptcy proceeding 4. Although the BOP as to civil fraud is higher than that as to other civil penalties, it is lower than the burden as to criminal fraud BOP is clear and convincing 5. Applies only to spouse whom the IRS proves to have committed the fraud ( 6663(c)) 6. Scienter is typically inferred from objective facts (i.e. the existence of one or more of the so-called badges of fraud 7. Fraud penalty applies only to filed returns ( 6664(b)) 8. Reasonable cause is a defense 9. Courts have rejected arguments that imposition of a civil fraud penalty on top of a criminal tax penalty violates the Double Jeopardy Clause of the 5 th Amendment and/or Excessive Fines Clause of the 8 th Amendment ii. Accuracy-related penalty ( 6662(a)) 1. 20%

7 2. Applies whenever any of five conditions is present two principal bases are negligent or intentional disregard of the tax rules and substantial understatement of income tax 3. After IRS meets an initial burden of production, taxpayer typically bears the burden of proof ( preponderance of the evidence ) iii. Delinquency penalties 1. Failure to file timely returns ( 6651(a)(1)) a. Elements are the same as the 7203 failure to file offense Taxpayer must have a duty to file and must have failed to timely file b. 5% per month, maximum penalty of 25% c. Under 6651(f), if the failure to file is fraudulent, the penalty rate becomes 15% per month, with a maximum of 75% (not same as 7201 tax evasion since latter requires an affirmative act in addition to failure to file) d. Limited case law as to whether 7203 conviction estops a taxpayer from denying the applicable of the 6651(f) penalty e. Failure to file civil penalty base is tax required to be shown on the return reduced by tax that has been paid 2. Various other penalties for failure to timely file or pay tax liabilities including: a. 6651(a)(2): Failure to pay tax shown on return b. 6651(a)(3): Failure to pay deficiencies after notice and demand c. 6652: Failure to file certain information returns d. 6653: Failure to pay stamp tax e and 6655: Failure to pay estimated taxes by individuals and corporations f. 6656: Failure to make deposit of taxes g. 6657: Payment via bad check h. 6721: Failure to file information returns X. International aspects of tax fraud prosecutions a. Methods for obtaining foreign evidence i. Traditional methods of summons and grand jury subpoenas 1. Bank s compliance may violate foreign law; foreign businesses contend that they may be prosecuted by their own government if they comply with the summons. In resolving these issues, courts have performed balance of interests test, in which they look at the need for the evidence and international comity ii. MLAT 1. Treaty 2. Creates a contractual obligation between the treaty partners to render each other assistance in criminal matters in accordance with the terms of the treaty iii. Tax Information Exchange Agreements (TIEAs) and income tax treaties 1. Most tax treaties are designed to reduce double taxation, and contain evidence sharing provisions iv. Letters rogatory (letters of request)

8 XI. b. Offshore bank accounts offshore voluntary disclosure initiatives i. In 2008, the IRS issued a John Doe summons out of a Miami federal district court to UBS (Swiss Bank that does business in USA). Summons asked for all Americans with accounts with UBS to be identified. UBS resisted b/c under Swiss law would have been illegal to provide the information. Lots of communications going on between two governments, modifications of info sharing treaty, etc. Settlement finally reached between UBS and USA involving a deferred prosecution agreement and information sharing. UBS paid $750 million. UBS turned over account info for 4,500 Americans with Swiss account and summons was quashed. Secrecy of Swiss accounts may now be a thing of past. ii. FATCA requires banks in foreign countries to report, on a country by country basis, foreign account holders severe consequences if they do not may not be able to operate Ethical issues in criminal tax practice a. Sources of law i. State ethics rules and opinions ii. ABA rules and opinions iii. Circular 230 and IRC iv. SEC Standards of Professional Conduct b. General Ethical Duties i. Duty of loyalty 1. No conflicts of interest 2. Lawyer required to act as a zealous advocate in furthering the client s case 3. Not absolute must be balanced with candor and fairness ii. Duty of competence 1. Knowledgeable 2. Diligent 3. Keep client informed of progress of case iii. Duty to the system of justice 1. Exercise candor toward the tribunal 2. Bring only meritorious claims 3. Act with decorum and fairness to an opposing party c. Duties owed to the IRS i. General duties and standards of conduct 1. Circular 230 governs lawyers who practice before the IRS (includes all matters connected with the presentation to the IRS relating to a taxpayer s rights, privileges, or liabilities under the tax laws) ii. Standards for giving tax advice d. Client confidentiality and dealings with government agencies i. When lawyer learns that his or her client has made false or misleading representations, or has engaged in misleading silence ii. Model Rule 3.3: Lawyer cannot knowingly make a false statement of fact or law to a tribunal or fail to correct a false statement previously made to the tribunal by the lawyer; lawyer must take reasonable remedial measures if lawyer s client has offered material false evidence

9 iii. ABA has opined that IRS is not a tribunal and that a lawyer appearing as an advocate before the IRS is under no duty to disclose weaknesses in the client s case if the case is fairly arguable iv. ABA has opined that a lawyer is under a duty not to mislead the IRS deliberately, either by misstatements or silence or by permitting client to mislead v. Rule 1.6 deals with keeping client confidences prevents disclosure e. Challenges of representing an entity client f. Cash for services i. If a law firm/lawyer receives more than $10K cash in a single transaction or related series of transaction, must file form 8300 (section 6050I) ii. What if client does not want his identity disclosed to IRS? 1. Lefcourt v. U.S., 125 F.3d 79 (1997): Too bad; nondisclosure due to attorney-client privilege is not warranted 2. Certain state bar associations have imposed a contrary rule holding that an attorney may not ethically disclose a client s identity on a Form 8300 unless the client consents

10 About the Presenters Sanford J. Boxerman is a shareholder of Capes, Sokol, Goodman & Sarachan, P.C., in St. Louis, Missouri, where he chairs the Firm s White Collar Criminal Defense & Internal Investigations practice group. Mr. Boxerman defends individuals and business entities in civil and criminal tax controversies and other white-collar criminal cases. From 1991 to 1994, Mr. Boxerman served as assistant public defender in the City of St. Louis. Mr. Boxerman has been an adjunct lecturer of business law at Washington University s Olin School of Business since He is also an adjunct faculty member at the Washington University School of Law, where he co-teaches the tax fraud prosecutions course in the law school s graduate tax program. He is a member of the American Bar Association s Tax Section (Civil and Criminal Penalties Committee) and Criminal Justice Section (White Collar Crime Committee). He is a frequent speaker on white collar and tax controversy matters at events sponsored by the ABA and others. Sara G. Neill is a shareholder of Capes, Sokol, Goodman & Sarachan, P.C., in St. Louis, Missouri, where she chairs the firm s Civil & Criminal Tax Controversy practice group. Ms. Neill regularly defends individuals and businesses under investigation for, or charged with, tax and other white collar crimes. In addition, Ms. Neill handles civil tax controversy matters, including IRS audits and appeals, litigation before the United State Tax Court and federal district courts, and significant tax collection proceedings. Ms. Neill s clients have included lawyers and accounts in preparer/promoter investigations and appeals, Fortune 500 corporations, small businesses and individuals. Ms. Neill is the Chair of the Taxation Section of the Bar Association of Metropolitan St. Louis and the Co-Chair of the ABA Tax Section s Civil and Criminal Penalties Committee s subcommittee on important civil developments. She serves on the Advisory Board for the University of Missouri-Columbia Tax Law Society and is an active member of the St. Louis Lawyers Association and the St. Louis Women s Law Association. She frequently speaks on issues relating to civil and criminal tax controversy. Justin K. Gelfand is Counsel at Capes, Sokol, Goodman & Sarachan in St. Louis, Missouri, where he focuses his practice primarily on criminal tax, criminal defense, white collar defense, and internal investigations. From 2009 through February 2014, Gelfand was a Trial Attorney with the U.S. Department of Justice s Tax Division, where he prosecuted federal tax crimes throughout the country. In addition to prosecuting offshore banking and international and domestic tax evasion, Gelfand played a large role in crafting the innovative way stolen identity tax refund fraud cases are now investigated and prosecuted and trained federal agents and federal prosecutors throughout the country on cutting-edge investigative techniques utilized by law enforcement today. For this work, Gelfand and a small team of colleagues received the 2013 Attorney General s Award for Fraud Prevention. Capes, Sokol, Goodman & Sarachan, P.C.is a firm of seasoned attorneys, committed to achieving business and individual client objectives in the most effective and efficient manner possible. When resolution requires litigation or the skills of an innovative transactional attorney, this group of attorneys has a long and distinguished record of success. The firm s criminal tax attorneys include two former federal prosecutors with the U.S. Department of Justice s Tax Division in Washington, D.C., a former public defender with significant defense trial experience, the Chair of the Taxation Section of the Bar Association of Metropolitan St. Louis, a former IRS-CI federal agent and forensic accountant with more than 28 years of federal investigation experience, and numerous experienced civil tax attorneys. The firm regularly handles all aspects of criminal and civil tax matters