IRS and DOJ Losing Patience with Taxpayers with Undisclosed Foreign Accounts

Posted by Jennifer Benda on February 04, 2013

The assistant US attorney general for the Tax Division, Kathryn Keneally, recently indicated that the window for avoiding criminal prosecution related to undeclared foreign accounts may be closing soon.  At a roundtable discussion at the University of Southern California’s annual tax institute, Ms. Keneally indicated that waiting to disclose offshore accounts is extremely dangerous. 

If you have undeclared offshore accounts, you should consult with a tax attorney who regularly handles such disclosures.  Taxpayers who would like more information regarding the 2012 IRS Voluntary Disclosure Program should call Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.

Ninth Circuit Holds that Fifth Amendment Does Not Shield Taxpayer's Attorney from Forced Production of Client-Taxpayer's Records

Posted by Jay R. Nanavati on January 15, 2013

Applying the “foregone conclusion” exception to the Fifth Amendment privilege against self-incrimination, the Ninth Circuit held on January 8, 2013, that the IRS could force a taxpayer’s criminal defense attorney to turn over the client-taxpayer’s records to IRS Criminal Investigation in response to a summons.  The case’s citation is United States v. Sideman & Bancroft LLP; No. 11-15930 (9th Cir. 2013).

In the course of a tax evasion investigation, the IRS executed a search warrant on the taxpayer’s home, business, and car, looking for tax records.  Agents were unable to find the records and eventually interviewed the taxpayer’s tax return preparer.  The return preparer described the records in detail and told the agents that she had given them to the taxpayer’s criminal defense attorney.  The IRS then served the attorney with a summons for the records.  When the attorney refused to turn over the records, the IRS and the U.S. Department of Justice Tax Division went to court to enforce the summons.

Both the District Court and the Ninth Circuit agreed that the “foregone conclusion” exception to the Fifth Amendment applied and required the attorney to turn over the records to the IRS in response to the summons.  This is because the government, using the tax return preparer’s detailed knowledge and description of the records, could identify and authenticate the records in court without relying on the taxpayer’s act of production of the records (through her attorney).  Since the existence, authenticity, and possession of the records were foregone conclusions, the summons did not violate the taxpayer’s Fifth Amendment privilege against self-incrimination.

“The testimony that was obtained and the known existence and specificity of the documents sought would tend to lean in the government’s favor, as the case demonstrated,” said Jim Mastracchio, Co-Chair of BakerHostetler’s Tax Controversy Practice.  Jay Nanavati, a former DOJ Tax Division Assistant Chief added, “this case re-affirms the principle that the Fifth Amendment privilege against self-incrimination is not bullet proof, especially when documents are at issue.  Whether using the “foregone conclusion” exception, as in this case, or the “required records” doctrine in offshore tax evasion cases, the government has the legal means to force people to turn over the very evidence that could put them in jail.”

For more information on the government’s efforts to prosecute tax evasion, please contact Jim Mastracchio at (202) 861-1650 (jmastracchio@bakerlaw.com) or Jay Nanavati at (202) 861-1747 (jnanavati@bakerlaw.com), BakerHostetler, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

New Jersey Businessman With NRI Account Pleads Guilty to Using Offshore Bank Accounts to Defraud the U.S. and Pays $2.37 Million FBAR Penalty

Posted by Jay R. Nanavati on January 15, 2013

Sanjay Sethi, a New Jersey businessman, pleaded guilty on January 7, 2013 to using hidden offshore bank accounts to defraud the U.S. in a so-called “Klein conspiracy.”  According to the information that the government filed in federal district court in New Jersey, Sethi used the “NRI [Non-Resident Indian] Services division” of a large bank..  Milwaukee neurosurgeon Arvind Ahuja, an Indian American who was convicted in August of failing to file an FBAR and filing a false tax return, also used a bank’s NRI Services division to conceal his income and assets from the IRS.

Sethi’s bank accounts at the large bank’s Swiss and Indian divisions had a combined balance of as much as $4.7 million.  He transferred money to the large bank from accounts held in the name of nominee entities in the Cayman Islands, the British Virgin Islands, and Switzerland.  The entities bore names like Karol Bagh Charitable Trust, Fundus, Inc., SNS Investments, Ltd., Driftmore International, Ltd., and Ace Marketing, Inc.  Sethi faces a maximum of five years in prison when he is sentenced on April 18, 2013.  The actual sentence is likely to be much lower.  For a case involving a tax loss of between $80,000 and $200,000, sophisticated tax evasion, and acceptance of responsibility, the U.S. Sentencing Guidelines are likely to recommend a sentencing range of 18-24 months in prison.  The sentencing could be higher or lower depending on the judge and whether Sethi is cooperating with the government against offshore bankers or other account-holders. 

‘Taxpayers do not have to wait for the IRS to investigate, the IRS Offshore Voluntary Disclosure Program is usually available to taxpayers seeking to come into compliance and avoid criminal prosecution,” said Jim Mastracchio, Co-Chair of BakerHostetler’s Tax Controversy Practice.  “With the implementation of FATCA banks will be seeking to identify all US account holders, making the disclosure programs increasingly attractive over the next few months,” added Mastracchio.  Jay Nanavati, a former DOJ Tax Division Assistant Chief added, “Indian Americans who use NRI bank accounts need to make certain that they report to the IRS the accounts’ existence and any income from those accounts.” 

For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (jnanavati@bakerlaw.com), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

Second Federal Court Holds that Recklessness is Willfulness for FBAR Penalty

Posted by Jay R. Nanavati on November 15, 2012

Following the Fourth Circuit’s lead in the recent and controversial Williams case, the District of Utah recently held that a taxpayer who signs a tax return and fails to file an FBAR stands in reckless disregard of the risk that he or she is violating the FBAR requirement and is therefore willful in his or her failure to file an FBAR.  The full citation is United States v. McBride, Case No. 2:09-cv-378 (D. Utah).  The court reasoned that “because the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious. The risk of failing to disclose a financial interest in a foreign account is an obvious risk, given that the question on line 7a of Schedule B is available to anyone who looks at a blank Form 1040 individual income tax return.”

What of the taxpayer who trusts his or her return preparer and does not bother to examine the tax return?  The court fell back on the Fourth Circuit’s statement that “[a] taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”

“This case, like Williams, appears to eschew the strict criminal standard of willfulness that the IRS has for years applied to the civil FBAR penalty,” said Jim Mastracchio, Co-Chair of the firm’s Tax Controversy Practice.  “I am not entirely convinced, however, that Williams and now McBride portend a broad application of the new recklessness standard to ordinary failures to file FBARs.”  Mastracchio explained, “The taxpayers in these two cases were both engaged in aggressive tax avoidance:  Williams had pleaded guilty to tax evasion, and McBride was involved in an apparently fraudulent tax shelter.  I believe that the jury is still out on whether the courts will apply this new standard of willfulness to taxpayers who merely signed their tax returns without noticing the language regarding the FBAR filing requirement.”

Jay Nanavati, who recently joined the firm after having spent years involved in the government’s offshore tax enforcement efforts, added “This case, if followed to its logical conclusion, stands for the proposition that a taxpayer who does not carefully analyze his or her tax return, even when a tax professional prepares the return, can be penalized for having willfully violated the law.  I do not believe that this is the result that the courts or the IRS hope to reach in the long run.”  The civil penalty for willful failure to file an FBAR is 50% of the highest aggregate account balance multiplied by the number of years for which the taxpayer failed to file an FBAR.

For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (jnanavati@bakerlaw.com), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

IRS Releases New Timeline for FATCA Implementation

Posted by Michael Nydegger on October 24, 2012

The IRS released Announcement 2012-42 today, delaying the deadlines for certain steps in FATCA implementation, and better aligning the deadlines in regulations with those under the model intergovernmental agreements.  Announcement 2012-42 was issued in response to numerous comments received from financial institutions, trade associations, and foreign governments regarding the proposed regulations for implementing FATCA (see BakerHostetler's FATCA site at www.bakerlaw.com/internationaltax/fatca for the comment letters and proposed regulations, in addition to other FATCA resources).  In addition to releasing the announcement, the IRS also released a helpful table summarizing the new deadlines.

Significantly, the IRS is instead requiring new account opening procedures to begin on January 1, 2014 (or the effective date of an FFI agreement, whichever is later).  In addition, many other due diligence deadlines and withholding deadlines were postponed by 6 months from those in the proposed regulations.  The new deadlines for withholding agents and participating FFIs are as follows:

  • For preexisting accounts of FFIs, due diligence must be completed by June 30, 2014 (or 6 months after the effective date of an FFI agreement, whichever is later);
  • For preexisting accounts of entities other than prima facie FFIs, due diligence must be completed by December 31, 2015 (or two years after the effective date of the FFI agreement, whichever is later);
  • For preexisting high value accounts of individuals, participating FFIs must complete due diligence by the later of December 31, 2014, or one year after the effective date of the FFI agreement; and
  • For all other preexisting individual accounts other than high value accounts, participating FFIs must complete due diligence by the later of Decemer 31, 2015 or two years after the effective date of the FFI agreement.

In addition to the new account opening procedure deadlines and due diligence deadlines listed above, the announcement postponed withholding on gross proceeds to December 31, 2016.  In addition, the announcement noted that the following types of obligations will be treated as grandfathered obligations: (1) any obligation that produces or could produce a foreign passthru payment and that cannot produce a withholdable payment, provided that the obligation is outstanding as of 6 months after the date final regulations defining passthru payments are filed with the Federal Register; (2) any instrument that gives rise to a withholdabel payment solely because the instrument is treated as giving rise to a dividend equivalent pursuant to section 871(m), provided that the instrument is outstanding 6 months after the date on which instruments of that type first become subject to such treatment; and (3) any obligation to make a payment with respect to, or repay, collateral posted to secure obligations under a swap.

For more information on FATCA implementation timelines and requirements, please contact Paul Schmidt at (202)861-1760, Allen Littmen at (202)861-1686, Scott Dayan at (202)861-1584, or Michael Nydegger at (202)861-1688.

For Holders of Offshore Bank Accounts, Another Domino Falls

Posted by Jay R. Nanavati on September 28, 2012

On September 21, 2012, the U.S. Court of Appeals for the Fifth Circuit joined the Seventh and Ninth Circuits in holding that holders of offshore bank accounts have no recourse to the Fifth Amendment privilege against self-incrimination when the government demands that they turn over their offshore bank account records.  The full citation is In re: Grand Jury Subpoena, No. 11-20750 (5th Cir. September 21, 2012).  The Fifth Circuit “decline[d] [the target’s] invitation to create a circuit split” with the Seventh and Ninth Circuits and reversed the District Court’s order quashing the government’s grand jury subpoena.

“The Government is now 3-0 in the circuit courts in its use of the Required Records Doctrine to pierce the Fifth Amendment’s protective veil in offshore cases,” said Jim Mastracchio, Co-Chair of BakerHostetler’s Tax Controversy Practice.  Jay Nanavati, a former Tax Division Assistant Chief added that at least according to the Southern District of California, “Not only must holders of offshore accounts produce their records, but they must go to the bank and request the records if necessary to comply with the grand jury’s subpoena for bank records.”

For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (jnanavati@bakerlaw.com), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

DOJ Tax Division Issues New Directive Aimed at Stolen Identity Refund Fraud

Posted by Jay R. Nanavati on September 19, 2012

On September 18, 2012, the Department of Justice Tax Division issued a policy directive (Directive 144) that delegates the ability to approve prosecutions involving the filing of false tax returns using stolen identities down to the various U.S. Attorney’s offices.  This eliminates the requirement in criminal tax cases that all prosecutions be approved by the Tax Division in Washington.  The change is meant to streamline the process of bringing indictments in such cases.  The Tax Division’s Assistant Attorney General Kathryn Keneally and the IRS have made Stolen Identity Refund Fraud or “SIRF” cases a top enforcement priority.  Congress has also held hearings on the issue.  “The massive increase in these crimes over the last few years is due primarily to the prevalence of electronic filing of tax returns,” said Jim Mastracchio, Co-Chair of BakerHostetler’s Tax Controversy Practice.  According to Jay Nanavati, a former Tax Division Assistant Chief, “Additional reasons for the epidemic include the issuance of tax refunds before the IRS has verified the accuracy of the tax returns by matching them to Forms W-2 and 1099 and the issuance of refunds in the form of untraceable pre-paid debit cards.”

For more information on the government’s efforts to prosecute tax evasion, please contact Jim Mastracchio at (202) 861-1650 (jmastracchio@bakerlaw.com) or Jay Nanavati at (202) 861-1747 (jnanavati@bakerlaw.com), BakerHostetler, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

Fifth Amendment Unavailable to Prevent Forced Production of Offshore Bank Account Records

Posted by Jay R. Nanavati on August 28, 2012

On August 27, 2012, the U.S. Court of Appeals for the Seventh Circuit joined the Ninth Circuit in holding that the required records exception to the Fifth Amendment privilege against self-incrimination applies to records of foreign bank accounts.  The full citation is In re: Special February 2011-1 Grand Jury Subpoena Dated September 12, 2011, No. 1:11-gj-00792-1 (7th Cir. August 27, 2012).  Until this decision, the Ninth Circuit had been the only federal appellate court to hold that a person may not resort to the Fifth Amendment to resist a subpoena for the person’s offshore bank records.  See In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011).

The Seventh Circuit acknowledged that when a person produces records of his or her offshore bank account in response to a grand jury subpoena, the person risks self-incrimination.  The so-called required records doctrine, however, is an exception to the Fifth Amendment privilege against self-incrimination.  Since the Bank Secrecy Act requires a holder of a foreign bank account to maintain records of the account, the account holder may not invoke the Fifth Amendment to protect him or her from being forced to produce the account records to the government on demand.

This holding means that people who have foreign bank accounts can be forced to produce records that may prove that they have committed tax crimes, including failure to file FBARs, filing false tax returns, tax evasion, and conspiracy to defraud the U.S.  The Southern District of California, in the M.H. case, has gone a step further by holding that even if the account holder does not have the records, he or she must go to the bank and request the records for the government.  These decisions, while valid precedents, are limited to the Seventh and Ninth Circuits.

For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (jnanavati@bakerlaw.com), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

Taxpayer who Moved Account from Unnamed "Zurich-based bank" in 2009 to Wegelin Bank Pleads Guilty to Failure to File FBAR and Pays $2.8 Million FBAR Penalty

Posted by Jay R. Nanavati on August 21, 2012

An 83-year-old Massachusetts man pleaded guilty in federal court in Manhattan on August 20, 2012, to one count of willful failure to file an FBAR.  Jacques Wajsfelner faces up to five years in prison and will pay a civil FBAR penalty of $2.8 million.

Mr. Wajsfelner moved his approximately $5.5 million account from an unnamed “Zurich-based bank” to Wegelin Bank in June 2009 after the unnamed Zurich-based bank got into trouble with U.S. authorities.  He had already changed the name on his account in 2006 from his own to that of a Hong Kong nominee entity called Ample Lion Ltd.  From at least 1995 through 2011, Mr. Wajsfelner failed to file FBARs with the IRS.  He also filed false tax returns for those years in that he did not indicate on Schedule B of his return that he had authority over a foreign bank account.  Both the bank and the financial adviser that Mr. Wajsfelner used are currently under indictment in the U.S.

“Taxpayers who have undisclosed accounts can still take advantage of the IRS Offshore Voluntary Disclosure Initiative- which will provide protection from criminal prosecution and a set civil monetary penalty.”  Said Jim Mastracchio, Partner and Co-Chair of the Firm’s National Tax Controversy Practice.  “This case demonstrates that when it comes to punishing offshore tax evasion, the government does not discriminate on the basis of age,” said Jay Nanavati, an attorney at Baker Hostetler and former DOJ Tax Division prosecutor.

For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (jnanavati@bakerlaw.com), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).

IRS Seeks Comment on New FATCA Forms; ISDA Announces FATCA-Driven Change to Master Agreement

Posted by Jay R. Nanavati on August 17, 2012

The IRS issued a request for comment on two new proposed FATCA-related forms on August 15, 2012.  The first is Form 8956, Application for Foreign Account
Tax Compliance Act (FATCA) Individual Identification Number.  Each participating Foreign Financial Institution ("FFI") must designate in individual to sign its FFI Agreement.  In most cases, this will be the FFI's FATCA Responsible Officer.  The signer of the FFI Agreement must indicate his or her FATCA Individual Identification Number on the FFI Agreement.  The signer, typically the FATCA Responsible Officer, will use proposed Form 8956 to apply for the issuance of a FATCA Individual Identification Number.

The second proposed form is Form 8957, Registration for Participating, Limited, or Registered Deemed Compliant Foreign Financial Institution Status.  This is the form on which an FFI will register its FATCA status as a Participating FFI, Limited FFI, or Registered Deemed Compliant FFI.  A Participating FFI would still need to sign an FFI Agreement in the absence of an intergovernmental agreement to the contrary.  The IRS has not yet released a draft FFI Agreement but has promised a draft by the end of the summer.

Separately, the International Swaps and Derivatives Association (ISDA) announced on August 16, 2012, that it has launched a protocol that allows market participants to efficiently amend the ISDA Master Agreement tax provisions to address the effects of the Foreign Account Tax Compliance Act (FATCA), which may impose a withholding tax on payments under derivatives transactions.  The ISDA 2012 FATCA Protocol puts the FATCA withholding tax burden on the recipient of the payment. It eliminates the tax from the definition of “Indemnifiable Tax” in the ISDA Master Agreement. ISDA said: “The rationale is that the recipient is the sole party that has the ability to avoid the withholding tax by complying with the FATCA rules; therefore, the recipient should be the party burdened with the FATCA withholding tax if it chooses to not comply.” The protocol became active on 15 August and it is open to ISDA members and non-members.