Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16)

DOJ Tax has posted here the Acting AAG Tax's remarks at the Federal Bar Association Tax Law Conference.  I copy here the discussion related to tax crimes:

On the criminal side, the Tax Division is charged with authorizing the investigation and prosecution of offenses arising under the internal revenue laws and, in doing so, setting criminal tax policy nationwide.  

With nearly 150 million returns filed each year and only about 1,800 investigations and prosecutions authorized, smart case selection is critical for effective deterrence.  Our criminal cases involve traditional tax crimes – tax evasion; preparing and filing false and fraudulent returns; failing to file; evasion of payment; failing to collect, account for and deposit employment tax; and conspiring to defraud the IRS.  Our criminal attorneys also prosecute ever increasing stolen identity refund fraud crimes, either alone or in conjunction with Assistant U.S. Attorneys. 

I would like to take a few moments to highlight our efforts with respect to two areas: employment tax and offshore enforcement. 

Civil and Criminal Employment Tax Enforcement 

Since January 2015, the Tax Division has sharpened its focus on civil and criminal employment tax enforcement.  As most of you know, these cases involve employers who fail to collect, account for, and deposit tax withheld from employee wages.  These withholdings represent 70 percent of all revenue collected by the IRS, and as of September 2015, more than $59 billion of tax reported on Forms 941 remained unpaid.  These employers are literally stealing money, knowing that their employees will receive full credit for those amounts when they file their returns.  The employers gain an unfair advantage over their competitors and the U.S. Treasury is left holding the bag. 

We are working very closely with IRS Field Collection, IRS Criminal Investigation (IRS-CI) and IRS Criminal Tax Counsel to address this problem.  We are training IRS personnel to identify and refer cases involving firm indicia of fraud to IRS-CI for criminal investigation and those cases warranting injunctive action to the Tax Division.  We are also training our civil tax attorneys to pursue injunctions and our criminal enforcement attorneys to investigate and prosecute criminal employment tax offenses 

We have designated a Senior Litigation Counsel in our Civil Trial Sections, Noreene Stehlik, and an Assistant Chief in the Southern Criminal Enforcement Section, Caryn Finley, as our points of contact for civil and criminal employment tax matters.  With every criminal case referred to the U.S. Attorneys’ Offices, we provide this contact information and, for those districts that would like additional resources, we offer litigation assistance with new referrals and for cases in the pipeline.

In September 2015, the Tax Division updated the employment tax chapter of our Criminal Tax Manual and the division is working on a centralized database of criminal employment tax resources for department prosecutors.  We also have a new page on our website dedicated to civil and criminal employment tax enforcement, listing criminal prosecutions and civil injunctions entered in the last two years.  [JAT Note:  the web page is here, providing separate links to the civil and criminal enforcement efforts.]

Finally, we are waging a public campaign in an effort to educate employers and their representatives about the serious nature of employment tax violations.  We are sending the message that we will hold employers accountable through civil litigation and criminal prosecutions.  

Civil and Criminal Offshore Enforcement

In the international arena, the Tax Division plays a lead role in prosecuting those who use foreign tax havens to evade taxes and reporting requirements, as well as those who facilitate this misconduct.  Since 2008, the department has publicly charged more than 100 accountholders and approximately 50 individuals who have facilitated the concealment of foreign accounts and evasion of U.S. tax obligations.  We also reached final resolutions with seven foreign financial institutions, including the guilty plea of Credit Suisse in May 2014, the deferred prosecution agreement entered against Bank Leumi in December 2014 and the deferred prosecution agreement entered against Bank Julius Baer in February 2016, imposing a monetary sanction of $547 million.  Our investigations of accountholders, facilitators and foreign financial institutions are ongoing and we anticipate public announcements regarding these matters in the coming months. 

In August 2013, the department announced the Swiss Bank Program, which provides 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 admitted to engaging in criminal conduct.  These institutions, identified as Category 2 banks, were required to make a complete disclosure of their conduct, provide detailed information on U.S. related accounts, cooperate in treaty requests, provide detailed information as to other banks that transferred funds into undisclosed accounts or that accepted funds when undisclosed accounts were closed and agree to cooperate in related criminal and civil proceedings for the life of those proceedings.  These banks were also required to pay appropriate penalties, which could be mitigated if a particular U.S. related account was not undeclared or was reported by the bank to the IRS, and also if the accountholder entered one of the IRS voluntary disclosure programs at the bank’s urging.  Category 2 banks that met these requirements and agreed to the proposed penalties were eligible for a non-prosecution agreement. 

On March 30, 2015, the department signed the first non-prosecution agreement with BSI SA, imposing a penalty of $211 million.  On Jan. 27, less than 10 months later, we signed the final Category 2 agreement, bringing us to 78 agreements with 80 Swiss banks, and the imposition of more than $1.3 billion in penalties under the program. 

The Swiss Bank Program is an extremely innovative approach to offshore enforcement.  The program brought to our attention the conduct of more than 100 Swiss banks and financial institutions and played a critical role in pushing U.S. taxpayers into compliance.  The IRS has announced the receipt, since 2009, of more than 54,000 voluntary disclosures, more than 30,000 streamlined filing submissions and the collection of more than $8 billion in tax, penalties and interest. 

The conclusion of the Category 2 agreements is a major milestone for the department and the IRS, but does not represent the conclusion of the program.  Working with our colleagues in IRS-CI and the IRS Large Business & International Division, we have been reviewing the information obtained from the Swiss banks, treaty requests, whistleblowers and individuals and entities cooperating outside of the program and using this information to pursue criminal investigations and civil enforcement efforts.  We are identifying and investigating accountholders and individuals, both domestic and foreign, who helped U.S. taxpayers conceal foreign accounts and evade their tax obligations. As discussed by Deputy Attorney General Sally Q. Yates in her memo last fall regarding Individual Accountability for Corporate Wrongdoing, one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.  Our investigations of both individuals and entities are well beyond Switzerland at this point, and no jurisdiction is off limits. 

Outside the program, working with the IRS, we have found a number of fruitful avenues to uncover information when taxpayers refuse to cooperate in civil examinations and criminal investigations and hope that information about their foreign accounts will not be discovered.  John Doe summonses on correspondent accounts can provide valuable information about money coming into and out of the United States. As you are probably well aware, eight courts of appeals have uniformly recognized that the required records exception to the Fifth Amendment act-of-production privilege compels taxpayers to produce those records about their accounts. And, where appropriate, we will gather documents through traditional summons enforcement proceedings or grand jury subpoenas aimed at U.S. entities or taxpayers who control documents held in foreign jurisdictions.  After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received.  Those who continue to fail to come forward and disclose their conduct run the very serious risk of ending up as the next criminal defendant or at the receiving end of a substantial assessment of civil penalties.  And to those individuals and entities, both in the United States and around the world, that have facilitated this criminal conduct, we encourage you to come forward before you are contacted as a target of our investigations.

Proposed FinCEN Rulemaking for Rules on FBAR Reporting for Financial Professionals (3/4/16)

FinCen has released proposal revisions to rules for FBAR reporting for financial professionals.  The press release is here and the proposed changes are here. As summarized in the press release:

The NPRM [Notice of Proposed Rulemaking] proposes to:

• Remove the provisions that limit the information reported with respect to situations when a filer has 25 or more foreign financial accounts, and instead require all U.S. persons obligated to file an FBAR to report detailed account information on all foreign financial accounts for which they are required to file an FBAR.
• Amend the FBAR regulation by eliminating the requirement for officers and employees of institutions to report on institutional accounts for which they have signature authority, but no financial interest, due solely to their employment, so long as their employer has an FBAR filing obligation.
• Require institutions to maintain a list of all officers and employees with signature authority over those same accounts; this list would be made available to FinCEN and law enforcement upon request.

Those interested in this subject having access to Tax Notes Today might want to read the TNT article:  Andrew Velarde, FBAR Changes Try to Balance Compliance Burden, Enforcement , 2016 TNT 42-3 (3/3/16).  I don't have permission to post it here.  I don't plan address the changes further because of demands on my time and my belief that this area of the broader subject is not of particular interest to the mainstream readership of this blog.

Yet Another Appeals Court Enforcement of Summons for FBAR Required Foreign Bank Account Records (3/4/16)

In United States v. Chen, 2016 U.S. App. LEXIS ____ (1st Cir. 2016), here, the First Circuit enforced an FBAR required records summons, following the unbroken line of cases in the other circuits.  The opinion is well researched and well-written.  Because this holding is now routine in the circuits, I offer only certain items from the opinion that caught my interest.

1. One of the judges on the panel was former Supreme Court Justice David Souter.  He did not write the opinion.

2. In the statement of facts, the Court notes that, in its petition to enforce, the agent's supporting affidavit advised that:

"[t]here is no 'Justice Department referral[ ]' . . . in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination." n1
   n1 This statement meant that the taxpayers were not then referred for criminal prosecution by the Department of Justice. "A Justice Department referral is in effect with respect to any person if -- (i) the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of the internal revenue laws, or (ii) any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person." 26 U.S.C. § 7602(d)(2)(A).

The Court returns to this key fact later in the opinion:

Additionally, the IRS may not issue a summons "with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1). The government here submitted an affidavit executed by the IRS revenue agent stating that the summons was issued for the purpose of determining the 2008 tax liability of Chen and Ng, and that the IRS had not referred Chen or Ng to the Department of Justice for criminal prosecution. The agent acknowledged that the government had some documents pointing to the existence of Chen's foreign bank accounts, but not enough documents to know whether there was underpayment of taxes. this key fact later in the opinion:

3.  The court lists of the unbroken string of circuit court holdings::

We agree with seven of our sister circuits that the claim fails on the grounds that BSA records are subject to the Required Records Doctrine. See United States v. Chabot, 793 F.3d 338 (3d Cir.), cert. denied, 136 S. Ct. 559 (2015); In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339 (2d Cir. 2013); United States v. Under Seal, 737 F.3d 330 (4th Cir. 2013); In re Grand Jury Proceedings, No. 4-10, 707 F.3d 1262 (11th Cir.), cert. denied, 134 S. Ct. 129 (2013); In re Grand Jury Subpoena, 696 F.3d428 (5th Cir. 2012); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012), cert. denied,133 S. Ct. 2338 (2013); In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011), cert. denied, 133 S. Ct. 26 (2012).

4. The Court somewhat succinctly summarizes the required records doctrine generally and with respect to foreign account records under the BSA(on footnote omitted):

The Required Records Doctrine prevents an individual from resisting, in the name of the Fifth Amendment, the production of records whose creation and maintenance is required as a condition of voluntarily engaging in a highly regulated activity. See Baltimore City Dep't of Soc. Servs. v. Bouknight, 493 U.S.549, 556 (1990); see also In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d at 908-09. In a nutshell, it is commonly accepted that courts should apply the following three-part test for determining whether the Required Records Doctrine applies to a particular recordkeeping scheme. "[F]irst, the purposes of the United States' inquiry must be essentially regulatory[.]" Grosso v. United States, 390 U.S. 62, 67-68 (1968) (citing Shapiro v. United States, 335 U.S. 1 (1948)). "[S]econd, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept[.]" Id. at 68. "[T]hird, the records themselves must have assumed 'public aspects' which render them at least analogous to public documents." Id.; see Marchetti v. United States, 390 U.S. 39, 56-57 (1968). n7
   n7 Chen questions whether this test is relevant to an act-of-production privilege claim, noting that the Required Records Doctrine was developed before the Supreme Court recognized the act-of-production privilege in Fisher, 425 U.S. at 410. This argument is foreclosed by Supreme Court precedent. In 1990, well after both lines of doctrine had been developed, the Supreme Court applied the Required Records Doctrine to an act-of-production privilege claim asserted by a mother, acting as custodian of her child pursuant to court order, who was resisting an order of a juvenile court to produce the child. Bouknight, 493 U.S. at 551, 554-61. 

The government presents the analysis as occurring within two distinct analytical steps. First, the initial question is whether the government is authorized to regulate the activity in question, as the doctrine was originally articulated by the Supreme Court in Shapiro. There is no doubt that is true here. See U.S. Const. art. 1, § 8, cl. 3 (granting Congress power "[t]o regulate commerce with foreign nations"); Shultz, 416 U.S. at 59. But second, the government recognizes that the Court later narrowed the doctrine in three criminal cases, where the government was targeting activity that is criminal or almost always criminal. See Haynes v. United States, 390 U.S. 85, 95-100, 88 S. Ct. 722, 19 L. Ed. 2d 923, 1968-1 C.B. 615 (1968); Grosso, 390 U.S. at 64-69; Marchetti, 390 U.S. at 55-57. Chen unsuccessfully tries to fit himself into the limitations set by those cases. The government correctly does not contend that just because it has the power to regulate in an area that it also has the power to compel disclosure of required records. It acknowledges that it is not taking the position that it can simply criminalize an act and require records to be kept, which would indicate performance or non-performance of that criminal act, and that the records would then be admissible over a Fifth Amendment objection. The government also agrees that it could not by statute regulate an activity that is essentially or almost entirely criminal, mandate recordkeeping conditions on the activity, tell the criminal to self-report, and then prosecute him for failing to do so. Neither situation is occurring here.

By contrast, Chen's keeping an offshore bank account is not inherently criminal. The focus of the Required Records Doctrine is on "the characteristics of the activities about which information is sought" and "the composition of the group to which the inquiries are made." Grosso, 390 U.S. at 68. Offshore banking clearly has inherently civil aspects, and one can comply with the Act's recordkeeping requirement without being a criminal. In fact, the Act covers a great many people who are not engaged in any criminal activity. Simply put, the Act cannot fairly be viewed as a backdoor attempt to get at a selected group engaged in illegal activities, through recordkeeping requirements and disclosure, for criminal prosecution. Compare Haynes, 390 U.S. at 95-97, with Varitimos, 404 F.2d at 1033-34.

To be sure, Congress contemplated that the records required to be kept under the BSA would be useful in criminal prosecutions. Any fair reading of the legislative history reveals as much. But "[w]hile Congress clearly intended the Act's disclosure requirements to be of some use in criminal proceedings, we regard [the] non-prosecutorial interests as substantial." United States v. Dichne, 612 F.2d 632, 640 (2d Cir. 1979) (upholding, over a Fifth Amendment challenge, a requirement under the BSA that individuals "report[ ] . . . the transportation of over $5,000 in monetary instruments into or out of the United States," id. at 639; see 31 U.S.C. § 5316 (previously codified at 31 U.S.C. § 1101) (now applicable to transportation of over $10,000 in monetary instruments)). 

Chen maintains, however, that despite the Act's civil applications, compliance with its recordkeeping provision has "criminal implications." That may be so for some people covered by the Act, but "criminal implications" are not enough to render the Required Records Doctrine inapplicable. 

5. The Court said that Chen had waived the argument that he be given some form of "use restriction on the testimonial communications inherent in the act of producing the records."  This might be a form of use immunity and request for suppression for overriding his assertion of the act of production doctrine under the Fifth Amendment privilege.  In addition, the Court said that the argument was premature because such use was entirely speculative.  When and if the Government attempts to use the testimonial consideration in a criminal proceeding, the issue can be raised.

6. Finally, the Court remanded for the district court to articulate the basis for its ordering production of personal and corporate domestic financial records.

Belgian Charges Against UBS for Money Laundering and Tax Evasion (2/26/16)

A number of internet articles indicate that UBS has been charged with money laundering and tax evasion.  See e.g., Joshua Franklin, Belgium charges UBS with money laundering, tax fraud (Reuters 2/26/16), here.  Here are some excerpts:

A Belgian judge has charged Swiss bank UBS with money laundering and serious and organized tax fraud, Brussels prosecutors said in a statement on Friday. 

"The Swiss bank is suspected of having directly, and not via its Belgian subsidiary, approached Belgian clients to convince them to set up structures aimed at evading taxes," Brussels prosecutors said in a statement. 

* * * * 

Belgian prosecutors said they were able to firm up the case against UBS through cooperation with French authorities and the work of an inquiry committee. 

I will post more today if I obtain more details.

NPR Planet Money Podcast on a Tax Protestor (2/20/16)

I just listened to this podcast episode of NPR's Planet Money:  Episode 685: Larry vs. The IRS (Planet Money), here.  I recommend it to readers of this blog.  Larry Williams, an admitted risk taker, allegedly received bad advice from a camping buddy lawyer.  Here is the blurb from the web site:

A lot of people dream of not paying their taxes. Larry Williams scoured the fine print of IRS code, talked to lawyers, settled on a plan, then just stopped paying taxes. Today on the show, we tell his story. It starts on a fateful camping trip, it winds through a jail cell in Australia and a courtroom in California, and it ends up in the U.S. Virgin Islands.

The show goes through basic tax and criminal law related to tax protestors / deniers.  There is a brief discussion of the Cheek concept that ignorance of the tax law can be a defense -- a sincerely held belief that the taxpayer does not owe the tax is a defense.  Cheek v. United States, 498 U.S. 192 (1991), here.  Many refer to this as the Cheek or good faith defense.  The podcast does not get into Cheek's exclusion of constitutional defenses from the defense, so that tax protestors / deniers should steer clear of those defenses.  At any rate, it is a short episode (around 20 minutes) and very well presented.  I recommend.  (The comments posted on the web site are interesting, also.)

One interesting point of the Cheek case is that the very late Justice Scalia wrote  a concurring opinion excoriating his colleagues in the majority for creating an artificial distinction allowing the good faith defense for nonconstitutional sincerely held belief but not for constitutional sincerely held belief.  Let's let him speak for himself.  His concurring opinion is short and very well stated. He keys off the longstanding definition of the willfulness element for tax crimes -- repeated in Cheek -- as the intentional violation of a known legal duty.  Here is the dissent:

JUSTICE SCALIA, concurring in the judgment. 

I concur in the judgment of Court because our cases have consistently held that the failure to pay a tax in the good-faith belief that it is not legally owing is not "willful." I do not join the Court's opinion because I do not agree with the test for willfulness that it directs the Court of Appeals to apply on remand. 

As the Court acknowledges, our opinions from the 1930s to the 1970s have interpreted the word "willfully" in the criminal tax statutes as requiring the "bad purpose" or "evil motive" of "intentional[ly] violat[ing] a known legal duty." See, e.g., United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Murdock, 290 U.S. 389, 394-395 (1933). It seems to me that today's opinion squarely reverses that long-established statutory construction when it says that a good-faith erroneous belief in the unconstitutionality of a tax law is no defense. It is quite impossible to say that a statute which one believes unconstitutional represents a "known legal duty." See Marbury v. Madison, 1 Cranch 137, 91 Cranch 177177-178 (1803).

Although the facts of the present case involve erroneous reliance upon the Constitution in ignoring the otherwise "known legal duty" imposed by the tax statutes, the Court's new interpretation applies also to erroneous reliance upon a tax statute in ignoring the otherwise "known legal duty" of a regulation, and to erroneous reliance upon a regulation in ignoring the otherwise "known legal duty" of a tax assessment. These situations as well meet the opinion's crucial test of "reveal[ing] full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable," ante, at 205-206. There is, moreover, no rational basis for saying that a "willful" violation is established by full knowledge of a statutory requirement, but is not established by full knowledge of a requirement explicitly imposed by regulation or order. Thus, today's opinion works a revolution in past practice, subjecting to criminal penalties taxpayers who do not comply with Treasury Regulations that are in their view contrary to the Internal Revenue Code, Treasury Rulings that are in their view contrary to the regulations, and even IRS auditor pronouncements that are in their view contrary to Treasury Rulings. The law already provides considerable incentive for taxpayers to be careful in ignoring any official assertion of tax liability, since it contains civil penalties that apply even in the event of a good-faith mistake, see, e.g., 26 U.S.C. § 6651, 6653. To impose in addition criminal penalties for misinterpretation of such a complex body of law is a startling innovation indeed. 

I find it impossible to understand how one can derive from the lonesome word "willfully" the proposition that belief in the nonexistence of a textual prohibition excuses liability, but belief in the invalidity ( i.e., the legal nonexistence) of a textual prohibition does not. One may say, as the law does in many contexts, that "willfully" refers to consciousness of the act, but not to consciousness that the act is unlawful. See, e.g., American Surety Co. of New York v. Sullivan, 7 F.2d 605, 606 (CA2 1925) (L. Hand, J.); cf. United States v. International Minerals and Chemical Co., 402 U.S. 558, 563-565 (1971). Or alternatively, one may say, as we have said until today with respect to the tax statutes, that "willfully" refers to consciousness of both the act and its illegality. But it seems to me impossible to say that the word refers to consciousness that some legal text exists, without consciousness that that legal text is binding, i.e., with the good-faith belief that it is not a valid law. Perhaps such a test for criminal liability would make sense (though in a field as complicated as federal tax law, I doubt it), but some text other than the mere word "willfully" would have to be employed to describe it — and that text is not ours to write. 

Because today's opinion abandons clear and long-standing precedent to impose criminal liability where taxpayers have had no reason to expect it, because the new contours of criminal liability have no basis in the statutory text, and because I strongly suspect that those new contours make no sense even as a policy matter, I concur only in the judgment of the Court.

Finally, among Williams' steps to avoid the tax were certain types of trusts commonly used by the tax protestor / defier community.  The IRS has a web site cataloguing the more common titled: Abusive Trust Tax Evasion Schemes - Special Types of Trusts (Page Last Reviewed or Updated: 21-Aug-2015), here.

Good Article on Pitfalls for Quiet Disclosure in the Offshore Setting (2/20/16)

Many readers of this blog will or should be interested in this article offered by  Frank Agostino and Lawrence A. Sannicandro of Agostino & Associates:  “Gotcha" -- Unanticipated Audit Issues After Quiet Disclosures (Agostino & Associates Monthly Journal of Tax Controversy (February 2016), here.  This firm has been very active in the offshore account area and thus can speak with authority and experience in this context.

I cut and paste from the Introduction and the Conclusion so that those interested will know whether to read the article.

I. Introduction 

Some taxpayers not willing to pay the 27.5% penalty that otherwise applied under the traditional Offshore Voluntary Disclosure Programs have made quiet disclosures or entered into the Streamlined Filing Compliance Procedures (“Streamlined Program”). Many of these taxpayers rejected the protections of the Offshore Voluntary Disclosure Programs in favor of what they perceived to be a more cost-effective quiet or streamlined disclosure. These taxpayers have subjected themselves to criminal liability and audit adjustments which, depending upon the source of the unreported income, could easily eclipse the 27.5% penalty under the traditional program. In this regard, audits of returns submitted as quiet disclosures or under the Streamlined Program have been (and should be) troubling to both practitioners and clients.  

This article discusses common audit adjustments that can apply to returns for taxpayers with international activities, including: the disallowance of deductions and credits for U.S. citizens, resident aliens, and nonresident aliens; the disallowance of the foreign earned income exclusion for U.S. citizens and resident aliens; and the Internal Revenue Service’s ability to recharacterize as ordinary income purported gifts and bequests from a partnership or a foreign corporation under Treas. Reg. § 1.672(f)-4. This article also highlights those taxpayers who are most likely to be negatively affected by each type of adjustment. Finally, for taxpayers who imprudently made a quiet disclosure, this article discusses how to transition the taxpayer from a quiet disclosure to a traditional Offshore Voluntary Disclosure Program.  

*** 

VIII. Conclusion

Practitioners worry about audits of returns submitted as quiet disclosures for good reason. The Service has been far less draconian in submissions under a traditional Offshore Voluntary Disclosure Program or the Streamlined Program, but revenue agents have taken a hard line in disallowing otherwise deductions and credits with respect to quiet disclosures. In this regard, the Service is granted broad authority to deny legitimate deductions, credits, and income exclusions, and to recast transactions to not only prevent the avoidance of U.S. tax but to impute income to U.S. donees and legatees. Practitioners should consider these issues when advising taxpayers to submit  returns as quiet disclosures, pursuant to the Streamlined Program, or under the traditional Offshore Voluntary Disclosure Program. Finally, it is important for practitioners to reevaluate whether the quiet disclosure was in fact a more cost-effective alternative than the traditional Offshore Voluntary Disclosure Program before being contacted by the Service. 

IRS Issues Publication Warning of Abusive Tax Shelters and Scams (2/17/16)

The IRS issued  IR-2016-25 (2/16/16), here, titled Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season.  In this announcement, the IRS singles out some particularly abusive kinds that appear to be ripe for criminal investigation and prosecution.  They are:

• Abusive Tax Structures (which I call bullshit tax shelters)
• Misuse of Trusts
• Captive Insurance.

I cut and paste just the discussion on Abusive Tax Structures (bullshit tax shelters):

Abusive Tax Structures 

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. 

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes. 

Multiple flow-through entities are commonly used as part of a taxpayer's scheme to evade taxes. These schemes may use Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. They are designed to conceal the true nature and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. 

 If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement is an abusive scheme.  Another thing to remember is that the promoters of abusive tax schemes often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Here is my discussion of the features of abusive tax shelters from the current working draft of my Federal Tax Procedure Book (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including their intended audience, IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”  Others have described the abusive tax shelters as “too good to be true.”