Commissioner Koskinen Calls On Congress to Adopt Common Reporting Standard (3/15/16)

A Tax Notes Today article reports that, in a speech to the Tax Executives Institute, IRS Commissioner Koskinen called for Congress to approve the U.S. use of the Common Reporting Standard ("CRS") to replace reporting under FATCA.  William Hoffman, Koskinen Calls on Congress to Approve Common Reporting Standard, 2016 TNT 50-1 (3/15/16) [no link available].  The OECD brief explanation of the Common Reporting Standard with links is here.  The brief explanation is:

The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The TNT article indicates that the reason the IRS has not moved to the standard is that it lacks authority to do so without congressional approval.  The article says:

The IRS asked for the authority to use the CRS in Treasury's green book  2016 TNT 27-25: Treasury Reports explanation of the Obama administration's fiscal 2017 revenue proposals. Fifty "early adopter" jurisdictions have pledged to implement the CRS by January 1, 2016, starting to exchange account information from their financial institutions with their partner jurisdictions in 2017. Almost 100 more jurisdictions signed on to implement the CRS by January 1, 2017, beginning information exchanges in 2018.

Tax Court Holds FBAR Penalty Collected Is Not in the $2,000,000 Threshold for Whistleblower Award under § 7623(b) (3/14/16 & 3/15/16)

In Whistleblower 22716-13W v. Commissioner, 146 T.C. ___, No. 6 (2016), here, the Tax Court that collections of FBAR penalties arising from Whistleblower claims under § 7623(b), here. are not in the $2,000,000 threshold calculation.  Here is the Tax Court's summary of its opinion:

P filed Form 211, Application for Award for Original Information, with the IRS Whistleblower Office with respect to TP1. By guilty plea, TP1 agreed to pay an FBAR civil penalty substantially in excess of $2,000,000 and a small amount of restitution, reflecting unpaid Federal income tax on income derived from Swiss bank accounts.
A whistleblower is eligible for a nondiscretionary award under I.R.C. sec. 7623(b) only “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.” I.R.C. sec. 7623(b)(5)(B). FBAR civil penalties are imposed and collected under 31 U.S.C. sec. 5321 (2006), not under the Internal Revenue Code. R contends that FBAR payments do not constitute “additional amounts” for purposes of ascertaining whether the $2,000,000 threshold has been met. 

1. Held: The term “additional amounts” as used in I.R.C. sec. 7623(b)(5)(B) means the civil penalties set forth in c. 68, subch. A, of the Internal Revenue Code, captioned “Additions to the Tax and Additional Amounts.” 

2. Held, further, FBAR civil penalties are not “additional amounts” within the meaning of I.R.C. sec. 7623(b)(5)(B), and they are not “assessed, collected, * * * [or] paid in the same manner as taxes.” I.R.C. sec. 6665(a)(1). FBAR payments must therefore be excluded in determining whether the $2,000,000 “amount in dispute” requirement has been satisfied.

Note that the key limiting language for the threshold is "tax, penalties, interest, additions to tax, and additional amounts" § 7623(b)(5)(B) may not be limiting for the award base itself in § 7623(b)(1).  In § 7623(b)(1), the award base is:  "collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action."  The issue is whether "including" is illustrative permitting other items fairly characterized as collected proceeds to be included or limiting so that only the items mentioned after including are in the base.  (I am sure there are at least mini-canons of statutory interpretation on that issue but have not researched them.)  The Tax Court said that the argument for interpreting the award base in § 7623(b)(1) more broadly to include related non-Title 26 amounts is "not without force," but deciding the interpretation of the threshold amount did not require it to resolve that issue.

The Court footnoted on page 6 another IRS "defense" that the Court did not decide because of its holding in the case.

   n6 Respondent also advances the broader contention that whistleblower awards are payable only for recoveries under “the internal revenue laws.” See sec. 7623(a)(2). Because FBAR penalties are paid under Title 31, respondent argues that they are not “collected proceeds” under section 7623(b)(1). Since we rule for respondent under the affirmative defense in section 7623(b)(5)(B), we need not address this alternative contention. We note that the IRS Chief Counsel opinion issued during the consideration of petitioner’s case acknowledges one type of payment made outside of Title 26 that does constitute “collected proceeds.” That opinion notes that “[t]he IRS assesses and collects in the same manner as tax any criminal restitution ordered” in a criminal case, and that “any such restitution should be included as ‘collected proceeds’ for purposes of section 7623, even though ordered pursuant to Title 18.” See supra p. 4.

JAT Comment:  The miscellaneous offshore penalty (MOP) in OVDP or Streamlined presumably would be in the whistleblower award base.  But, in most cases, the MOP collection likely would be attributable to the voluntary disclosure and not be deemed attributable to the information the whistleblower provided.  And, in most cases, if the IRS had the whistleblower information before the voluntary disclosure  (which may have prompted the taxpayer to join a voluntary disclosure program with an MOP), the taxpayer presumably would not qualify for the voluntary disclosure program.

On the restitution issue, I think that is a bit of a rabbit trail.  The ordering of restitution for taxes simply permits the IRS to make a summary assessment of the amount of the restitution and to use IRS collection tools to collect that amount.  Thus, that restitution is really in all practical effects within the scope of the provision, particularly once it is assessed.  For prior blog entries on the recent statute for assessing and collecting tax restitution:

• New Statute for Civil Effect of Restitution in Tax Cases (2/11/11), here.
• More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (10/25/13), here.
• The Rub Between Restitution Assessed as a Tax and a Deficiency (12/18/14), here.

Post Conviction Collateral Consequences - Payment of the Tax and CDP Proceedings (3/12/16)

Tax crimes enthusiasts will recall the case of Boulware v. United States, 552 U.S. 421 (2008), here.  The Supreme Court opinion in Boulware reaffirmed some key tax crimes sound bites such as (i) the Spies holding that tax evasion is the capstone of the federal tax crimes regime and (ii) no tax evasion without a "tax deficiency" (really evaded tax due and owing *).  The Supreme Court remanded to the Ninth Circuit to deal with the nettlesome issue of E&P and return of capital.  On remand, Boulware lost in the Ninth Circuit.  United States v. Boulware, 558 F.3d 971 (9th Cir. 2009), here.  (See Boulware Wins the Battle Only to Lose the War (Federal Tax Crimes Blog 3/9/09), here.)

Since that time, Mr. Boulware has popped up again in the case reporters.  E.g., HIE Holdings v. Commissioner, 521 F. App'x 602, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, cert. denied 134 S. Ct. 712 (2013). (HIE is Boulware's company, and his personal case was consolidated on appeal, see Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (Federal Tax Crimes Blog 4/14/13), here.

Just yesterday, Mr. Boulware showed up again in a Collection Due Process ("CDP") case on appeal.  Boulware v. Commissioner, ___ F.3d ___, 2016 U.S. App. LEXIS 4502 (D.C. Cir. 2016), here. The issues in the case are not tax crimes issues per se, but the case does serve as a reminder that there are civil tax consequences that attend criminal tax prosecutions.  I will briefly address the case to illustrate that point.

After HIE Holdings and Boulware lost on the merits in the prior Tax Court case and failed to post bond while appealing, the IRS was permitted assess the tax determined by the Tax Court while the appeal was pending.  § 7485(a)(1).  The IRS did so and moved to collect.  § 7485(a)(1).  Boulware filed a CDP request in issue here.

In the CDP proceeding, the Settlement Officer ("SO") placed the following conditions on an installment payment agreement for Boulware:

First, Boulware would have to agree to pay $29,000 per month, which Martin calculated was his "ability to pay" based upon Boulware's most recent tax returns and other financial documents. Second, Boulware would have to become compliant with all current tax obligations, including his estimated taxes for 2012. Finally, he would have to liquidate various personal assets, including a 401K account and two life insurance policies all together worth approximately $950,000, and put the proceeds toward his deficiency.

Boulware then counteroffered (on counteroffers, see My Cousin Vinny, here)

Boulware then mailed Martin a counter-offer in which he proposed paying $12,500 per month n2 and waiting until he had exhausted his appeals to liquidate his retirement account and life insurance policies. His offer did not address his delinquent estimated taxes for 2012.
   n2 Boulware indicated that he planned to divert much of his salary from his companies to pay back monies he had borrowed from them, which in turn would significantly reduce his taxable income and therefore his "ability to pay." Boulware had not made any payments on his officer loan accounts since 1987, and did not explain why he wanted to do so then. 

The Settlement Officer "rejected Boulware's proposal because it failed to meet any of the three requirements she had set. "

The DC Circuit held that:

1) the Settlement Officer did not abuse her discretion in setting the conditions of the offer she made and denying the counteroffer.

2) the IRS may require, as a condition of an installment agreement. the taxpayer to liquidate available assets, including specifically 401K account and insurance policies, to pay a delinquent tax.  The Court was not sympathetic with the claim that irreparable harm would occur from the liquidation while the appeal was pending.

3) the Court said:

Third, Boulware argues that Martin improperly considered his criminal conviction for tax evasion in rejecting his proposed installment agreement. Nothing in the record supports this contention, however.

4) finally, the Court held that he was not entitled to a face-to-face meeting with the SO.

* on this issue, see For Tax Evasion, Is the Element "Tax Deficiency" or "Tax Due and Owing" (Federal Tax Crimes Blog 10/14/13), here, and Is the Spies Element for Evasion (i) Tax Deficiency or (ii) the Criminal Tax Number? (Federal Tax Crimes Blog 9/17/13), here.

Tax Obstruction Conviction Permits Inclusion in Tax Loss of Penalties and Interest (3/12/16)

I previously reported on the criminal tax appeal by Rex Black who was convicted of tax obstruction, § 7212(a), here.  Seventh Circuit Reverses Sentence for Improper Calculation of Advisory Guidelines Range (8/21/15), here.  The Seventh Circuit opinion discussed in that blog entry covered several issues, one of which I questioned.  That issue was whether the conviction for obstructing the collection of tax could include penalties and interest within the scope of the financial harm Black intended to inflict on the IRS by his obstructive acts.  The Seventh Circuit held that the calculation could not.  The Government filed for rehearing on that issue.  On March 7, 2016, the Seventh Circuit granted the rehearing, changed its mind on that issue, and produced a new opinion which it substituted for the old one.  See United States v. Black, ___ F.3d ___ (7th Cir.), here.

Here is the complete discussion:

In its order, the district court stated "[t]he loss Black intended the IRS to suffer had Black's offense been successfully completed included the loss of the penalties and interest Black owed the IRS, as well as the taxes he owed." It included a footnote in its order that stated, 

Even though Black's criminal statute of conviction was 26 U.S.C. § 7212(a) not [ §§ ] 7201 or 7203, the evidence at trial established beyond a reasonable doubt that the object of Black's criminal conduct in committing the offenses . . . was to defraud the IRS by willfully failing to pay and willfully evading his payment of his debt obligations to the IRS, which included the penalties and interest, as well as the taxes that Black owed to the IRS. 

The district court included penalties and interest in the tax loss calculation and did so because Black's conduct was similar to conduct criminalized by § 7201 and § 7203. 

Black argues that the tax loss calculation under U.S.S.G. § 2T1.1 should not include penalties and interest as part of the tax loss calculation. He specifically argues that penalties and interest should not be included in the tax loss calculation because he was not charged or convicted of willful evasion under 26 U.S.C. § 7201 or willful failure to pay under § 7203. 

The government argues that the issue of whether Black's tax loss calculation included penalties and interest is not properly before the court because the district court based the tax loss amount on the face value of the fraudulent checks, not the amount of taxes Black owed. As stated above, the face value of the checks was not the correct tax loss. Moreover, the record establishes that the district court included penalties and interest in its tax loss calculation. 

The general rule is that the tax loss calculation "does not include interest or penalties." U.S.S.G. § 2T1.1 cmt. n.1. There is a narrow exception to this general rule for "willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203." Id. To determine whether penalties and interest should be included in the tax loss calculation, we must determine to which types of cases the exception applies. 

Relying on U.S.S.G. § 1B1.3 cmt. n.6 and United States v. Thomas, 635 F.3d 13 (1st Cir. 2011), the government argues that U.S.S.G. § 2T1.1 cmt. n.1 does not limit the inclusion of penalties and interest to defendants convicted of willful evasion of payment under § 7201 or willful failure to pay under § 7203. It further argues that penalties and interest should be included in the tax loss calculation "in any case where defendant's conduct -- offense, relevant, or stipulated, as admitted in a plea agreement, proven at trial, or established by a preponderance of the evidence at sentencing -- constituted willful evasion of payment, as defined by 26 U.S.C. § 7201, or willful failure to pay, as defined by 26 U.S.C. § 7203."

Application Note 6 to U.S.S.G. § 1B1.3 provides guidance on how to interpret a section of the guidelines that, like § 2T1.1 cmt. n.1, directs that a principle be applied to conduct in light of a specific statute. Specifically, it instructs: 

A particular guideline (in the base offense level or in a specific offense characteristic) may expressly direct that a particular factor be applied only if the defendant was convicted of a particular statute. For example, in § 2S1.1 (Laundering of Monetary Instruments; Engaging in Monetary Transactions in Property Derived from Unlawful Activity), subsection (b)(2)(B) applies if the defendant "was convicted under 18 U.S.C. § 1956". Unless such an express direction is included, conviction under the statute is not required. Thus, use of a statutory reference to describe a particular set of circumstances does not require a conviction under the referenced statute. An example of this usage is found in § 2 A3.4(a)(2) ("if the offense involved conduct described in 18 U.S.C. § 2242"). 

U.S.S.G. 1B1.3 cmt. n.6. Because U.S.S.G. § 2T1.1 cmt. n.1 does not expressly direct the court to exclude penalties and interest if the defendant was convicted under 26 U.S.C. §§ 7201 or 7203, a conviction under one of these statutes is not required for the court to include penalties and interest. While a conviction is not required, what makes a case a case "under" 26 U.S.C. §§ 7201 and 7203? 

In Thomas, the grand jury returned a six-count indictment against the defendant. Counts 1 and 2 charged the defendant with willfully attempting to evade the payment of taxes, in 1995 and 1996, respectively, under 26 U.S.C. § 7201 and Counts 3 through 6 charged the defendant with willfully attempting to evade the assessment of taxes also under 26 U.S.C. § 7201. Indictment, United States v. Thomas, No. 06 CR 00004, ECF No. 1 (D. Me. Jan. 11, 2006). The defendant pleaded guilty to one count of willful attempt to evade assessment of taxes. Thomas, 635 F.3d at 16. The district court included penalties and interest in the tax loss calculation used to determine his offense level. Id. On appeal the defendant argued that the district court should not have included penalties and interest because he evaded assessment, not payment of the tax, and that note 1 to U.S.S.G. § 2T1.1 concerns only willful evasion of payment cases under § 7201. Id. at 17. The First Circuit found that the fact the defendant pleaded guilty only to willful evasion of the assessment of taxes did not preclude the district court from considering as relevant conduct actions the defendant took that were evasion of the payment of taxes. Id. Finding that the defendant willfully evaded payment of taxes in 1995 and 1996 (Counts 1 and 2) in furtherance of his evasion of the assessment of taxes, the First Circuit concluded that the district court properly included penalties and interest. Id. at 17-18. 

We find Thomas persuasive and conclude that the statutory reference in U.S.S.G. § 2T1.1 n.1 does not require a charge or conviction to be applicable to a defendant's case. Admittedly, it is not clear whether the "cases under 26 U.S.C. § 7201 or § 7203" requires at least a charge, but the absence of a statement in the guidelines asserting that the indictment must contain a charge under either statute supports our interpretation. Moreover, the tax loss definition instructs the court to look to the object of the offense. U.S.S.G. § 2T1.1(c)(1). If the object of the offense is to avoid the tax, penalties, and interest, then penalties and interest should be included in the tax loss. The district court found that the evidence established beyond a reasonable doubt that Black intended to defraud the IRS by willfully failing to pay and willfully evading payment of the taxes he owed the IRS, a conclusion Black does not challenge. Since the conduct was tantamount to 26 U.S.C. § 7201 and § 7203 conduct, the district court may include penalties and interest in the tax loss calculation.

I am not sure if the Seventh Circuit changed other portions of the opinion in any material way.  If anyone knows the answer to that, please let me know by comment or by email.

Revised Streamlined Certification Forms 14653 SFOP and 14654 (SDOP) (3/11/6)

In February, the IRS revised the Foreign and Domestic certifications (Forms 14653, here, and 14654, here, respectively) in February 2016.  I set forth the principal revisions below:  (In my browser, the links doe not permit actually viewing the form, but it can be downloaded or saved and should work fine with a pdf program.)

The Non-Resident Certification form 14653 (Feb 2016) now includes:

1. A chart asking the filer to declare for each year whether they were out of the country for at least 330 days
2. If the  person is not a citizen or lawful permanent resident, the calculations for the application of the substantial presence test under section 7701(b)(3) for 5 years (the 3 years in return covered period and the two previous years).
3. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story.  
4. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

The Resident Certification Form 14654 (Feb 2016) now includes:

1. An enlarged explanation of the facts that the IRS deems important to include in the Streamline statement, emphasizing that the taxpayer should provide specific reasons for noncompliance and tell the complete story. 
2. A Paid Preparer Section for the preparer of the Certification and box to indicate whether the filer allows the IRS to speak with that person.

If I missed any key differences, please let me know either by comment or email.

DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16)

I have previously posted on certain comments at a recent Federal Bar Conference.  See Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16), here, and Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. A significant portion of the  AAG's prepared remarks related to criminal enforcement initiatives for prosecutions under § 7202, Willful failure to collect or pay over tax, here.  This is the criminal analog to the trust fund recovery penalty, § 6672, Failure to collect and pay over tax, or attempt to evade or defeat tax, here.  The article is Matthew R. Madara,  DOJ Seeking to Change Employment Tax Sentencing Guideline, 2016 TNT 45-8 (3/8/16) [no link available].

Key points and extrapolations from the article are:

1.  As DOJ Tax has made clear both in pronouncements and prosecutions, it is very serious about § 7202 prosecutions.

2.  DOJ Tax is seeking to amend the Sentencing Guidelines statement in the background to the § 7202 Guideline, §2T1.6.Failing to Collect or Truthfully Account for and Pay Over Tax, here, that "The offense is a felony that is infrequently prosecuted."  Specifically, DOJ Tax wants the vestige reference to infrequently dropped (which would probably mean dropping out all after felony).  The proposed amendments are here, with the proposal on § 7202 at pp. 3-4 which says in pertinent part:

The Background commentary to §2T1.6 states that “[t]he offense is a felony that is infrequently prosecuted.” The Department of Justice in its annual letter to the Commission has proposed that the “infrequently prosecuted” statement should be deleted. The Department points out that while that statement may have been accurate when the relevant commentary was originally written (in 1987), the number of prosecutions under section 7202 have since increased substantially. The use of §2T1.6 increased from three cases in 2002 to 46 cases in 2014. See United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2002), at http://www.ussc.gov/research-and-publications/federal-sentencingstatistics/guideline-application-requencies/guideline-application-frequencies-2002; United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2014), at http://www.ussc.gov/sites/default/files/pdf/research-andpublications/federal-sentencing-statistics/guideline-applicationfrequencies/2014/Use_of_SOC_Guideline_Based.pdf

3.  Besides being inaccurate because of the increase in § 7202 prosecutions, the statement is being deployed by defense lawyers to minimize the gravity of the offense in sentencings.  I would not think, however, that sentencing judges are much swayed by that genre of argument.

4.  As to characteristics of failure to withhold and pay over cases that are prosecutors, a DOJ Tax attorney said that DOJ Tax is particularly looking for cases where the responsible parties have lied to the IRS.  (As I has said often on the blog, criminal tax cases, like many or most white collar crimes cases, are principally about the lie, in one form or another.)  The lie is what will help make the substantial burden to prove willfulness beyond a reasonable doubt.

5.  Proving willfulness -- and thus obtaining conviction -- is relatively straightfoward despite the criminal burden of proof.  If the employer -- with the action of the responsible person -- has withheld from the wages, any defense by the responsible person with regard to failing to pay over "falls by the wayside."

AICPA Recommends Changes to OVDP and SFCP (3/10/16 & 3/11/16)

On March 9, 2016, the AICPA (American Institute of Certified Public Accountants) sent the IRS recommendations on the OVDP and SFCP.  The letter with the recommendations is here.  The recommendations as summarized in the letter are:

For the 2014 Offshore Voluntary Disclosure Program, we recommend that the IRS: 

1) Restore the previous practice of not requiring an upfront payment of the miscellaneous offshore penalty by taxpayers.
2) Apply the 50% miscellaneous “Super” penalty only to accounts held at institutions listed on the Foreign Financial Facilitators List.
3) Allow the waiver of the passive foreign investment company (PFIC) computations for small account cases. 

For the Streamlined Filing Compliance Procedures, we recommend that the IRS: 

1) Modify the penalty base to include only those assets associated with tax non-compliance.
2) Expand the Streamlined Filing Compliance Procedures to include certain classes of nonwillful individuals who are currently ineligible for either the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP).
3) Provide additional guidance in the SFOP and SDOP filing instructions to taxpayers on the specific factors the IRS will consider in judging whether their non-compliance was willful.

See the letter for more detail.  I think the recommendations generally are good ones I am concerned but some of them come a little late in the implementation of these programs to be adopted after many cases have already been processed.

Addendum 3/11/16:  I am advised that the AICPA comments overlap somewhat prior recommendations by the American Bar Association in October 2015, here.