Thursday, November 10, 2016
Update on DOJ's Tax Cases by Deputy Assistant Attorney General Caroline D. Ciraolo to the ABA Annual Tax Conference
The Tax Division currently employs 370 attorneys and approximately 130 administrative and executive staff. This represents substantial progress from the end of fiscal year 2014, when the division was down to about 300 attorneys due to sequestration, the government shut down, and a hiring freeze. A fully-funded and staffed Tax Division ensures efficient and effective tax enforcement, and we hope that Congress will soon provide funding for the remainder of the 2017 fiscal year.
During the last two years, our civil trial attorneys were successful in more than 95 percent of the cases they litigated to a decision. During this time, we collected more than $1.6 billion and saved the U.S. Treasury an additional $1.3 billion by successfully defending against tax refund suits. As of Aug. 30, the division was defending tax refund cases worth approximately $10 billion to the federal Treasury.
With over 6,000 civil cases pending each year in various stages of litigation, we covered the landscape of tax enforcement. We sued to collect assessed tax, penalties and interest, assisted the Internal Revenue Service (IRS) through pursuit of summons enforcement proceedings and defended the IRS in challenges to regulations, refund litigation and matters involving the Freedom of Information Act. We pursued penalties and obtained injunctions against fraudulent tax return preparers, promoters of abusive tax schemes and employers who fail to comply with their employment tax obligations. When these defendants violated the injunctions, civil trial attorneys pursued contempt proceedings seeking disgorgement and incarceration.
At any given time, our civil appellate attorneys are handling approximately 650 appeals involving everything from collection due process proceedings to refund litigation over the economic substance of tax shelters and related penalty assessments.
Tax Division prosecutors authorized, investigated and prosecuted traditional tax crimes, such as tax evasion, false returns, obstructing and impeding the due administration of the internal revenue laws, employment tax violations and the concealment of assets and income offshore, as well as aggravated identity theft and fraudulent return preparation. Since 2014, our division prosecutors obtained more than 200 indictments, negotiated more than 100 guilty pleas and achieved a conviction rate in more than 30 trials of over 95 percent. This does not include the additional criminal tax prosecutions authorized by the Tax Division and assigned to the U.S. Attorneys’ Offices.
We briefed and argued criminal tax appeals, served as a resource to the IRS and our department colleagues on criminal tax matters and provided technical expertise related to international issues, tax information agreements and treaties.
As many of you know, over the past two years, the Tax Division increased its focus in several areas and I am pleased to report that we continue to make substantial progress in these areas.
Among our top priorities is civil and criminal employment tax enforcement. Employment tax violations represent $91 billion dollars of our country’s $458 billion gross tax gap, and as of June 30, more than $59 billion reported on quarterly employment tax returns remained unpaid.
In the last two years, in an effort to send a clear message to delinquent employers who treat taxes withheld from employee wages as a personal slush fund or loan that can be put off or ignored entirely, we filed 55 injunction complaints in federal courts across the country and, to date, courts have issued 47 permanent injunctions. These injunctions require the timely deposit of employment tax and filing of employment tax returns, prompt notice to the IRS after each deposit and notice to the IRS if the employer begins operating a new business. In addition, the injunctions preclude employers from assigning property or making payments to other creditors until the company’s employment tax obligations are paid.
We are also prioritizing criminal investigations and prosecutions of willful employment tax violations. For example, in September, the former owner of a trucking company in Kansas was sentenced to three years in prison for evading the payment of more than $900,000 in employment taxes and for filing a false statement with the IRS concealing his ownership interest in assets when the IRS began collection efforts.
On the offshore front, we completed 78 non-prosecution agreements with 80 Swiss banks that admitted assisting in the concealment of U.S. related accounts and facilitating the evasion of U.S. tax, and that completed the requirements of Category 2 of the Swiss Bank Program. We collected more than $1.3 billion in penalties and received substantial, detailed information regarding U.S. related accounts, U.S. accountholders and foreign and domestic individuals and entities that assisted the U.S. accountholders to evade U.S. tax and reporting requirements.
In addition, since 2008, the department, working with our colleagues in IRS Criminal Investigation (IRS-CI), charged more than 160 U.S. accountholders with tax evasion and willful failure to report foreign accounts and more than 50 individuals who assisted in this criminal conduct. We also reached resolutions with nine foreign financial institutions outside of the Swiss Bank Program and continue to pursue investigations of entities located within and outside Switzerland.
Our criminal offshore enforcement efforts have encouraged participation in the IRS offshore voluntary disclosure programs, through which more than 55,000 taxpayers have come into compliance and paid nearly $10 billion in tax, interest and penalties since 2009. In addition, filing of Reports of Foreign Bank and Financial Accounts (FBARs) has increased from 332,000 reports for calendar year 2007, to over a million reports for 2015.
Our civil trial attorneys also furthered our offshore tax enforcement efforts, seeking the issuance of John Doe summonses to identify U.S. taxpayers whose identities are unknown and who are engaged in violations of the internal revenue laws and initiating summons enforcement proceedings to assist the IRS in conducting its examinations and determining the accurate tax due. The information we seek is often located in the United States; however, as we recently demonstrated in a district court in Miami, we will pursue enforcement of a Bank of Nova Scotia summons when a domestic entity has dominion or control over records located outside the United States, even where the domestic entity asserts that production may be a violation of foreign law, if our interest in combatting tax evasion substantially outweighs the interest in foreign jurisdictions in allowing banks to preserve the privacy of their customers.
Our civil trial attorneys also are actively engaged in suits involving penalties assessed for failing to file FBARs. These suits include affirmative litigation to collect unpaid penalties, and defensive litigation raising a variety of issues. We have approximately three dozen cases involving FBAR issues pending, the vast majority of which include a willfulness penalty for at least one of the years at issue. These suits have raised issues related to the computation of the penalty, burden of proof, service of process abroad, definition of a foreign account, corresponding assessments on spouses, venue, jurisdiction, and challenges under the Administrative Procedures Act.
We also enhanced our efforts to protect the public and the U.S. Treasury from fraudulent tax return preparers. In the last two fiscal years, we filed more than 90 suits all over the country to enjoin these preparers and courts have issued nearly 80 injunctions that prohibit the defendants from owning or operating tax return preparation businesses and require them to turn over customer lists to the IRS and share copies of the injunction order with their employees.
When preparers failed to comply with injunctions, we pursued contempt proceedings. In Tennessee, we successfully moved to hold two former tax return preparers in contempt after they violated an injunction by opening a successor tax-return preparation company in the same location. The court ordered the new company to shut down and disgorge all fees collected, and later jailed one preparer for failure to comply.
We also sought injunctions against promoters of fraudulent schemes to evade taxes and hide assets. While advertising asset protection arrangements, novel charitable contributions, or tax avoidance plans, these promoters are in fact assisting taxpayers to fraudulently assign income, conceal ownership of income-producing assets and file tax returns with fraudulently inflated charitable donation deductions to evade paying their taxes.
In September, a federal court in Montana permanently barred an attorney and his two companies from promoting an abusive scheme that promised generous tax savings to clients who donated unwanted timeshares to a tax-exempt entity organized and operated by the promoter. Clients received grossly inflated appraisals that they used to support excessive charitable donation deductions. The court required that the promoter notify all customers and employees of the injunction and that a copy of the order be posted on the promoter’s website.
Tax Division attorneys also continue to challenge tax shelters designed to generate large tax benefits using multiple entities and complex financial institutions that, in the government’s view, lack a real business purpose or any real economic substance. These cases often involve well-disguised transactions and tax-indifferent parties located in other countries, making case development and document discovery difficult and expensive. Because tax shelters typically involve enormous sums of money and often attract significant media attention, a coordinated and effective effort is essential to prevent substantial losses to the Treasury and we remain committed to deterring future use of such shelters by other taxpayers.
As you can see, it has been a very busy and productive time at the Tax Division and we have worked closely with the tax practitioner community on a variety of matters. As we approach the close of 2016, what does the future hold for tax enforcement? Let me take a moment to share my forecast of what I think you will see in 2017.
First, the Tax Division is now well into the legacy phase of the Swiss Bank Program, reviewing the substantial data provided by the banks and obtained from other sources. We are working closely with our colleagues in the IRS and using information gathered in pending investigations and to identify new individuals, entities and areas of interest for both civil tax enforcement and criminal tax investigations and prosecutions. We are following the money outside Switzerland and into jurisdictions around the world and investigating activities by asset management companies, corporate service providers, financial advisers, insurance companies and other financial entities. As a result of our enforcement efforts, entities are contacting us to acknowledge their role in facilitating U.S. tax evasion, disclose the individuals engaged in this conduct, and cooperate with the department in an effort to address and resolve criminal exposure.
In addition, the IRS recently announced that 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and paid approximately $450 million in taxes, interest and penalties. While we certainly encourage taxpayers to come into compliance, Tax Division prosecutors are reviewing certain streamlined filings and will investigate and prosecute taxpayers who willfully submit false statements in an effort to obstruct and impede the IRS and evade the payment of tax due.
When requested by the IRS, the Tax Division will ask courts to authorize John Doe summonses, pursue summons enforcement proceedings, and when appropriate, will seek to enforce Bank of Nova Scotia summonses and issue and enforce Bank of Nova Scotia subpoenas to obtain information located outside the United States.
In conducting civil and criminal investigations, the Tax Division will also continue to seek and review information pursuant to our bilateral and multilateral international treaties and agreements, respond to requests from treaty partners, and work closely with foreign counterparts to promote financial transparency and combat global tax evasion.
In addition, the Tax Division is working closely with IRS-CI to prioritize traditional legal source tax prosecutions. Our voluntary tax system only works when the honest taxpayer has faith in the process and believes that those who break the law will be held accountable. When a local business owner, the neighborhood doctor or dentist, the mechanic down the street, or an investment banker is prosecuted for skimming from their business, using nominee accounts and shell companies to conceal assets and evade tax, filing false returns, conspiring to defraud the IRS, or obstructing the due administration of the internal revenue laws, there is an immediate and substantial impact among the defendant’s family, friends and neighbors, in the local and regional community and throughout the applicable industry. These high-impact cases send a clear message that no one is above the law and that those who engage in this criminal conduct will pay a heavy price, including incarceration, fines, restitution and collateral consequences.
In corporate civil and criminal investigations, you will continue to see an emphasis on individual accountability. Corporate crimes damage not only a company, but its employees and shareholders. Prosecution of a corporation is not a substitute for the prosecution of criminally culpable individuals and imposition of individual criminal liability may provide the strongest deterrence against future corporate wrongdoing.
To comply with this requirement, an entity must conduct a fulsome internal investigation and provide all non-privileged evidence to the United States. Failure to come forward and identify individual actors will render an entity ineligible for cooperation credit.
Tax Division prosecutors will continue to seek to resolve cases with individuals before or at the same time that we resolve a matter with the related entity. After a corporate resolution is reached, the entity must continue to provide relevant information about individuals implicated in the wrongdoing. If simultaneous individual and corporate resolutions are not feasible based on the particular facts and circumstances of a case, the department looks for a clear plan that addresses individual accountability prior to the entity resolution. We recognize that holding individuals accountable may not be feasible or appropriate in every case, but these efforts will force entities to view serious misconduct as a substantial risk to the company and a threat to the liberty of those involved, rather than simply a cost of doing business.
A good example of corporate cooperation is the resolution reached with Bank Julius Baer, which signed a deferred prosecution agreement in February, admitting that it conspired with and assisted U.S. accountholders to hide offshore accounts and evade U.S. taxes. Julius Baer paid $547 million, including restitution for tax loss arising from the undeclared U.S. related accounts, disgorgement of gross fees paid with respect to these accounts and a fine for its illegal conduct. In addition, two Julius Baer bankers, both of whom had been fugitives since 2011, pleaded guilty to their role in the conspiracy. Julius Baer’s early, extensive and continuing cooperation resulted in a substantial reduction in the monetary penalties imposed.
Finally, we are encouraging individuals with information regarding material violations of the internal revenue laws to submit that information to the IRS Whistleblower Office. When those individuals have specific, credible and substantiated information of material domestic or international criminal tax violations, we encourage them, through counsel, to share that information and a copy of their Form 211 with the Tax Division. We are interested in claims involving criminal tax violations and filed pursuant to subsection (b) of the IRS whistleblower statute, in which the amount in dispute exceeds $2 million.
Please note that we are not announcing the opening of a Tax Division whistleblower office. The IRS operates the whistleblower program pursuant to its statutory authority. However, if a whistleblower is truly interested in bringing attention to illegal conduct and schemes that undermine our nation’s tax system, the Tax Division welcomes and is prepared to receive such information.