Vince Nardone: Tax and Controversy

Internal Revenue Service Appoints New CI Chief

The Internal Revenue Service named Victor Song, a 28-year veteran of IRS, as the new chief for IRS Criminal Investigation (CI). He will assume his position in January and will replace Eileen Mayer, who is retiring in January. Song is currently CI deputy chief. CI is the agency's law enforcement arm and investigates and assists in the prosecution of criminal tax evasion, money laundering and narcotics-related financial crime cases.

See the entire news release attached below.Download CI - IRS names new chief for CI

IRS Agent Prosecuted for Willfully Failing to Make an Income Tax Return - Criminal Tax

In U.S. v. Jackson, 102 AFTR 2d 2008-5274, the Eleventh Circuit affirmed a district court's decision involving the prosecution of a former IRS agent for willfully failing to make an income tax return for the tax years 2000 through 2003.  The IRS agent argued that the Paperwork Reduction Act (PRA) insulated her from prosecution because the government's alleged failure to comply with the PRA prevented her from filing the returns.  The Eleventh Circuit rejected that argument, stated that "Congress didnot enact the PRA's public protection provision to allow OMB to abrogate any duty imposed by Congress," in this instance the filing of a income tax return.  Thus, the district court's earlier sentencing of the IRS agent to four consecutive 12-month sentences, for a total of 48 months' imprisonment, followed by one year of supervised release on each count was upheld.  

See the case below.

Download criminal_case_former_irs_agent.pdf

Willfulness does not require proof of ability to pay, atleast in the Ninth Circuit

I initially chose note to discuss the case below because it starts out with the following: This case illustrates the enduring truth of Ben Franklin's sage observation that “nothing is certain but death and taxes.”  But, after considering it further and hearing this quote a million times, it still rings true for me and so I reconsidered my decision and actually wanted to include it for that same reason, so here it is.

In U.S. v. Easterday(2008, CA9) 102 AFTR 2d ¶ 2008-5218, the taxpayer appealed his conviction for willful failure to pay over employee payroll taxes, in violation of 26 U.S.C. §7202.  During the lower court trial, the taxpayer sought an “ability to pay instruction” in order to contend to the jury that his failure to pay over the taxes he owed was not “willful,” because he had spent the money on other business expenses and therefore could not pay it to the government when it was due.  The district court refused to give the instruction, and the jury subsequently convicted the taxpayer and sentenced the taxpayer to thirty months in prison.

According to the Ninth Circuit, which heard the taxpayer’s appeal, the requested instruction by the taxpayer in the lower court case was drawn from a portion of a 1975 decision of the Ninth Circuit court, in U.S. v. Poll, 521 F.2d 329 (9^th Cir. 1975).  The Ninth Circuit, however, stated that it had never subsequently cited the Poll case favorably in the context of a prosecution for failure to pay taxes.  The Court went onto to say that the Poll decision relied upon an earlier Ninth Circuit decision that two other circuits have expressly rejected.  And, most significantly, the holding of Poll that formed the basis for the proposed instruction was effectively eradicated by subsequent Supreme Court authority in U.S. v. Pompano, 429 U.S. 10, 12 (1976).

Nevertheless, the taxpayer contended that the Poll decision was controlling because the Ninth Circuit had never expressly overruled it.  The lower court had held that Poll was no longer good law.  The Ninth Circuit ultimately agreed.  The Ninth Circuit analyzing Poll, stated that the requirement in Poll that the government prove the taxpayer had sufficient funds to pay the tax was premised on a definition of willfulness that included some element of evil motive.  The Ninth Circuit went onto to say that the Supreme Court subsequently rejected any such definition of willfulness in the tax statutes.  See United States v. Pomponio, 429 U.S. 10, 12 (1976)(per curiam); see also United States v. Cheek, 498 U.S. 192, 201-02 (1991). “Willful” in the tax context means a voluntary, intentional violation of a known legal duty. See Cheek, 498 U.S. at 201-02; United States v. Powell,955 F.2d 1206, 1211 (9th Cir.1992). In other words, if you know that you owe taxes and you do not pay them, you have acted willfully. Poll has continued to be referred to occasionally in other contexts, principally in the child support area. See United States v. Ballek,170 F.3d 871, 874 (9th Cir.1999); H.R.Rep. No. 102-771, at 6 (1992). The Ninth Circuit, however, made it clear that it is not good tax law and should not be cited as such.

See the decision attached.

Download willfulness_withholding_tax.pdf

Government not Required to Obtain a Civil or Administrative Determination of Tax Deficiency Before Prosecuting Taxpayer - Criminal Tax

In U.S. v. ELLETT, 101 AFTR 2d 2008-XXXX, 05/23/2008, the Court held that the government is not required to obtain a civil or administrative determination of a tax deficiency in order to establish the existence of a substantial tax deficiency beyond a reasonable doubt. In doing so, the Court joined the First, Sixth, Seventh and Ninth Circuits in holding that due process does not require the government to adjudicate tax disputes civilly or administratively before proceeding to criminal prosecution for tax evasion. See United States v. Daniel, 956 F.2d 540, 542 [69 AFTR 2d 92-663] (6th Cir. 1992); United States v. Hogan, 861 F.2d 312, 315–16 [63 AFTR 2d 89-318] (1st Cir. 1988); United States v. Dack, 747 F.2d 1172, 1174–75 (7th Cir. 1984); United States v. Voorhies, 658 F.2d 710, 715 (9th Cir. 1981) (per curiam). Thus, the Court found that the taxpayer's criminal prosecution was not unlawfully premature.

The Court went on to state that the taxpayer misunderstood the tax deficiency element of tax evasion. A tax deficiency arises by operation of law the date a tax return is due but not filed; no formal demand or assessment is required. See 26 U.S.C. § 6151(a) ("[W]hen a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice or demand from the Secretary ... pay such tax at the time and place fixed for filing the return ...." (emphasis added)); id. §6072(a) (requiring annual tax returns to be filed on or before April 15). Tax liability therefore comes into being as of April 15. A tax deficiency notice "merely reminds the taxpayer of his duty to pay a tax debt already due[, it] does not create that liability." United States v. Voorhies, 658 F.2d at 714.

See case below.

Download criminal_versus_civil_tax.PDF

Tax Return Preparer Prosecuted; Failure to File Defense Rejected; and Sentencing Enhancements Affirmed

In U.S. v. Borden, 101 AFTR 2d ¶2008-581 (11^th Cir.), the Eleventh Circuit affirmed a return preparer's conviction for assisting in preparation and presentation of false returns. The taxpayer presented evidence disputing intent to defraud by presenting witness's testimony that the witness contacted IRS and asked it to disregard amended return. The court found that the fact that the return was mailed to and received by IRS showed that it was "filed." And, the return preparer did not dispute her involvement in the return's preparation. The court further found that the district court correctly calculated tax loss on basis of the government’s documentary evidence and testimony and also found that a 2-level leadership/organizer enhancement was proper where testimony showed that at least 1 other person participated in activity and was under preparer's supervision.

This case is another example of the government's constant pursuit of tax professionals that cross the line.  See U.S. v. Borden, CA 11, 101 AFTR 2d ¶2008-581 below.

Download criminal_tax_case.PDF

IRS Publishes Top Tax Scams for 2008

In Information Release 2008-041, the Internal Revenue Service issued its 2008 list of the most egregious tax schemes and scams, highlighted by Internet phishing scams and several frivolous tax arguments. Topping this year’s list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers.   New to the "Dirty Dozen" this year is a scheme, which IRS auditors discovered, that relates to unreasonable and/or excessive fuel tax credit claims. See the entire release below by clicking on the link.

Download tax_scams.PDF

Return of Capital Defense Prevails - Tax Fraud (Criminal)

In an unanimous opinion (Boulware v. United States, 101 AFTR 2d ¶2008-536 (March 3, 2008), the Supreme Court found that Sections 301 and 316(a) of the Internal Revenue Code set the conditions for treating certain corporate distributions as returns of capital, nontaxable to the recipient. The question is whether a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. The Court held that no such showing is required.

In doing so, the U.S. Supreme Court overturned a Ninth Circuit decision upholding a criminal tax evasion prosecution. Petitioner Boulware was charged with criminal tax evasion and filing a false income tax return for diverting funds from a closely held corporation, HIE, of which he was the president, founder, and controlling shareholder. To support his argument that the Government could not establish the tax deficiency required to convict him, Boulware sought to introduce evidence that HIE had no earnings and profits in the relevant taxable years, so he in effect received distributions of property that were returns of capital, up to his basis in his stock, which are not taxable, see 26 U. S. C. sec.sec.301 and 316(a). Under sec.301(a), unless the Internal Revenue Code requires otherwise, a "distribution of property" "made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in [sec.301(c)]." Section 301(c) provides that the portion of the distribution that is a "dividend," as defined by sec.316(a), must be included in the recipient's gross income; and the portion that is not a dividend is, depending on the shareholder's basis for his stock, either a nontaxable return of capital or a taxable capital gain. Section 316(a) defines "dividend" as a "distribution" out of "earnings and profits." The Ninth Circuit held that Boulware's proffer was properly rejected because he offered no proof that the amounts diverted were intended as a return of capital when they were made.

See the Boulware Case attached below.

Download criminal_tax_return_of_capital.PDF

IRS Frowns Upon Taxpayer’s Filing False Reports or Forms Regarding Other Taxpayers - Tax Fraud (Criminal)

In U.S. v. Allison, 101 AFTR 2d ¶2008-448 (5^th Cir. Feb. 4, 2008), the jury's finding that the taxpayer acted "corruptly" under §7212(a) was supported by evidence showing that taxpayer filed false Form 8300s to harass and intimidate city employees and to secure improper advantage for himself.

The Court went on to articulate that: Section 7212(a) provides that "[w]hoever corruptly... endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title or in any other way corruptly ... obstructs or impedes, or endeavors to obstruct or impede the due administration of this title" shall be guilty of an offense. The Court stated that one acts corruptly in the context of §7212(a) when one acts "with the intention of securing improper benefits or advantages for one's self or others."United States v. Reeves , 752 F.2d 995, 1001–02 [55 AFTR 2d 85-932] (5th Cir. 1985). See United States v. Saldana, 427 F.3d 298, 305 [96 AFTR 2d 2005-5782] (5th Cir. 2005) (holding that the improper benefit sought need not be a benefit under the tax laws to support conviction under §7212); United States v. Bowman, 173 F.3d 595, 600 [83 AFTR 2d 99-2219] (6th Cir. 1999) (holding that §7212(a) proscribes "an individual's deliberate filing of false forms with the IRS specifically for the purpose of causing the IRS to initiate action against another taxpayer").

See U.S. v. Allison, CA 5, 101 AFTR 2d ¶2008-448 below.

Download irs_filing_false_reports_or_forms.PDF

Obtaining Information from the Internal Revenue Service, Tax Fraud (criminal)

In U.S. v. Weisberg, DC, Western District of NY, 101 AFTR 2d ¶2008-417, a magistrate judge quashed a subpoena (in part) that a chiropractor issued on the IRS seeking to compel production of various records or documents allegedly relevant to his defense to Section 7203 criminal charges.  The court held that to extent the defendant was seeking IRS form letters and correspondence it sent to non-parties/other non-filers or tax protest organizations to which the defendant had granted a power of attorney over his tax matters, information was not sufficiently relevant to taxpayer's defense to warrant compelled production. The court also held that the production of that information would violate Section 6103. But, the court held that to extent the taxpayer was seeking IRS guidelines as to how it deals with non-filers generally, the IRS was ordered to comply and produce the same at trial.

This case highlights the importance of obtaining information from the IRS prior to litigation and the difficulty of obtaining certain information through formal process.  In fact, although the IRS aggressively and frequently demands that taxpayers’ turn over their records to the IRS, the IRS is not so willing to share with taxpayers when asked to do the same.  Certainly, in Weisberg’s case, he may not have had an earlier opportunity, but many other taxpayers do have that opportunity.  Thus, prior to entering into litigation with the IRS, a taxpayer should consider his options of how to obtain information from the IRS.  Under most circumstances, taxpayers would be surprised how much you can obtain prior to litigation.  The tools available that should be explored are: (i) Section 6103 involving disclosure to persons with a material interest; (ii) the Freedom of Information Act (FOIA); (iii) the Privacy Act of 1974; and (iv) general information available to all taxpayers without any formal process, such as the Internal Revenue Manual.  There is a plethora of information available in public forums on each of these categories.

See U.S. v. Weisberg, DC, Western District of NY, 101 AFTR 2d ¶2008-417 attached below.

Download document_disclosure.PDF

 

Court Applies Abuse of Discretion Standard in Determining Reasonableness of Sentence - Tax Fraud (Criminal)

A Business owner's sentence for section 7202 violation and related offenses was affirmed by the Eight Circuit in U.S. v. Wetzel, CA 8, 101 AFTR 2d ¶2008-375.  The taxpayer's unreasonableness and disparity objections failed in face of the facts brought out in the case that his case was dissimilar to that of predecessor business owner's case and that district court had given due consideration to his mitigating circumstances claims and properly weighed relevant 11 USCS 3553(a) factors.

Specifically, the Court reviewed the defendant’s sentence for reasonableness in light of the 18 U.S.C. § 3553(a) factors, applying an abuse-of-discretion standard. See United States v. Booker, 543 U.S. 220, 261–62, 125 S.Ct. 738, 160 L.Ed.2d 621 (2005);United States v. Boss , 493 F.3d 986, 987 (8th Cir.2007). The Court found that there was no abuse of discretion. The Court found that the disparity argument failed because, as the district court correctly determined, the defendant’s case and criminal history were not at all similar to those of another individual who owned the predecessor to the defendant's business. See 18 U.S.C. § 3553(a)(6) (court is to consider “need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct”). Further, the Court’s review of the record convinced the Court that the district court considered and rejected the defendant's arguments regarding mitigating circumstances, properly took into account only relevant section 3553(a) factors, and did not commit a clear error of judgment in weighing these factors. See United States v. Long Soldier, 431 F.3d 1120, 1123 (8th Cir.2005) (sentencing court abuses its discretion if it fails to consider relevant factor that should have received significant weight, gives significant weight to improper or irrelevant factor, or considers only appropriate factors but commits clear error of judgment in weighing them).

See U.S. v. Wetzel, CA 8, 101 AFTR 2d ¶2008-375 attached below.

Download abuse_of_discretion.PDF