Issues in Tax Controversy

Supreme Court Settles Fifth Amendment Required Records Issue in Context of Offshore Bank Accounts

Jay R. Nanavati — Tue, 21 May 2013 09:31:09 -0500

On May 13, 2013, the Supreme Court denied a taxpayer’s petition for certiorari regarding the Seventh Circuit’s August 27, 2012, decision applying the Required Records Exception to override the taxpayer’s Fifth Amendment objection to producing records of his offshore bank account. The citation is T. W. v. United States, No. 12-853 (2013).

Before the Supreme Court’s denial of certiorari, the four circuits to have considered the issue were unanimous in upholding the government’s ability to use grand jury subpoenas to force taxpayers to produce records of their offshore bank accounts. The Supreme Court’s denial of certiorari appears to settle the issue in the government’s favor.

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

Government Runs Its Record to 4-0 in Compelling Production of Records of Offshore Bank Accounts

Jay R. Nanavati — Tue, 21 May 2013 09:29:07 -0500

Posted by Jay R. Nanavati

On February 7, 2013, the U.S. Court of Appeals for the Eleventh Circuit joined “the three of our sister circuits that have considered the same issue here about foreign financial account records and conclude that the subpoenaed records fall within the Required Records Exception.” In other words, taxpayers in the Fifth, Seventh, Ninth, and Eleventh Circuits have no recourse to the Fifth Amendment privilege against self-incrimination to resist producing records of their undeclared offshore bank accounts to the government. The full citation is IN RE: Grand Jury Proceedings, No. 4-10 (11^th Cir. February 7, 2013). Every circuit that has considered the Required Records Exception in the context of offshore bank accounts has now ruled in the government’s favor.

Indian American Neurosurgeon Sentenced to Probation for Unreported Offshore Bank Accounts

Jay R. Nanavati — Tue, 21 May 2013 09:24:34 -0500

Posted by Jay R. Nanavati

On February 1, 2013, the U.S. District Court for the Eastern District of Wisconsin sentenced Arvind Ahuja, a Milwaukee neurosurgeon, to serve three years of probation and to pay a fine of $350,000 following his conviction by a federal jury of one felony count of willful failure to file a Report of Foreign Bank Account (“FBAR”) and one felony count of filing a false federal income tax return.

According to the evidence presented at Ahuja’s August 2012 trial, Ahuja transferred millions of dollars from bank accounts in the United States to undeclared bank accounts located in India at HSBC bank. Ahuja invested the funds in these accounts in certificates of deposit, which earned more than $2.7 million in interest income during the years 2005 through 2009. Ahuja also maintained an HSBC bank account in the Bailiwick of Jersey, a British Crown dependency located in the Channel Islands off the coast of Normandy, France. Ahuja used credit and debit cards linked to this account to pay personal expenses while on trips to London. Ahuja managed his offshore accounts with the assistance of bankers who worked at an HSBC India representative office in New York.

Ahuja’s sentencing is only the latest in a string of tax-enforcement news that affects Americans with undeclared offshore bank accounts generally and Indian Americans with unreported non-resident Indian or “NRI” bank accounts specifically. Banks with operations in India offer high interest rates on NRI accounts, usually 9-10%. Unsuspecting account holders may not realize that although the interest income from NRI accounts is typically not taxable in India, it is taxable in the U.S. In addition to reporting the interest income and the existence of the account on a U.S. tax return, the account holder must separately disclose the foreign account by filing a FBAR.

In December 2010, Vaibhav Dahake of New Jersey pleaded guilty to conspiring to defraud the United States. Sanjay Sethi, also of New Jersey, pleaded guilty on January 7, 2013 to the same charge. Californian Ashvin Desai faces trial on July 23, 2013 for tax evasion, aiding in the preparation of false tax returns, and willful failure to file FBARs. All of these Indian Americans are alleged to have maintained undeclared accounts at HSBC India.

According to a court filing by the U.S. Department of Justice, there are 9,000 U.S. residents of Indian origin who have $100,000-minimum-balance accounts at HSBC India alone. Undoubtedly, there are many more whose account balances total less than $100,000. According to the DOJ, however, for calendar year 2009, the most recent year for which information is available, there were only 1,391 FBARs filed disclosing 1,921 accounts at HSBC India.

On April 7, 2011, the U.S. District Court for the Northern District of California granted the IRS and DOJ’s request for a “John Doe summons” to force HSBC India to turn over the names of U.S. taxpayers “who at any time during the years ended December 31, 2002 through December 31, 2010, directly or indirectly had interests in or signature or other authority (including authority to withdraw funds; trade or give instructions or receive account statements, confirmations, or other information, advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through The Hongkong and Shanghai Banking Corporation Limited in India (HSBC India).”

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

IRS and DOJ Losing Patience with Taxpayers with Undisclosed Foreign Accounts

Jennifer Benda — Mon, 04 Feb 2013 10:53:21 -0500

Posted by Jennifer Benda

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

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

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

Jay R. Nanavati — Tue, 15 Jan 2013 09:21:29 -0500

Posted by Jay R. Nanavati

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

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

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

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

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

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

Jay R. Nanavati — Tue, 15 Jan 2013 09:14:53 -0500

Posted by Jay R. Nanavati

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

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

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

Second Federal Court Holds that Recklessness is Willfulness for FBAR Penalty

Jay R. Nanavati — Thu, 15 Nov 2012 11:11:01 -0500

Posted by Jay R. Nanavati

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

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

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

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

IRS Releases New Timeline for FATCA Implementation

Michael Nydegger — Wed, 24 Oct 2012 13:50:07 -0500

Posted by Michael Nydegger

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

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

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

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

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

For Holders of Offshore Bank Accounts, Another Domino Falls

Jay R. Nanavati — Fri, 28 Sep 2012 11:54:17 -0500

Posted by Jay R. Nanavati

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

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

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

Jay R. Nanavati — Wed, 19 Sep 2012 10:31:35 -0500

Posted by Jay R. Nanavati

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