Posted by: Robert Horwitz | January 14, 2021

IRS Loses Another Non-Willful FBAR Case by ROBERT S. HORWITZ

In December I had an FBAR roundup, where I wrote about three recent FBAR cases, two willful cases the IRS won (the Fourth Circuit’s decision in US v. Horwitz and the district court’s decision on remand in Bedrosian v. US) and the IRS loss in a non-willful case (US v. Bittner).  This week a district court in Connecticut handed the IRS a loss in another non-willful FBAR case, U.S. v. Kaufman, 18-cv-00787 (Jan. 11, 2021).  As in Bittner, the parties filed cross motions for summary judgment and presented the court with two issues: a) whether the maximum $10,000 non-willful penalty was per account or per annual filing and b) whether the defendant had “reasonable cause” for not filing an FBAR form.  The result was the same as in Bittner: the defendant did not have reasonable cause, but the non-willful penalty was per annual form not per account.

A little background:  Mr. Kaufman is a U.S. citizen who has resided in Israel since 1979.  He had multiple financial accounts in Israel.  In 2008 he had a beneficial interest in or signatory authority over 13 Israeli accounts, in 2009 there were 12 accounts and in 2010 there were 17 accounts.  Mr. Kaufman’s U.S. tax returns were prepared by an American accounting firm.  Each year, the accountants would ask if he had any foreign accounts and would advise him that if he did, he may need to file FBAR forms.  Each year he told his accountants he did not have any foreign accounts.  When asked how he paid his bills, he claimed it was out of a U.S. brokerage account, so they checked the “no” box to the question on the return whether he had foreign accounts.  Notwithstanding this evidence, Mr. Kaufman claimed he did not learn of the FBAR filing requirement until September 2011.  He also claimed that he suffered a heart attack in late 2010 and was involved in an auto accident in 2011 and that these affected his cognitive abilities.

The first issue the Court addressed was the reasonable cause defense.  To escape liability for the non-willful penalty a person must show “reasonable cause” and that the amount in the account was accurately reported.  The Court focused on the “reasonable cause” prong.  Since “reasonable cause” is not defined in the FBAR statute, the Court looked to the reasonable cause defense to penalties in Internal Revenue Code sections 6651 and 6664, noting that under US v. Boyle, 469 U.S. 241 (1985), failure to timely file a return is not excused by reliance on an agent.  Given the facts, including the taxpayer being told by his CPAs that he did not have foreign accounts and used a U.S. brokerage account to pay his bills, the Court found there was no reasonable cause.  Thus, he was liable for the non-willful penalty. 

Now the Court had to decide whether the maximum penalty was $10,000 per year, or whether the IRS could assess the non-willful penalty on an account by account basis, with the maximum penalty per account being $10,000.  This was a question of interpreting the statute, the starting point for which is the “plain meaning” rule, i.e., the language in a statute is given its plain meaning.    The problem was that the language in the statute was not clear on whether the maximum non-willful penalty was to be applied on an annual basis or an account-by-account basis.  The Government pointed to the language in the willful penalty provisions of the statute, which refer to “balance in the account” and “existence of an account” as requiring the non-willful penalty to apply on an account by account basis.  Mr. Kaufman argued that this language “reveals exactly the opposite.  The Court agrees with Kaufman.”  The Court followed the logic of the Bittner court.

The Court, relying on Bittner, reasoned that the language in the willful penalty provision shows that Congress knew how to make penalties account specific.  It drew a negative inference from the exclusion of language in the non-willful provision of language that was in the willful provision of the statute that Congress did not intend for the non-willful penalty to apply per account.  To buttress its determination, the Court found it significant that the regulations provide as the threshold for filing the FBAR form an aggregate balance in all accounts of over $10,000 since it makes no sense to assess a non-willful penalty per account when the reporting obligation is based on the aggregate balance and not on the number of accounts. 

Under both willful and non-willful penalties “the violation flows from the failure to file a timely and accurate FBAR.  The only difference is that the manner for calculating the statutory cap for penalties for willful violations involves an analysis that includes consideration of the balance in the accounts, while no such analysis is required for non-willful violations.”  (Slip. Op. at 18-10.)

The Government’s interpretation “could readily result in disparate outcomes among similarly situated people” based solely on the number of accounts and a person who had several accounts who  was non-willful “could be exposed to a significantly higher penalty than a willful violator.”  The Court found as conjecture the Government’s argument that limiting the penalty for non-willful violations to $10,000 per year would decrease the penalties deterrence value.  The Court noted that for the first three decades of the statutes existence there was only a willful penalty and when Congress added the non-willful penalty it was aware that the willful penalty used the account balance as a cap, something the Court found persuasive evidence that Congress did not want the non-willful penalty to be applied on a per account basis.  The Court found unpersuasive the district court’s decision in US v. Boyd.

Boyd is currently on appeal to the Ninth Circuit, which heard oral argument last summer.  Counsel for Ms. Boyd has already sent a copy of the Kaufman decision to the Ninth Circuit.  We can only wait to see whether the Ninth Circuit finds the reasoning in Kaufman and Bittner persuasive.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

It has been a while since I blogged on FBAR cases, but three cases over the past few months deserve mention.  Two were willful cases where the courts held that the taxpayers were liable for the FBAR willful penalty: the Fourth Circuit’s affirmance of the district court’s grant of the Government’s summary judgement motion in United States v. Horowitz (no relation) and the district court’s decision on remand in Bedrosian v. United States.  The third was a case dealing with whether the non-willful FBAR penalty is assessed on an account-by-account basis, United States v. Bittner.

The taxpayers in Horowitz had worked for a number of years in Saudi Arabia.  The deposited a large part of their income into a local bank.  Since that bank did not pay interest on deposits, they eventually transferred the funds to a Swiss bank account.  The amount in the Swiss account eventually reached over $1.6 million and was their main financial asset.  Eventually, they had the funds placed in UBS account.  When they returned to the U.S., they did not give UBS their mailing address.

Dr. and Mrs. Horowitz reported on their U.S. income tax returns the income they earned in Saudi Arabia and the interest earned on their U.S. bank accounts, so they knew that foreign income and interest income were both reported.  They never told their CPA about the Swiss account or asked if interest on a foreign account was subject to U.S. income tax.  They did, however, tell friends about the Swiss account.

In 2008 they were told by UBS that they had to close their account because UBS no longer was accepting U.S. citizens as customers.  They moved the funds to another Swiss bank.  The account opening forms directed the bank to hold mail and Dr. Horowitz initialed each page. 

The taxpayers entered the Offshore Voluntary Compliance Initiative and paid the tax due on previously unreported foreign income,  but in 2012 they opted out. In June 2014, the IRS assessed willful penalties against them.  In 2016, the Government sued to collect the willful penalty.  The district court entered summary judgment in favor of the Government and the Horowitzes appealed.

The Horowitzes raised four arguments on appeal.  First, they argued that under United States v. Ratzlaf, 510 U.S. 135 (1994), willful for purposes of criminal penalties under the Bank Secrecy Act requires actual knowledge that one is violating the law.  They argued that “willful” for purposes of civil penalties under the Bank Secrecy Act should have the same meaning.  The Court noted that the Supreme Court had remarked that “willful” is a term with many meanings and, in Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), the Supreme Court in the civil context “willful” includes “reckless disregard.”  The Court concluded that for purposes of the civil FBAR willful penalty, willful includes both actual knowledge and reckless disregard, which is determined under an objective standard: a person acts with reckless disregard if he acts or fails to act “in the face of an unjustifiably high risk of harm that is either known or so obvious that I should be known.”  This differs from criminal recklessness and willful blindness, both of which include an objective element.  Nor is reckless disregard negligence, sine it requires “a high risk of harm, objectively assessed.”  It agreed with the Third Circuit in Bedrosian that recklessness is established if the taxpayer “(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.”

You probably know the background in Bedrosian.  As you may recall, Bedrosian claimed his former accountant, now deceased, told him about the FBAR requirements but told him since he failed to file in prior years, he didn’t have to file (I guess because he was “grandfathered” ?) Bedrosian subsequently filed an FBAR that reported only one of two accounts he had overseas.  The district court held that Bedrosian was not liable for the willful FBAR penalty, the Third Circuit held that a) the FBAR penalty is a penalty under the internal revenue laws, so that the district court did not have jurisdiction over the taxpayer’s suit for refund of a partial payment towards the penalty, b) the district court had jurisdiction over the Government’s counterclaim for the unpaid balance of the FBAR penalty, and c) the district court would have to consider whether the plaintiff acted willfully under the “reckless standard” based on other Third Circuit cases in the “taxation realm.” 

The second argument raised by the Horowitzes was that evidence did not support the district court’s determination.  The Fourth Circuit held this argument was hogwash.  The Horowitzes knew a significant part of their savings were in the foreign accounts; that income they earned in Saudi Arabia was taxable by the U.S. and that interest on U.S. accounts was taxable by the U.S. and gave their CPA information about the interest on their U.S. accounts each year.  Nevertheless, they never asked their CPA if foreign interest was taxable by the U.S. and never informed the CPA about their foreign account.  They did not give their U.S. mailing address to UBS and had their second Swiss bank hold  the mail.  Additionally, they failed to closely review their returns which reported they had no foreign accounts and signed the returns under penalties of perjury.  The Fourth Circuit held that the evidence clearly established that the Horowitzes “ought to have known” that they were failing to fulfill their obligation to disclose their Swiss accounts and could easily have found out that duty. 

The Horowitzes also argued that if they willfully failed to file FBAR returns, under the applicable regulations, the maximum penalty per year was limited to $100,000.  Joining the Federal Circuit, the Fourth Circuit rejected this argument, finding that the 2004 amendments to the civil FBAR penalty voided the regulation and Treasury’s failure to amend the regulation did not abrogate the statute.

Finally, the Horowitzes argued that the assessment  was not  timely.  The statute of limitations was June 30, 2014 and the IRS had made the assessment on June 13, 2014.  Subsequently, when the Horowitzes filed a protest with appeals, an IRS employee removed the assessment date without abating the assessment.   The Court held that the June 13, 2014 assessment was never abated or reversed and removing the assessment date did not change the date of the assessment.  Thus, the Court held that the assessment was. Timely.

Now to Bedrosian on remand: Surprise, surprise.  Applying the following description of the reckless standard for willfulness, the district court held that Bedrosian acted willfully (quoting from the Third Circuit’s opinion):

A person commits a reckless violation of the FBAR statute by engaging in conduct that violates an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.

After considering several Third Circuit cases involving the trust fund recovery penalty, the district court held that based on the evidence, including the following, “Bedrosian’s conduct was reckless and therefore willful”:

  1. Bedrosian cooperated with the Government “only after he was exposed as having hidden foreign accounts.”
  2. Bedrosian’s FBAR only disclosed one of two Swiss accounts and he moved the funds in the undisclosed account to a different bank rather than repatriate them.
  3. Bedrosian admitted he saw a Wall Street Journal article about the federal government tracking mail coming to the United States from overseas and thus was aware of the possibility it would learn of his offshore accounts if mail was sent to him by the Swiss bank.
  4. Bedrosian’s Swiss accounts were on “mail hold,” as he was undoubtedly aware of.
  5. His FBAR checked the box for having less than $1 million in the account when he knew the total in his accounts was over $1 million.

According to the district court, many of the circumstances cited by the Fourth Circuit in Horowitz were present in Bedrosian’s case:

  1. Bedrosian knew of the FBAR reporting requirements and the Horowitz’s knew they their world-wide income was taxed
  2. Both used mail holds for correspondence from their Swiss bank
  3. Both had significant amounts in their offshore accounts
  4. Both signed returns under penalties of perjury and representing that the answers were true.

The district court interpreted non-FBAR tax cases to “generally support that when a taxpayer is responsible for reviewing tax forms and signing checks, the taxpayer is responsible for errors that would have been apparent had they reviewed such forms and checks closely.”  Bedrosian knew there was more than $1 million his Swiss accounts but the FBAR form he signed checked the box for under $1 million.  He thus knew or should have known the form he signed was inaccurate and therefore acted willfully.  

Based on this standard of willfulness, anyone who signs a return that contains an error that he or she would have caught had the return been read over carefully, has willfully signed an inaccurate return.  I don’t know if that is what Congress had in mind when it used the word “willfully” in the FBAR statute but that is where it appears we have ended up.

The Government has been pushing the line that the FBAR penalty is assessed on an account-by-account basis.  Thus, a person whose failure to report several accounts is non-willful can be assessed a penalty of $10,000 for each unreported account.  Similarly, where a person willfully fails to report multiple accounts can be assessed a penalty equal to the greater of $100,000 or 50% of the value of the account. The Government won the first reported decision on multiple non-willful penalties, United States v. Boyd, (CD CA), appeal pending (9th Circuit).  On June 29, 2020, a district court judge in Texas held, in a thoughtful opinion, that the non-willful FBAR penalty is applied per FBAR form and not per account, so that a non-willful penalty cannot exceed $10,000 per year.  United States v. Bittner, 126 AFTR 2d 2020-5051 (E.D. Tex. 6/29/2020).

The defendant in Bittner was born in Romania, moved to the U.S. in 1982, became a naturalized U.S. citizen, and returned to Romania in 1990.  In Romania, he became a very successful businessman, operating several businesses and opening a number of foreign accounts.  He returned to the U.S. in 2011.  During the years he lived in Romania he had earned over $70 million.  Between 2007 and 2011 he had, at any one time, between 51 and 61 foreign financial accounts.  He did not file timely FBARs for these years, so the IRS assessed non-willful FBAR penalties against him totaling $2.72 million.  The Government sued to collect the penalties.  Because Bittner admitted to having a financial interest in some, but not all, of the accounts, the Government moved for partial summary judgment as to those accounts.  The penalties on the admitted accounts totaled $1.77 million.  Bittner filed a cross-motion for partial summary judgment. 

The Court framed the issue as:

Does the civil penalty provided by 31 U.S.C.  31 U.S.C. 5321(a)(5)(A) and (B)(i) for non-willful violation(s) of the regulations implementing 31 U.S.C. 5314 apply per foreign financial account maintained per year but not properly or timely reported on an annual FBAR, or per annual FBAR report not properly or timely filed?

The Court stated it was conducting analysis of the text of the statute in light of the statutory and regulatory framework in which it appears.  Since section 5321(a)(5)(A) provides for a penalty “on any person who violates, or causes any violation of, any provision of section 5314,” the question became what is a “violation” of the statute.  Under the regulations then in effect, “the form prescribe under section 5314 is the [FBAR] or any successor form which is to be filed on or before June 30 of the calendar year  for foreign accounts maintained during the immediately preceding calendar year.  According to the Court, the parties agreed that, based on this language, the failure to file the annual FBAR is the violation that triggers the penalty.  The dispute was whether, where there are multiple accounts, does the failure to file the FBAR form constitute a separate violation for each account or one violation.

            The Court looked to the language of  the willful penalty , which bases the amount of the penalty “in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.”  From this language, the Court concluded that Congress intended the willful penalty to be applied on an account by account basis.

            The Court then looked at the language of the non-willful penalty and the reasonable cause exception.  While the reasonable cause exception to the non-willful penalty was related to the “balance in the account,” the non-willful penalty itself did not contain any reference to “account” or “balance in the account.”   The Court presumed that Congress acted intentionally when it drafted the non-willful penalty language without these references.  Further, because the BSA aimed “to avoid burdening unreasonably a person making a transaction with a foreign financial agency,” an individual required to file an FBAR form was only required to file one report for each year.  As a result, “it stands to reason that a ‘violation’ of the statute would attach directly to the obligation that the statute creates – the filing of a single report – rather than attaching to each individual foreign financial account maintained.”  Additionally, no matter how many foreign accounts a person has the requirement to file an FBAR is only triggered if the aggregate balance in the accounts is over $10,000.  It thus made no sense “to impose per-account penalties for non-willful FBAR violations when the number of foreign financial accounts an individual maintains has no bearing whatsoever on that individual’s obligation to file an FBAR in the first place.”

            The Court rejected the government’s arguments that since the reasonable cause exception relates to the “balance in the account” the penalty must apply per account and that since the willful penalty applies on a per-account basis, so must the non willful penalty.  While Congress may have had good reason to assess the willful penalty on a per-account basis and look to the balance in the account to determine the applicability of the reasonable cause exception was no reason to conclude that it meant for the non-willful penalty to apply for a per-account basis given the statutory language.

            According to the Court, adopting its “per form” reading avoids the “absurd outcome that Congress could not have intended in drafting the statute.”  The Court used as an example of this absurd result two individuals with multiple offshore accounts with $1 million.  One had two accounts and the other had 20.  Even though both failures to file were non-willful, based on the government’s reading, the individual with 2 accounts would face a maximum penalty of $20,000 while the individual with 20 accounts would face a maximum penalty of $200,000.  As to the government’s argument that investigation costs increase with the number of accounts, the Court found this insufficient to overcome the statutory language, especially since an individual with 25 or more accounts would not have to list any of the accounts on the FBAR. 

The Court also rejected the government’s reliance on United States v. Boyd (CD CA) appeal pending (9th Circuit) since the Boyd court did not explain why it found the government’s interpretation more reasonable, the case was not binding precedent and the Court disagreed with it.  The Court ended its discussion of the issue as follows:

To conclude, Congress used the word “account” or “accounts” over one hundred (100) times throughout the BSA. But remarkably, it omitted any mention of “account” or “accounts” in § 5321(a)(5)(A) and (B)(i).  At the end of the day, the Court will not insert words into statutes that are not there. E.E.O.C. v. Abercrombie & Fitch Stores, Inc. , 135 S. Ct. 2028, 2033 (2015) (“The problem with this approach is the one that inheres in most incorrect interpretations of statutes: It asks us to add words to the law to produce what is thought to be a desirable result.  That is Congress’s province. We construe [a statute’s] silence as exactly that: silence.”); 62 Cases, More or Less, Each Containing Six Jars of Jam v. United States, 340 U.S. 593, 596 (1951) (“After all, Congress expresses its purpose by words. It is for us to ascertain-neither to add nor to subtract, neither to delete nor to distort.”); see also King v. Burwell, 135 S. Ct. 2480, 2505 [115 AFTR 2d 2015-2203] (2015) (Scalia, J., dissenting) (quoting Pavelic & LeFlore v. Marvel Entertainment Group, Div. of Cadence Indus. Corp., 493 U.S. 120, 126 (1989)) (“They made Congress, not this Court, responsible for both making laws and mending them. This Court holds only the judicial power-the power to pronounce the law as Congress has enacted it….  We must always remember, therefore, that ‘[o]ur task is to apply the text, not to improve upon it.'”).  Congress knew how to make the non-willful FBAR penalty vary with the number of foreign financial accounts maintained, but it did not do so.  That is the end of the road.

Finally, the Court determined that since Bittner did not file FBAR forms for the years in issue, the reasonable cause exception did not apply.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

The Due Process Protections Act (DPPA)[i], was signed into law and became effective October 21, 2020.  The DPPA effectively provides federal judges with greater supervisory authority over the federal government’s disclosure of exculpatory evidence in criminal prosecutions.

A prosecutor’s obligation to disclose exculpatory evidence to the defense after charging a defendant with a federal crime is not new.  In fact, it is both part of the due process obligations guaranteed to defendants under the Fifth and Fourteenth Amendments to the U.S. Constitution as well as clearly set forth in the U.S. Supreme Court’s 1963 decision in Brady v. Maryland[ii] mandating prosecutors disclose to the accused all “favorable” evidence that is “material either to guilt or to punishment” under the defense’s theory of the case.  The prosecutor’s duty to disclosure of exculpatory evidence to the defense is often referred to as the government’s Brady obligations.  A failure to provide the defense with Brady material in the possession of the prosecution team[iii] is deemed a constitutional violation, regardless of whether the individual prosecutor is aware of the evidence or not and despite whether the prosecutor acted in good faith or not.[iv]  Furthermore, the government’s Brady obligations exist even if the defendant does not specifically request the information.[v]

In technical terms, the DPPA amends Rule 5 of the Federal Rule of Criminal Procedure, which addresses Initial Appearances in Court by defendants, by creating new Rule 5(f), titled “Reminder of Prosecutorial Obligations”, which now provides:

  • IN GENERAL. — In all criminal proceedings, on the first scheduled court date when both prosecutor and defense counsel are present, the judge shall issue an oral and written order to prosecution and defense counsel that confirms the disclosure obligation of the prosecutor under Brady v. Maryland, 373 U.S. 83(1963) and its progeny, and the possible consequences of violating such order under applicable law.
  • FORMATION OF ORDER. — Each judicial council in which a district court is located shall promulgate a model order for the purpose of paragraph (1) that the court may use as it determines is appropriate.

While DPPA does not alter the substantive nature of the federal government’s Brady obligations nor does it mandate a national standard for the required oral and written orders, instead deferring to the judicial counsel of each circuit, of which, it should be noted, there are 12,[vi] it does require a consistent rule in each district and, under that rule, an order which will provide federal judges with enhanced supervisor authority over prosecutors and directly put federal prosecutors on notice of the possible consequences of violating their Brady obligations.  Additionally, although the DPPA does not mandate a specific timing for the disclosure of Brady information, and noting that current DOJ policy directs the government’s Brady disclosures be made in sufficient time to permit the defendant to make effective use of that information at trial,[vii] the DPPA is clearly intended to reinforce the message to federal prosecutors that the production of exculpatory material is a priority.  Now, with the additional requirements of a mandated Rule 5(f) court order, that message comes with judicial oversight and, where necessary, consequences to the government that include, but are not limited to, exclusion of evidence, adverse jury instructions, dismissal of charges, contempt proceedings and sanctions for noncompliance with a Rule 5(f) court order.

SANDRA R. BROWN – Ms. Brown has been a principal at Hochman Salkin Toscher Perez PC since March 2018.  Prior to joining the firm, Ms. Brown spent more than 26 years as a federal trial attorney, including serving as the Acting United States Attorney, the First Assistance United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown’s broad range of experience in complex civil tax controversies and criminal tax investigations and litigation includes having handled over 2,000 cases on behalf of the United States before the United States District Court, the Ninth Circuit Court of Appeals, the United States Bankruptcy Appellate Panel and the California Superior Court.  In addition to other honors, commendations and awards, Ms. Brown has received the Internal Revenue Service Criminal Investigation Chief’s Award and the IRS’s Mitchell Rogovin National Outstanding Support of the Office of Chief Counsel Award, respectively, the two most prestigious criminal and civil awards available for presentation by the IRS to a Department of Justice employee.

Ms. Brown represents individuals and entities on a national and local level in complex federal criminal investigations and litigation as well as sensitive civil tax controversy examinations and litigation matters.  Ms. Brown obtained her LL.M. in Taxation from the University of Denver, is a fellow of the American College of Tax Counsel, co-chair of the NYU Tax Controversy Section, and a member of the Women’s White Collar Defense Association.  Ms. Brown may be reached at brown@taxlitigator.com or 310.281.3217.     


[i] Pub. L. N. 116-182, 234 Stat. 894 (Oct. 21, 2020).

[ii] United States v. Brady, 373 U.S. 83 (1963).

[iii] Kyles v. Whitley, 514 U.S. 419, 437 (1995).

[iv] Id., at 87.

[v] United States v. Agurs, 427 U.S. 97 (1976).

[vi] See https://www.uscourts.gov/about-federal-courts/governance-judicial-conference.  Under 28 U.S.C. § 332, each circuit has a judicial council composed of chief judge and an equal number of circuit and district judges; Under sec. 28 U.S.C. § 41 there are 13 circuits: the DC Circuit, the

1st – 11th Circuits, and the Federal Circuit.  Since the Federal Circuit does not hear appeals in criminal cases, only 12 of the judicial councils will promulgate model orders.

[vii] Justice Manual § 9-5.001.

We hope you are all staying healthy and safe. It has been challenging year—but it looks as if we are starting to turn the corner.

Please join us Monday through Wednesday, January 25-27, 2021 for the USC Gould School of Law 2021 Virtual Tax Institute. This year’s Institute has a stellar line up of tax superstars.  Learn the latest tax law developments for corporations, privately-held businesses, individuals, partnerships and real estate transactions, and important ethics, compliance, enforcement and estate planning solutions.

We are very proud that three of our principals have been chosen to speak at this prestigious event:

  • Dennis Perez on Representing the High Income Non-filer in the New Non-filer Enforcement Environment
  • Michel Stein on Handling the IRS New Wealth Examinations-Lessons from the Past and Guidance for the Future
  • Sandra Brown on Why Your Client’s Chances of Criminal Prosecution and Civil Fraud Penalties has Dramatically Increased – The IRS New Office of Fraud Enforcement

The Institute is also excited  that two of the nation’s top tax officials, Michael Desmond, IRS Chief Counsel and  Erin Collins, IRS Taxpayer Advocate, will be giving keynote presentations.

For programming and registration details for the USC Gould School of Law 2021 Tax Institute Click Here.

We are pleased to announce that Evan Davis will be speaking at the upcoming LACBA webinar, “What to Do When the Feds Come Knocking: The Do’s and Don’ts” on Tuesday, December 8, 2020, 5:00 p.m. – 6:00 p.m. (PST).

Many industries are now regulated by government agencies.  Even companies not in heavily-regulated industries face the real prospect of government investigations if they received stimulus funds under the CARES Act.  Sooner or later, most companies will come into contact with representatives of law enforcement.  Being prepared is more important than ever before.  Companies and executives should be prepared when investigators “knock on your door.” 

Join a panel of experts to learn about these important topics:

  • Typical law enforcement investigative tools 
  • Responding to government subpoenas
  • Responding to search warrants
  • Department of Justice focus on company executives
  • Avoiding allegations of obstruction of justice
  • Be prepared: Takeaways for clients

Please join us. For full programming details Click Here.

We are pleased to announce the 37th Annual National Institute on Criminal Tax Fraud and the 10th Annual National Institute on Tax Controversy is going virtual and will be held on February 24-26th, 2021. As usual, we anticipate a line-up of all-star government and private practice practitioners discussing the cutting edge issues in civil and criminal tax enforcement. More to come.

The 37th Annual National Institute on Criminal Tax Fraud and the 10th Annual National Institute on Tax Controversy is the yearly gathering of the criminal tax controversy and criminal tax defense bar. This program brings together high-level government representatives, judges, corporate counsel, and private practitioners engaged in all aspects of tax controversy, tax litigation, and criminal tax prosecutions and defense. Please join us.

Click Here for More Information.

Bankruptcy ruins your credit score but comes with the promise of a clean slate, reducing or even wiping out debts including tax assessments.  However, to earn a discharge one has to reveal all assets and income, and the temptation to hide assets often proves too great for less scrupulous debtors.  Obtaining a discharge while secretly retaining substantial assets seems like a no-lose proposition.  Unless, that is, you get caught.  However, the consequences of getting caught for committing bankruptcy fraud historically haven’t been as bad as one might think, as often the most serious punishment was simply a denial of discharge of indebtedness.  The IRS’s trumpeting of relatively lengthy sentences such as the 18-month sentences below belies the truth, namely that such sentences are rare because bankruptcy fraud prosecutions are rare.

One of us (Evan) was the Bankruptcy Fraud Coordinator in the Los Angeles U.S. Attorney’s Office for a number of years, and was disappointed that bankruptcy crimes were so low on the FBI’s priority list that only a few investigations were approved each year in a judicial district whose 18-million-plus population is as large as New York State’s (the fourth most-populous state).  Given that IRS Criminal Investigations also did not work many bankruptcy cases, despite the existence of a specialized Bankruptcy Fraud Unit, this meant that bankruptcy crimes by and large went uncharged.  This enforcement gap frustrated just about everyone involved with the bankruptcy system, including judges and the Office of the United States Trustee, an arm of the Department of Justice charged with protecting the integrity of the system.  The US Trustee has personnel assigned to refer cases for investigation and to support any bankruptcy investigation and prosecution, which is a severely underutilized resource given how few bankruptcy fraud investigations take place. 

Because debtors typically owe taxes along with other debts, the IRS is often among the hardest-hit victims of bankruptcy fraud.  With so many tax crimes to prosecute and so few resources, this has not historically been an area of focus, however, for its Criminal Investigation division. 

Current IRS Commissioner Chuck Rettig has prioritized enforcement since taking office in late 2018, and one of his important reforms was to create a “Fraud Enforcement Office” in March 2020 to develop civil cases for referral to Criminal Investigations and to identify audits involving less severe conduct that should remain as civil fraud matters.  When the head of the Fraud Enforcement Office identifies focus areas, it’s a signal to IRS civil agents to look for viable criminal cases amongst their inventory, and to criminal defense counsel to expect more of that type of case in a year or two. 

Last week, Damon Rowe, head of the Fraud Enforcement Office, announced “Operation Liquidation,” which he said would focus on taxpayers who commit bankruptcy fraud as a means of cheating on their taxes.  He used an example familiar to those of us who have prosecuted or defended bankruptcy fraud cases – someone who transfers assets to a nominee shortly before filing bankruptcy with an unwritten agreement that the nominee would hold the assets until after discharge and then return them to the debtor.  If the debtor has a tax debt, this run-of-the-mill bankruptcy fraud (18 U.S.C. Section 152, concealment of assets) is two frauds in one, as it also is an attempted  evasion of payment of tax (26 U.S.C. Section 7201) at the same time. 

Commissioner Rettig has been beating the drum for more evasion-of-payment referrals from Revenue Officers and focusing on bankruptcy cases is a smart move.  Further, bankruptcy cases frequently offer something that standard Revenue Officer referrals do not: judicial findings that the debtor/taxpayer has committed fraud.  Where a judge has already found fraud and the debtor owes substantial tax debts, turning that case into a criminal investigation or civil fraud examination is almost a no-brainer.  Damon Rowe is a former Special Agent who just moved over from Criminal Investigation, meaning he knows which levers to pull on the criminal side including contacting Bankruptcy Fraud Coordinators with whom he no doubt interacted during his decades as a Special Agent.  Those who really pay attention will also note that the IRS refreshed the “Criminal Investigation Strategies” section of its bible, the Internal Revenue Manual, in August 2020 to further underscore that agents should be looking for criminal tax fraud within bankruptcy.  https://www.irs.gov/irm/part9/irm_09-005-003#idm139666666427792

As with all such operations, the real question is whether the IRS will devote its scarce civil and criminal fraud resources to these investigations.  We suspect that the IRS will decide that selecting from among cases where a judge has already found fraud and where the US Trustee is willing to assist, is akin to fishing with dynamite and they will soon have more good cases than they know what to do with.  This focus, added to the IRS’s increased use of data mining to select cases, cryptocurrency training for special agents, and increased enforcement resources under this Commissioner, means the IRS hopes to see a substantial uptick in the number and quality of criminal investigations from the low point a few years ago. 

Of course, whenever the IRS publicizes an increased focus and enhanced presence in any area of enforcement, it is not only the taxpayers who are put on notice; practitioners (in this case, bankruptcy lawyers) are also put on alert.  This serves the IRS’s continual goals of increasing compliance and providing practitioners with a point of contact for a client who may have an interest in reporting allegations of fraud in any particular area of interest to the IRS.

Like any federal crime, bankruptcy fraud, even more so if charged along with tax evasion, carries significant penalties, most notably a sentence of incarceration and an order of restitution, of which the later the IRS can hold a taxpayer accountable for up to 40 years. 

Perhaps merely being denied a discharge won’t continue to be the worst consequence that befalls taxpayers who try to use a bankruptcy filing to evade payment of taxes.              

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis has been a principal at Hochman Salkin Toscher Perez P.C. since November 2016.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division where he handed civil and criminal tax cases and eight years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, he received an award from the CDCA Bankruptcy Judges for combatting Bankruptcy Fraud and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. 

Mr. Davis represents individuals and closely held entities in federal and state criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud. 

SANDRA R. BROWN – Ms. Brown has been a principal at Hochman Salkin Toscher Perez P.C. since March 2018.  Prior to joining the firm, Ms. Brown spent more than 26 years as a federal trial attorney, including serving as the Acting United States Attorney, the First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown’s broad range of experience in complex civil tax controversies and criminal tax investigations and litigation includes having handled over 2,000 cases on behalf of the United States before the United States District Court, the Ninth Circuit Court of Appeals, the United States Bankruptcy Appellate Panel, and the California Superior Court.  In addition to other honors, commendations, and awards, Ms. Brown has received the Internal Revenue Service Criminal Investigation Chief’s Award and the IRS’s Mitchell Rogovin National Outstanding Support of the Office of Chief Counsel Award, respectively, the two most prestigious criminal and civil awards available for presentation by the IRS to a Department of Justice employee.Ms. Brown represents individuals and entities on a national and local level in complex federal criminal investigations and litigation as well as sensitive civil tax controversy examinations and litigation matters.  Ms. Brown obtained her LL.M. in Taxation from the University of Denver, is a fellow of the American College of Tax Counsel, co-chair of the NYU Tax Controversy Section, and a member of the Women’s White Collar Defense Association.  Ms. Brown may be reached at brown@taxlitigator.com or 310.281.3217.


Posted by: Robert Horwitz | November 23, 2020

Saved by Beard—Taxpayer’s Return Was Timely, by Robert S. Horwitz

I don’t mean the Seinfeld episode “The Beard” or the San Francisco Giants’ former closer, Brian “The Beard” Wilson.  I mean the Beard test for determining whether information provided the IRS constitutes a tax return.  Fowler v. Commissioner, 155 T.C. No. 7 (Sept. 9, 2020), involved the question of whether a Form 1040 electronically filed by the petitioner was a return and whether it was properly filed.  The facts in the case are simple:

Petitioner had been a victim of identity theft in 2013 and the IRS had sent him a Identity Protection (IP) PIN prior to October 15, 2014, the date his CPA transmitted the 2013 return.  Petitioner authorized his CPA to e-file the return and the CPA e-signed the return with his Practitioner PIN and electronically filed it with the IRS.  The CPA received a Submission ID from the IRS, acknowledging that the return had been received.  He then received notice that the return was rejected because it did not have an IP PIN.  A 2013 return with petitioner’s IP PIN was not transmitted to the IRS until April 30, 2015, and the return was processed by the IRS.  But for the inclusion of the IP PIN the April 30, 2015, return was identical to the October 15, 2014, return. 

After an audit, the IRS issued a Statutory Notice of Deficiency (SNOD) to the taxpayer on April 8, 2018.  He filed a petition with the Tax Court, claiming that the SNOD was barred by the three-year statute of limitations on assessment.  The petitioner and the IRS filed cross motions for summary adjudication on the issue of whether the SNOD was time barred.  The Tax Court granted petitioner’s motion.

Whether the SNOD was time barred turned on two questions: first, was the October 15, 2014 submission a required return and second, was it properly filed.  The Tax Court noted that Code defines return as “the return required to be filed by the taxpayer” and neither the Code nor the regulations expand on this definition.  Thus, in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d 793 F.2d 129 (6th Cir. 1986), the Tax Court established a three-part test to determine whether something is a return:

  1. Does the document purport to be a return and does it provide sufficient information to calculate the tax liability.
  2. Did the taxpayer make an honest and reasonable effort to satisfy the requirements of the tax laws.
  3. Did the taxpayer sign the return under penalties of perjury.

The Tax Court found it was clear the October 15, 2014, submission met the first prong.  To meet the second prong, the return must appear reasonable on its face; thus, a fraudulent return can satisfy this requirement, although a return having zeros on every line would not.  The earlier submission was identical but for the IP PIN accepted by the IRS and thus it met the second prong. 

The third prong, whether the return was validly signed, was the bone of contention.  The IRS argued that to be a valid signature a return must include the IP PIN.  The Tax Court noted that there was nothing in the regulations requiring an IP PIN.  Treasury. Reg. sec. 1.6695-1(b)(2) requires signing return preparers to electronically sign returns in the manner provided in forms and instructions.  There was no IRS guidance characterizing an IP PIN as a signature.  The instructions to the 2013 Form 1040 just state that the return must be signed with either a Self-Select PIN or a Practitioner PIN.  Petitioner’s CPA used the Practitioner PIN.  The Tax Court stated: “Just as taxpayers must comply with instructions referenced on IRS forms … the IRS cannot disavow the 2013 1040 instructions to accommodate its litigation stance.”  The taxpayer justifiably relied on IRS instructions and the October 15, 2014 submission was signed as required.

The Tax Court rejected the IRS’ argument that Internal Revenue Manual 10.5.3.2.15(3) required an IP PIN for a return to be valid.  That IRM provision states that an electronic return that is filed with a missing IP PIN will be rejected.  This, however, did not mean that petitioner’s submission struck out with the third Beard prong, since a return can be rejected for a number of reasons that do not affect its validity.  Thus, petitioner’s October 15, 2014, submission was a valid return.

The Tax Court then addressed the second issue, whether the return was properly filed.  The test is whether a taxpayer’s “mode of filing” complies with the IRS’s prescribed filing requirements.  A return is filed when it is delivered to the correct IRS office even if it is not accepted by the IRS or not processed.  Here the October 15, 2014 return was properly e-filed, even though it was rejected.  As a result, the SNOD was barred by the statute of limitations.

Associate Justice Oliver Wendell Holmes, Jr., wrote in Rock Island C.R.R. v. United States, 254 U.S. 141, 143 (1920) that “Men must turn square corners when they deal with the Government.”  It is good to see the IRS being required to cut a square corner when dealing with taxpayers. Contact

Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200.   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

IRS attempts to help cannabis industry taxpayers understand their tax obligations likely signal an increased interest in enforcement, according to practitioners.

Jonathan Kalinski of Hochman Salkin Toscher Perez PC told Tax Notes that the information in the FAQ is well known to the state-legal marijuana industry, but “’the IRS doesn’t just pop up — even though this is brief — a Q&A just for the heck of it.'”

To read full article Click Here.

Posted by: Taxlitigator | October 1, 2020

UCLA 36th Annual Tax Controversy Institute – October 20, 2020

Please join Sandra R. Brown, former Acting United States Attorney, as she moderates a panel featuring IRS Director of Fraud Enforcement Damon Rowe and IRS CI Special Agent in Charge Ryan Korner, entitled “What Every Practitioner Needs to Know to Protect Their Clients and Themselves From Civil Fraud Penalties and Criminal Investigations”, to be webcast on October 20, 2020 at 2:15-3:30 PM (PST). Also joining the panel are Nathan Hochman, former Assistant Attorney General, DOJ Tax Division and Evan Davis, former DOJ Tax Division trial attorney and Assistant United States Attorney, CDCA. This “can’t miss” panel is part of UCLA’s 36th Annual Tax Controversy Institute which annually brings together leading tax practitioners and government officials to discuss current topics in areas of civil and criminal tax controversy.  

Other “can’t miss” panels include:

  • Employment Tax Enforcement- How AB 5 Has Changed the Employment Tax World.
  • Handling the Case of the High Income Non-Filer—What to do….What to do?
  • Handling Your Tax Court Matter in the COVID-19 Environment
  • The Tax Problems Caused by COVID-19 and the Best Practices to Handle Them
  • “Handling the Cannabis Tax Examination—What is Different and What is Not”
  • LB&I’s New High Wealth Examinations-Is there Really Gold in Them Hills

For more information Click Here.

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