The IRS has recently provided interim guidance to clarify actions IRS Examiners must take to analyze and document Currency Transaction Report (CTR) data during an audit.  The Guidance, which is effective immediately, will be incorporated into IRM 4.10.4, Examination of Returns, Examinations of Income.

Prior to incorporation, IRM 4.10.4 provided very little guidance on when and how to use the Financial Crimes Enforcement Network’s (FinCEN) Currency Transaction Reports. However, this new guidance assists examiners during an audit of a taxpayer’s returns and income.

The Guidance

Financial institutions are required to report all transactions of currency that exceed $10,000 by filing a FinCEN CTR. Information from this filing may be used by an examiner to decide whether to use additional auditing techniques, question sources of income for which tax has not been withheld, and generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.

The Guidance reminds examiners that while conducting the in-depth pre-contact analysis (during which examiners determine the scope of the audit), examiners should review Information Returns Processing Transcript Requests (IRPTR) for CTR data. However, when the information on an IRPTR does not provide enough information regarding the taxpayer’s CTR data, the examiner should request a FinCen Query (FCQ), which, if approved, will provide a full copy of the taxpayer’s CTR data.

An examiner may also request FCQ data when a CTR is not shown on the IRPTR. This request should be used when (1) there is an indication of fraud; (2) banking information is not located through traditional means; (3) there are an unusually large number of cash transactions or cash transactions that are of an unusually large amount; (4) a business’ activities remain consistent after a pattern of CTR filing stops; (5) there is suspicion of offshore bank accounts or entities;  or (6) when a whistleblower reports a third-party’s alleged unreported income or offshore banking activities

A CTR provides information that an individual was involved in a transaction that exceeded $10,000. It does not provide information as to who the money belonged to. To remedy this situation, the Guidance has provided the following actions an examiner should take to determine whether the individual names on a CTR is the taxpayer in question:

  1. The examiner must confirm the information on the CTR is for the taxpayer in question.
  2. The examiner must confirm the bank account on the CTR is the taxpayer’s, or whether the bank account belongs to an entity related to the taxpayer.
  3. The examiner must trace the transaction on the CTR to the taxpayer’s bank account.
  4. The examiner must determine the origin of the transaction.
  5. If the examiner is unable to establish a relationship between the CTR and taxpayer through an analysis of the financial accounts, the examiner should ask the taxpayer if they were involved in cash transactions over $10,000.
  6. If the examiner cannot trace the transaction and the taxpayer denies involvement in transactions over $10,000, the examiner may consider issuing a summons for the bank account listed on the CTR.

Examiners must document the steps taken to trace a CTR and their conclusions.

It is important to note that although the examiner will not provide a taxpayer with a copy of the CTR, a taxpayer can still obtain the information from the CTR by submitting a Freedom of Information Act Request.

This Guidance is a reminder to all taxpayers that large monetary transactions are tracked by the government and, more importantly, that the IRS is taking steps to insure that its agents are following proper procedures to utilize the rich treasure trove of data in its possession.

Taxpayers thinking of avoiding leaving CTR footprints by depositing smaller amounts of currency in their bank accounts – say $9,500 – should think twice.  Structuring bank deposits to avoid the CTR requirements is a felony punishable by prison.

STEVEN TOSCHER – For more information please contact Steven Toscher – Mr. Toscher is a principal at Hochman Salkin Toscher Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at

Posted by: mstein10 | July 29, 2019

Cryptocurrency Enforcement Is Here by: Michel R. Stein

For those who have failed to report their cryptocurrency transactions correctly — be warned.   The Internal Revenue Service (IRS) is paying attention.

IRS Virtual Currency Contact Letters

Beginning this month (July 2019), the IRS has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay tax from virtual currency transactions or did not report their transactions properly.  See IR-2019-132.  By the end of August, more than 10,000 taxpayers will receive these letters.  For taxpayers receiving these educational or soft letters, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A.  According to the IRS, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.  The letters point to appropriate information on, including which forms and schedules to use and where to send them.

The IRS states that the names of these taxpayers were obtained through various ongoing IRS compliance efforts.  It is likely that these names were obtained as part of the Coinbase, Inc. (“Coinbase”) Summons Enforcement proceedings, culminating with a District Court Order ordering Coinbase to produce documents on approximately 14,000 of its customers in response to the IRS’ petition to enforce its summons.  The court ordered Coinbase, the largest  U.S. based virtual currency exchange, to produce accounts with at least the equivalent of $20,000 in any one transaction type (Buy, Sale, Send or Receive) in any one year between 2013 and 2015, and to include: (1) Taxpayers’ identification number; (2) name; (3) birth date; (4) address; (5) record of account activity; and (6) all periodic statements of account.

Undoubtedly, the IRS has culled through this Coinbase information, in additional to information obtained through Third Party Settlement Organization (TPSO) required by the Form 1099-K reporting system, as part of its decision to send these letters.  In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a TPSO.  A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.  When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.

Previously in July 2018, the IRS announced a Virtual Currency Compliance campaign as part of its Large Business and International Compliance Campaign to, among other things, address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers.  The IRS says that it will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.  Virtual currency is an ongoing focus area for IRS Criminal Investigation. The Chief of the Criminal Investigation of the IRS recently announced that he anticipates the public announcement of criminal prosecutions of taxpayers who failed to report cryptocurrency transactions.

Back in 2018, we cautioned that the ordered release of this information is clear warning to all cryptocurrency customers that the IRS has the tools, means and fortitude to seek out and make an example of those who are not in compliance.  Today, we see that the IRS is in fact directing its resources to education and on the noncompliant taxpayer. Anyone out of compliance should be thinking long and hard about these issues. Taxpayers should consult with qualified tax counsel regarding the need to utilize the IRS voluntary disclosure practice and the availability of the qualified amended return exception to accuracy related penalties.

IRS Guidance on Virtual Currency

 The first and only guidance issued by IRS on the income taxation of virtual currency was IRS Notice 2014-21 (PDF).  The IRS Notice describes how existing tax principles apply to transactions using virtual currency in the form of answers to Frequently Asked Questions (“FAQs”).  The Notice states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.    The recent explosion of cryptocurrency has created challenging tax reporting issues with no further guidance from the IRS.  Whenever virtual currency is issued, received, spent, bought, sold, traded or given away — there is a potential tax impact.  Cryptocurrency is treated as “property” for tax purposes, which typically means gains or losses when disposing of virtual currency—in a realization and recognition event.  Anytime virtual currency is used to acquire goods or services, a taxable bartering transaction takes place.  Much has changed in the virtual currency world since 2014, and clearly much more guidance is needed.  The IRS anticipates issuing additional legal guidance in this area in the near future.

For a detailed discussion of the tax treatment of cryptocurrency, when virtual currency is bought, sold, exchanged for other currency, received through mining or received through a hardfork transaction, see the article Toscher & Stein, Cryptocurrency and IRS Enforcement – Get Ready for Uncle Sam to Look into your Digital Wallet, Journal of Tax Practice an Procedure, Feb.-March 2018.

Voluntary Disclosures for Virtual Currency

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution. See I.R.M. In November, 2018, the IRS issued memorandum addressing the process for all voluntary disclosures (domestic and offshore).  See Memorandum for Division Commissioners, Chief Criminal Investigation, November 28, 2018.  The Voluntary Disclosure procedures are designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to pay all tax due in respect of their noncompliance. The procedures provide taxpayers with exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations.  Noncompliance with respect to cryptocurrency may be corrected through a timely and complete voluntary disclosure.  Different compliance options exist depending upon the facts of each case.  Anyone lacking in compliance, should consult a tax professional with experience and expertise with these matters.

For more information about virtual currency tax reporting, the latest on IRS enforcement and potential voluntary disclosure options, we invite you to attend our presentation for Strafford Webinar entitled  “Tax Reporting of Cryptocurrency Calculating Basis, Income and Gain” scheduled for Thursday, August 29, 2019, 1:00 p.m. – 2:50 p.m. EDT/ 10:00 a.m. – 11:50 a.m. PST.

MICHEL R. STEIN – For more information please contact Michel Stein –  Mr. Stein is a principal at Hochman Salkin Toscher Perez P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.  Mr. Stein has significant experience in matters involving cryptocurrency enforcement and reporting, previously undeclared interests in foreign financial accounts and assets, the IRS Offshore Voluntary Compliance Program (OVDP) and the IRS Streamlined Filing Compliance Procedures. Additional information is available at

Internal Revenue Code § 6694 imposes a penalty on return preparers who understate a taxpayer’s tax liability. The amount of the penalty is $1,000 per return if the understatement is due to an “unreasonable” position.  § 6694(a)(1).  Under § 6694(b)(1), the amount is the greater of $5,000 or 75% of the income derived by the preparer from preparing the return if the understatement is due to

  • “a willful attempt” to understate the tax liability on the return, § 6694 (b)(2)(A), or
  • “reckless or intentional disregard” of tax “rules and regulations’.’§ 6694 (b)(2) (B).

In Rodgers v. United States, Docket No. 18-55009 (June 21, 2019), the Ninth Circuit held that “willful” under (b)(2)(A) does not include reckless conduct.  Instead, it requires “a conscious act or omission made in the knowledge that a duty is therefore not being met.” It reversed the district court’s determination that 5 corporate returns prepared by Rodgers willfully understated tax because the district court defined willful as including reckless disregard-

The Rodgers decision is “not for publication” and thus may not be cited as precedent under Ninth Circuit Rule 36-3.  It also does not discuss the facts in the case.  The district court’s 33-page Findings of Fact and Conclusions of Law fill in the details.  Rodgers is a tax attorney and certified public accountant who prepares tax returns.  He prepared returns for two individuals and three related corporations.  These returns substantially understated tax due to numerous errors.  Determining that the understatements were due to Rodgers’ willful or reckless acts and omissions, the IRS assessed fourteen penalties against him under §6694(b).  Rodgers paid part of the penalties and sued for a refund of the amounts paid and the abatement of the remainder.  The Government answered and counterclaimed for the balance owed.  Prior to trial, the Government conceded five of the penalties.  The district court was left to decide whether Rodgers was liable for penalties assessed with respect to the 2009 and 2010 returns prepared for each of the two individual clients and two of the corporate clients and the 2009 return for a third corporate client.

In its conclusions of law, the district court cited Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), for the proposition that “where willfulness is a statutory construct of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.”  The district court then held, as to the returns for each of the five taxpayers, that Rodgers “willfully” understated tax, listing for each return the numerous errors they contained.  The only difference between the district court’s discussion of Rodgers’ willfulness in preparing the individual returns and its discussion concerning the corporate returns is that with respect to the former the district court found that Rodgers had knowledge of specific provisions of the Internal Revenue Code but failed to apply them while in the case of the corporate returns the district court determined that Rodgers “knew of the operation” of the three corporations and failed to follow his office’s standard practice in preparing their returns.  The district court concluded by finding that Rodgers “willfully and recklessly” prepared the nine returns in question and was, therefore, liable for penalties under § 6694(b).

In support of its decision, the Ninth Circuit relied on its prior decision in Ritchey v IRS, 9 F3d 1407 (9th Cir. 1993), and “noted further” that “willful” in § 6694(b) has the same meaning as the definition used in § 7206.  According to the Ninth Circuit, under United States v. Bishop, 412 US 346 (1973), this “does not include recklessness.”  In Bishop, the Supreme Court held that “willful” for purposes of § 7207, a misdemeanor, has the same meaning as for purposes of § 7206(1):

The Court, in fact, has recognized that the word “willfully” in these statutes [the criminal tax provisions of the Internal Revenue Code] generally connotes a voluntary, intentional violation of a known legal duty.

412 US at 360.

The Richey case relied on in Rodgers was a § 6694(b) penalty case involving a return preparer previously convicted of aiding and abetting in the preparation of false and fraudulent returns in violation of § 7206(2).  The Government moved prior to trial for partial summary judgment on the ground that the conviction collaterally estopped Richey from asserting he was not willful.  The district court denied the motion and the jury returned a verdict in favor of Richey.  The Ninth Circuit reversed, noting that the issue was the same in both the criminal case and the civil penalty case: whether Richey acted willfully.  The Ninth Circuit held that the district court erred in denying the Government’s motion:

Furthermore, the term “willful” has the same meaning under both sections 7206 and 6694. Willfulness under section 7206 “simply means a voluntary, intentional violation of a known legal duty.”  United States v. Pomponio, 429 U.S. 10, 12, 97 S.Ct. 22, 23-24, 50 L.Ed.2d 12 (1976). Similarly, under section 6694(b) willfulness “merely requires a conscious act or omission made in the knowledge that a duty is therefore not being met.” Pickering v. United States, 691 F.2d 853, 855 (8th Cir.1982).

Neither Richey nor Rodgers articulates why the definition of “willful” for criminal tax purposes means the same for civil tax penalties.  In the context of the trust fund recovery penalty under § 6672, the Ninth Circuit has held that reckless disregard is sufficient to support a finding of willfulness, Phillips v United States, 73 F3d 939 (9th Cir. 1996); Leuschner v United States, 336 F2d 246 (9th Cir. 1964), even though criminal liability for failing to collect, account for or pay over withholding tax requires a finding of a “voluntary and intentional violation.”  United States v Easterday, 564 F3d 1004, 1006 (9th Cir. 2009); United States v. Gilbert, 266 F3d 1180, 1185 (9th Cir. 2001).

If the Ninth Circuit is of the opinion that, where criminal and civil liability for the same action require a finding of willful action or omission, the same definition of willful should be used, then the definition of “willful” articulated by the Supreme Court in Ratzlaff v United States, 510 US 135 (1994), involving a criminal violation of the structuring provisions of the Bank Secrecy Act, should apply to the parallel civil penalties contained in 31 USC § 5321, including the FBAR willful penalty.  The definition of “willful” articulated by the Supreme Court in Ratzlaff required the Government to prove that the defendant’s actions were voluntary and that the defendant knew his actions violated the law.  The only published appellate decision on the question of what constitutes willfulness for purposes of the civil FBAR penalty is Bedrosian v United States, 912 F. 3d 144 (3d Cir. 2018) (holding that willfulness for purposes of the FBAR civil penalty encompasses both knowing and reckless violations).  In a brief recently filed with the Fourth Circuit, the defendants in United States v. Horowitz urge the appellate court to apply the Ratzlaff standard and require a showing of actual knowledge to impose the willful FBAR penalty.

In a blog posted on January 2, 2019, I wrote about the district court’s decision in United States v. Flume, 122 AFTR 2d 2018-5641 (SD TX 2018), where the court denied the Government’s motion for summary judgment in an FBAR willful penalty case, specifically rejecting the theory that a taxpayer is deemed to have known of the FBAR requirement if he signed a tax return that checked the box “no” to the question of whether he had offshore accounts.  Flume’s victory was short lived.  On June 11, 2019, the district court issued an opinion holding that Flume was liable for the willful FBAR penalty.  123 AFTR 2d 2019-2211 (SD TX 2019).

In its opinion, the district court stated that willful for purposes of the FBAR penalty includes a knowing or reckless failure to file.  It found that Flume knew about the FBAR requirement but intentionally did not file reports listing his UBS accounts.  At trial, Flume’s two return preparers for 1999 through 2010 both testified that Flume told them about Mexican bank accounts but never told them about his UBS accounts, that they had never seen the general ledger for his business listing the UBS accounts, and that they sent him each year a form letter reminding him of his obligation to report all foreign bank accounts and financial interests.  The district court further found Flume’s testimony “not credible,” and full of “numerous indicia of dishonesty,” due, among other things, to the many contradictions in his testimony, the discrepancy between his testimony about when and how he learned of the FBAR requirement in a Tax Court case, in his deposition and at trial, and his explanation of why he understated the value of his UBS accounts in delinquent FBARs.  The court ended its opinion with the continued affirmance of its determination that “‘the constructive-knowledge theory is unpersuasive’ as a justification for penalties based on knowing conduct.”

We still have a long way to go before the willfulness standard for the FBAR willful penalty is resolved.   Besides the Horowitz case pending before the Fourth Circuit, there is the Kimble case pending before the Federal Circuit challenging a Federal Claims Court decision holding that constructive knowledge is sufficient to establish willfulness and rejecting the argument that the FBAR regulation caps the maximum willful penalty at $100,000.  So stay tuned.

Contact Robert S. Horwitz at 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

The Treasury Inspector General for Tax Administration Issued a report to the IRS Commissioner on  May 23, 2019 pointing the way to increasing the efficacy of its Information Referral  Program to increase tax compliance and raise revenue.

The IRS has long had a program where the public could report  to the IRS alleged non-compliance with the tax laws. IRS received almost 300,000 Information Referrals in the last four fiscal years.  These Information  Referrals, filed on Form 3949-A, can range from claims of false exemptions or deductions, unreported income or failure to withhold tax — employment or otherwise. These forms are processed at a central Service Center and reviewed by technicians or examiners depending on the complexity and if the information seems promising, the information is sent out to the appropriate business unit of the IRS for further review and action. These business units could include the Small Business Self Employed, the Wage and Investment Division or even the Criminal Investigation Division. Some of course – those that are not so promising — end up in “retention” for future possible use.

These are not informants’ claims for rewards (although there may be some duplication) but just individuals and businesses providing the IRS information on a confidential basis, such as a disgruntled employee or a competitor who believes it is at a disadvantage.

Figure 1, below, from the TIGTA Report reflects the number of Information Referrals received over the last four fiscal years.

Figure 1: Forms 3949-A Received in FYs 2015 Through 2018

FY Total Receipts
2015 89,213
2016 72,593
2017 67,046
2018 61,890
Total 290,742

Source: Form 3949-A Inventory Reports, as of September 29, 2018.

What is really interesting is the amount of tax assessments made based on these Information Referrals — more than $246 million in additional tax for the fiscal years 2016-2018. Moreover, examinations emanating from Information Referrals produce almost twice as much revenue per examination as other sources of examinations.  This suggests that random public information reporting may be one of the most effective mechanisms of finding non- compliance.

See Figure 4 c, below, from the TIGTA Report.

Figure 4: Form 3949-A Examinations vs Other Sources for Examinations for FYs 2016 Through 2018 

  SB/SE Division W&I Division
  Form 3949-A Other Sources of Examinations Form 3949-A Other Sources of Examination
Total Examinations 6,636 1,214,048 6,750 1,406,448
Total Assessments $200,571,550 $22,329,977,944 $46,425,181 $6,521,042,199
Average Assessment Per Examination $30,225 $18,393 $6,878 $4,637

Source: Accounts Information Management System – Centralized Information System Reports for W&I and SB/SE Informant Examination Closures and Other Examination Closures.

The TIGTA Report has some very good suggestions that the IRS has agreed to implement. These include an online Information Referral portal for taxpayers to use, better communication to the public through its website, and up to date computer tracking — it’s presently largely manual — of the processing and use of these forms.  One might also assume with the computerization of the process, the IRS will be utilizing data analytics to help further develop the program.

Some advice to taxpayers-keep your tax positions to yourself. Many people out there would love to share your secrets with the IRS — even if they aren’t looking for a reward.

STEVEN TOSCHER – For more information please contact Steven Toscher – Mr. Toscher is a principal at Hochman Salkin Toscher Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at

The general rule is that under IRC Section 6672(a), a person “required to collect, truthfully account for, and pay over any tax…who willfully fails to collect such tax, or truthfully account for and pay over such tax” (known as trust fund taxes) is liable for a penalty equal to the total amount of the tax not paid over—even if that person was directed by a superior to not pay the tax.[i]  In Myers v. United States, Docket No 1:16-cv-01792 (11th Cir. May 6, 2019)[ii], the Eleventh Circuit addressed the narrow question of whether there is an exception to that general rule where the order to not pay the taxes came from a government agency.  Holding that the rule applies the same, the Eleventh Circuit affirmed the lower court’s decision rejecting the defense of “my boss told me not to pay,” where the boss in question was the U.S. Small Business Administration (“SBA”), a government agency.

The plaintiff in Myers v. United States was the CFO and co-president of two newspaper publishing companies, which were both owned by a parent company that had been licensed by the SBA as a Small Business Investment Company.  The SBA is an agency of the federal government that helps small businesses in the U.S. to start, build, and grow, by providing loans, loan guarantees, contracts, counseling sessions, and other forms of assistance.[iii]  As a Small business Investment Company, the parent company could issue debentures guaranteed by the SBA, and in turn, the SBA had the power to place the parent company into receivership.

In 2008, after violating the terms of its Small Business Investment Company license, the SBA filed suit in the Southern District of New York to place the parent company into receivership.  The Southern District of New York took “exclusive jurisdiction” of the parent company and all of its assets—including the two newspaper publishing subsidiaries—and appointed the SBA as the parent company’s receiver.  As receiver, the SBA was given “all powers, authorities, rights and privileges…[enjoyed] by the general partners, managers, officers and directors” of the company.

The following year, while the parent company was under the control of the SBA, the newspaper publishing companies failed to pay the required payroll taxes to the IRS, which are trust fund taxes under Section 6672(a).  As CFO and co-president, Myers had signature authority on the companies’ bank accounts, knew the payroll taxes were due, and approved payments to other vendors instead of paying the taxes over to the IRS.  As a result, the IRS assessed the trust fund tax penalties against Myers.  Myers argued that he should not be liable for the penalties because he was told by the SBA—a federal government agency—to prioritize other vendors over the trust fund taxes; however, the Eleventh Circuit held that Section 6672(a) “applies with equal force when a government agency receiver tells a taxpayer not to pay trust fund taxes.”

LACEY STRACHAN – For more information please contact Lacey Strachan at Ms. Strachan is a principal at the law firm of Hochman Salkin Toscher Perez P.C. and represents clients throughout the United States and elsewhere in complex civil tax litigation and criminal tax prosecutions (jury and non-jury).  Ms. Strachan has experience in a wide range of civil and criminal tax cases, including cases involving technical valuation issues, issues of first impression, and sensitive examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise.  Additional information is available at

[i] See, e.g., Thosteson v. United States, 331 F.3d 1294, 1300 (11th Cir. 2003) (“Acting, or rather failing to act, under orders from his superior does not negate [a defendant’s] culpability under the statute.”); Brounstein v. United States, 979 F.2d 952, 955 [71 AFTR 2d 93-1714] (3d. Cir. 1992) (“Instructions from a superior not to pay taxes do[es] not… take a person otherwise responsible under section 6672(a) out of that category.”).

[ii] Myers v. United States, Docket No 1:16-cv-01792 (11th Cir. May 6, 2019), available at

[iii] U.S. Small Business Administration,

Administrative summonses are an important investigative tool of the IRS in fulfilling its statutory duty of “proceeding from time to time, through each internal revenue district and inquire after and concerning all persons who may be liable to pay any internal revenue tax.”  Internal Revenue Code (“IRC”) §7601(a).  Where a person served a summons fails to comply, the IRS can bring a summary proceeding to enforce the summons.  To obtain enforcement, the government must show (usually done by the affidavit of the IRS officer who issued the summons) that a) the summons was issued for a legitimate purpose; b) it seeks information that may be relevant to that purpose; c) the information sought is not already in the IRS’s possession; and d) the IRS has followed all administrative steps required by the I.R.C.  United States v. Powell, 379 U.S. 48, 57-58 (1964).  Once this Powell showing is made, the summoned party can only defeat enforcement if it can show that enforcement would be an abuse of process, 379 U.S. at 58, or another “appropriate ground,” including that the information sought is privileged or is sought for use in a criminal prosecution.  Reisman v Caplin, 375 U.S. 440, 449 (1963).

The courts, including the Supreme Court, broadly constructed the IRS’s summons power with respect to third-party record keepers, including so-called “John Doe” summonses.  Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 315-316 (1985).  Concerned that the use of John Doe and other summonses to third parties could “unreasonably infringe on the civil rights of taxpayers, including the right of privacy,” H.R. Rep. 94-658 at p. 307, Congress enacted IRC §7609.  This section instituted procedures requiring notice to taxpayers when a summons was issued to a third-party (with certain limited exceptions) and provides any person entitled to notice with a right to intervene in any proceeding to enforce the summons and a right to bring an action in district court to quash the third-party summons.  IRC §7609(a)(2), (b).

In the case of a John Does summons, the IRS does not know the identity of the taxpayer (or class of taxpayers) about whom it is seeking information.  Because this makes the service of notice on the taxpayer impossible, Congress required district court approval before a John Doe summons could be served.  H.R. Rep. 94-658 at p. 307.  Section 7609(f) provides that a summons that does not identify the person with respect to whose liability it was issued may only be served if the IRS establishes to the satisfaction of a court that:

(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,

(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

(3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

The IRS and the Department of Justice have set up additional safeguards with respect to a John Doe summons.  While non-John Doe summonses can be served after approval by the issuing IRS officer’s manager, see Internal Revenue Manual ¶ [2] (03/03/2017) and Exhibit m, n, a John Doe summons must be approved by IRS Area or Associate Area Counsel, who will then refer the matter to the Department of Justice.  Internal Revenue Manual ¶ [3], [4].  Before a proceeding is instituted in court for authorization to serve the John Doe summons, the summons must be approved by the Deputy Assistant Attorney General (Civil Trial Matters) of the Tax Division.  Department of Justice Tax Division Summons Enforcement Manual at §III.A.2.

This prolix preface gets us to the subject of this blog: Taylor Lohmeyer Law Firm PLLC v United States, 2019 WL 2124676 (WD Tex. 5/15/19), an action by a law firm to quash a John Doe summons issued for the names and other information relating to clients for whom the firm (between 1995 and 2017) “create[d] and maintain[ed] foreign bank accounts and foreign entities” that may have been used to hide taxable income.

Prior to service of this John Doe summons, the government petitioned the district court for an order authorizing it to serve the summons.  The petition was supported by a 30 page declaration from an IRS agent who had audited an unidentified client of the firm.  The IRS had assessed a deficiency of over $2 million tax on over $5 million of income the client had allegedly hidden through the use of “foreign accounts, foreign trusts, foreign corporations” set up by the law firm.  Attached to the declaration were more than 200 pages of exhibits, including memos from the law firm, letters between the law firm and firms in tax haven jurisdictions, transactional documents and excerpts from recorded interviews of both the taxpayer and a partner of the law firm.  It appears that the IRS obtained some documents because the taxpayer asserted reliance on advice of the law firm, thus waiving the attorney client privilege.  During the lawyer’s interview, he estimated that he had set up foreign entities for twenty to thirty other clients.  The lawyer died before the petition for service of the summons was filed.

In authorizing service of the summons, the district court determined that the requirements of §7609(f) had been satisfied.  The findings, made in an ex parte proceeding, cannot be challenged in a proceeding to enforce the summons.  United States v. Samuels, Kramer & Co., 712 F. 2d 1342, 1346 (9th Cir. 1983).  Because the government had met its burden under Powell to enforce the summons, the burden shifted to the law firm to establish that enforcement would be inappropriate.  The court held that the law firm failed to meet its burden.

The first claim of the law firm that the court addressed was that the affidavit submitted in support of the petition to serve the summons contained numerous inaccuracies.   In the court’s view, this was an attack on its finding in the prior proceeding that it was reasonable to believe that the persons about whom the information was sought failed to comply with the internal revenue laws.  Thus, it was not an issue that could be raised in the context of the enforcement proceeding.  Even if it could have been raised in the enforcement proceeding, the court held that issuance of the summons was proper.

The firm further argued that not only was the agent’s affidavit replete with misrepresentations, the audited taxpayer owed additional tax because he failed to follow the law firm’s advice.  According to the firm, it had reviewed the files of the clients for whom it had structured and maintained foreign grantor trusts and determined that all of them had followed the firm’s advice and thus did not owe additional tax.  The court viewed this argument as being two-fold: that enforcement would be an abuse of process and that the Government failed to meet the first two Powell requirements.   The court held that these allegations did not rebut the fact that investigating possible offshore tax evasion is a legitimate purpose and that the information sought is relevant to that purpose.  Because the law firm disavowed the implication the government acted with a sinister purpose, this undermined its claim of abuse of process.

The main issue raised by the law firm in opposition to enforcement of the summons was that providing the requested information would breach the attorney-client privilege.  The law firm did not produce a privilege log identifying any specific document or set of documents that were protected by the attorney client privilege.  The court held that the law firm could not use a blanket assertion of privilege but instead had to identify specific documents that it claimed were privileged.  The court noted that the identity of a client is not normally privileged except in those rare instances where the identity would be the “last link in an existing chain” of evidence that would likely lead to the client’s indictment.

The law firm argued that identifying the clients and services sought amounted to a violation of the attorney client privilege while the government argued that it was not seeking the advice given clients, just the identities of clients for whom the firm formed or maintained foreign entities or foreign accounts or assisted in foreign financial transactions and that the summons was tailored to avoid the attorney-client privilege.  [In fact, the summons sought more than taxpayer identities: an attachment to the summons contained 2 ½ pages of categories of documents sought.]

According to the firm, it had identified 32,000 documents that were responsive to the summons.  While given the opportunity to submit additional briefing on the attorney-client issue, the law firm failed to provide a privilege log specifying what documents it alleged were privileged and the reason for the claim of privilege.  The firm did produce redacted billing statements that indicated that it performed legal services and thus some documents sought were potentially privileged.  The court held that this was insufficient to establish that any specific documents sought were privileged.  Thus it ordered the summons enforced.

The court ended its discussion with the following observation:

As the Government suggests, “[u]pon this Court ordering enforcement of the summons, if Taylor Lohmeyer wishes to assert any claims of privilege as to any responsive documents, it may then do so, provided that any such claim of privilege is supported by a privilege log which details the foundation for each claim on a document-by-document basis.” Docket no. 7 at 8. Whether certain documents fit the Liebman argument the Firm advances is better decided individually or by discrete category.

As a result, the enforcement order may not be the end of the matter.  It will probably take a while for the firm and its counsel to review all 32,000 documents and provide a privilege log of those documents or categories of documents that are privileged.  If the law firm produces a privilege log and establishes that specific documents are privileged, it may still be able to keep the IRS from obtaining the documents.

Contact Robert S. Horwitz at 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


In 2010, Congress amended Internal Revenue Code (IRC) sec. 6201 by adding subsection (a)(4), which authorizes the IRS to assess and collect the amount of criminal restitution ordered for failure to pay any tax in the same manner as if the restitution was a tax.  The assessment could be made at any time after all appeals were concluded and the right to appeal from the criminal restitution order had expired.  The person against whom restitution was ordered could not challenge the restitution amount on the basis of the existence or amount of the underlying tax liability.  In Carpenter v Commissioner, 152 TC No. 12 (April 18, 2019), the Tax Court held that a payment schedule set by the district court in imposing restitution did not limit the IRS’s ability to assess or collect restitution.

Carpenter pled guilty to tax perjury (IRC 7206(1)) for 2005 and 2006.  He was sentenced by the district court to 27 months imprisonment and ordered to pay $507,995 restitution.  The district court found that Carpenter did not have the financial ability to pay a fine or interest on the amount of any penalty.  It ordered him to pay the restitution immediately but if he could not to so “he must pay $100 per month” until the restitution was paid.  Carpenter complied with the restitution payment schedule and, after his period of supervised release ended the court ordered that the unpaid restitution “be collected by civil means through the US Attorney’s Office.”  The US Attorney filed liens and levied Carpenter’s social security benefits.  The IRS, in the meantime, assessed the restitution, sent notice and demand for payment and followed with lien and levy CDP notices.  Carpenter protested on the ground that the IRS lacked authority to enforce the restitution order, could not initiate administrative collection action without a district court order and could not collect more than the amount set in the district court’s payment schedule.  He expressly waived his right to seek a collection alternative.  Appeals sustained the IRS’s collection action and Carpenter petitioned the Tax Court.

While the case was pending, the Tax Court in Klein v. Commissioner, 149 TC 341, held that sec. 6204(a)(4) was just a means to “facilitate bookkeeping.”  Thus, the IRS could not assess statutory interest and penalties under sec. 6201(a)(4), just the restitution amount.  The IRS therefore abated the interest and penalties assessed against Carpenter.   The Court further held that in enacting subsection (a)(4) Congress “expanded the authority to collect actively on criminal restitution orders following summary assessment,” including by exempting the assessment from the Code’s statute of limitations and limiting the ability to challenge the amount of restitution.  As a result, the IRS’s authority to assess and collect criminal tax restitution was independent of Title 18.

The Tax Court also rejected Carpenter’s argument that the district court‘s restitution order limits the amount the IRS could collect.  Although in restitution orders a district court can set a payment schedule which becomes part of a final judgement that may not be modified, Title 18 doesn’t require the IRS to obtain a court order before it can assess restitution.   Further, a restitution order is due immediately unless specified otherwise, including in the judge’s oral pronouncements at sentencing.   Where a court orders restitution is due only in accordance with a payment schedule and not immediately, the Government may only collect pursuant to the schedule.  But where the district court specifies immediate full payment, a payment schedule contained in the order does not limit the Government’s ability to pursue other means of securing the restitution amount.  At Carpenter’s sentencing the district court made it clear it did not intend to limit the IRS’s collection efforts.  The IRS acted properly in filing its notice of federal tax lien and in issuing its levy notice.  Further, under the statute Carpenter was barred from challenging the amount of restitution.  Appeals had considered all required matters and took into account the district court payment schedule and the US Attorney’s collection efforts.  Its determination was therefore sustained.

The Court ended by noting that although Carpenter did not propose any collection alternative, he could still do so outside of CDP by submitting an installment agreement request.

Restitution in a criminal case is meant to compensate the victims of a crime.  It is paid to the US Attorney and the restitution amount cannot be decreased or compromised.  As a result, regardless of the financial situation of a person convicted of a tax crime, neither the Department of Justice nor the IRS can agree to compromise a restitution order by settling for less than the full amount of restitution payable to the IRS.

Contact Robert S. Horwitz at 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

The Internal Revenue Service has broad authority to examine books and records and interview witnesses for the purposes of determining the liability of any person for taxes, penalties or interest and collecting any liability.  This authority includes the power to issue summonses, including to third-parties.  Under Powell v United States, 379 U.S. 48 (1964), the IRS is required to meet four requirements before a summons will be enforced: a) that the summons was issued for a legitimate purpose, b) the inquiry is relevant to that purpose, c) the information sought is not already in the government’s possession and 4) the IRS followed the procedures required under the Internal Revenue Code.  The IRS normally establishes these requirements by submitting a declaration from the agent conducting the investigation.

Because of the adverse impact an IRS audit could have on a taxpayer’s business or reputation, as part of the IRS Restructuring and Reform Act of 1998, Congress added subsection (c) to Internal Revenue Code sec. 7602, which provides that the IRS “may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.”  Although this provision has been part of the Internal Revenue Code, no published court of appeals decision has addressed what constitutes “reasonable notice in advance” until February 26, 2019, when the Ninth Circuit issued its opinion in J.B. v. United States, Docket No. 16-15999,

The taxpayers are “an elderly married couple.”  The husband  accepts appointments by the California Supreme Court to represent indigent criminal defendants in death penalty cases.  They had been audited for prior years, but in 2013 received notice from the IRS that they had been selected for a “compliance research audit” of their 2011 income tax return.  A compliance research audit is an in-depth examination that is so demanding that in 1988 Congress discontinued a similar program.  Briefly stated, it is the IRS equivalent of a proctology exam.

Included with the letter was an IRS publication, “Publication 1: Your Rights as a Taxpayer,” which had on page two a statement that the IRS normally deals with taxpayer and their authorized representatives directly, but sometimes seeks information from third parties.  After the letter, the IRS sent the taxpayers a document request.  The taxpayers responded by requesting that they be excused from the compliance research audit due to their advanced age and health and included declarations from the husband’s physician.  When the IRS refused the request, the taxpayers sued to stop the audit in district court.  Despite the pending suit, the IRS continued its audit, issuing a summons to the California Supreme Court seeking copies of all documents relating to payments to the husband in 2011.

The taxpayers first learned of the summons when their daughter, who was their representative, received notice of service by mail.  The taxpayers filed a petition to quash with the district court.  The district court found that the IRS satisfied the first three Powell requirements but not the fourth, since it determined that the statement about third party contacts in Publication 1did not constitute reasonable advance notice.  The district court reasoned that to constitute “reasonable advance notice” the notice had to be specific to a particular third party and not a general generic notice.  The IRS appealed to the Ninth Circuit.  The Ninth Circuit affirmed the district court holding that the IRS did not provide the required advance notice.

To interpret the phrase “reasonable notice in advance” the Ninth Circuit looked to Supreme Court cases interpreting notice provisions in other contexts: to be adequate, notice must be “reasonably calculated, under all circumstances, to apprise interested parties” and “afford them an opportunity to present their objections.”  According to the Court, this interpretation was consistent with both the context in which the phrase is used and the broader context of the Internal Revenue Code as a whole.  While the Code generally prohibits disclosure of taxpayer information, sec. 7602(a) allows disclosure to ascertain “’the correctness of any return, making a return where none has been made, determining the liability of any person … or collecting any such liability.’”  Sec. 7602(c) was meant to protect taxpayers from unnecessary third-party contacts.  The exceptions to the notice requirement ( a) pending criminal investigation,  b) a good cause belief notice will jeopardize the IRS’s collection efforts or subject a third party to reprisal and c) taxpayer authorization for the contact) showed that Congress meant to give the taxpayer a meaningful opportunity to respond to the IRS request.

The Court further held that “reasonable notice in advance” did not require the IRS to provide the taxpayer with a list of people it might contact in advance, since what notice is reasonable depends on the facts.  It rejected the IRS argument that the title of subsection (c)(1), “General Notice,” made the section ambiguous.  The Court found in the legislative history support for the proposition that Congress intended IRS to provide notice reasonably calculated to apprise taxpayers that the IRS may contact third-parties.  The Court also noted that Treas. Reg. sec. 301.7602-2 nowhere suggests that the notice requirement is satisfied by mailing Publication 1.

Finally, the Court rejected the IRS’s argument that other courts have endorsed the notice in Publication 1, finding that district courts that have addressed the issue evaluated the totality of the circumstances in determining whether reasonable advance notice was given and that the Second Circuit, in an unpublished summary order, embraced a “totality of the circumstances” approach to determine whether the IRS provided reasonable advance notice.

Based on the facts of the case, the Ninth Circuit held that Publication 1 did not provide the taxpayers with reasonable advance notice that gave them a meaningful opportunity to volunteer their own records to avoid third-party contacts.  It noted that while the holding was based on the facts of the case “we are doubtful that Publication 1 alone will ever suffice to provide reasonable notice in advance to the taxpayer.”

In this case, the only notice to the taxpayers was in Publication 1, which was sent independent of any request for information.  There was no evidence that the IRS ever provided any later notice, even after the taxpayers requested that the audit be halted and had not provided documents requested by the IRS.  Thus, under the circumstances, the notice provided in Publication 1 was not adequate.

The Court also pointed out that there was no urgency in the IRS requesting information, since the research audit is designed to help the IRS improve its tax collection system and not because there is a belief that the taxpayers may have underreported tax.  Further, the summons was issued two years after commencement of the audit, to the California Supreme Court, which was effectively the taxpayer’s employer, and the IRS knew that the documents sought were potentially covered by attorney-client privilege and other litigation-related privileges.  Further, the records sought were ones that the IRS would have expected the taxpayers to have and to provide once the dispute over whether they should remain in the research audit program was resolved.

Finally, the Court noted that given the ongoing litigation, the IRS had the opportunity to inform the taxpayers if they did not provide the documents it would contact third parties for the information.  The Ninth Circuit ended its opinion as follows:

The IRS must comply with its statutory obligation to

provide reasonable notice in advance of contacting third

parties. Courts are not in the position to prescribe the exact

form of notice that is reasonable in every circumstance.

Under the circumstances here, however, reliance on

Publication 1 was plainly unreasonable, and there are no

doubt numerous other circumstances where the IRS needs to

take further steps to provide the reasonable and meaningful

notice Congress mandated. When the IRS seeks information

from an employer of a party with whom it is currently in

litigation and much of the information sought is covered by

common law and state-recognized privileges, additional

reasonable measures must be taken to provide meaningful

notice and an opportunity to respond, in order to avert the

potential third-party contact.

Taxpayers rarely prevail in summons enforcement proceedings.  The National Taxpayer Advocate reported in her 2014 Annual Report to Congress that of 102 summons cases in that year, the IRS won 97, the taxpayers won 2 and the remaining 3 cases resulted in decisions upholding the summons in part.  It is thus impressive for a taxpayer to prevail in a summons case, especially one involving a universal IRS practice: to provide a taxpayer with Publication 1 and no further explanation of either the taxpayers’ rights or that the IRS may contact third parties as part of its audit or investigation.  The decision could lead to the IRS reevaluating how it provides notice to taxpayers of potential third-party contacts.

Contact Robert S. Horwitz at 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




While many people are familiar with the phrase “Cash is King,” dealing in cash can, and often does, take on new meaning when it comes to the IRS. There is, of course, the obvious obligation to ensure that any, and all, cash received as income is properly reported annually on the appropriate tax return. However, that annual filing is not all that is required for some individuals and businesses who deal in large sums of cash. Specifically, for those who, in the course of a trade or business, receive more than $10,000 in cash in one transaction or in two or more related transactions, there are also obligations to file a Form 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business.[1]

In light of the IRS’s not one, but two, recent announcements regarding Forms 8300, now is a really good time to focus on understanding and ensuring that such obligations are being met.

On February 21, 2019, the IRS issued IR-2019-20[2], urging businesses with obligations to file reports of cash transactions to take advantage of the speed and convenience of filing Forms 8300 electronically. Once the account is set up with the Financial Crimes Enforcement Network’s (“FINCEN”) BSA E-filing System, a business’s e-filing is not only faster and more convenient, but a free way to meet reporting obligations with the added benefit of receiving an automated acknowledgement of the receipt of your filing, which can come in handy should the IRS ever question your timely compliance with this obligation. Of course, businesses also have the option to file the Form 8300 on paper by mailing the form to the IRS at: Detroit Computing Center, P.O. Box 32621, Detroit, Michigan 48232.

Also, on February 21, 2019, the IRS released a fact sheet, FS-2019-1[3], to assist individuals and businesses to better decipher, among other things relevant to cash transactions, exactly who is covered, as well as what is considered a reportable cash transaction, for purposes of the Form 8300 reporting requirements.

For the purposes of Form 8300, the “who” is defined as an individual, company, corporation, partnership, association, trust or estate. Tax-exempt organizations which receive cash solely for the purposes of a charitable cash contribution need not file a Form 8300.[4] The “what” is reportable as cash is actually a bit broader than just dollar bills. Reportable transactions include coins, currency (U.S. or foreign), cashier’s checks, bank drafts, traveler’s checks, and money orders with a face value of $10,000 or less. However, a transaction which involves a personal check drawn on an account of the payor or cashier’s checks, bank drafts, traveler’s checks or money orders with a face value of more than $10,000, is not considered a cash transaction. It is also important to understand that not only is the receipt of a lump sum payment of cash in excess of $10,000 a reportable transaction, the receipt of cash in excess of $10,000 which is received in what is viewed by the IRS as a “related” transaction, e.g., amounts in excess of $10,000 which are broken down into smaller payments, but are part of the same business transaction, is also required to be reported. As such, cash payments, albeit not received in one lump sum, but which are received within a 24-hour time period and total in excess of $10,000, are related transactions and reportable on a Form 8300. But that’s not all. Even if cash, received in a trade or business, is paid over a time period which exceeds 24-hours but where the recipient either knows, or has reason to know, that each cash transaction is part of a series of connected transactions whereas if paid all at once would exceed $10,000, then the series of connected payments are considered by the IRS to be related transactions and thus, are also reportable on a Form 8300.  In all such circumstances, the recipient of the funds is required to file, by the 15th day after the date the cash transaction, or related transactions, occurred.

Lastly, it is of note that the IRS’s Form 8300 fact sheet ends with both a reminder and a cautionary note. The IRS is reminding businesses that they must give a customer written notice by January 31 of the year following the transaction that it filed Form 8300 to report the customer’s cash transaction, which also means that it is a good practice to keep a copy of every Form 8300 filed, whether done electronically or in paper form. Additionally, businesses are being warned that, while they may voluntarily file a Form 8300 to report a suspicious transaction below $10,000 which they suspect is being done in such amount to cause the business to avoid filing a Form 8300, the law prohibits the business from informing a customer that it marked the suspicious transaction box on the Form 8300.

For more information regarding the filing of Form 8300, including potential civil and criminal penalties for failure to properly comply with these cash reporting obligations, the IRS has also published a Form 8300 Reference Guide.[5]


Sandra R. Brown  ~ is a principal at Hochman Salkin, Toscher & Perez P.C., and specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.  Prior to joining the firm, she served 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 may be reached at or 310.281.3200.





[4] Donors should consult Publication 526, Charitable Contributions regarding instructions on requirements for obtaining a written acknowledgement of cash contributions from tax-exempt organizations. The latest version of Publication 526 can be found at:



The United States Sentencing Commission  recently released a study of sentencing of federal offenders convicted of economic crimes.  The study included within the category of “economic crimes” thus sentenced under §2B1.1 of the United States Sentencing Guidelines (USSG), tax crimes and identity theft.  Tax crimes encompass Title 26 (Internal Revenue Code) violations, conspiracies to defraud the United States of taxes, and the use of stolen identities for filing tax forms (stolen identity refund frauds).

The study focused on offenders sentenced during the fiscal year ended September 30, 2017, but also included some data for fiscal 2013 through 2016.  Some interesting tidbits from the report include:

  1. The median loss of all crimes studied was just over $100,000. Four categories of crimes had over $700,000 median loss:  securities & investment crimes – $2.1 million; health care fraud – $1.08 million; mortgage fraud – $999,000; government procurement fraud – $739,000.  With an average loss of $398,000, tax fraud was well above the median  for all economic crimes but well under the median amounts for the four top categories of economic crimes.
  2. 1% of all federal defendants sentenced in FYE 2017 were sentenced for economic crimes. Tax crimes accounted for less than 5% of all defendants sentenced for economic crimes, or less than 0.5% of all defendants sentenced in fiscal 2017. The two categories of crimes that accounted for most defendants sentenced: drug crimes at 30.6% and unlawful entry into the US (25.5%).
  3. Tax crimes made up the following percentages of defendants sentenced between FYE 2013 and FYE 2017:

2013                2014           2015           2016           2017

2.8%                3.8%           4.5%           5.4%           4.5%


  1. The Ninth Circuit, which includes federal district courts in California, accounted for almost half of all defendants sentenced in federal criminal cases in 2017 (44.6%) but only 13.1% of defendants convicted of economic crimes.
  2. The Central District of California accounts for 31.5% of economic crimes sentenced in the Ninth Circuit in 2017 with 251 defendants, which is more than half of the total numbers in the Second Circuit (which includes New York) or the Seventh Circuit (which includes Illinois). Los Angeles leads the way in prosecuting economic crimes.
  3. Tax offenders made up 4% of all federal defendants sentenced for economic crimes in the Ninth Circuit in fiscal 2017. More defendants were sentenced for tax offenses in the Central District of California than in the other three districts in California combined.
  4. The Circuit with the most tax offenders sentenced in fiscal 2017: the Sixth Circuit (Michigan, Ohio and Kentucky), over half of whom were in the Western District of Michigan (think Kalamazoo). There were more defendants sentenced for tax offenses in the Western District of Michigan than in the Third Circuit (which includes Pennsylvania), the Second Circuit (which includes New York), the DC Circuit or the Seventh Circuit (which includes Illinois).
  5. Of defendants sentenced in FYE 2017 for tax crimes, 21.7% were in the 11th Circuit, 22.4% in the 6th Circuit and 11.8% in the 9th
  6. The race of persons sentenced for tax crimes in 2017 were: blacks (55.5%), whites (28.8%) and Hispanic (12.2%).
  7. Women accounted for 13.4% of all defendants sentenced in 2017, but 32.7% of defendants sentenced for economic crimes and 36.8% of defendants sentenced for tax crimes.
  8. The median age for tax offenders was 44; 23.5% had college degrees, 41.5% had some college but didn’t graduate; and the rest (35%) had no college.
  9. The study also looked at sentencing adjustments applied in economic crime cases. The frequency with which adjustments were applied to tax offenders sentenced in 2017:


Victim Adjustment (includes a person whose identity

is used unlawfully or without authorization)                          36.4%

Sophisticated means enhancement                                19.9%

Aggravating Role enhancement                                               13.2%

Mitigating Role enhancement                                         5.5%

Abuse of Trust/Use of Special Skill enhancement                   17.3%


  1. The sentencing guidelines have offender history categories, which is the number of prior convictions a defendant has. Category 1 (0 or 1 prior offense) is the lowest category.  The higher the category, the higher the potential sentence.  Over half of economic crimes offenders sentenced in 2017 fell into Criminal History Category 1, the highest percentage of any category of crimes.  7% of tax offenders were in category 1.
  2. At sentencing, offenders convicted of economic crimes had the lowest percentage incarcerated (66.3%) compared to 88% for all federal offenders sentenced in 2017 and the highest rate of probation only (20.8% versus 6.9% for all federal offenders). For tax offenders, the percentages were as follows:

Prison only                              71.7%

Prison and confinement           11%

Confinement and probation    6.3%

Probation only                         10%

  1. For those offenders sentenced, the average for all economic offenders in 2017 was 23 months in prison. This compares to an average prison term of 45 months for all federal offenders sentenced to a term of imprisonment.  The average period of imprisonment for tax offenders sentenced to prison was 31 months.

Part of the reason that tax statistics skew they way they do based on race, education and length of sentences is that stolen identity refund fraud is included in the sentencing statistics.  Many of these cases involve organized criminal gangs that obtain stolen identity information (name, social security number, etc.) and, using that information, file false returns to obtain refunds.

Note that the statistics reported by the USSG do not jibe with IRS Criminal Investigation’s statistics about percentage of defendants sentenced to prison and average term of imprisonment.  This is because CI investigates Bank Secrecy Act violations and money laundering and is involved in public corruption and drug prosecutions, among other non-tax crimes.

Contact Robert S. Horwitz at 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


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