TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

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.

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 (6^th 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.

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 36^th 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.

Law360 — Included in Justice Ruth Bader Ginsburg’s monumental legacy are several tax opinions in which she addressed whether a California corporate
franchise tax violates the U.S. Constitution, how states can tax citizens and when employment taxes apply to baseball players’ back pay.

Justice Ruth Bader Ginsburg in a panel discussion at Georgetown University Law Center last October, part of a lecture series named for her. She appeared with former President Bill Clinton and former Secretary of State
Hillary Clinton.

For Full Article Click Here.

The 36th Annual UCLA Extension Tax Controversy Institute is right around the corner on October 20th. This year the Institute will be virtual and we have an all star line up of Government representatives and private practitioners who will discuss the cutting edge issues in tax controversy.

We are pleased to announce that Commissioner of Internal Revenue Charles P. Rettig will be giving a luncheon keynote on the state of the IRS.
Join us for an interview with the new Chief of the IRS Criminal Investigation Division Jim Lee and attend panel discussions with SBSE Deputy Commissioners De Lon Harris and Darren Guillot on the current state of examination and collection enforcement.

We will also have panels on the anticipated High Wealth examinations and the IRS approach to non-filers. We will conclude the day with an in-depth discussion of the IRS new Office of Fraud Investigations, including its new Director Damon Rowe and the Special Agent in Charge of the Los Angeles Field Office of the Criminal Investigation Division, Ryan Korner. 

Please join us. Click Here for more information.