TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

AGOSTINO & ASSOCIATES –To download a great article prepared by our very close friends at the Law Firm of Agostino & Associates in Hackensack, NJ ( http://www.agostinolaw.com ), see the Agostino & Associates Newsletter – http://files.constantcontact.com/f7d16a55201/ab897fa2-b252-47cc-ba92-138337eb9269.pdf

Invoking the Fifth Amendment in Audits With Offshore Issues: Required Records Under The Bank Secrecy Act, Greenfield, and Continuation Penalties by Frank Agostino, Esq. and Lawrence A. Sannicandro, Esq. – The Internal Revenue Service (“IRS”) continues to deliver on its promise to audit taxpayers who made quiet disclosures, who imprudently entered into the Streamlined Filing Compliance Procedures (“Streamlined Program”), or who never disclosed offshore accounts. These audits, which are typically based on third-party information received under the Foreign Account Tax Compliance Act (“FATCA”), tax information exchange agreements, or as a result of the Swiss Bank Program, require a special strategy because the third-party information that triggered the audit (whether right or wrong) usually supports the conclusion that the taxpayer violated U.S. law. Practitioners handling audits with undisclosed offshore accounts must be especially proactive in asserting all applicable privileges, including the Fifth Amendment privilege against self-incrimination.

This article explains that tax professionals handling offshore audits should assert all applicable privileges, including the Fifth Amendment privilege against self- incrimination, when submitting to an IRS interview or responding to a summons or an information document request (“IDR”).

Then, this article discusses three common situations in which a taxpayer may rightly invoke his or her Fifth Amendment privilege against self-incrimination during an audit with offshore issues.

1. The first situation is in response to an IDR or a summons by the IRS seeking information with respect to foreign bank accounts. In this regard, the Court of Appeals for the Second Circuit’s recent decision in United States v. Greenfield breathes new life into Fifth Amendment objections to some, if not many, of the documents the IRS routinely requests in an offshore audit.
2. The second situation is during IRS interviews, especially where the revenue agent possesses third-party information suggesting a violation of the internal revenue laws but refuses to disclose the specifics of that information.
3. The third situation is in response to revenue agents’ requests for taxpayers to file past due international information returns to avoid continuation penalties. On this point, a recent Order by the United States Tax Court (“Tax Court”) in Youssefzadeh v. Commissioner supports that a line-by-line assertion of the Fifth Amendment privilege on delinquent foreign information returns is a viable alternative to filing a potentially inculpatory information return.

GREAT ARTICLE!! FOR THE FULL ARTICLE SEE http://files.constantcontact.com/f7d16a55201/ab897fa2-b252-47cc-ba92-138337eb9269.pdf

AGOSTINO & ASSOCIATES, with a national practice based in Hackensack, NJ, specializes in tax and tax controversies (civil and criminal), offers in compromise, voluntary disclosures, tax lien discharges, innocent spouse determinations, forfeitures, estate planning and probate, contract and contract litigation.  A firm comprised truly great, caring people who want the best for their clients !

For further information, contact Frank Agostino or Lawrence A. Sannicandro, Esq.- directly at (201) 488-5400 or visit http://www.agostinolaw.com

In a strange set of facts, the Tax Court reconsidered a prior decision because one of the IRS’ experts lied in his report and testimony, but the outcome remained the same. On November 19, 2015, the Tax Court issued a Memorandum Opinion in AD Inv. 2000 Fund LLC[1], in favor of the IRS, holding that a currency option transaction lacked economic substance.  The trial testimony consisted primarily of expert witnesses, two for the IRS, one for Petitioner.  In an unrelated subsequent Tax Court case[2] (Tucker v. CIR), it was discovered that one of the IRS’ witnesses in AD Inv. 2000lied in both his expert report and his trial testimony regarding his expert qualifications.  Voir dire in the Tucker case revealed that the expert failed to update his curriculum vitae with respect to certain aspects of his employment history and the trial in which he had testified in.  Under Tax Court Rule 143(g), experts are required to include in their report a list of all cases during the previous 4 years that they testified as an expert at trial or by deposition.

Petitioner in AD Inv. 2000 filed a motion to vacate, on the grounds the expert lied. Respondent, perhaps surprisingly, did not object.  In reconsidering its decision, and ignoring the expert’s report, the Court reentered decision for the IRS.[3]  In the first decision, the Court made 5 principal findings, two of which were made on the basis of expert testimony.[4]  The Court, however, determined that there was corroborating testimony from other experts, and therefore, the outcome does not change.

Although this case ultimately did not cost the IRS a favorable decision, practitioners should learn the lesson to thoroughly vet your expert and their report.  In the Tax Court, an expert’s direct testimony is his or her expert report.  Expert reports must include the following:

1. Complete statement of all opinions the witness expresses and the basis and reason for them;
2. The facts or data considered by the witness in forming them;
3. Any exhibits used to summarize or support them;
4. The witness’ qualification, including a list of all publications authored in the previous 10 years;
5. A list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
6. A statement of the compensation to be paid for the study and testimony in the case.

Experts can make or break a case. Make sure your expert is qualified, and that his or her report follows the rules.  Just as important, make sure the IRS’ witness is qualified.

JONATHAN KALINSKI specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world. He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court in Washington, D.C.

[1] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.

[2] Tucker v. Commissioner, T.C. Dtk. No. 12307-04.

[3] AD Inv. 2000 Fund LLC, T.C. Memo. 2016-226.

[4] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.

In a closely watched decision by the Supreme Court issued today, the Court unanimously sided with the Ninth Circuit over the Second Circuit when it determined that, to prove securities fraud against a “tippee” who receives an insider tip, the government is not required to show that the “tipper” received anything tangible in return.  https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf   

The decision slams the door shut on the Second Circuit’s approach, announced in 2014 in the case United States v. Newman.  In Newman, the Second Circuit broke with other Circuits – and, it turns out, Supreme Court precedent – when it determined that, when prosecuting a tippee, the government must demonstrate that an insider who gives a tip to a friend or relative must receive something valuable in return.  The Supreme Court had previously decided that a tipper must receive a personal gain, and had suggested that personal gain could simply be to help the tipper’s friend or relative.  The Newman court ignored the Supreme Court’s suggestion and said that the tipper must receive at least a potential gain in money or something else valuable, in exchange for the tip.  The Second Circuit’s decision was the first to give “teeth” to the personal-benefit element.   

Soon after Newman, the Ninth Circuit hewed to the literal reading of Supreme Court precedent later in United States v. Salman, and the Supreme Court agreed with this approach today.  As the Supreme Court explained, it would be illegal for an insider to trade on inside knowledge and then give the trading proceeds to a friend or relative as a gift.  Therefore, according to the Supreme Court, it is illegal for an insider to tip off a friend or relative with the expectation that the friend or relative will then trade on the tip and pocket the gain directly.  Characterizing this simple test as a “commonsense point,” the Court defanged the personal-benefit element and noted that the jury instructions retain safeguards to ensure the government does not overreach with its securities-fraud prosecutions. 

As the former Securities Fraud Coordinator for the U.S. Attorney’s Office, I was particularly interested in how short the opinion was, and how little regard the Justices appeared to have for the Second Circuit’s Newman decision.  However, the Supreme Court’ did not address Newman’s second controversial holding – that the government must demonstrate that the tippee on trial knew about the tipper’s personal benefit.  This knowledge can be very difficult for the government to prove with “remote” tippees, who may be many steps removed from the initial tip.  The Department of Justice is no doubt looking for such remote-tippee cases in other circuits to attack this “knowledge of the personal benefit” holding in Newman by creating a circuit split that only the Supreme Court can resolve.  Stay tuned. 

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division. 

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

The 2016 ABA 33rd Annual National Institute on CRIMINAL TAX FRAUD and Sixth Annual National Institute on TAX CONTROVERSY being held December 7-9 at the WYNN HOTEL in Las Vegas – EVERYONE IS INVITED TO ATTEND!

The National Institutes represent the annual gathering of the criminal tax defense bar and civil tax dispute practitioners. 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.Curriculum topics include:

• Roundtable discussions with senior officials from the IRS and the Tax division of the U.S. Department of Department
• Strategies for experienced practitioners when representing clients in examination, at appeals, and during criminal investigations
• Breakout sessions focused on civil tax controversy and criminal tax defense strategies
• Advice from judges on what they want to hear from you

The Low Income Taxpayer Assistance Workshop (coordinated by Frank Agostino), Civil Tax Workshop and Criminal Tax Workshop will be held on Wednesday, December 7 and the National Institutes will be held on December 8-9 (concluding on Friday, December 9 no later than 1:00 p.m.).

The Annual Maggiano’s Reception (coordinated by Larry Campagna) and the Woman’s Networking Event (coordinated by Jenny Johnson) will be held on Thursday Evening, December 8.

The AGENDA and brochure are available at http://www.americanbar.org/content/dam/aba/events/cle/2016/12/ce1612ctf/ce1612ctf_brochure.authcheckdam.pdf

REGISTRATION information is available at: http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=255363497 (If the link doesn’t work, search 33rd Annual National Institute on Criminal Tax Fraud and the ABA site should come up for you).

HOTEL INFORMATION: Wynn⃒ Encore Las Vegas, 3131  Las Vegas Boulevard South, Las Vegas, NV 89109

Hotel Reservations can be made by calling the hotel directly at 866.770.7555 or online at  https://aws.passkey.com/event/15062747/owner/18530/landing

In an IRS Counsel advisory email, the Service interpreted Code Section7605 (b) to determine that “routinely” looking at an individual taxpayer’s returns a “number of times” does not amount to an examination of the return, and thus does not trigger the restriction in IRC Section to only conduct one examination.

Under Code Section 7605(b), “no taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.”

Under Internal revenue Manual (IRM) 4.10.2.2, repetitive audits is a factor that must be considered before an in-depth pre-contact analysis is performed (other factors are statute of limitations, conflicts of interest, and repeat audits by the same examiner are other considerations). Consideration of these factors should be given and may prevent examiners from even initiating an examination.  Additionally, after considering these factors, the examiner is also responsible for determining the scope of the audit, and must conduct a pre-contact analysis including a thorough review of the case (See IRM 4.10.2.3).  Under IRM 4.10.2.3.2, for non-business returns, the pre-contact actions required include completing a preliminary t-account analysis for office examination returns with a Schedule C or F.

Under IRM 4.10.2.13, the Service sets forth procedures for when examinations are repetitive. Repetitive audit procedures apply to individual tax returns without a Schedule C or Schedule F, when the following criteria are met:  a) An examination of one or both of the two preceding tax years resulted in a no change or a small tax change (deficiency or overassessment), and b. The issues examined in either of the two preceding tax years are the same as the issues selected for examination in the current year.  Prior year surveys do not meet the criteria for repetitive audit procedures.

IRS Counsel’s position is not a particular surprise given the Service’s procedural position in Rev. Proc. 2005-32 that the following items are excluded from examinations: 1) looking at the return; 2) matching the return with other records in the Service’s position; or 3) considering voluntarily provided information.  Moreover, while the Counsel advice memorandum does not set forth the specific facts involved, it notes that the repetitive audit procedures apply to individual returns without a schedule C or Schedule F.  Accordingly, the determination appears consistent with both the IRM and Rev. Proc. 2005-32.

While not particularly new, this interpretation is maintained when high income taxpayers are being audited a disproportionately higher rates than low income taxpayers. For instance, in 2014, taxpayers with adjusted gross income of between $1 and $200K had an examination coverage of under 1%, but examinations of higher-income returns had much higher percentages of cover:  $200K-$500K (1.75%); $1M – $5M ($3.62%); $5M-$10M (10.53%); and $10M or more (16.22%).  See https://www.irs.gov/uac/soi-tax-stats-examination-coverage-individual-income-tax-returns-examined-irs-data-book-table-9b.  While the Service is doing what it can with limited resources, and under particularly high scrutiny from Congress, repeatedly stopping taxpayers solely for “looking at the return” at some point should amount to “unnecessary examinations or investigations” under the Internal Revenue Code.  Take the opposite situation in which a low income taxpayer repeatedly receives notices regarding the same income tax return, whether the non-examination is being done to “look at the return,” match records, or otherwise.   From the individual taxpayer’s perspective, receiving multiple notices for the same tax year starts to feel like an audit.  A high income taxpayer with a small business (i.e. a taxpayer who may file a Schedule C) should not be subject to a different result.

Moreover, continuous or duplicative examinations may have a practical effect of chilling the otherwise longstanding ability to voluntary disclose and amend tax positions before the IRS contacts the taxpayer. If the taxpayer feels he or she is under perpetual examination, some disclosure practices may appear less desirable, or even not available (qualified amended returns or voluntary disclosures may not be available if an examination is perceived to have begun).

While the comments herein go beyond the settled definition of what an “examination” is for purposes Code Section 7605(b), permitting the routine review of a single taxpayer’s return for the same year raises important policy considerations regarding how many times the Service should look at a taxpayer in a given year before its focus is considered an examination.

CORY STIGILE – For more information please contact Cory Stigile – cs@taxlitigator.com  or 310.281.3200   Mr. Stigile is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state civil and criminal tax controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at www.taxlitigator.com

Back in September, the Treasury Inspector General for Tax Administration (“TIGTA”) issued a final report: As the Use of Virtual Currencies in Taxable Transactions Become More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance.[i]  This report, issued September 21, 2016, focused on the use of virtual currencies in transactions, such as Bitcoin, and the IRS’s strategy for addressing income produced through virtual currencies.  With the anonymity provided by using a virtual currency like Bitcoin, TIGTA was concerned about the likelihood of their use in illegal transactions.

The IRS had previously established the Virtual Currency Issue Team and issued Notice 2014-21, Virtual Currency Guidance, but TIGTA’s review found there to be little evidence of coordination among the IRS operating divisions to develop a strategic approach to the tax implications of virtual currencies, noting that none of the IRS operating divisions had developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies.

In Notice 2014-21, the IRS states that convertible virtual currency for federal tax purposes is treated as property subject to the general tax principles that apply to property transactions.[ii]   For example, if the virtual currency is a capital asset in the hands of the taxpayer, the taxpayer should be reporting capital gains or losses on all exchanges of or transactions involving virtual currencies.  TIGTA found that although the IRS had received comments from taxpayers in response to Notice 2014-21 asking for additional information that would be helpful in understanding how to comply with the tax reporting requirements when using or receiving virtual currencies, the IRS had taken no action in response.

As a result of its findings, TIGTA recommended that the IRS: (1) develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation; (2) provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies; and (3) revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.

We are now seeing increased action from the IRS to target taxpayer noncompliance on transactions involving virtual currencies. On November 17, 2016, the Department of Justice petitioned a district court to serve a John Doe summons to Coinbase, the largest Bitcoin exchange in the United States, asking for the records of all customers who bought virtual currency from the company from 2013 to 2015.[iii] The John Doe summons was supported by a declaration by a senior revenue agent with the IRS’s offshore compliance initiatives program, whose exam of two corporate entities that had accounts at Coinbase resulted in admissions of using Bitcoin purchases as part of a tax evasion plan.

The John Doe summons would require the San Francisco-based startup to turn over the identity and full transaction history of millions of customers to the IRS. In response, Coinbase stated in a company blog post on November 18^th that it will oppose the current form of the petition in court, out of concern for its customers’ privacy.[iv]

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a senior tax attorney at Hochman, Salkin, Rettig, 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). She represents U.S. taxpayers in litigation before both federal and state courts, including the federal district courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the Ninth Circuit Court of Appeals. Ms. Strachan has experience in a wide range of complex tax cases, including cases involving technical valuation issues. She routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. Additional information is available at

[i] The full report is available at: http://www.treasury.gov/tigta/auditreports/2016reports/201630083fr.pdf

[ii] IRS Notice 2014-21 was issued March 25, 2014 and is available at: https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[iii] United States’ Ex Parte Petition for Leave to Serve “John Doe” Summons filed November 11, 2016, In The Matter of the Tax Liabilities of John Does, United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21, Case No. 3:16-cv-06658-JSC (N.D. Cal).

[iv] https://blog.coinbase.com/2016/11/18/protecting-customer-privacy/

Tax Court Update: Attorney Looking to Get Paid Gets Dismissed For Lack of Jurisdiction

In a recent division opinion[1] the Tax Court held that an attorney cannot recover administrative costs under IRC §7430 because he was not a party to the underlying action, instead he acted on behalf of the party.  The Petitioner in the case was an attorney who represented a taxpayer before the IRS through a power of attorney.  Petitioner’s client owed him fees after the matter concluded and the client agreed that Petitioner would receive any administrative fees awarded.  After the Appeals Officer denied the request for fees, Petitioner filed his petition.  IRC §7430(f)(2) gives the Tax Court jurisdiction over petitions contesting the denial of fees.  IRC §7430(f)(2) does not specify who may file a petition.  The IRS moved to dismiss for lack of jurisdiction and the Court granted the motion.

IRC §7430 allows the prevailing party to recover administrative fees. The IRS successfully argued Petitioner, as the attorney and not the taxpayer, was not a party.  The Court relied in part of Estate of Plumbo v. United States[2], where the Third Circuit held that the party seeking administrative costs must be a party to the underlying action to be a prevailing party.  In that case, the estate argued that a charitable trust should be considered the prevailing party for purposes of the net worth requirement because it was the sole residuary beneficiary of the estate.  The Court rejected this view and held that the net worth requirement applied to the prevailing party, which needed to be the party to the underlying dispute, in that case the estate itself.

In determining that the Petitioner attorney was not the prevailing party, the Court distinguished two of its own Memorandum opinions.  This is likely why the case is a division or T.C. opinion, which gives it higher precedential value.  In Young v. Commissioner[3] and Dixon v. Commissioner[4], the Tax Court held that the net worth test would apply to individual taxpayers who were part of a large litigation with more than 300 similar cases, but were not the actual named parties.  The taxpayers had contributed to a fund and entered into “piggyback” agreements in which they agreed to follow the test cases.  Those taxpayers had an independent legal claim in the underlying action.  An attorney certainly wants to win (and get paid), but he or she has no independent claim.[5]

The Court also stated that treating an attorney representing a party as a prevailing party conflicts with the §7430 requirement the costs be incurred by the prevailing party. Fees are incurred by when there is a legal obligation to pay them.

JONATHAN KALINSKI – For more information please contact Jonathan Kalinski at Kalinski@taxlitigator.com. Mr. Kalinski is a senior tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigationhas considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

Mr. Kalinski routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue domestic civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. He has considerable expertise in handling matters arising from the U.S. government’s ongoing civil and criminal tax enforcement efforts, including various methods of participating in a timely voluntary disclosure to minimize potential exposure to civil tax penalties and avoiding a criminal tax prosecution referral. Additional information is available at http://www.taxlitigator.com.

[1] Greenberg v. Commissioner, 147 T.C. No. 13 (2016).

[2] Estate of Palumbo v. United States, 675 F.3d 234 (3d Cir. 2012).

[3] Young v. Commissioner, T.C. Memo. 2006-189.

[4] Dixon v. Commissioner, T.C. Memo. 2006-97.

[5] Greenberg, 147 T.C. No. 13 at 9-10.

The never-ending “Whack-a-Mole” game that the IRS plays with legitimate (and not-so-legitimate) tax planners follows a predictable pattern: planners use tax strategies in ever-more-aggressive ways, shysters push planning into abusive or even criminal territory, and if the Treasury Department is losing enough money from a tax strategy then the IRS will focus civil and criminal resources on promoters who sell it and taxpayers who use it.

Today’s target? Captive insurance.  In the past year, the IRS has issued two notices about abusive captive insurance schemes, with the second notice warning that using a captive could be a crime.  That’s no surprise to me, as I worked on a criminal case involving a captive insurance company while I was a federal prosecutor, but it could come as a shock to a client who thought she’d found a clever way to avoid taxes.

For those in the know, a properly set up and operated captive insurance company – an insurance company designed to allow a business to self-insure in a tax-advantaged way – can save on current-year taxes by deducting the premiums.  Small captives only pay income tax on investment income, not underwriting income, under Tax Code Section 831(b).  According to promoters, if you do it right, and much to the IRS’s chagrin, you can pay little or no income tax on up to $2.2 million of premiums per year and, at death, pass those untaxed funds to your heirs.  Insurance is generally treated well under the tax code, but the estate tax benefits appear particularly galling to the IRS and they have decided to clamp down on captives.

One way Congress has recently clamped down on captives was to require small captives to act more like real insurance companies, such as by spreading risk amongst more insured entities, to retain the tax exemption for underwriting income. However, the IRS is also attacking captives through aggressive audits, and the Agency doesn’t like what it’s seen.  It just sent a shot across the bow in the form of Notice  2016-66, available at https://www.irs.gov/pub/irs-drop/n-16-66.pdf, which warns that the IRS considers certain captives “transactions of interest” meriting close scrutiny.  Most troublingly, the IRS notes that it can’t determine which transactions are abusive or even criminal, leaving clients unsure of which way to turn.

The bottom line is, as usual, to seek out competent advice, never engage in a transaction just for tax benefits, and get experienced help if the IRS comes knocking.

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

The 2016 ABA 33rd Annual National Institute on CRIMINAL TAX FRAUD and 6th Annual National Institute on TAX CONTROVERSY will be held on December 7-9,  2016 at the ENCORE HOTEL in Las Vegas.

The Low Income Taxpayer Assistance Workshop (coordinated by Frank Agostino), Civil Tax Workshop and Criminal Tax Workshop will be held on Wednesday, December 7 and the National Institutes will be held on December 8-9.  The Annual Maggiano’s Reception (coordinated by Larry Campagna) and the Woman’s Networking Event (coordinated by Jenny Johnson) will be held on Thursday Evening, December 8. 

REGISTRATION AND HOTEL information is available at:

http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=255363497  (If the link doesn’t work, search 31st Annual National Institute on Criminal Tax Fraud and the ABA site should come up for you). 

BROCHURE: http://www.americanbar.org/content/dam/aba/events/cle/2016/12/ce1612ctf/ce1612ctf_brochure.authcheckdam.pdf

DEADLINE FOR GROUP RATE HOTEL RESERVATIONS:  Tuesday, November 15, 2016

HOTEL INFORMATION:

Wynn⃒ Encore Las Vegas, 3131  Las Vegas Boulevard South, Las Vegas, NV 89109

Group Rates:

Single:         $189.00 for Sunday – Thursday; $209.00 for Friday and Saturday

Double:      $219.00  for Sunday – Thursday; $239.00 for Friday and Saturday

Hotel Reservations can be made by calling the hotel directly at 866.770.7555 or online at  https://aws.passkey.com/event/15062747/owner/18530/home .  Refer to the ABA Criminal Tax Fraud and Tax Controversy National Institute to receive the group rate.

If you should have any questions, please let us know!

Kathy Keneally – kathryn.keneally@dlapiper.com

Chuck Rettig – rettig@taxlitigator.com

I recently had the pleasure of moderating a panel on domestic and international criminal tax enforcement at the California Tax Bar and California Tax Policy Conference in San Diego.  With me was Mark F. Daly,  DOJ Tax Division Senior Litigation Counsel and Robert Conte, Deputy Chief of the Tax Division of the United States Attorney’s Office in the Central District of California.

There are some rumblings by our colleagues that the government is letting criminal tax enforcement, including the international tax enforcement wither.  That is not the case.  What we are seeing is a bottleneck within the Internal Revenue Service (“IRS”) because of the lack of resources and funding.

The representatives of the Department of Justice (“DOJ”), Robert Conte and Mark Daly indicated  foreign tax enforcement is alive and well.

In discussing issues of case selection, Mark Daly indicated “there is a complex mixture of factors in determining whether to pursue a criminal tax fraud case.  The IRS and DOJ consider at every stage how much money is at stake, the target’s age and education, and whether the target is a public figure with some level of notoriety.”

Mark Daly indicated that his favorite cases coming from the IRS Criminal Investigation division’s business opportunity program are those in which undercover agents pose as prospective buyers of a taxpayer’s business. He explained that when the agents request information on what they are buying, the taxpayer will frequently show them a second set of books.  The beauty is that the agents are wearing a wire and the taxpayer has basically written the search warrant.

The government attorneys addressed how the U.S. government collects criminal tax information from other countries and Mark Daly indicated it depends upon the jurisdiction and whether the country uses an informal or formal basis for obtaining information.  Mr. Daly noted that one of the beauties of the criminal investigation division is its criminal attachés who are stationed in London, Frankfurt, Cairo, and Sydney.  He noted that in offshore tax cases, the DOJ can contact the attaché and inform the local police that the U.S. government needs intelligence information.  Sometimes a month later the DOJ and IRS can get a “sneak and peak” of the person’s entire account records.

The other significant topic discussed was the government’s offshore streamlined procedures.  The DOJ has been very public about its interest in streamline filings and Mark Daly told the practitioners “I like to read streamline applications [and] compare [them] to the bank account records that I have in my possession.  There’s a level of cognitive dissonance sometimes between what a taxpayer represented to the IRS as to why they were not willful and the handwritten crawled notes to the banker that appear in the file.”

There ensued  a debate  as to the appropriateness of streamline filings.  Practitioner Martin Schainbaum—known as the Tax Warrior– was of the view that streamline filings are too dangerous, that the better view is to go into the full offshore voluntary  disclosure program and  as applicable, opt out because under that circumstance you do get a measure of protection in terms of criminal prosecution.

The other side of the argument advocated by the undersigned was that there are many many cases which are very appropriate for streamline; in fact, the government has received 48,000 streamline applications thus far.  True, if your client does have a willfulness problem and/or criminal exposure, streamlined is not the way to go, but the government is inviting streamline applications and it is an opportunity which should not be overlooked

Finally, the DOJ representatives noted that the goal is to bring U.S. taxpayers into compliance and they will continue to keep pursuing criminal tax cases of significant dollar amounts that would bring publicity. Robert Conte noted “incarceration is such a key part of the overall prosecution and this means informing the law-abiding taxpayers who voluntarily file their tax returns on time that for criminal fraud it’s not just going to be a fine or home confinement, but rather incarceration and loss of liberty.”  He noted “frankly, I won’t even issue a press release unless the judge has sentenced the defendant to incarceration.”

The saga continues . . .

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman, Salkin, Rettig, 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 http://www.taxlitigator.com