The Justice Department press release  also notes that the U.S. Government seized more than $16 M from Wegelin’s U.S. correspondent bank accounts, pursuant to a civil forfeiture complaint.  The press release details the allegations in the criminal indictment, the thrust of which are succinctly summarized as follows:

In the wake of the IRS investigation of UBS, members of Wegelin’s senior management affirmatively decided to capture the illegal business that UBS exited.   To capitalize on the business opportunity this presented and to increase the assets under management, along with the fees earned from managing those assets, Berlinka, Frei, Keller and others, acting on behalf of Wegelin, told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. authorities because the bank had a long tradition of secrecy.   They also persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing, among other things, that unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement pressure.   Members of the Swiss bank’s senior management approved efforts to capture the clients who were leaving UBS and also participated in meetings with U.S. taxpayer-clients who were fleeing UBS.

However, the timing of indictment is conspicuous.  On January 30, 2012, eight Swiss banks (Credit Suisse, Julius Baer, and Basler Kantonalbank, among others) handed over to the United States government data on U.S. clients  suspected of evading U.S. income taxes.  This disclosure was made in order to avoid prosecution in the United States.  However, remarkably, the data was encrypted at the Swiss government’s request, and Switzerland has indicated that it will not provide the encryption key to unlock the data  until the Swiss and the United States reach a broader agreement on exchange of information.

The clear implication of the Wegelin indictment is that the Department of Justice is making good on its threats of prosecution.  Indeed, in taking the unprecedented move to indict a foreign bank that has no branches to the United States, the Justice Department is sending a clear message to foreign banks, and U.S. taxpayers, that income tax evasion, and assisting those that evade income taxes, will not go unpunished.

The press release is available here.

The attorneys at Fuerst Ittleman have extensive experience dealing with IRS audits and Justice Department prosecutions.  You can reach an attorney by emailing us at contact@fuerstlaw.com.

In its decision, the full text of which is available here, the Tax Court of New Jersey ruled that such taxation was consistent with both the Due Process Clause and Commerce Clause. The Court held that New Jersey’s attempt to tax did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. The court also held that the employee’s presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey’s labor markets.

The significance of this decision is that when an employee is located outside of the jurisdiction where the business is incorporated and/or doing business, the foreign jurisdiction may have a claim to tax the business.  Consequently, businesses must be cognizant of the fact that they may have filing obligations and tax liabilities to jurisdictions that they had not previously considered.

The attorneys at Fuerst Ittleman have extensive experience advising clients to minimize or reduce the ability of state and local governments to tax businesses.  Additionally, the attorneys at Fuerst Ittleman have extensive experience litigating against the government when it assesses additional tax, penalties, and interest.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

The 2012 program will be open for an indefinite period.  Unlike the 2009 and 2011 programs, the 2012 program contains is no set deadline for people to apply.  However, the terms of the program are subject to  change by the IRS at any time with no advanced warning.

For the 2012 program, the penalty for failing to disclose their foreign bank accounts by failing to file a Form TD 90.22-1 is 27.5 percent of the highest aggregate balance during the eight full tax years prior to the disclosure. That is a small (2.5%) increase from 25 percent in the 2011 program. However, certain taxpayers will be eligible for 5% or 12.5% penalties that were available under the 2009 and 2011 programs. 

Like the 2009 program, participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties (usually 20% of the additional tax owed, which is separate and apart from the Bank Secrecy Act penalty of 27.5%). 

The announcement on the IRS website is available here.

The attorneys at Fuerst Ittleman have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRS’s voluntary disclosure program.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

The IRS takes this new position based on a strained reading of the U.S. Supreme Court’s holding in G.M. Leasing Corp. v. United States, 429 U.S. 338, 351 (1977), to conclude that “if an entity is a taxpayer’s alter ego, then it is appropriate to ‘regard’ all of the entity’s assets as the taxpayer’s property for federal collection purposes.”

The significance of the Notice is that taxpayers now must be ready to counter IRS efforts to apply “federal common law” instead of more favorable state law.  The result will be, at least in the short term, that the IRS will seek to challenge state law and will seek to aggressively enforce tax liens against taxpayers who own business entities.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice in tax lien and collection matters.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

The indictment alleges that the Defendants sought to take advantage of the UBS investigation by offering to allow American taxpayers to open bank accounts that would not be disclosed to the IRS.  American taxpayers maintaining financial accounts abroad have an obligation under Title 31 of the United States Code to file Form TD90-22.1 (Report of Foreign Bank and Financial Accounts (“FBAR”)), available here, with the United States Treasury Department.  The willful failure to file an FBAR form is a felony.  The Defendants, according to the indictment, gave as part of their sales pitch to prospective clients assurances that the bank accounts would not be disclosed because the bank had a long tradition of bank secrecy and did not have offices outside of Switzerland.   The Defendants opened accounts at the bank in the name of sham corporations and foundations in jurisdictions that the IRS considers to be tax havens.

In order to ensure that the accounts would remain secret, account holders names were not used, statements  were not mailed to the United States, and emails were sent from personal accounts instead of business email accounts, all with the aim of reducing the risk of detection by U.S. law enforcement.  To that end, according to the indictment, the Defendants used a third-party website called “SwissPrivateBank.com” to solicit new business from American taxpayers.  The indictment goes on to detail, without naming, various individuals who had accounts opened by the Defendants with the aim of avoiding IRS detection and to avoid income tax obligations.     

A full copy of the indictment is available here. 

The attorneys at Fuerst Ittleman have experience with IRS and Department of Justice investigations of U.S. taxpayers who have unreported income and undeclared foreign bank accounts.  You can reach an attorney by emailing us at:  contact@fuerstlaw.com, or by calling us at  305.350.5690.

The relevant facts are fairly straightforward. The Taxpayer exercised certain stock options, sold the stock and realized approximately $8M of income. The Taxpayer’s financial planner knew about the CARDS transaction, and the taxpayer consulted with a CPA  who promoted and arranged the CARDS transaction.  However, the taxpayer’s return preparer refused to prepare the income tax return without a tax opinion letter supporting the CARDS transaction and the related loss used to offset capital gains on the sale of the stock (the $8M gain).

The CPA provided a model tax opinion letter to the taxpayer from a major law firm.  The opinion letter  concluded that CARDS  transaction would more likely than not withstand an Internal Revenue Service examination and would protect the Taxpayer from substantial tax penalties if the transaction was ultimately disregarded for Federal tax purposes.  The Taxpayer subsequently received a formal tax opinion letter from the same major law firm, which arrived at the same "more likely than not" conclusions as the model tax opinion letter.

The Tax Court, in addressing the Taxpayer’s penalty defense based on reasonable cause, found that  “[the Taxpayer’s] reliance on  [the law firm’s] tax opinion letter was unreasonable because they should have known about the law firm’s inherent conflict of interest. [The CPA], the promoter of CARDS, both referred [the law firm] to [the Taxpayer] and supplied him with the law firm’s model tax opinion letter, which described a CARDS transaction that was not unique to [the Taxpayer’s] situation. [The Taxpayer] proffered no evidence that [the Taxpayer] had an engagement letter with [the law firm] spoke to any attorney at the law firm, or directly compensated [the law firm] for either tax opinion letter. On the facts presented, [the Taxpayer] could not have reasonably believed that [the law firm] was an independent adviser.”

A full copy of the opinion can be found here.

The teaching of Gustashaw is that a tax opinion must be tailored to the facts and circumstances of each taxpayer and “model” opinions can be problematic.  Likewise, penalty defenses based on tax opinions must be well developed and factually based in order to be successful in Tax Court litigation.

The attorneys at Fuerst Ittleman have experience in providing tax opinions and defending against penalties based on tax opinion reliance.  You can contact an attorney by emailing us at contact@fuerstlaw.com.

The indictment against Mr. Desai provides as follows:

“[The Defendant] who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his wife, which was filed with the Internal Revenue Service. In that false income tax return, it was stated that their joint taxable income for the calendar year 2008 was $69,917.84 and that the amount of tax due and owing thereon was $6,156.88. In fact, as DESAI then and there knew, their joint taxable income for the calendar year was in excess of the amount stated on the return, and, upon the additional taxable income an additional tax was due and owing to the United States of America, and he had an interest in, and signature or other authority over, bank accounts located in India during calendar year 2008.”

The significance of this criminal indictment is that the IRS’s and the U.S. Department of Justice’s investigation of those holding unreported foreign bank accounts at HSBC have now started to produce tax evasion and FBAR failure to file cases against U.S. citizens who have attempted to use HSBC to avoid paying taxes to the U.S. government. This appears to be the first of many such cases as Title 31 violations are the criminal charge of the moment.

The attorneys at Fuerst Ittleman have experience defending against IRS investigations/audits and Department of Justice investigations and criminal prosecutions for those with unreported foreign bank accounts and unreported/under-reported income. You can reach an attorney by emailing us at: contact@fuerstlaw.com.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTC’s celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTC’s advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crim’s case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuit’s Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fuerstlaw.com.

In Appleton I, the Tax Court held that the Government of the U.S. Virgin Islands lacked the ability to intervene under Rule 24 of the Federal Rules of Civil Procedure, made applicable to the Tax Court via Tax Court Rule 1.  The Government of the U.S. Virgin Islands sought to intervene either as of right (Rule 24(a)(2)) or permissively (Rule 24(b)(2)).  The Tax Court ruled in Appleton I that the Government of the U.S. Virgin Islands could not show that it had “neither demonstrated that its participation as a party is necessary to advocate for an unaddressed issue nor shown that its intervention will not delay resolution of this matter” and further stated that the participation of the Government of the U.S. Virgin Islands in the Tax Court litigation “could result in trial complications as well as delay the resolution of the issue in which movant asserts an interest.”

However, Judge Benton, in writing for the 8th Circuit, noted that neither of these concerns comported with the legal standard for Rule 24 intervention.  The 8th Circuit agreed with the 3rd Circuit that the appropriate standard is whether there is “undue delay” or “prejudice that adjudication of the original parties’ rights.”  Based on this erroneous view of the law, the Tax Court abused its discretion by denying the Government of the U.S. Virgin Islands intervention.

The ramifications of this ruling is that the pending cases before the 11^th Circuit (Cooper v. Commissioner (11-10617); McGrogan v. Commissioner (11-10618); Huff v. Commissioner (11-10608)) and the 4^th Circuit (McHenry v. Commissioner (11-1239)) are more likely to have an outcome in favor of the Government of the U.S. Virgin Islands.  The 4^th Circuit has set oral argument in McHenry v. Commissioner for January 25, 2012, in Richmond, Virginia. Additionally, the outcomes in the pending motions to intervene in the Tax Court (Teffeau v. Commissioner (27904-10)) are more likely to be ruled in favor of the Government of the U.S. Virgin Islands.

A full copy of the 8th Circuit’s opinion can be found here.

The attorneys at Fuerst Ittleman have extensive experience litigating against the U.S. Government in tax cases in at both the trial and appellate court levels.  Likewise, Fuerst Ittleman’s attorneys have extensive experience litigating USVI residency cases and cases against the USVI Government, and Joseph DiRuzzo of Fuerst Ittleman is licensed to practice in the USVI.  You can contact us by emailing us at contact@fuerstlaw.com, or by calling us at 305.350.5690.

Notably, the burden that is imposed upon those employers participating in the VCSP is far more than what was required by Congress when it enacted Section 530 of the Revenue Act of 1978. 

Under the VCSP, in exchange for being alleviated from interest and penalties on the tax liability attributed to the misclassification, employers will pay a penalty equal to 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.  Although participating employers will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers, they will, however, be subject to a six-year statute of limitations for the first three years under the program instead of the three-year payroll tax statute of limitations.

In discussing the background of worker misclassification in its Announcement, the IRS extensively compared relief obtained under the VCSP to that obtained in the current Classification Settlement Program (CSP). As discussed by the IRS, the CSP allows employers and tax examiners to resolve worker classification issues in the administrative process; however, the VCSP allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through administrative correction procedures applicable to employment taxes.

Significantly, however, the VCSP Announcement as well as the VCSP Frequently Asked Questions fail to discuss an integral provision in the background of worker misclassification, Congress’s safe harbor rule, section 530 of the Revenue Act of 1978, which entitles certain employers to reclassify workers as employees without being imposed a penalty. 

As discussed by Congress:

Section 530 of the Revenue Act of 1997 is a safe harbor for an employer who owes FICA and FUTA taxes resulting from the improper classification of employee as independent contractor. Thus, if a worker employee is misclassified as an independent contractor under the common-law analysis, the employer will nonetheless escape employment tax liability if the conditions of section 530 are met.   Section 530 shields a taxpayer who pays workers for services from employment tax liability if the employer has consistently treated the worker as “other-than-employees” unless the employer had no reasonable basis for doing so. Section 530 should be interpreted liberally in favor of the employer.

Present Law and Background Relating to Worker Classification for Federal Tax Purposes. Page 6. JCX-27-07.Joint Committee on Taxation. (May 7, 2007)

Section 530(a) provides in pertinent:

1. In general.

- If –

• for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and
• in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee,

then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

2. Statutory standards providing one method of satisfying the requirements of paragraph (1). For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following:
• judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;
• a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or
•  long-standing recognized practice of a significant segment of the industry in which such individual was engaged.
3. Consistency required in the case of prior tax treatment.- Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977 . . .  

Similarly, in order to be eligible for the VCSP, employers must meet the following criteria:

• Employer must have consistently treated the workers in the past as nonemployees;
• Employer must have filed all required Forms 1099 for the workers for the previous three years; and
• Employer must not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

By failing to address section 530 in its discussions of the VCSP, the IRS is guiding Taxpayers into a voluntary penalty regime they may otherwise not be subject to.  Because section 530 was never codified as part of the Internal Revenue Code, most Taxpayers are oblivious of its existence. The IRS is taking advantage of this unawareness by marketing the VCSP as if it is the Taxpayers’ most favorable outcome.  Notably, however, when given a choice under the two schemes, it is inconceivable why Taxpayers would choose to be penalized.   

Section 530 relief was recently discussed on November 17, 2011, during the American Bar Association’s (ABA) 22nd Annual Philadelphia Tax Conference.  According to these discussions, which included Ligeia Donis, Assistant Branch Chief in the IRS Office of Chief Counsel, Tax Exempt and Government Entities and numerous tax practitioners, the benefit of VCSP over section 530 relief is the certainty it provides.  According to one practitioner, “although an employer may believe it has an ironclad case for section 530 relief, there is always the possibility the IRS will disagree.”  

Remarkably, this discussion of section 530 is contrary to Congress’s Joint Committee on Taxation, which expressly stated that “section 530 should be liberally construed in favor of the Employer.”  Present Law and Background Relating to Worker Classification for Federal Tax Purposes. Page 6. JCX-27-07.Joint Committee on Taxation. (May 7, 2007).  Further, section 530(e)(4) expressly includes the Taxpayers’ liberal burden of proof when requesting section 530 relief:

(A) IN GENERAL

-If-

1. A taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an employee for purposes of this section, and
2. The taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or his delegate,

   then the burden of proof with respect to such treatment shall be on the Secretary.

Although the IRS has provided Taxpayers with vast information regarding the VCSP, and similar programs such as CSP, it is silent on the penalty-less framework of section 530.   Unaware of other alternatives, Taxpayers continue to apply to the VCSP and consequently, voluntarily agree to be penalized where it may not otherwise be necessary. 

If you have any questions regarding the Voluntary Classification Settlement Program, relief under section 530 of the Revenue Act of 1978, payroll taxes, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fuerstlaw.com.

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