#TaxLaw19 #FBA

Moderator:Larry A. Campagna

Chamberlain, Hrdlicka, White, Williams & Aughtry, P.C.

Panelists:Michael C. Boteler

Trial AttorneyUSDOJ Tax Division

James C. LeeDirector of Operations

Northern Area, IRS Criminal Investigation

Niles A. ElberCaplin & Drysdale, Chartered

Matthew D. LeeFox Rothschild LLP

Domestic Hot Topics in Criminal Tax Enforcement

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Update on Current Developments

IRS Criminal Investigation

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#TaxLaw19 #FBA

• IRS Criminal Investigation is the only agency with jurisdiction over Title 26 violations• The tax laws and tax convictions are our focus!

• Violations of Title 18 and Title 31, U.S.C.

• Criminal Tax Prosecutions drive the deterrent message to all taxpayers and U.S. citizens.

• CI is a critical component to voluntary compliance.

• 326M U.S. residents. 245M tax returns/forms filed.

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#TaxLaw19 #FBA

• Currently - Approximately 2800 employees• Approximately 2000 Special Agents

• Planning to Hire 250 Special Agents• Approximately 110 in FY18 – Already in Process• Approximately 140 in FY19

• Planning to Hire 100 key professional and support staff positions• Strategic Recruitment/Placement Focus

Diverse Pool Essential – Background, Skills, Experiences. Asking more questions……language, cyber, international banking….

Future Hiring – Anticipate most major cities and key geographic areas. Placement based on the work

Criminal Investigation - 2019 Growth

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#TaxLaw19 #FBA

IRS-CI Special Agents, approx. 2.5% of IRS Workforce

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Field Auditors13.4% Field Collectors

4.5%

Criminal Investigators2.5%

Other IRS Employees 79.6%

Field Compliance Resources at IRS

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General Overview of Crimes IRS-CI Investigates

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The Internal Revenue Code

Title 26 USC § 7201 – Evasion

Title 26 USC § 7202 – Failure to Collect or Pay Over

Title 26 USC § 7203 – Failure to File

Title 26 USC § 7206 – Filing a False Return, etc.

Title 26 USC § 7212 – Corrupt or Forcible Interference

The Money Laundering Control Act

Title 18 USC § 1956(a)(1)(A)(i) – Promotion

Title 18 USC § 1956(a)(1)(B)(i)– Concealment

Title 18 USC § 1957 – Spending > $10,000

The Bank Secrecy Act

Title 31 USC § 5324(a)(1) – Fail to file report

Title 31 USC § 5324(a)(2) – File a false report

Title 31 USC § 5324(a)(3) – Structuring

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Investigative Priorities, FY19 Investigative Priorities Remain Unchanged

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Tax Evasion & Other Financial CrimesIRS-CI’s primary resource commitment is to T26, Tax Crimes, arising from bothlegal and illegal sources of income. Specifically in the areas of:• Employment Tax• International Tax Fraud• Abusive Tax Schemes• Refund Crimes – QRP, RPP and ID theft• Cybercrimes (including Virtual Currency)• Frivolous Arguments Program – Non-filers• Political/Public Corruption• Counterterrorism/Terrorist Financing• Money Laundering/Bank Secrecy Act (BSA)• Organized Crime Drug Enforcement Task Force (OCDETF)• High Intensity Drug Trafficking Area (HIDTA)

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FY Statistics

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FY 2016 FY 2017 FY 2018

Investigations Initiated 3,395 3,019 2,886

Prosecution Recommendations 2,744 2,251 2,130

Informations/Indictments 2,761 2,294 2,011

Conviction Rate 92.1% 91.5% 91.7%

Total Sentenced 2,699 2,549 2,111

Percent to Prison 79.9% 80.1% 82%

Average Months to Serve 41 42 45

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Investigations Initiated 1,063 776 573 374 164

Prosecution Recommendations 970 774 566 403 222

Informations/Indictments 896 732 649 484 217

Sentenced 748 790 613 550 387

Incarceration Rate 87.7% 84.6% 87.8% 87.5% 86%

Average Months to Serve 43 38 40 34 40

Direct Investigative Time 17.3% 18.1% 16.2% 13.6% 10%

Identity Theft Statistics

DIT is currently under 8%

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Employment Tax Statistics

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FY 2016 FY 2017 FY 2018

Investigations Initiated 137 162 207

Prosecution Recommendations 77 59 81

Informations/Indictments 71 60 64

Sentenced 87 77 48

Incarceration Rate 70.1% 77.9% 77%

Average Months to Serve 14 21 21

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NCIUNationally Coordinated Investigations Unit

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NCIU• Cutting edge, future of IRS-CI: Nationwide impact by using

DATA to identify and develop areas of non-compliance.• Moving to better manage and manipulate all available data

to better select criminal cases.• Primary goal – ensure nationwide coverage of all program

areas.

• First projects – SEC Microcap Fraud, international tax enforcement, employment tax. Must-work referrals will come out of this group.

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#TaxLaw19 #FBA

FY 2018 Results to Date: 55 Cases referred, all Field Offices received at least one referral.

Program Areas: Employment Tax, Biofuels, Microcap, International, Whistleblower

FY 2019 Goals: Expand referrals in Employment Tax, Biofuels, Virtual Currency and

International (USCs living overseas/FATCA), Significant ML Cases from National Targeting Center and NTC-JTTF Leads

Refer 100+ cases. Referrals to all field offices - maximize geographic coverage

NCIU Update

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J5JOINT CHIEFS OF GLOBAL TAX

ENFORCEMENT

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The J5 was formed after a November 2017 OECD meeting in London. Criminal tax heads of Australia, Canada, The Netherlands, U.S., and U.K. expressed a desire to work more collaboratively, with an operational focus in tackling the enablers of tax crime. The group, with direct leadership of the Chief’s, is intended to build on and compliment the work from the policy arena. The inaugural meeting of the full group was held in June of 2018 in Canada.

4 workgroups:

• Professional Enablers (UK ) – Emphasis in this group will be strong with respect to operations with a sharp focus on working together jointly via case development and criminal intelligence sharing.

• Cyber/Virtual Currency (US) – As virtual currency and its associated use to evade taxes becomes more common place, this team will work collaboratively on the case development and information exchange fronts.

• Platforms/Data (NL) – This group will explore the tools and technologies to best tackle tax evasion , the sharing of existing tools and best practices while supporting the other J5 work groups.

• Media and Communications (US) – The media and communications group is a significant force multiplier in the use of the media as deterrent effect. Efforts on the international front have a broader impact on media coverage.

J5 Background

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ITFCInternational Tax & Financial Crimes

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• Formed new elite International Enforcement Group by consolidating foremost experts in International Tax Crimes under one focused operational group.

• Comprised of agents in DC as well as strategically located in other locations around the country.

• We will continue to have heavy support from DOJ-Tax Division and continue to partner with our civil and international partners.

International Tax Enforcement

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#TaxLaw19 #FBA

• Ex Patriates• US Corporations• FATCA• Offshore Compliance Initiative• Promoters – banks, fiduciaries, law firms• Emerging Technologies• Next Foreign Financial Institution/Jurisdiction

ITFC General Program Areas

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CI is located throughout the world and specifically in 10 overseas posts:1. Australia (Sydney)

2. Barbados (Bridgetown) 3. Canada (Ottawa)

4. China (Hong Kong)5. Colombia (Bogota)6. England (London)

7. Germany (Frankfurt)8. Mexico (Mexico City)

9. Panama (Panama City)10. The Hague, The Netherlands (Europol)

INTERNATIONAL FOOTPRINT

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Tax Shelters

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• Notice 2016-66 – Transaction of Interest• United States v. Crithfield, 2017 WL 3412208 (M.D. FL.)

• Promoters of a micro captive insurance program that sold “Business Protection Plans” were convicted of promoting an illegal tax shelter.

• Appeal is pending.

• Avrahami v. Commissioner of Internal Revenue, 149 T.C. No. 7 (Aug. 21, 2017)• The Tax Court upheld the disallowance of deductions paid to the

taxpayers’ wholly owned micro captive insurance company because the insurance did not distribute risk and did not meet commonly accepted notions of insurance.

Micro Captive Insurance

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• Notice 2017-10 – Listed Transaction

• United States v. Nancy Zak, et. al., Case No. 1:18-cv-05774 (N.D. Ga.)• The complaint seeks an injunction against the defendants to stop

them from promoting an allegedly abusive conservation easement syndication tax scheme that included among other items, grossly overvalued appraisals.

Syndicated Conservation Easement

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Cybercrimes

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• CI’s cybercrimes Unit (CCU) will continue to develop and expand in response to the ongoing threat of internet theft, refund fraud, and other virtual financial crimes.

• Emphasis on threat to traditional white collar crime, include tax crimes

• CCU will identify and pursue tax, money laundering, identity theft, and refund crimes in the cyber world.

• In addition, CI will collaborate with FinCEN and other federal law enforcement agencies to identify the movement of illegal monies utilizing virtual currency.

Cybercrimes

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#TaxLaw19 #FBA

• Deconfliction of ongoing investigations between CI Field Offices (Internal) and with LE counterparts (External)

• Collaborative efforts with our international partners, other federal agencies and public/private sectors

• Sharing of information with other IRS business units & components to establish a process for free flow of leads back & forth (Dark web Intelligence)

Information Sharing & Deconfliction

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#TaxLaw19 #FBA

Investigations to date have revealed the following criminal conduct:

• Selling/buying of PII on the internet• Data intrusion/exfiltration• Compromise of PII databases through the internet• Dark web marketplace owners/administrators/large vendors• Business e-mail compromise in regards to money laundering• Bank account takeovers• Phishing as it effects the integrity of the U.S. tax system• Terrorist financing • Virtual currency money launderers and exchangers to facilitate money

laundering • Tax evasion through the use of virtual currency/embezzlement• Virtual currency use to conceal political corruption/illegal campaign

contributions

Cyber & Dark Web Enforcement

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The presentation and the views expressed therein reflect the unofficial, individual views of the government participants, and do not necessarily represent official DOJ or IRS policy.

#TaxLaw19 #FBA

• July 2018 indictment of 12 Russian GRU officers by Office of Special Counsel alleging cyber operations to interfere with 2016 Presidential Election.

• Count 10: Conspiracy to Launder Money• Alleges that defendants laundered funds through “a web of

transactions structured to capitalize on the perceived anonymity of cryptocurrencies such as bitcoin.”

• Defendants used Bitcoin when purchasing servers, registering domains, and making payments in furtherance of alleged hacking activity.

• Defendants alleged to have funded their purchases of computer infrastructure for hacking activity by mining Bitcoin as well as by acquiring Bitcoin through peer-to-peer exchanges, moving funds through other digital currencies, and using prepaid cards.

Money Laundering and Cryptocurrency

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#TaxLaw19 #FBA

• Count 10:• Defendants are alleged to have transferred “monetary instruments and

funds” into the United States with the intent to promote the carrying on of specified unlawful activity in violation of 18 U.S.C. § 1956(a)(2)(A).

• A monetary instrument is defined as “(i) coin or currency of the United States or of any other country, travelers checks, personal checks, bank checks or money orders, or (ii) investments, securities or negotiable instruments, in bearer form or otherwise such that title thereto passes upon delivery.”

• Compare U.S. tax treatment of Bitcoin as “property” pursuant to IRS Notice 2014-21.

Money Laundering and Cryptocurrency

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#TaxLaw19 #FBA

• Husband and wife own and operate a corporation that conducts consulting business for independent hotels. Although most of the income from their business is received from clients by checks or wire transfers deposited to the corporate checking account, the couple also has established a cryptocurrency account. Over a four year period, an average of a million dollars per year of client payments for the corporate consulting work has been paid to the corporation’s cryptocurrency account.

• After a tip from an employee of the corporation, an IRS administrative investigation begins. The investigating special agent obtains copies of the cryptocurrency account information and confirms that corporate tax returns did not include the cryptocurrency income. However, upon interviewing the corporation’s tax return preparer, the special agent learns that in the bucket of records husband and wife provided each year for the corporation there were a few records reflecting cryptocurrency transactions but that the return preparer was unfamiliar with cryptocurrencies and did not understand their significance or follow-up with his clients about them.

Hypothetical

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#TaxLaw19 #FBA

• After proper referrals to the Tax Division and review, the local U.S. Attorney is authorized to seek an indictment from the grand jury. The ultimate indictment of the husband and wife includes four counts under 26 U.S.C. §7206(1) for filing false tax returns. But the major count is a charge under 18 U.S.C. §371 alleging a conspiracy between the husband and wife:

• for the purpose impairing, obstructing, and defeating the lawful government functions of the Internal Revenue Service in the ascertainment, computation, assessment, and collection of revenue: to wit, income taxes.

Questions:1. If there was no IRS investigation, examination, or collection action pending

during the four years of corporate tax return filings, can this Klein conspiracy charge survive a challenge based on Marinello?

2. What special challenges does this case create in light of the use of cryptocurrency?

Hypothetical (cont’d)

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Transforming Tax Offenses into Wire Fraud, Mail Fraud, and Money

Laundering Charges

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• 18 U.S.C. § 1956(a)(1): prohibits engaging in a financial transaction involving proceeds of “specified unlawful activity” (SUA):

• (A)(i): with the intent to promote the carrying on of SUA.• (A)(ii): with the intent to engage in conduct violating IRC §§ 7201 or

7206.• (B)(i): knowing that the transaction is designed to conceal proceeds of

SUA.

• 18 U.S.C. § 1956(a)(2): prohibits transfer of monetary instruments to/from the United States in order to promote or conceal an SUA.

• 18 U.S.C. § 1957: prohibits engaging in a monetary transaction of criminally derived property derived from an SUA.

Tax Conduct as Predicate for Money Laundering Offenses?

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#TaxLaw19 #FBA

• Lengthy list of SUAs appears in the money laundering statute, 18 U.S.C. § 1956(c)(7), and in the RICO statute, 18 U.S.C. § 1961(1).

• However, no violation of the Internal Revenue Code is identified as an SUA for money laundering purposes.

• Thus, it would appear that prosecutors are unable to transform tax offenses into money laundering.

Specified Unlawful Activities

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#TaxLaw19 #FBA

• Superseded Tax Division Directive No. 99.• Requires Tax Division approval for any criminal charge if the

underlying conduct arises under the Internal Revenue law.• Permits the charging of mail fraud, wire fraud, or bank fraud if

there is a “large fraud loss or substantial pattern of conduct and there is a significant benefit to bringing charges instead of or in addition to Title 26 violations” and/or “significant benefit at the charging stage . . . at trial . . . or at sentencing.”

• Example: if the target filed multiple fraudulent returns or if the target promoted a fraudulent tax scheme.

• States that the Tax Division will not, however, authorize fraud charges “to convert routine tax prosecutions into RICO or money laundering cases.”

Tax Division Directive No. 128 (issued October 29, 2004)

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#TaxLaw19 #FBA

• USVI supermarket chain not reporting all of its income.• Owners are charged with mail fraud as predicate for international

money laundering charge.• District court holds that there are no “proceeds” created by a

USVI tax offense.• On appeal, Third Circuit reverses, holding that mailing of false tax

USVI returns constituted mail fraud and therefore created “proceeds” for purposes of charging money laundering.

• Based upon Yusef, it appears that prosecutors could easily charge mail fraud, and therefore money laundering, in any case where false tax returns were mailed to the Internal Revenue Service.

United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008)

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• Defendant owned and operated nine restaurants in Chicago area and was known as the “Mayor of Chinatown” for his business and political prowess.

• Defendant was charged with failing to report more than $10 million in gross sales to state and local governments, and failing to pay more than $1.1 million in sales taxes due to the State of Illinois:

• Restaurant employees were routinely paid “under the table” in cash;• Defendant’s accountants provided false gross sales figures to Illinois

Department of Revenue and the Internal Revenue Service; and • Defendant and his wife diverted $1 million in restaurant revenues into

their personal bank accounts.

United States v. Tony Hu (N.D. Ill. 2016)

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#TaxLaw19 #FBA

• Defendant is charged with the following offenses:• 18 U.S.C. § 1343 (wire fraud) based upon use of email to communicate

false gross sales figures to his accountant for purposes of preparing sales tax returns.

• Money laundering (18 U.S.C. § 1957(a)) by engaging in a monetary transaction in criminally derived property derived from specified unlawful activity (wire fraud) based upon deposit of diverted sales receipts into personal bank account.

• Government also sought forfeiture of the full amount of sales tax due and owing to the Illinois Department of Revenue.

• Notably, no federal tax offenses are charged.

United States v. Tony Hu (N.D. Ill. 2016)

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#TaxLaw19 #FBA

• Four individuals charged with tax, wire fraud, and money laundering offenses in connection with decades-long scheme perpetrated by Mossack Fonseca law firm in Panama.

• Defendants include a Panamanian investment manager; a Panamanian attorney; a U.S.-based accountant; and a U.S. taxpayer.

• Indictment alleges that the Panamanian defendants aided U.S. taxpayers in hiding offshore financial assets using offshore trusts, sham foundations, and shell corporations formed in Panama, Hong Kong, and the BVI.

• Indictment further alleges that the Panamanian defendants assisted U.S. taxpayers in repatriating funds to the U.S. using debit cards and fictitious sales.

Panama Papers Indictment (Dec. 4, 2018)

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#TaxLaw19 #FBA

• Panamanian attorney, U.S. taxpayer, and U.S. accountant are charged with wire fraud based upon their use of bank wires and email to carry out scheme to defraud United States.

• Wire fraud charge enabled the government to charge them with conspiracy to commit international money laundering based upon their transfer of monetary instruments to/from the United States.

• Defendants are also charged with tax offenses:• Conspiracy to commit tax evasion; and • Willful failure to file FBARs.

• Finally, the wire fraud and money laundering charges permitted the government to include forfeiture allegations in the indictment.

Panama Papers Indictment

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