I attended the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas during first week of December 2017. During a criminal tax roundtable discussion, Mark Daly, Senior Litigation Counsel for the Department of Justice, caused quite a stir in the audience when he announced that the Department of Justice would begin arguing that offshore tax defendants should be sentenced under different guidelines that are based on the balances of offshore accounts rather than the tax loss from failing to report income from those accounts.
Getting to a Criminal Tax Sentence
The IRS's Criminal Investigation Division (CI or CID) is charged with investigating tax crimes, and as I discussed on previous blog post here, CI is refocusing its efforts on traditional tax crimes as identity theft crimes decrease. Once CI identifies a target of a criminal investigation, gathers sufficient evidence, and then believes that the target should be prosecuted or investigated further under grand jury proceedings, CI makes a referral to the Department of Justice's Tax Division (DOJ Tax). DOJ Tax then either handles the prosecution, or oversees the United States Attorney's office that is handling the prosecution. Most tax prosecutions result in plea agreements, but if there is no plea agreement, a DOJ Tax Attorney or an Assistant United States Attorney will handle the trial. After either a plea agreement is reached or the target is convicted through a trial, the case moves into the sentencing phase. Prosecutors have long had discretion to inflict great pain on a target of a criminal investigation because they can choose who to charge, and what to charge, and that can have a huge impact on the ultimate sentence that a defendant receives after reaching a plea agreement or being convicted.
The Probation Office will prepare a report for the sentencing judge that addresses the sentencing factors and the facts and circumstances of the particular case. The report will include a Sentencing Guideline calculation. The report will be guided by the United States Sentencing Guidelines, which are published in December of each year (available at http://www.ussc.gov/). The Sentencing Guidelines are drafted and issued by the U.S. Sentencing Commission. The goal of the Sentencing Guidelines is to bring uniformity to sentencing. The Sentencing Guidelines attempt to achieve uniformity by weighting principal sentencing factors—like the amount of harm and acceptance of responsibility—to determine levels. The principal sentencing factors are aggregated, and that determines the sentencing level, which determines the sentencing range.
The sentencing judge will hold a sentencing hearing. The sentencing hearing may include an evidentiary phase where testimony and other evidence are admitted to the extent that it is relevant to the sentencing. When the hearing is concluded, the judge will find the facts necessary to apply the Sentencing Guidelines. Then the judge will consider the determined sentencing range, and other factors that may allow her to sentence outside of the sentencing range. Finally, the judge will determine the sentence.
The defendant may appeal the sentence to the Court of Appeals unless appeal was waived as part of a plea agreement. The Court of Appeals can usually reverse only for procedural irregularity, which is usually an improper application of the Sentencing Guidelines, or substantive abuse of discretion in the sentence imposed.
Current Sentencing Guidelines
Part 2T of the Sentencing Guidelines is titled Offenses Involving Taxation. Part 2T uses the amount of tax loss as the primary determinant of the offense level. This means that the higher the tax loss, the higher the sentencing range, and vice versa. Taxpayers may have foreign bank accounts with large balances, but merely holding money offshore is not crime and it does not result in a tax loss. The failure to report income associated with those large balances, however, would result in a tax loss that would be used as part of the Sentencing Guidelines under Part 2T. Taxpayers can argue that the tax loss is small to support a lower sentencing range.
DOJ's Announced Change to Sentencing Guidelines
Mr. Daly announced during the conference that I attended that DOJ plans to shift to Part 2S1.3 of the Sentencing Guidelines for at least some offshore tax cases. Part 2S1.3 is titled Money Laundering and Monetary Transaction Reporting. Part 2S1.3 uses the value of the offshore bank accounts as the primary determinant of the offense level rather than the tax loss. This means that the taxpayer could have earned no income on the offshore bank account, but the sentence would be guided by the value of the account rather than the failure to report any income. When this was announced, there was uproar. Mr. Daly gave the example of United States v. Kim, where there was a $150,000 tax loss but account balances of $28 million. Using Part 2S1.3 rather than Part 2T would mean a sentence that was ten times the Part 2T sentence in Kim.
But wait, there is more. Part 2S1.3 allows for a 2-level enhancement where a defendant has been convicted of an offense under subchapter II of chapter 53 of title 31. Filing a false or misleading FBAR falls under that subchapter, since FBARs are required to be filed each year, DOJ may add charges under title 31 chapter 53 to obtain a 2-level enhancement at sentencing.
When Will DOJ Argue that the Account Balances Rather than the Tax Loss Should Drive the Sentence?
The short answer is that we do not know yet. Mr. Daly said that DOJ may assert that Part 2T still applies in some offshore account tax cases, but that it may assert that Part 2S1.3 applies in other cases. He said that these determinations were above his pay grade and that additional guidance would be forthcoming.
Taxpayers facing criminal investigation often want to know as soon as possible the potential sentence that they face. Now, consideration will need to be given to whether DOJ will assert that Part 2S1.3 applies, or whether Part 2T will continue to apply in sentencing.