Tuesday, March 28, 2017

Wickenby, Lux, Panama and Other Leak Driven Laws

Privilege police. When did fetishizing powerlessness become a commonplace of online debate? Dismissing someone's view because of his "privilege" isn't an argument. It's a Slur  
For those of you too busy this week to follow Judge Neil Gorsuch’s confirmation hearing, here’s a nice collection of the highlights by Benjamin Wallace-Wells. [New Yorker via How Appealing]

Why Steven Mnuchin Wants a Stronger I.R.S.

Another Offshore Account Guilty Plea Coupled with Bank Fraud Conspiracy

Ring (2017)Diane Ring (Boston College) presents Leak-Driven Law, 65 UCLA L. Rev. __ (forthcoming 2018) (with Shu-Yi Oei (Tulane; moving to Boston College)) at Boston College today as part of its Tax Policy Workshop Series:

Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries.

The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially beneficial from an economic welfare perspective. This Article argues, however, that the conventional wisdom is too simplistic.

Reuven S. Avi-Yonah (Michigan) & Martin Vallespinos (Michigan), Special Tax Zones and the WTO:

Since the SCM agreement was enacted in 1995, the global leadership in the field of STZs has shifted from the OECD to the WTO.

Reuven S. Avi-Yonah (Michigan) & Haiyan Xu (Michigan), A Global Treaty Override? The New OECD Multilateral Tax Instrument and Its Limits:

The new OECD Multilateral Instrument to amend tax treaties (MLI) is an important innovation in international law. Hitherto, international economic law was built primarily on bilateral treaties (e.g., tax treaties and BITs) or multilateral treaties (the WTO agreements). The problem is that in some areas, like tax and investment, multilateral treaties proved hard to negotiate, but only a multilateral treaty can be amended simultaneously by all its signatories.

TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (3/25/17)


TIGTA issued a report titled A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes (Ref # 2017-IE-R004 3/21/17), here.  I highly recommend the report to readers, both those watching the trajectory of criminal tax prosecutions and for students wanting to know more about the process.  I will report on some of the key features here to encourage readers to read or at least puruse the whole report.

I briefly introduce the key context for the report.

Employment taxes withheld from employee compensation and remitted to the IRS are the backbone of our tax and FICA system.  There must be robust incentives to encourage compliance by employers and those within the employer organization reponsible for employment tax withhold and payment to the IRS.  Those incentives include the standard range of civil and criminal penalties applicable to employers that apply to tax noncompliance.  But employment tax noncompliance requires that the penalty disincentives include potential civil liability and criminal penalties of those inside the employer organization that were responsible for the employment tax noncompliance.

The Trust Fund Recovery Penalty ("TFRP") in § 6672, here, is a civil collection mechanism whereby persons within an employer organization required to withhold, collect and pay over employment taxes from the compensation paid employees can be held civilly liable for those taxes.  Liability requires that the person have acted willfully.

The parallel criminal penalty for that failure to withhold, collect and payover employment taxes is in § 7202, here.  That provision imposes up to a 5-year incarceration period for each failure.  Liability requires that the person have acted willfully, but this is generally perceived as a higher level of willfulness than required for the TFRP.

The IRS investigates failures to withhold, collect and pay over.  Where it can, it tries to collect from the employer.  In order to insure collection, it may assert the TFRP against persons it believes are responsible for the noncompliance.  An IRS collection officer investigates the delinquent employment taxes and makes determinations as to potential TFRP liability.  The IRS collection officer will also look for indicators and fraud and, if firm indicators of fraud (also called badges of fraud) are found, may, in conjunction with his supervisor and the fraud technical adviser, refer the the case to IRS Criminal Investigation ("CI") to consider whether the case should be further investigated for potential criminal prosecution and referred to DOJ Tax Criminal Enforcement Section.

With that introduction the following is the the cover memorandum for the TIGTA report (I omit footnotes):
Employment tax noncompliance is a serious crime. Employment taxes finance Federal Government operations plus Social Security and Medicare. When employers willfully fail to account for and deposit employment taxes, which they are holding in trust on behalf of the Federal Government, they are in effect stealing from the Government. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in our opinion, there is likely little deterrent effect. 
The TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, CI, should consider a focused strategy to enhance the effectiveness of the IRS’s efforts to address egregious employment tax cases. This strategy should include use of data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. In addition, the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present).  
The IRS partially agreed with our recommendation. The IRS agreed with the portion of our recommendation describing a focused strategy to enhance effectiveness of the IRS’s efforts to address egregious employment tax cases by citing various initiatives in process and completed. However, the IRS did not specifically address our recommendation to enhance the use of data analytics. The IRS disagreed with the portion of our recommendation that the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present) citing the need to balance several factors by a number of stakeholders and limited government resources including limitations on the number of criminal tax cases the United States Attorneys and the US Courts can accommodate. Management’s response to the draft report is included as Appendix IX.