The Internal Revenue Service announced today that it has begun mailing what it calls “educational letters” to taxpayers with cryptocurrency transactions who potentially failed to report income and pay the resulting tax from such transactions, or did not report their transactions properly. The IRS started sending these letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The IRS said it obtained the names of these taxpayers through “various ongoing IRS compliance efforts,” but did not specifically identify such efforts.

The unnamed “compliance efforts” referred to in today’s IRS announcement no doubt include the well-publicized “John Doe” summons served on Coinbase by the IRS. In late 2016, a federal judge authorized the IRS to serve a “John Doe” summons on Coinbase, the largest U.S.-based cryptocurrency exchange, based upon the IRS’s belief that numerous taxpayers were evading taxes by investing in Bitcoin and other cryptocurrencies. After the parties engaged in a year of contentious litigation challenging the summons, a federal judge ultimately ruled in the IRS’s favor, and ordered Coinbase to turn over the names of approximately 13,000 of its customers to the IRS.

Today’s IRS announcement included a stern warning from Commissioner Chuck Rettig. “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174, or Letter 6174-A. According to the IRS, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors, and advise such taxpayers to file amended returns and pay back taxes.

The IRS also reminded taxpayers that last year it announced the creation of a Virtual Currency Compliance campaign to focus on tax noncompliance related to the use of cryptocurrency. At the time, the IRS stated that it would address noncompliance in this area through outreach and audits, and further stated that “[t]axpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical.”

According to today’s announcement, the IRS will be issuing additional legal guidance on the tax treatment of cryptocurrency transactions in the near future. To date, the IRS has issued only a single guidance document on cryptocurrency. IRS Notice 2014-21 states that cryptocurrency is property for federal tax purposes and provides guidance on how general federal tax principles apply to cryptocurrency transactions.

The IRS concluded today’s announcement by stating that it will remain actively engaged in addressing noncompliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations. In addition, the IRS warned that cryptocurrency is an ongoing focus area for IRS Criminal Investigation, and that taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest, and in some cases could be subject to criminal prosecution.

Individuals who receive one of these “educational letters” from the IRS should proceed cautiously, as such letter may be a precursor to enforcement activity, such as an audit or even a criminal investigation. Fox Rothschild’s tax controversy and white collar criminal defense attorneys have significant experience dealing with IRS audits and criminal investigations. Please contact Matthew D. Lee if you receive correspondence from the IRS or have questions regarding the tax treatment of cryptocurrency.

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Earlier this week, the Internal Revenue Service’s Large Business & International Division announced six more compliance campaigns, bringing the total number of campaigns announced to date to a whopping 59. These campaigns reflect LB&I’s movement toward issue-based examinations and a compliance process in which LB&I decides which tax issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach is intended to make the best use of the IRS’s knowledge and to deploy the right resources to address these issues. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. The overall goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.

A complete list of all 59 campaigns is available here.

LB&I’s description of each new campaign follows:

S Corporations Built in Gains Tax

C corporations that convert to S corporations are subjected to the Built-in Gains tax (BIG) if they have a net unrealized built-in gain and sell assets within 5 years after the conversion. This tax is assessed to the S corporation. LB&I has found that S corporations are not always paying this tax when they sell the C corporation assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners.

Post-OVDP Compliance

U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

Expatriation

U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

High Income Non-filer

U.S. citizens and resident aliens are subject to tax on worldwide income. This is true whether or not taxpayers receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or its foreign equivalents. Through an examination treatment stream, this campaign will concentrate on bringing into compliance those taxpayers who have not filed tax returns.

U.S. Territories – Erroneous Refundable Credits

Some bona fide residents of U.S. territories are erroneously claiming refundable tax credits on Form 1040, U.S. Individual Income Tax Return. This campaign will address noncompliance through a variety of treatment streams including outreach and traditional examinations.

Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009

This campaign addresses compensation deferred from nonqualified entities attributable to services performed before January 1, 2009. In general, Internal Revenue Code (IRC) Section 457A requires that any compensation deferred under a nonqualified deferred compensation plan shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. The campaign objective is to verify taxpayer compliance with the requirements of IRC Section 457A through issue-based examinations.

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Earlier this week, the Attorneys General of New Jersey, New York, and Connecticut sued the Treasury Department and the Internal Revenue Service challenging a new IRS rule that would preclude individuals in those states from claiming deductions for charitable contributions to local governments. This lawsuit is the latest chapter in the battle over the “SALT cap,” enacted as part of the 2017 tax reform legislation which imposes a $10,000 annual limitation on the deduction for state and local taxes.

Enacted in 2017, the Tax Cuts and Jobs Act was touted as the most significant tax reform legislation in three decades. Among its provisions is a $10,000 annual limitation on the deduction for state and local tax, which includes state and local income taxes, local real estate taxes and state sales taxes. Previously, there was no monetary limitation for an individual taxpayer’s SALT deduction. The new limitation is more detrimental to individuals in high tax states, such as California and New York. The average SALT deduction in California was around $18,500, while the average deduction in New York was around $22,000. The SALT limitation imposed by the TCJA applies to taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Some states have attempted to work around the SALT limitation using creative legislative solutions. Last year, New York Gov. Andrew Cuomo signed into law a new state-operated charitable contribution fund to accept donations for the purposes of improving health care and public education in New York state. Taxpayers who itemize deductions may claim these charitable contributions as deductions on their federal and state tax returns. Any taxpayer making a donation may also claim a state tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. Taxpayers may also make qualified contributions to certain not-for-profit organizations for specified purposes. The law also authorizes local governments and school districts to establish charitable gift reserve funds and to offer real property tax credits to incentivize contributions to these new local charitable funds.

New Jersey soon followed suit, with Gov. Phil Murphy signing into law a measure allowing municipalities, counties and school districts to establish charitable funds where taxpayers can donate in return for a property tax credit. In return for donations, taxpayers would receive credits on their property tax bill of up to 90 percent of the donation. Taxpayers would then be able to claim their donation as a charitable deduction on their federal income tax return.

In Connecticut, the General Assembly passed legislation in 2018 that allowed municipalities to create “community supporting organizations” classified as charitable organizations. Taxpayers could make contributions to these organizations and most of that donation would be credited toward their local property tax liability.

In response to these state initiatives, the IRS issued a new rule aimed at nullifying the tax benefits these states were making available to charitable givers. The new rule – set to take effect on August 12, 2019 – requires taxpayers to subtract the value of any state and local tax credits they receive for charitable giving from their federal charitable contribution deduction.

The lawsuit filed this week by New Jersey, New York, and Connecticut contends that the new IRS rule is arbitrary and capricious, in violation of the federal Administrative Procedures Act. The complaint further alleges that the rule threatens economic harm to the states by discouraging charitable giving, and by depriving school districts, municipalities, and counties of important funding.

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The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced new efforts to crack down on Business Email Compromise (BEC) schemes and those who profit from such scams.  BEC fraud schemes generally involve attempts to compromise the email accounts of victims to send fraudulent payment instructions to financial institutions or business associates in order to misappropriate funds or to assist in financial fraud.  Often, the unsuspecting victim is conned into thinking a legitimate email from a trusted person or entity is directing them to make a payment for a normal business activity.  Based upon Suspicious Activity Report (SAR) data, BEC scams generated more than $300 million in fraud proceeds each month during 2018, with a cumulative total exceeding billions of dollars stolen from businesses and individuals.

As part of its FinCEN Exchange forum, FinCEN convened a meeting this week in New York City to focus was on identifying and combatting BEC schemes.  Representatives from depository institutions, federal and state government agencies, a federal task force, money transmitters, third-party service providers, and technology companies attended the session.  The FinCEN Exchange is a voluntary program established in 2017 to convene law enforcement and financial institutions from across the country to share information.

FinCEN also issued an update to its “Advisory to Financial Institutions on E-mail Compromise Fraud Schemes,” first published in 2016.  The updated advisory offers updated operational definitions, provides information on the targeting of non-business entities and data by email compromise schemes, highlights general trends in BEC schemes targeting sectors and jurisdictions, and alerts financial institutions to risks associated with the targeting of vulnerable business processes.  The advisory also highlights the potential for financial institutions to share information about subjects and accounts affiliated with email compromise schemes in the interest of identifying risks of fraudulent transactions and money laundering.

FinCEN also released a Financial Trend Analysis of Bank Secrecy Act data that explores industries targeted and methodologies used by BEC scammers.  It notes that the number of SARs describing BEC incidents reported monthly has more than doubled, from averaging nearly 500 per month in 2016, to above 1,100 per month in 2018.  The total value of attempted BEC thefts reported in SARs has almost tripled, to an average of $301 million per month in 2018 from $110 million per month in 2016.  The use of fraudulent vendor or client invoices grew as a BEC methodology, from 30 percent of sampled 2017 incidents, to 39 percent in 2018, becoming the most common BEC method.  Impersonating a CEO or other high-ranking business officer as a methodology declined, accounting for 12 percent in 2018 from 33 percent of sampled incidents in 2017.  Impersonation of an outside entity was described in 20 percent of 2018 reports.  Manufacturing and construction businesses were the top targets for BEC fraud in 2017 and 2018.

In another ongoing effort, FinCEN’s Rapid Response Program, in collaboration with law enforcement, recently surpassed $500 million in recovered funds.  Under the program, when U.S. law enforcement receives a BEC complaint from a victim or a financial institution, the relevant information is forwarded to FinCEN, which moves quickly to track and recover the funds.  The program utilizes FinCEN’s ability to rapidly share information with counterpart Financial Intelligence Units (FIU) in more than 164 jurisdictions, and uses these relationships to encourage foreign authorities to intercede and hold funds or reverse wire transfers.

Finally, the Egmont Group of FIUs has issued a public bulletin to alert competent authorities and reporting entities of key typologies and money laundering risks associated with BEC fraud schemes.  This bulletin was the result of an initiative by FinCEN and the FIU of Luxembourg, in collaboration with nine other FIUs.  The Egmont Group is a united body of 164 FIUs that provides a platform for the secure exchange of expertise and financial intelligence to combat money laundering and terrorist financing.

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By Kristina Burland and Matthew D. Lee

A precedent-setting criminal prosecution of two California executives under the Consumer Product Safety Act is sending a strong warning to corporate boardrooms that the reporting requirements of the CPSA must be taken seriously and that a company’s compliance program must be thoughtfully designed to ensure that reports are submitted promptly.

In an indictment handed up in March, a federal grand jury charged that Simon Chu and Charley Loh – executives of two California corporations that import and distribute dehumidifiers from China – had received multiple reports that the dehumidifiers were defective and could catch fire, but failed to notify the Consumer Products Safety Commission.

According to the indictment, Chu and Loh knew that they were required to report their knowledge of the defects, but waited at least six months before doing so and continued to sell the dehumidifiers to retailers.

Chu and Loh were charged with conspiracy to commit wire fraud, failure to furnish information under the CPSA, and defraud the CPSC, as well as one count of wire fraud. The indictment identifies a number of unnamed, unindicted co-conspirators, including the two corporations that Chu and Loh work for, referred to as “Unindicted Co-Conspirator Company A” and “Unindicted Co-Conspirator Company B” throughout the indictment. The case is being prosecuted in the Central District of California.

CPSA Reporting Requirements

Section 15 of the CPSA requires every manufacturer, distributor and retailer of a consumer product – as well as all directors, officers, and agents thereof – to “immediately” inform the CPSC of a product defect that could “create a substantial product hazard,” or “creates a substantial risk of injury to the public.”

Regulations clarify that the requirement for “immediate” reporting means “within 24 hours” of receiving information that the product “contains a defect which could create a substantial risk of injury to the public, or creates an unreasonable risk of serious injury or death.”

Chu’s and Loh’s Conduct

According to the indictment, Chu and Loh became aware of the defects associated with the dehumidifiers as early as July 2012, when they saw a video that depicted a burning dehumidifier resembling those imported, distributed, and sold by their companies. Soon after, Chu tested the plastic used in the Chinese dehumidifiers and confirmed that it would burn.

In September 2012, Loh allegedly informed a manager of one of the companies that the dehumidifiers could catch fire, and that the material used in them did not meet safety standards. But the indictment alleges that manager recommended that Chu and Loh “delay a recall … for six to nine months.” Later that month, Loh allegedly told high-ranking executives at one company that he believed the defects should be reported to the CPSC. However, neither Chu nor Loh submitted a report to the CPSC, and they continued to sell the defective dehumidifiers to retail companies in the United States from September 2012 to April 2013.

Approximately 2.2 million Chinese dehumidifiers, including those sold by the companies that employed Chu and Loh, were ultimately recalled in September 2013.

The indictment alleges that Chu and Loh “knowingly and willfully failed to immediately report,” and “willfully caused others” to fail to immediately report to the CPSC “upon receiving information that reasonably supported the conclusion that the Chinese dehumidifiers contained a defect that could create a substantial product hazard, and created an unreasonable risk of serious injury and death.”

The indictment also alleges that the executives “deliberately withheld” information about the dangers of the dehumidifiers from retailers who purchased the dehumidifiers for resale as well as the insurance companies who paid for damages associated with the defects.

Takeaways

The government has routinely brought civil actions against corporations for failure to report product defects pursuant to Section 15. Indeed, the prosecution of Chu and Loh is related to a civil CPSC administrative matter brought against Chinese company Gree Electric Appliances that was resolved in 2016. In that case, Gree and others agreed to pay a $15.5 million civil penalty for failures to report the defective dehumidifiers.

The indictment signals that the U.S. Department of Justice is now willing to prosecute both corporations and their executives for failing to comply with the reporting requirement set forth in Section 15. Criminal penalties for failure to report product defects can no longer be ruled out. As U.S. Attorney Nicola T. Hanna of the Central District of California cautioned, the indictment “sends a clear message: If you plan to profit from selling defective products, you should also plan to face justice.”

Earlier this month, the five leaders of the Joint Chiefs of Global Tax Enforcement (known as the “J5”) met in Washington to commemorate the one-year anniversary of the formation of the J5 organization and to announce their first year results. The J5 consists of the leaders of tax enforcement agencies in five countries: Australia, Canada, the Netherlands, England, and the United States. The J5 was established to focus on cross-border tax and money laundering threats, including cybercrime, cryptocurrency, and enablers of global tax crimes, and to share intelligence and data. In a press release, the J5 revealed that its member organizations are involved in, and collaborating about, numerous global tax evasion investigations:

The J5 is involved in more than 50 investigations involving sophisticated international enablers of tax evasion, including a global financial institution and its intermediaries who facilitate taxpayers to hide their income and assets. These highly harmful, high-end enablers of tax evasion were previously thought to be beyond the reach of the member countries. The agencies are also cooperating on cases covering crimes from money laundering and the smuggling of illicit commodities to personal tax frauds and evasion. Additionally, there have already been hundreds of data exchanges between J5 partner agencies, with more data being exchanged in the past year than the previous 10 years combined.

“I’m extremely proud of the work we have accomplished in just one year since the formation of the J5,” said Don Fort, Chief of the IRS Criminal Investigation Division. “Each country came to the group with expectations and challenges that needed to be overcome so we could each realize our goal. We have found innovative ways to tackle these problems, remove barriers, and develop processes that make the sum of all of our parts a much more efficient and successful organization. It is not a good time to be a tax criminal on the run—your days are numbered.”

Part of the work of the J5 is focused on establishing mechanisms by which partner countries may share information in a more organized fashion. One such mechanism is the FCInet platform, which is a decentralized virtual computer network that enables agencies to compare, analyze, and exchange data anonymously. It helps users obtain the right information in real-time and enables agencies from different jurisdictions to work together while respecting each other’s local autonomy.

More information about the J5 is available at www.irs.gov/J5.

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Last week, the Financial Crimes Enforcement Network (FinCEN) announced its first-ever civil penalty against a cryptocurrency exchanger for willful violations of the Bank Secrecy Act (BSA). According to the FinCEN Assessment of Civil Money Penalty (Assessment), California-based Eric Powers failed to register with FinCEN as a money services business (MSB); develop, implement, and maintain an effective written AML program; report suspicious transactions conducted by, at, or through Mr. Powers; and file currency transaction reports – all requirements of the BSA and implementing regulations.

Mr. Powers operated as a peer-to-peer exchanger of the convertible virtual currency bitcoin, meaning he purchased and sold bitcoin to and from other people. Mr. Powers conducted over 1700 such transactions between December 6, 2012 and September 24, 2014, and completed these transactions by sending or receiving physical currency in person, by mail, or via wire transfer.

FinCEN shed any doubt about the application of the BSA to virtual currency in March 2013, and made clear that those like Mr. Powers who are engaged as a business in the exchange of virtual currency (exchangers) as well as those issuing and redeeming virtual currency (administrators) are generally considered MSBs within the meaning of the BSA. See FIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013, available here. Administrators or exchangers who “accept and transmit a convertible virtual currency” or “buy[ ] or sell[ ] convertible virtual currency” are money transmitters under the regulations implementing the BSA. See id.

In pertinent part, the BSA requires MSBs to:

  • Register with FinCEN;
  • Establish and implement a written Anti-Money Laundering (AML) program;
  • Report transactions that the MSB “knows, suspects, or has reason to suspect” are suspicious; and
  • File currency transaction reports (CTRs) for transactions that involve the physical transfer of $10,000 or more in currency.

Mr. Powers failed to follow these requirements. First, Mr. Powers did not register with FinCEN as an MSB, despite his “awareness of BSA requirements” as evidenced by his participation in “online discussions pertaining to AML compliance, including specific conversations about registering as an MSB.” See Assessment at 3.

Second, Mr. Powers failed to implement an AML program. Mr. Powers did not produce any AML policies, procedures, and internal controls documents to FinCEN and had no written policies or procedures for filing any BSA reports. Mr. Powers also openly stated that he would assist customers in circumventing AML laws. See Assessment at 4.

Third, Mr. Powers did not report any suspicious transactions, despite the fact that he “processed transactions that bore strong indicia of illicit activity.” See Assessment at 5. For example, his bitcoin wallet was associated with hundreds of transactions for customers doing business on a darknet site shut down by federal law enforcement authorities in 2013. He also conducted transactions with numerous customers who used torrent services to anonymize their location and identity, which the Assessment describes as a “strong indicator of potential illicit activity when no additional due diligence is conducted.” However, no suspicious activity reports were ever filed. See Assessment at 5-6.

Finally, Mr. Powers conducted numerous transactions which required CTRs, but failed to file any CTRs with FinCEN. The Assessment estimates that Mr. Powers should have filed 243 CTRs. See Assessment at 7.

Mr. Powers has agreed to pay a $35,350 fine and to cease providing “money transmission services” within the meaning of the BSA. The Assessment notes that in reaching the fine, it took into consideration “the extensive cooperation provided by Mr. Powers” in FinCEN’s investigation. See Assessment at 8.

Click here to read FinCEN’s Assessment of Civil Money Penalty.

Yesterday, the Internal Revenue Service’s Large Business and International division (LB&I) announced three additional compliance campaigns, bringing the total number of campaigns announced to date to 53. These campaigns reflect LB&I’s movement toward issue-based examinations and a compliance process in which LB&I decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach is intended to make the best use of the IRS’s knowledge and to deploy the right resources to address these issues. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. The overall goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.

Of note, the three new campaigns are all focused on offshore activities of U.S. taxpayers, reflecting the IRS’s continuing prioritization of international tax enforcement. A description of each new campaign follows:

Captive Services Provider Campaign

The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary. Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.

Offshore Private Banking Campaign

U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. It is not illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these offshore activities. The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

Loose Filed Forms 5471

Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return (or partnership or exempt organization return, if applicable). If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.

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Yesterday the IRS announced the results of a nationwide two-week “education and enforcement campaign” regarding employment tax compliance. For several years, the IRS has made employment tax compliance a top enforcement priority, on both the civil and criminal sides. With payroll taxes withheld from employee wages accounting for nearly 72 percent of all tax revenue collected by the U.S. Treasury, employment tax noncompliance is one of the biggest problems for the IRS. The IRS announcement revealed that between March 25 and April 5, IRS Field Collection and IRS Criminal Investigation undertook a special campaign “to shore up this area of compliance.”

“Payroll taxes form a key part of our tax system,” said IRS Commissioner Chuck Rettig. “When individuals and businesses evade their employment tax obligations, it not only undermines our tax system, it also creates an unfair situation for people who are following the law. The IRS is committed to compliance in the payroll tax arena, which helps ensure fairness and faith in our tax system.”

On the civil side, IRS revenue officers made personal visits during the two-week campaign to nearly 100 businesses around the country suspected of having serious issues with employment tax compliance. Business owners were informed about ways to catch up with back payroll taxes, how to stay current and the potential for civil and criminal penalties. The Trust Fund Recovery Penalty is one example of the legal ramifications of not collecting, accounting for and paying payroll taxes to the IRS when required. “Enforcement is never our first resort, but protecting this significant source of revenue to the nation deserves our best efforts, including reaching out to help businesses help themselves,” said Darren Guillot, Director of IRS Field Collection Operations.

On the criminal enforcement side, IRS CI worked with the Department of Justice Tax Division and U.S. attorneys around the nation to focus on about 50 law enforcement actions related to employment tax crimes. During the two weeks, IRS CI indicted 12 individuals, executed four search warrants and saw six individuals or businesses sentenced for crimes associated with payroll taxes. In addition to these early numbers, roughly two dozen more enforcement actions are planned in the weeks following the two-week campaign as well.

“Employers know the rules—they must deposit and report employment taxes accurately—this is non-negotiable,” said Don Fort, Chief of IRS Criminal Investigation. “When employers fail to pay over the required employment taxes for whatever reason, they skip out on one of their most important responsibilities as a business owner. Not only are those employers cheating the system and their employees, they are cheating future generations relying on those taxes to help build the future.”

The IRS noted in its announcement that the agency has several tools to bolster payroll tax compliance including educational outreach, data analytics, civil investigations by highly trained revenue officers, as well as harsher measures such as lawsuits, seizures, and criminal referrals to IRS CI.

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With April 15 just around the corner, the Justice Department’s Tax Division has issued its annual public warning to would-be tax cheats. It is no secret that the Justice Department and Internal Revenue Service significantly ramp up their publicity campaigns regarding tax prosecutions in the weeks leading up to April 15, in an attempt to deter any taxpayer thinking about filing a false tax return or otherwise cheating on their taxes. “Filing a tax return and paying taxes are serious acts and willfully filing false and fraudulent tax returns and deliberately evading paying taxes are criminal acts,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.  “During tax season and every season, the Tax Division is committed to achieving justice through the prosecution of those who choose to engage in tax crimes.” Today’s warning includes a summary of recent criminal tax prosecutions throughout the country, as follows:

Recent Tax Prosecutions of Individuals

  • In April 2019, a Houston, Texas, man was sentenced to 360 months in prison for multiple conspiracy and tax crimes, including corporate tax evasion. The defendant engaged in the fraudulent sale of second-hand prescription drugs and tax crimes. The court imposed a criminal forfeiture money judgment of $20,326,464.17 and ordered $716,986 in restitution to the IRS.
  • In April 2019, a District of Columbia woman was sentenced to 54 months in prison for conspiring to defraud the United States and commit theft of public money and aggravated identity theft. She engaged in a fraudulent tax refund scheme and was ordered to pay $1,806,876.66 in restitution to the IRS.
  • In March 2019, a Salinas, California, woman was sentenced to 60 months in prison for conspiring to file false income tax returns and bank fraud. She was ordered to pay $1,641,610 in restitution to the IRS.
  • In January 2019, a Union, South Carolina, mechanic was sentenced to 36 months in prison for wire fraud and filing a false income tax return. After creating a false invoice scheme, he embezzled money from his employer and failed to report the income on his tax returns. He was ordered to pay $1,941,377.32 in restitution.
  • In November 2018, a Farmington, Michigan, trucking business owner was sentenced to 33 months in prison for wire fraud and willfully failing to file a tax return. The court ordered restitution of $2,919,265 to a third party victim and $142,069 to the IRS.
  • In October 2018, a former IRS-Criminal Investigation special agent was sentenced to 51 months in prison for filing false tax returns, obstruction of justice, and stealing government money. A federal jury in the Eastern District of California convicted the defendant, who was also a CPA.

Recent Employment Tax Prosecutions

  • In March 2019, a Raleigh, North Carolina, mental health executive was sentenced to 30 months in prison for failing to report and pay almost $1.7 million in employment taxes to the IRS.
  • In November 2018, a Collinsville, Virginia, pharmacist was sentenced to 41 months in prison for failing to pay over more than $5 million in employment taxes to the IRS. The defendant spent the money owed to the United States on a Jeep Grand Cherokee, a jet ski, stock market investments and real property.
  • In June 2018, a former Virginia Software Company CEO was sentenced to 21 months in prison for conspiring to defraud the government of more than $1.8 million in payroll taxes. Along with his co-conspirator, he also failed to remit the full amount of employee retirement contributions to the company’s retirement plan.

Recent Prosecutions Involving Offshore Banking

  • In March 2019, one of the largest Israeli banks, Mizrahi-Tefahot Bank Ltd., and two of its subsidiaries, United Mizrahi Bank (Switzerland) Ltd. and Mizrahi Tefahot Trust Company Ltd., entered a deferred prosecution agreement (DPA) with the Department of Justice. Mizrahi-Tefahot Bank Ltd. paid $195 million to the United States as a direct result of its role in defrauding the United States, specifically the IRS, by conspiring with U.S. taxpayer-customers and enabling U.S. taxpayers to hide income and assets from the IRS.
  • In October 2018, a Scottsdale, Arizona man, who managed a resort with family members in Pagosa Springs, Colorado, was sentenced to 18 months in prison for filing a false tax return underreporting his income and omitting $9.7 million in investment income from two offshore bank accounts in Liechtenstein.

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