On November 1, 2016, the IRS issued Notice 2016-66 imposing new reporting requirements on micro-captives and their material advisors (see prior post describing the Notice). On March 27, 2017, CIC Services, LLC and Ryan, LLC filed a complaint against the IRS seeking a preliminary injunction prohibiting the IRS from enforcing the disclosure requirements in the Notice. They argued that as material advisors subject to the Notice’s disclosure requirements, complying with the Notice’s disclosure requirements will force them to incur significant costs. In addition, they argued that the Notice constitutes a legislative-type rule that fails to comply with the mandatory notice-and-comment requirements under the Administrative Procedures Act. CIC Services had previously filed a lawsuit on December 28, 2016 against the IRS seeking an injunction but voluntarily withdrew the suit hoping that lobbying efforts undertaken on behalf of the captive insurance industry would result in the IRS eliminating or modifying the reporting requirements.

In denying the injunction, the US District Court for the Eastern District of Tennessee found that the Tax Anti-Injunction Act (AIA) prohibits injunctive relief restraining the assessment or collection of any tax and that the penalties assessed for noncompliance with the Notice are taxes within the AIA’s injunctive relief prohibition. However, the Court notes that the AIA does not prevent the plaintiffs from obtaining judicial review of the Notice, but only after they fail to report, pay the penalties and sue for a refund.

The Court conceded that the plaintiffs demonstrated that they are likely to suffer at least some irreparable harm in the absence of an injunction. The plaintiffs estimate that they and similarly situated captive insurance companies will expend at least $60,000 per year to comply with the Notice’s requirements. However, in weighing the public’s interest for the disclosures, the Court found that the public interest would not be served by issuing the injunction because Congress gave the IRS authority to designate certain transactions as “reportable transactions” as a way to identify transactions that have the potential for tax avoidance or evasion. During hearings on the motion, the principal and founder of CIC testified that captive insurance agreements can “most definitely” be used for tax avoidance or evasion purposes. As a result, the Court concluded that the public interest in identifying transactions potentially aimed at tax avoidance or evasion outweigh any incidental effect on entities forced to comply with the IRS’s reporting requirements.


irsThree influential members of Congress have questioned the Internal Revenue Service’s strategy for addressing the tax treatment of digital or virtual currencies, such as Bitcoin, and its efforts to uncover the identities of taxpayers who used such currencies through a “John Doe” summons to Coinbase, a virtual currency exchanger in San Francisco. In a letter dated May 17, 2017, Orrin G. Hatch, Chairman of the Senate Finance Committee; Kevin Brady, Chairman of the House Ways and Means Committee; and Vern Buchanan, Chairman of the Oversight Subcommittee of the House Ways and Means Committee, wrote to IRS Commissioner John Koskinen to express concern about the manner in which the IRS is undertaking to treat digital currencies for tax purposes.

In the letter, the three members noted that in March 2014, the IRS released guidance on the tax treatment of digital currencies for the first time. In IRS Notice 2014-21, which consisted of a series of “frequently asked questions” (and answers), the IRS announced that virtual currency would be treated, and taxed, as property. Among other things, this announcement meant that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

In Notice 2014-21, the IRS acknowledged that “there may be other questions regarding the tax consequences of virtual currency not addressed in this notice that warrant consideration,” and invited public comment.  Soon thereafter, the IRS stated informally that virtual currency was not reportable for purposes of the Report of Foreign Bank and Financial Accounts (FBAR), but cautioned that this position could change in the future.

In June 2016, the American Institute of CPAs (AICPA) urged the IRS to issue additional guidance on virtual currency transactions, noting ten areas left unaddressed by Notice 2014-21 and for which guidance was needed:

  • Acceptable valuation and documentation;
  • Expenses of obtaining virtual currency;
  • Challenges with specific identification for computing gains and losses;
  • General guidance regarding property transaction rules;
  • Nature of virtual currency held by a merchant;
  • Charitable contributions;
  • Virtual currency as a “commodity;”
  • Need for a de minimis election;
  • Retirement accounts, and
  • Foreign reporting requirements for virtual currency.

In September 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report criticizing the IRS for failing to develop a “coordinated virtual currency strategy” during the two years following issuance of Notice 2014-21:

Although the IRS issued Notice 2014-21, Virtual Currency Guidance, and established the Virtual Currency Issue Team, there has been little evidence of coordination between the responsible functions to identify and address, on a program level, potential taxpayer noncompliance issues for transactions involving virtual currencies. None of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies. In addition, it does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.

TIGTA further pointed out that although the IRS solicited public comments to Notice 2014-21, the agency has taken no actions to address comments received.

In response, the IRS agreed with TIGTA’s recommendations and stated that it “plans to develop a virtual currency strategy including an assessment of whether changes to information reporting documents are warranted.” According to TIGTA, the IRS also agreed that “additional guidance would be helpful and plans to share the recommendation with the IRS’s Office of Chief Counsel for coordination with the Department of the Treasury’s Office of Tax Policy.” To date, however, no such additional guidance from the IRS regarding virtual currency has been issued.

Approximately two months later, however, the IRS issued a “John Doe” summons to Coinbase, a U.S. company that serves as a digital currency wallet where merchants and consumers can conduct transactions using virtual currencies such as Bitcoin and others. A “John Doe” summons is a relatively unknown information-gathering tool that is being used with increasing frequency by the IRS to obtain information and records about a class of unidentified taxpayers if the IRS has a reasonable belief that such taxpayers are engaged in conduct violating U.S. tax laws. Because the identities of the targeted taxpayers are unknown, the summons is denoted with a “John Doe” moniker. Expressly authorized by the Internal Revenue Code, a John Doe summons must first be approved by a federal judge before it can be served. The IRS sought to serve a summons on Coinbase because of its concern that the anonymous nature of virtual currencies like Bitcoin may allow users to engage in tax evasion and other illegal conduct:

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are nearly a thousand virtual currencies, but the most widely known and largest is bitcoin. Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. In the court’s order, U.S. Magistrate Judge Jacqueline Scott Corley found that there is a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws.

In an affidavit submitted to the Court in support of its application for a John Doe summons, the IRS claimed that in 2015, only 802 taxpayers reported a Bitcoin transaction on Form 8949.

The “John Doe” summons directed to Coinbase requires that company to produce records identifying U.S. taxpayers who have used its services during the years 2013 and 2015. In response, both Coinbase and one of its customers have sought to quash the summons. In March 2017, the IRS filed a petition in federal court to enforce the summons against Coinbase. Subsequently several Coinbase customers have sought to intervene in the summons enforcement proceeding anonymously. To date, the Court has not ruled on these applications, and Coinbase has not produced any records in response to the summons.

In the Congressional letter to the IRS, the authors express concern with the Coinbase summons, pointing out that the summons is estimated to affect 500,000 active Coinbase customers and would result in the production of millions of pages of transaction records. The letter further points out that “90 percent of these customers engaged in less than $10,000 in cumulative, gross transactions during the entire period requested.” Under these circumstances, the three members question whether the IRS genuinely has a reasonable belief that Coinbase customers are engaging in tax evasion:

However, we strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS. Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals. The IRS’s actions in this case also set a dangerous precedent for companies facilitating virtual currency transactions that could be subject to a similar summons.

The letter concludes by demanding that the IRS respond, by June 7, 2017, to a broad set of questions about the agency’s strategy for addressing the tax treatment of digital currencies:

1.  Please describe the IRS’s current digital currency strategy and provide any existing policies and procedures.

a.  What efforts has the IRS made to conduct industry outreach or coordination on its digital currency strategy?

b.  What, if any, industry concerns have been raised and what actions is the IRS taking to address these?

c.  How does the John Doe summons issued to Coinbase fit into the larger IRS digital currency strategy?

2.  As mentioned earlier, to issue a John Doe summons, the IRS must first establish that it has a reasonable basis to believe that the individuals may fail or may have failed to comply with internal revenue law. What is the justification for the IRS’s position that all Coinbase customer records are needed for this timeframe?

a.  When seeking this summons, what provision(s) of the IRC did the IRS believe Coinbase customers not to be in compliance with?

b.  Did the IRS consider issuing a more narrowly tailored summons? If so, what impediments existed to the IRS issuing a more narrowly tailored summons?

3.  TIGTA made three recommendations in its 2016 report referenced above. What is the current status of the IRS’s implementation of each of these recommendations and what actions have been taken to address each one?

4.  How has or will the IRS assess and take into account the compliance burdens on start-up financial technology companies as well as digital currency users (especially those engaging in light to moderate transactional use) when developing and refining its digital currency strategy?

5.  Will the IRS consider a de minimis exemption or other action to remove practical obstacles to such moderate, transactional use of digital currencies?

This letter from Congress is the latest example of criticism of the IRS’s digital currency strategy (or lack thereof). As noted above, the issuance of Notice 2014-21 was helpful in providing initial guidance in this area, but it left unanswered many more questions than it answered, as evidenced by follow-up comments from the AICPA and TIGTA. And the IRS is encountering resistance in its efforts to enforce its John Doe summons to Coinbase. The Congressional letter only adds to the growing chorus calling for the IRS to clarify this area once and for all.

In The Green Solution Retail v. U.S., Case No. 16-1281, 10th Cir, May 2, 2017, the Tenth Circuit agreed with the District Court that a marijuana dispensary was not entitled to injunctions intended to stop an IRS examination of the taxpayer’s books and records. After the IRS initiated an examination, the taxpayer filed injunction to prevent IRS from investigating its business records and also sought declaratory judgment that IRS was acting outside its authority because in applying Section 280E, it was attempting to determine whether the taxpayer violated the Controlled Substances Act. The IRS moved for dismissal based on lack of subject matter jurisdiction asserting the Anti-Injunction Act (“AIA”) prevents the court from hearing the case and Declaratory Judgment Act (“DJA”) prohibits declaratory judgments in certain federal tax matters. Both the District Court and the Tenth Circuit agreed with the IRS.

  • The AIA prevents suits for the purpose of restraining the assessment or collection of any tax. Section 7421(a). The AIA is a jurisdictional statute which prevents the courts from entertaining suits which prohibit the collection of federal taxes. The taxpayer argued that the AIA did not apply because the IRS actions did not, yet, involve assessment of tax. However, pursuant to Lowrie v. United States, 824 F.2d 827, 830 (10th Cir. 1987), the AIA also bars “activities leading up to, and culminating in, such assessment and collection.” The Tenth Circuit and the District Court applied the holding in Lowrie to hold that the AIA barred a suit here.
  • The DJA allows a federal district court to grant declaratory relief in a case of a controversy…except with respect to Federal taxes.  28 U.S.C. section 2201.  The Tenth Circuit held “if AIA bars this suit, the DJA claims are likewise barred because the two Acts are coterminous.”
  • The taxpayer argued that the Supreme Court’s decision in Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015), holding that the Tax Injunction Act deprived the Courts from jurisdiction to stop the implementation of Colorado’s sales tax reporting regime, overruled Lowrie. The Tenth Circuit concluded that while Direct Marketing called into question the holding in Lowrie, it did not clearly undermine Lowrie, and therefore Lowrie controls here.
  • After concluding that Direct Marketing did not overrule Lowrie, the Court addressed the taxpayer’s arguments that the AIA was not applicable because the IRS was acting outside its jurisdiction and because section 280E is a penalty, not a tax.  The Tenth Circuit disagreed with both of these arguments, reviewing the Colorado District Court’s recent decision in Alpenglow Botanicals v. U.S., discussed in our prior post available here, to determine that the IRS was not acting outside its jurisdiction.  The Tenth Circuit also clearly held that “Section 280E is not a penalty,” primarily based on case law holding that disallowance of a deduction is not a penalty or punishment.

Followers of developments in this area should note that the taxpayer has also filed a petition to quash a summons issued to the Colorado Marijuana Enforcement Division. This case is pending in the United States District Court for the District of Colorado, Case no 1:16-mc-00137 (filed June 27, 2016).


In a press release touting recent law enforcement success stories based upon Bank Secrecy Act reporting by financial institutions, the Treasury Department’s Financial Crimes Enforcement Network revealed publicly for the first time that its recent Geographic Targeting Orders (GTOs) are generating meaningful leads that are leading to the investigation and prosecution of individuals for money laundering violations. GTOs are a little-known, but powerful, anti-money laundering tool authorized by federal law which impose enhanced anti-money laundering reporting obligations on financial institutions that are short-term and limited to geographic regions of the United States that are perceived to be particularly vulnerable to money laundering. One such geographic area of concern is the U.S. Mexico border at two California ports of entry, which was the subject of a GTO intended to improve transparency of cross-border movements of cash. FinCEN’s announcement revealed that information generated by that GTO led Homeland Security Investigations agents to uncover a money laundering scheme that moved $45 million from the U.S. to Mexico during a 15-month period.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. Authorized by the Bank Secrecy Act, GTOs were originally only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. Historically, FinCEN’s issuance of a GTO was not publicized, and generally only those businesses served with a copy of a particular GTO were aware of its existence. Over the course of the last three years, however, FinCEN – the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement – has aggressively exercised its GTO authority frequently throughout the United States in areas of money laundering concern. Recent, publicly-announced GTOs have focused on the fashion district of Los Angeles, exporters of electronics in South Florida, check cashing businesses in South Florida, and most recently, all-cash purchases of luxury residential real estate in six high profile U.S. real estate markets. In each of these examples, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were vulnerable to money laundering. These GTOs demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity.

GTO Focused on Cross-Border Cash Transport

In August 2014, working in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), FinCEN announced issuance of a GTO covering the U.S.-Mexico border at two California ports of entry. The purpose of this GTO was to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services and other common carriers of currency, the GTO required enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California.

When this GTO was announced, FinCEN noted that in 2010, Mexico enacted new anti-money laundering provisions to attack the flow of illicit cash from the United States to Mexico. These efforts made it much more difficult for criminals and narco-traffickers to place large amounts of cash in Mexican financial institutions and resulted in an increase in cash coming back to the United States from Mexico, via armored car services or couriers, for attempted placement in U.S. financial institutions. According to FinCEN, law enforcement information and BSA data analysis suggest that much of this cash movement is not properly reported and therefore not made available in FinCEN’s database for the benefit of investigators and analysts following illicit money trails.

In August 2015, FinCEN renewed the California border crossing GTO and issued another GTO focused on eight major border crossing locations in Texas. These GTOs temporarily modified the Report of International Transportation of Currency or Monetary Instruments (CMIR) requirements for common carriers of currency when physically moving more than $10,000 in cash across designated border crossings in California and Texas. The GTOs required 100 percent CMIR reporting and recordkeeping by common carriers of currency at these border crossings because they eliminate the reporting exemption for these carriers that might otherwise apply to transporting currency from a foreign person to a bank. The GTOs’ enhanced reporting also required common carriers of currency to note additional information when completing the CMIR, including the name and address of the currency originator; the name and address of the currency recipient; and the name and address of all other parties involved in the movement of currency and monetary instruments. According to FinCEN, this additional information significantly assists law enforcement’s ability to identify and prosecute illegal transportation of currency and disrupt the illicit movement of bulk cash across the southwest border.

Law Enforcement’s Use of GTO Data

FinCEN’s announcement explained that HSI agents initiated an investigation which was based largely on information provided in response to the California border GTO:

Over the course of 18 months, HSI investigators utilized an extensive volume of sensitive financial information to assist in their investigation into a large-scale illegal third-party money laundering organization. The investigation began based largely on information gleaned from a FinCEN-issued Geographic Targeting Order (GTO). This GTO required armored car services importing or exporting funds through two specific geographies in the southwest border region to acquire additional identifying information on certain transactions.

The information that investigators discovered as a result of the GTO led them to focus on one particular armored car company that appeared to be facilitating a money laundering scheme outside southern California. Investigators discovered that the company was importing U.S. dollars and Mexican pesos from casas de cambio in Mexico and depositing them into shell company bank accounts that were opened and operated by the two individuals who owned and operated the company.

Law enforcement was able to identify and connect an address for the armored car company that was shared by several other companies owned by the same individuals. Two of these newly identified companies were registered as money services businesses (MSB). Further investigation and a detailed analysis of financial data indicated that these additional companies were simply shell companies that the two individuals used to funnel millions of U.S. dollars back into Mexico.

Subpoenas were issued to the banks used by each of these companies, as well as to all of the people known to be involved with the companies. Transaction records identified cash deposits of $45 million over a 15-month period, which were then transferred in and out of the accounts of the various companies owned by the individuals before ultimately being wired to Mexico.

As a result of the investigation and discovery of the money laundering scheme, both individuals pled guilty to violations regarding failures to maintain an effective anti-money laundering program. They also lost all licenses necessary to operate as an MSB and forfeited hundreds of thousands of U.S. dollars and Mexican pesos.

The investigation and prosecution referred to in FinCEN’s announcement appears to be United States v. Angelica Padilla and Valente Marquez, No. 16-1075 (Southern District of California). In that case, the defendants, who are husband and wife, were charged with failing to maintain an effective anti-money laundering program in connection with a series of money transmitting businesses that they owned and operated. The press release announcing their guilty pleas described their offenses as follows:

SAN DIEGO – Bonita residents Angelica Padilla and her husband, Valente Marquez, pleaded guilty in federal court today, admitting that they failed to establish and maintain an effective anti-money laundering program in connection with their money transmitting businesses.  The guilty pleas were heard before U.S. Magistrate Judge Karen Crawford.

Under U.S. law, any business which provides check cashing, currency exchange, or money transmitting or remittance services, or any person who engages as a business in the transmission of funds, must register with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).  In addition, any such business must establish and maintain an anti-money laundering program including the development of internal policies, procedures and controls.

According to the plea agreements, Padilla and Marquez owned and operated money transmitting businesses in Bonita, through which they accepted and transmitted large amounts of U.S. currency.  Although Padilla and Marquez registered their businesses with FinCEN, they admitted that they lied to financial institutions about the true nature of their operations.

Specifically, Padilla operated money transmitting businesses under the names “Giros Express” and “Liberty Metals and Coins,” while Marquez operated a money transmitting business under the name “Cuva.”  Both falsely claimed that they were in the business of buying and selling precious metals.  All three businesses operated from an office at 4045 Bonita Road.

As part of their plea agreements, Padilla and Marquez agreed to cease operating as money transmitters and to relinquish their licenses. In addition, both agreed to forfeit $400,000.

U.S. Attorney Laura Duffy said, “Those who choose to operate a money transmitting business under U.S. law must fully comply with all federal regulations governing their operations, and will be held to the highest standards to ensure that criminal proceeds do not filter into the financial system.”

Both defendants were sentenced on January 9, 2017, to probation for a period of five years. They were also ordered to pay a fine of $25,000 and to forfeit the amount of $400,000, which the parties agreed represented proceeds of the criminal activity.


Over the course of the last three years, each of the GTOs described above has been accompanied by a FinCEN press release and a flurry of media coverage.  FinCEN has been notably (and understandably) silent, however, on whether any of the information disclosed by financial institutions pursuant to the terms of the GTOs has been valuable.  FinCEN’s announcement confirms that its campaign to crack down on trade-based money laundering through the frequent and expansive use of Georgraphic Targeting Orders appears to be generating meaningful information for law enforcement, and we expect to see additional investigations and prosecutions in the future based upon information reported to FinCEN pursuant to the GTOs.  We also expect that FinCEN will continue to make aggressive use of its authority to issue GTOs in regions or industries perceived to have money laundering vulnerabilities.

Following its publication on December 30, 2016, of an updated FFI agreement, the Internal Revenue Service has published a reminder to financial institutions about renewing their FFI agreement. All financial institutions that had in effect an FFI agreement that expired on December 31, 2016, and that wish to retain their GIIN, are required to renew their FFI agreement using the FATCA FFI Registration system. In a forthcoming update of that registration system, those financial institutions that are required to renew will need to review, update, and resubmit their registration application by July 31, 2017, to be treated as having in effect an FFI agreement as of January 1, 2017. A “Renew FFI Agreement” link will become available on the FATCA registration website to be used for this purpose.

Those financial institutions that are required to renew their FFI agreement and do not do so by July 31, 2017, will be treated as having terminated their FFI agreement as of January 1, 2017, and may be removed from the FFI List. The following table below provides a general overview of the types of entities that are required to renew their FFI agreement.

Renewal of FFI Agreement

Financial Institution’s FATCA Classification in its Country/ Jurisdiction of Tax Residence

Type of Entity

FFI Agreement Renewal Required?

Participating Financial Institution not covered by an IGA; or a Reporting Financial Institution under a Model 2 IGA Participating FFI not covered by an IGA Yes
Reporting Model 2 FFI Yes
Registered Deemed-Compliant Financial Institution (including a Reporting Financial Institution under a Model 1 IGA) Reporting Model 1 FFI operating branches outside of Model 1 jurisdictions Yes, on behalf of branches operating outside of Model 1 jurisdictions (other than related branches)
Reporting Model 1 FFI that is not operating branches outside of Model 1 jurisdictions; No
Registered deemed-compliant FFI (regardless of location) No
None of the above Sponsoring entity No
Direct reporting NFFE No
Trustee of Trustee-Documented Trust No

irsThe Internal Revenue Service has released additional guidance about its new and controversial “Private Debt Collection” program — which requires the use of private debt collectors to collect certain delinquent tax debts — while fraudsters continue to scam unsuspecting victims by posing as IRS debt collectors.

According to the new guidance which will be incorporated into the Internal Revenue Manual, “[t]he IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continuing scams where callers impersonate IRS agents and request immediate payment.” To this end, the IRS will utilize the following procedures when a taxpayer’s account is referred to a private collection agency (PCA):

  • The IRS will first send a letter to the taxpayer indicating that their account that the module has been assigned to the PCA.
  • The PCA will also send a letter to the taxpayer to confirm that the module has been assigned to them.
  • Both of these letters to the taxpayer will contain a unique 10-digit identifier, instead of the taxpayer’s SSN.
  • This unique identifier will be used to conduct a two-party verification between the taxpayer and the PCA.
  • Taxpayers can confirm the names of the PCAs under contract with the IRS at this link:   https://www.irs.gov/businesses/small-businesses-self-employed/private-debt-collection.
  • PCAs will not ask for payment on prepaid debit, gift or iTunes cards (a common technique used by fraudsters impersonating IRS representatives).
  • Payment by check will be payable to the “United States Treasury” and sent directly to IRS, not the PCA.

The IRS has entered into collection contracts with only four PCAs: (1) CBE Group in Cedar Falls, Iowa; (2) ConServe in Fairport, New York; (3) Performant in Pleasanton, California; and (4) Pioneer in Horseheads, New York. Each of the PCAs are authorized to identify themselves as contractors of the IRS collecting taxes. Private debt collectors are required to be courteous and respect taxpayers’ rights. They must follow provisions of Internal Revenue Service Private Collection Agency Policy and Procedures Guide and the Fair Debt Collection Practices Act, and are also subject to various provisions of the Internal Revenue Code governing confidentiality of tax returns and return information.

Under the new law requiring the use of PCAs, the IRS must refer the following categories of collection cases to private collection agencies:

  • Cases removed from active IRS inventory because of lack of resources;
  • Cases removed from active IRS inventory due to inability to locate the taxpayer;
  • Cases for which more than one-third of the 10 year statute of limitations for collection has passed and there has been no assignment to an IRS employee for collection; or
  • Cases where 365 days have passed without taxpayer or third party interaction to further collection of the account.

In addition, IRS has the discretion to refer other types of collection cases to PCAs as appropriate.

The following types of collection cases may not be referred to PCAs:

  • Cases involving a taxpayer that is deceased;
  • Cases involving a taxpayer that is under the age of 18;
  • Cases involving a taxpayer located in a designated Combat Zone;
  • Cases involving a taxpayer that is the victim of tax-related identity theft;
  • Cases involving a taxpayer under examination, litigation, criminal investigation or levy;
  • Cases subject to pending or active offers in compromise;
  • Cases subject to a pending or active installment agreement;
  • Cases subject to a statutory right of appeal;
  • Innocent spouse cases; or
  • Cases involving a taxpayer located in a presidentially declared disaster area who requests relief from collection.

Any case assigned to a PCA that subsequently meets any of the above criteria — due to a change in circumstances — will be returned to the IRS.

The IRS guidance also provides direction to IRS employees when contacted by taxpayers whose accounts have been referred to private collection agencies. Such taxpayers are to be advised that they must work directly with the PCA to work out collection issues, including the negotiation of installment agreements. Any taxpayer who says they feel threatened or have reason to believe they are being scammed are to be referred to the Treasury Inspection General for Tax Administration (TIGTA).

Critics of the IRS Private Debt Collection program warn that it will provide fraudsters with additional opportunities to perpetrate a long-running scam where criminals prey on unsuspecting victims by posing as IRS representatives seeking to collect tax debts.  According to the Treasury Inspector General for Tax Administration, this widespread fraud scheme has caused taxpayer losses of over $55 million.  To date, more than 50 individuals have been criminally charged for their roles in a complex fraud scheme in which individuals from call centers in India impersonated IRS officials in demanding payment of back taxes.  Call center operators targeted U.S. victims who were threatened with arrest, imprisonment, fines, and/or deportation if they did not pay money allegedly owed to the IRS.  Victims who agreed to pay the scammers were instructed on how to provide payment, such as by purchasing stored value cards or wiring funds.

In federal court yesterday in Houston, an Indian national pleaded guilty to conspiracy to commit money laundering for his role in liquidating and laundering victim payments generated through various telephone fraud schemes using India-based call centers.  Also yesterday the Justice Department announced the arrest of seven individuals who are alleged to have participated in a nationwide scheme to steal $9 million from unsuspecting taxpayers by impersonating IRS agents.  In this scheme, individuals purporting to be employees of the IRS would call and threaten victims with legal action, arrest, and imprisonment for a supposed debt owed to the IRS.  The callers made these threats and used other methods of intimidation to persuade the victims to wire money utilizing MoneyGram, Walmart-2-Walmart Money Transfer, and other wire transfer services.  IRS investigators have currently identified nearly 8,000 victims of this fraud scheme and total loses approximating $9 million.

The Justice Department press release announcing yesterday’s arrests cautions taxpayer to be wary of telephone calls demanding payment of tax debts:

“No legitimate employee of the United States Treasury Department or the Internal Revenue Service will demand that anyone make payments via MoneyGram, Western Union, Walmart-2-Walmart Money Transfer, or any other money wiring method, for any debt to the IRS or the Department of the Treasury,”  J. Russell George, Treasury Inspector General for Tax Administration, said. “Nor will the Department of the Treasury demand that anyone pay a debt or secure one by using iTunes cards or other prepaid debit cards. If you receive one of these calls, hang up immediately and go to the Treasury Inspector General for Tax Administration (TIGTA) scam reporting page to report the call.”

With private collectors set to start making calls about overdue tax debts, taxpayers must be more vigilant than ever to ensure that they are dealing with legitimate representatives of either the IRS or a duly-authorized private collection agency.

2000px-Seal_of_the_United_States_Department_of_Justice_svgFollowing a relentless flurry of press releases announcing criminal charges against tax evaders in the run up to today’s tax filing deadline (see here, here, and here), the Justice Department wasted no time in turning its attention to its next target:  employers and individuals who violate the federal employment tax laws. In a press release entitled “Justice Department Continues To Sue, Prosecute Delinquent Employers,” the Justice Department emphasizes that it is continuing its employment tax “enforcement push” by bringing civil and criminal enforcement actions against employers and individuals who violate employment tax laws:

Many Americans associate April with “Tax Day” and the annual deadline for filing individual income tax returns. But the end of April is also the first deadline for employers to file quarterly employment tax returns. Those who do not comply with filing requirements or who fail to pay the taxes withheld from their employees’ wages face civil lawsuits or criminal prosecutions as part of the Department of Justice’s ongoing focus to enforce employment tax laws using all tools available.

By way of background, employers in the United States are required to collect, account for, and pay over to the Internal Revenue Service tax withheld from employee wages, including federal income tax and social security and Medicare taxes. Employers also have an independent responsibility to pay their matching share of social security and Medicare taxes.

“Employers who willfully fail to comply with their employment tax obligations are cheating the U.S. Treasury at the expense of taxpayers, such as law-abiding employers and employees, who pay their taxes on time and in full,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Department is committed to holding employers that willfully fail to pay their employment taxes accountable with, as appropriate, criminal prosecution, bringing these offenders into compliance through civil injunctions, and working with the IRS to collect what is owed.”

“Employment taxes are a critical part of the tax system, generating more than $1 trillion a year in payments to the government, and the IRS works closely with employers and the payroll community to help ensure compliance in this area,” said IRS Commissioner John Koskinen. “We want to help employers avoid problems in the employment tax area. When problems do arise, we use civil enforcement tools and, when appropriate, work closely with the Justice Department in the pursuit of criminal cases. The collection of employment taxes is a priority area for the IRS and helps ensure fairness for employers and taxpayers. Employers who fail to pay or withhold these taxes enjoy an unfair economic advantage over those who comply with the tax laws.”

The Justice Department’s press release serves as a reminder that an individual’s willful failure to comply with employment-tax obligations is not simply a civil matter. Employers whose business model is based on a continued failure to pay employment tax, who use withheld employment taxes as a slush fund to pay personal expenses or other creditors, who pay employees in cash to avoid employment tax obligations, or who file false employment tax returns can subject themselves to prosecution, imprisonment, monetary fines, and restitution.

Aggressive criminal and civil enforcement of the federal employment tax laws has been a top priority of both the Justice Department and the IRS for the past several years. Amounts withheld from employee wages represent nearly 70% of all revenue collected by the IRS. According to a recent report from the Treasury Inspector General for Tax Administration (TIGTA), as of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The Justice Department’s Tax Division reports that as of June 30, 2016, more than $59.4 billion of taxes reported on quarterly federal employment tax returns remained unpaid. Employment tax violations represent more than $91 billion of the “Tax Gap,” which measures the difference between the total amount of tax owed to the U.S. Treasury and the amount actually paid. During fiscal year 2016, employment tax investigations were one of the few categories of tax crimes for which IRS-Criminal Investigation initiated more investigations than in the prior fiscal year.

Employment tax schemes can take a variety of forms. Some of the more common schemes include employee leasing, paying employees in cash, filing false employment tax returns, failing to file employment tax returns, and “pyramiding.” Pyramiding refers to the practice of withholding taxes from employee wages, but failing to remit such taxes to the IRS. After the employment tax liability accrues, the business owner starts a new business and begins to accrue employment tax liabilities anew.

Today’s press release highlights recent examples of employment tax enforcement in both the criminal and civil arenas, starting with the following examples of employers who engaged in “pyramiding” taxes by opening successive businesses:

In January, Napoleon Robinson of Lauderhill, Florida, was sentenced to serve 18 months in prison for evading more than $500,000 in employment taxes. Robinson owned and operated a series of ship welding and repair businesses in Virginia and New York. Robinson was not paying over employment taxes and would close down one company and open a new one in the name of a nominee owner, while continuing to run the company, making its financial and personnel decisions and controlling the businesses’ bank accounts. He was also ordered to pay restitution to the IRS.

In January, two West Virginia business owners, Michael and Jeanette Taylor, were sentenced to serve 21 and 27 months in prison for failing to pay over more than $1.4 million in employment taxes. The Taylors owned a construction business that transported steel and sold gravel and concrete. They changed the name of their business several times, though the operations of the business remained the same. Both were responsible for collecting, accounting for and paying over the employment taxes withheld from their employees’ wages. Instead of paying over the taxes that they collected, the Taylors used the funds to purchase property and finance their horse farm. They were also ordered to pay restitution to the IRS.

The following cases demonstrate examples of employers who used withheld employment taxes to pay personal expenses, or to pay other creditors:

In January, Paul Harvey Boone of Hillsborough, North Carolina, was sentenced to serve 15 months in prison for failing to pay over employment taxes. Boone owned and operated Boone Audio Inc. From 2008 through 2011, Boone used company funds for personal expenses while failing to pay over the employment taxes withheld from his employees’ wages. He was also ordered to pay restitution to the IRS.

In December 2016, Sreedar Potarazu, a Maryland surgeon and entrepreneur, pleaded guilty to failing to account for and pay over $7.5 million in employment taxes and to shareholder fraud. Potarazu founded VitalSpring Technologies Inc., a corporation that provided data analysis and services related to health care expenditures. Potarazu was responsible for collecting, truthfully accounting for and paying over VitalSpring’s employment taxes. Instead of paying over the employment tax, Potarazu spent millions on personal expenses including transferring funds to himself and others, travel, car service and the publication of a book.

In January, Steven Lynch, a tax attorney and owner of the Iceoplex in Pittsburgh, Pennsylvania, was sentenced to serve 48 months in prison, fined $75,000 and ordered to pay restitution to the IRS of more than $793,000, after being convicted of failing to collect, account for and pay over employment taxes. Lynch co-owned and operated the Iceoplex, a recreational sports facility which included a fitness center, ice rink, soccer court, restaurant and bar. He controlled the finances for these businesses and was responsible for collecting, accounting for and paying over tax withheld from employee wages and timely filing employment tax returns. Lynch failed to pay over more than $790,000 in employment taxes withheld.

In June 2016, Muzaffar Hussain of Pleasanton, California, pleaded guilty to failing to account for and pay over employment taxes for Crossroads Home Health Care Inc. Hussain was the CFO and was responsible for filing the company’s employment tax returns and paying over the employment taxes. Hussain transferred funds in an amount equal or close to the amount of employment taxes from the business bank account into other accounts and used the money to fund other business and personal expenses.

In the following case, the Justice Department prosecuted an employer who paid employees in cash to avoid paying employment taxes:

In September 2016, Phillip Hui of Sicklerville, New Jersey, was sentenced to serve 15 months in prison for conspiring to evade payroll taxes on cash wages paid to illegal immigrants employed at his dry cleaning business. Hui hired foreign nationals from Mexico and Guatemala who did not have legal status in the United States and paid them in cash. Their wages were not reported on the quarterly employment tax returns filed with the IRS. He was also ordered to pay restitution to the IRS.

Employers who file false employment tax returns are also subject to prosecution, as the following cases demonstrate:

In March, Richard Tatum, a Houston, Texas, business owner of an industrial staffing company, pleaded guilty to failing to pay more than $18 million in employment taxes. Tatum filed false employment tax returns that did not report the majority of his employees and did not pay over the taxes he withheld from his employees. Instead, he used the money for luxury travel and to make payments on his ranch.

In January, Janis Ann Edwards, an Oklahoma City, Oklahoma, business owner, pleaded guilty to evading more than $3.5 million in employment taxes. Edwards was the sole owner of Corporate Resource Management Inc. and a number of related companies that operated as professional employer organizations. Edwards directed her employees to alter quarterly employment tax returns to reflect less payroll tax liability than was actually owed.

The Justice Department’s Tax Division is also aggressively pursuing civil enforcement action against those who fail to meet their employment tax obligations. Since 2003, the Division has permanently enjoined more than one hundred employers and obtained tens of millions of dollars in money judgments. Civil injunctions are court orders requiring the employer and principal officers to timely deposit and pay employment taxes to the U.S. Treasury. These court orders also impose various other requirements and prohibitions, including the obligation to provide notice of each deposit to the IRS, as well as restrictions on opening and operating new businesses and transferring or dissipating assets.

In recent years, the Tax Division increased the number of civil actions brought against employers who violate employment tax laws. In 2016, the Tax Division obtained employment tax injunctions against 38 employers—more than double the number of injunctions obtained in 2015. The injunctions obtained in the past year include court orders against employers throughout the United States, such as a St. Louis concrete business, a Florida restaurant, an Iowa lawn care business and a Michigan custom kitchen company.

Since January 1, 2017, the Tax Division filed 17 suits, collectively seeking more than $10 million in unpaid employment taxes, against tax-delinquent medical-care providers who, despite IRS notices and efforts to collect, have been non-compliant for three or more quarters, despite persistent attempts by the IRS to remind them of their obligations and to collect the unpaid taxes.

These 17 suits collectively seek more than $10 million in unpaid employment taxes and are part of an ongoing effort by the Justice Department and the IRS focusing on employment tax compliance. Among these cases is a suit filed in federal court in Minnesota to enjoin Dawda Sowe and Nurse Staffing Solutions Health Care from failing to pay employment taxes and to obtain a $2 million judgment against the business for employment taxes the business allegedly failed to pay over an eight-year period. Also, this month the Tax Division filed suit in federal court in Texas to obtain a court order requiring Jeanna Smith to timely file employment and unemployment tax returns for her business and pay those taxes in full, amongst other requirements. In this suit, the government also seeks a judgment for unpaid employment taxes and alleges that Smith incorporated several home-health care businesses, such as Paris Senior Care Group Inc., which accumulated more than $1.3 million in unpaid employment taxes.

Finally, those who violate an injunction can be charged with civil and criminal contempt and face being shut down, paying compensation for the damage the contempt caused and incarceration of the principal corporate officers. For example, a federal court in Washington held Dr. James Hood and his wife, Karen Hood, in contempt of court for a consistent pattern of failing to meet their tax obligations. The court later ordered the two to close their dental care businesses, cease operating as employers, and barred them from opening any new businesses where the Hoods would serve as employers by June 8, 2017.

Any individual who is responsible for ensuring that employment taxes are collected, truthfully accounted for, and paid over to the IRS, and willfully fails to do so or willfully attempts to evade or defeat paying employment taxes may be subject to a civil penalty equal to the amount of the unpaid withholdings. This civil penalty, referred to as the Trust Fund Recovery Penalty (TFRP), may be imposed even if the individual uses the employment tax to pay other creditors or keep the business afloat. Individuals subject to these penalties include, but are not limited to, corporate officers, treasurers, managers, and, in some circumstances, bookkeepers. In fiscal year 2015, the IRS assessed the TFRP against approximately 27,000 responsible individuals.

Since January 2013, the Tax Division has obtained tens of millions of dollars in money judgments against individuals subject to these penalties. For example, in July 2016, a Florida jury found the CEO and owner of a professional employer organization personally liable for more than $4.2 million due to his failure to pay his company’s employment taxes. In addition, in December 2016, the U.S. Court of Federal Claims found that the CFO of an Internet-marketing platform was responsible for his company’s failure to pay its employment taxes and entered a judgment of more than $500,000 against him. And in April, a federal court found the co-manager of an architectural woodwork installation company personally liable for $1.9 million due to his failure to pay his company’s employment taxes.

In contrast to the Justice Department’s press release touting its successes in the employment tax field, a TIGTA report issued less than 30 days ago painted a considerably less rosy picture of the government’s efforts to ensure employment tax compliance. In a report entitled “A More Focused Strategy Is Needed to Effectively Address Employment Tax Crimes,” TIGTA concluded that the IRS needs a better strategy to enhance the effectiveness of the agency’s efforts to address, and punish, egregious employment tax violators:

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.

TIGTA recommended that the IRS should use 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, TIGTA recommended that the IRS Collection Division expand the criteria used to refer potentially criminal employment tax cases to IRS-CI to include any egregious cases (not only those where a firm indication of fraud is present).

Notwithstanding TIGTA’s recent criticism, it is readily apparent that employment tax enforcement is a top priority for both the Justice Department and the IRS.  With the massive amounts of unpaid employment taxes that remain outstanding, we can undoubtedly expect to see vigorous enforcement in this area, both criminal and civil, in the coming months and years.

2000px-Seal_of_the_United_States_Department_of_Justice_svgWith only four days remaining until “Tax Day,” the Justice Department’s well-publicized campaign to deter potential tax evaders continues with more stern warnings to taxpayers. In a bleak press release entitled “With the Individual Income Tax Filing Deadline Approaching, Justice Department Warns Willful Violations of Tax Laws Are Criminal,” the Justice Department sounds the warning once again that taxpayers who attempt to violate the federal tax laws that they face prosecution, jail, restitution and significant monetary penalties.

“Most Americans follow the tax law and rightfully expect that each of their fellow citizens will do the same,” said Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division. “Yet every year some taxpayers try to take a different path – they hide money offshore, declare only a small portion of their income, make up bogus deductions and lie to the IRS if they are caught. With this year’s filing deadline approaching, these taxpayers should stop, reverse course and simply pay what they owe. As the Justice Department’s recent criminal prosecutions make clear, the consequences for willful violations are severe: jail time and substantial monetary penalties.”

“The majority of Americans file their taxes without issue and they would tell you that they want strong enforcement of the tax laws to ensure that we are all paying our fair share,” said Chief Richard Weber of IRS Criminal Investigation. “For those thinking about intentionally evading the tax laws – IRS-CI has the finest financial investigators and are trained to follow the money trail wherever it may lead.”

The press release then proceeds to summarize recent tax prosecutions, starting with the following examples of individuals prosecuted for “garden variety” tax evasion or filing false tax returns:

  • In March, Denver Nichols, a Labadie, Missouri roofing contractor, pleaded guilty to filing false 2007 and 2008 income tax returns. Nichols operated his roofing business under the name Eagle Roofing Co. He late filed false 2007 and 2008 returns that underreported his business’s gross receipts by approximately $959,500 and $794,680.
  • In March, Stephen Leib, a Philadelphia, Pennsylvania tech business owner, pleaded guilty to tax evasion. Leib owned New Wave Logistics Inc. He evaded more than $800,000 in taxes by cashing a significant amount of his business’s gross receipts at a check cashing facility, lying to his accountant about the total amount of income he earned and filing false tax returns.
  • In March, Jeffrey Nowak, a Las Vegas, Nevada liquor storeowner, was sentenced to serve 41 months in prison for tax evasion and conspiring to defraud the United States. Nowak conspired with Ramzi Suliman, with whom he jointly owned and operated liquor stores in Las Vegas. Nowak and Suliman skimmed cash receipts and provided their accountant with a phony set of books that omitted nearly $4 million in cash receipts.
  • In February, Jose Echeverria, a Chelan Falls, Washington businessman, pleaded guilty to filing a false individual income tax return. Echeverria owned and operated a produce sales business. He underreported his income by approximately $564,292.
  • In December 2016, James and Mardeen Perin, former owners of Sully’s Pub in West Des Moines, Iowa, pleaded guilty to aiding and assisting in filing a false tax return. The Perins filed a false 2013 tax return that did not report cash that they earned through their business.

Individuals who fail to file returns are also subject to prosecution, as the Justice Department points out with the following examples:

  • In March, James Burton and Lucretia Pecantte-Burton, two Louisiana attorneys, pleaded guilty to failing to file individual income tax returns. Burton and Pecantte-Burton were partners of the law firm Pecantte-Burton & Burton (PB&B) and regularly received cash payments. They also had a partnership interest in a tax return preparation business. Burton and Pecantte-Burton did not file 2007 through 2009 income tax returns.
  • In February, Samuel Frazier, a Gulfport, Mississippi businessman, was sentenced to serve 12 months in prison for failing to file an individual income tax return. Frazier owned two companies in Gulfport: Frazier Fire Systems LLC and EZ Haul Demolition and Construction LLC. Frazier failed to file a 2009 tax return despite earning more than $618,253 in income.
  • In December 2016, John Raschella, a former Parma, Ohio resident, was convicted at trial for failing to pay more than $1 million in income taxes, interest and penalties for 1995, 1996 and 1998 through 2012 on income earned as an insurance salesman. He also failed to timely file income tax returns between 1989 and 2012.
  • In June 2016, Carlos Cortes, a San Antonio, Texas artist, was sentenced to serve 12 months in prison for failing to file an individual income tax return. Cortes did not file tax returns for 2006 through 2009, despite earning more than $1.3 million in income during this time.

One of the Justice Department’s top priorities in tax cases is prosecuting individuals who employ nominee entities and offshore bank accounts to hide assets and income, as the following cases demonstrate:

  • In March, Casey Padula, a Port Charlotte, Florida owner of Demandblox, a marketing and information technology business, pleaded guilty to conspiracy to commit tax and bank fraud. Padula conspired to move more than $2.5 million to offshore accounts in Belize and disguised them as business expenses in the corporate records. Padula used the funds to pay for personal expenses and purchase significant personal assets.
  • In March, Masud Sarshar, a Los Angeles, California businessman, was sentenced to serve 24 months in prison for hiding more than $23.5 million in offshore bank accounts. Sarshar maintained several undeclared bank accounts at Israeli banks, both in his name and in the names of entities that he created. Between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to those undeclared accounts and earned more than $2.5 million in interest income. Sarshar reported none of this income on his individual and corporate tax returns.
  • In January, three Orange County, California residents pleaded guilty to hiding millions of dollars in secret foreign bank accounts. Dan Farhad Kalili, David Ramin Kalili and David Shahrokh Azarian, willfully failed to file legally required reports, commonly known as FBARs, disclosing their bank accounts in Switzerland and Israel.
  • In January, Peggy and John DeYoung, a Missoula, Montana couple, pleaded guilty to conspiring to defraud the United States. The DeYoungs had not filed an income tax return since 1998. Peggy DeYoung earned income through her ownership interest in two companies that owned Southern California mobile home parks. The DeYoungs also established a number of purported trusts. They owned bank accounts in the names of these trusts using fabricated taxpayer identification numbers and paid personal expenses from the accounts, causing a tax loss of $376,350.

The Justice Department also prosecutes individuals who engage in obstruction of IRS efforts to assess and collect taxes:

  • In November 2016, Richard Thomas Grant, a Point Richmond, California man, was sentenced to serve 33 months in prison. Grant stopped filing income tax returns and paying income taxes despite earning significant income as a partner with an engineering company. Grant attempted to frustrate IRS collection and audit efforts by filing lawsuits against the IRS. To conceal his income, Grant used prepaid debit cards and money orders to pay personal expenses.
  • In November 2016, Steven Headden Young of St. Petersburg, Florida, was sentenced to serve 21 months in prison. Young evaded a substantial portion of his individual income taxes for 2007 through 2011 and interfered with an IRS audit. He fabricated a letter from the IRS to a bank directing the bank to send subpoenaed records to a bogus address.
  • In October 2016, Henti Lucian Baird, a Greensboro, North Carolina resident and former IRS revenue officer, pleaded guilty. Baird filed tax returns each year but has not paid since at least 1998. Baird created nominee bank accounts to hide hundreds of thousands of dollars from the IRS, submitted false information to the investigating IRS officer regarding these accounts and transferred funds from nominee accounts to avoid impending IRS levies.
  • In June 2016, Paul Tharp, a North Carolina man, was sentenced to serve 21 months in prison. Tharp failed to file tax returns for 2003 through 2006, and the IRS assessed income tax against him for those years. Tharp attempted to evade payment of his tax debt by filing false disclosures with the IRS, omitting businesses that he owned as well as bank accounts and rental income.

Ironically, the Justice Department’s press release touting its successes in prosecuting tax crimes comes at a time when the Criminal Investigation Division of the Internal Revenue Service – which is responsible for investigating potential tax crimes – finds itself more resource-constrained than at virtually any other time in its history.  IRS-CI’s most recent annual report for FY2016 reveals that the agency has only 2,217 criminal investigators, its lowest point in two decades.  During FY2016, only 889 criminal tax cases were authorized for prosecution, a substantial decrease and the lowest number of authorizations in a decade.  Of all the myriad categories of crimes investigated by IRS-CI, only four — employment tax, public corruption, healthcare fraud, and offshore tax evasion — reflected an increase in the number of investigations initiated as compared to FY2015.  In every other category, the number of investigations initiated by IRC-CI during FY2016 decreased.  A substantial decrease in the number of tax investigations initiated by IRS-CI during the past year will have a lasting impact, as such cases typically require several years of investigation followed by prosecution, if approved.  As a result, we can expect to see fewer and fewer criminal tax prosecutions in the coming years.  And only if Congress agrees to fully fund the IRS will IRS-CI be able to hire new special agents to replace the hundreds of agents who have left the agency over the last 10 years without being replaced.

irsThe Internal Revenue Service announced earlier this week that its private debt collection program is starting now.  Beginning this week, the IRS will start sending letters to taxpayers whose overdue federal tax debts are being assigned to one of four private-sector collection agencies. At the same time, the IRS is warning taxpayers that they must be vigilant to guard against scammers posing as legitimate tax collectors.

The new private tax collector program, authorized under a federal law enacted by Congress in December 2015, enables these designated contractors to collect, on behalf of the IRS, unpaid tax debts. Usually, these are unpaid individual tax obligations that are not currently being worked by IRS collection employees and often were assessed several years ago.

According to the IRS, taxpayers whose tax debts are being assigned to private collectors would have had multiple contacts from the IRS in previous years and still have an unpaid tax bill. “The IRS is taking steps throughout this effort to ensure that the private collection firms work responsibly and respect taxpayer rights,” said IRS Commissioner John Koskinen. “The IRS also urges taxpayers to be on the lookout for scammers who might use this program as a cover to trick people. In reality, those taxpayers whose accounts are assigned as part of the private collection effort know they have a tax debt.”

The program will begin this month with a few hundred taxpayers receiving mailings and subsequent phone calls, with the program growing to thousands a week later in the spring and summer. Taxpayers with overdue taxes will always receive multiple contacts, letters and phone calls, first from the IRS, not private debt collectors.

The IRS will always notify a taxpayer before transferring their account to a private collection agency (PCA). First, the IRS will send a letter to the taxpayer and his/her tax representative (if any) informing them that their account is being assigned to a PCA and giving the name and contact information for the PCA. (See prior coverage here.) This mailing will include a copy of Publication 4518, entitled “What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.”

There are four private firms that are participating in this collection program: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y. The taxpayer’s account will only be assigned to one of these agencies, and never to all four. No other private group is authorized to represent the IRS.

Once the IRS letter is sent, the designated private collection firm will send its own letter to the taxpayer and his/her representative (if any) confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

The private collectors will identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies will be required to follow the provisions of the Fair Debt Collection Practices Act, and like IRS employees, must be courteous and must respect taxpayer rights.

The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers. But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the “United States Treasury.”

Private firms are not authorized to take enforcement actions against taxpayers. Only IRS employees can take these actions, such as filing a notice of Federal Tax Lien or issuing a levy.

The IRS announcement also warned taxpayers to be on the lookout for scammers posing as private collection firms. “Here’s a simple rule to keep in mind. You won’t get a call from a private collection firm unless you have unpaid tax debts going back several years and you’ve already heard from the IRS multiple times,” Koskinen said. “The people included in the private collection program typically already know they have a tax issue. If you get a call from someone saying they’re from one of these groups and you’ve paid your taxes, that’s a sure sign of a scam.” If taxpayers are unsure if they have an unpaid tax debt from a previous year – which is what the private collection firms will handle – they can go to IRS.gov and check their account balance at www.irs.gov/balancedue.

Whether or not a taxpayer’s account is assigned to a private collection agency, the IRS warns taxpayers to beware of scammers pretending to be from the IRS or an IRS contractor. Here are some things the scammers often do but the IRS and its private contractors will never do.

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes, and if a case is assigned to a PCA, both the IRS and the authorized collection agency will send the taxpayer a letter. Payment will always be to the United States Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

“Unexpected and threatening calls out of the blue from someone saying they’re representing the IRS to collect a tax debt is a warning sign people should watch out for,” Koskinen said.


With less than two weeks until the April 18 deadline for filing individual federal income tax returns, the Justice Department and Internal Revenue Service are issuing stern warnings to potential tax cheats. Today the U.S. Attorney for the Western District of North Carolina and the Special Agent in Charge of the IRS Charlotte Field Office issued a joint press release entitled “Federal Prosecutors Warn Potential Tax Cheats: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences, And Fines.” Their press release announced recent tax fraud prosecutions and sentencings, and is intended to “deliver a powerful warning to those who are thinking about breaking the law by committing tax crimes.”

“As tax filing season reaches its peak, we are putting would-be tax cheats on notice: My office will prosecute those who try to cheat the tax system at the expense of honest taxpayers who file their returns on time and pay the taxes they owe. Our tax system is built on voluntary compliance and tax criminals who do not pay their fair share increase the tax burden on law-abiding taxpayers,” said U.S. Attorney Jill Westmoreland Rose.

“The 2017 income tax filing season is soon coming to a close, however, special agents of the IRS – Criminal Investigation work year-round to combat criminal violations of the Internal Revenue Code and related financial crimes. Agents in the Charlotte Field Office have pursued, and will continue to pursue, those who prepare returns fraudulently, steal and misuse identities, and those who take extraordinary measures to conceal their income in an effort to evade their tax responsibility,” said Special Agent in Charge Thomas J. Holloman, III. “To build faith in our nation’s tax system, honest taxpayers need to be reassured that everyone is paying their fair share and we will work vigorously to pursue those who do not.”

The press release proceeds to highlight recent successes in prosecuting tax evaders and those who file false tax returns:

Matthew Moretz, 31, of Taylorsville, N.C., pleaded guilty to one count of filing a false tax return. From April 2010 to March 2011, Moretz collected unemployment income from the North Carolina Division of Employment. However, beginning in or about March 2010 and continuing through in or about 2013, Moretz was self-employed as the owner of MJM Recycling, a scrap metal business. From tax year 2010 through tax year 2013, Moretz earned additional personal income totaling approximately $529,622.44 that Moretz failed to report on his U.S. Individual Income Tax Returns Form 1040 filed with the IRS. As a result of the unreported taxable income, Moretz had additional tax due and owing of approximately $116,409.38 from 2010 to 2013. Moretz is currently awaiting sentencing.

Patrick Emanuel Sutherland, 48, of Charlotte, was convicted of filing false tax returns and obstructing a federal grand jury investigation. Court documents and trial evidence showed that, from at least 2007 to 2015, Sutherland was an actuary, and the owner and operator of numerous companies in the insurance and financial industries. Between 2007 and 2010, Sutherland engaged in an elaborate scheme to conceal a substantial amount of income, including filing false tax returns with the IRS which underreported business receipts and personal income of approximately $2 million in income received from an offshore bank account in Bermuda, as well as from domestic sources. Sutherland is currently awaiting sentencing.

Reuben T. DeHaan, 44, of Kings Mountain, N.C., was sentenced to 24 months in prison for tax evasion and possession of an unregistered firearm. DeHaan owned a holistic medicine business, which he operated out of his residence in Kings Mountain under the names Health Care Ministries International Inc. and Get Well Stay Well. During the years 2008 through 2014, DeHaan earned more than $2.7 million in gross receipts from his holistic medicine business, but failed to file income tax returns for those years and evaded approximately $678,000 in income taxes due and owing. DeHaan was also ordered to pay 567,665 in restitution to the IRS and $110,449 to the state of North Carolina.

Another area of focus for the Justice Department and IRS are unscrupulous return preparers and those who perpetrate stolen identity refund fraud:

Ramos, formerly of Lincolnton, N.C., was previously sentenced to 48 months in prison for her role in a false claims conspiracy. The conviction stemmed from Ramos’s role in a conspiracy to defraud the government by filing fraudulent tax returns seeking refunds totaling more than $5 million, by using stolen identity information of individuals in Puerto Rico. Ramos fled the United States and failed to report to federal prison after the sentencing. She is awaiting sentencing on charges of obstruction of justice and failure to report and faces additional jail time and fines.

Cara Michelle Banks, Carmichael Cornilus Hill, and Priscilla Lydia Turner conspired with Senita Dill and Ronald Jeremy Knowles, and others, to file false federal and state tax returns using stolen personal identifying information. From 2009 to 2012, this conspiracy defrauded the United States Treasury of over $3.5 million. Banks, Hill, Turner and others stole personal identifying information and then provided it to Dill to file the false returns in exchange for payment. Dill and Knowles used stolen personal information to file over 1,000 false tax returns. Court records show that Hill provided approximately 26 percent of the stolen identifications used to file the fraudulent returns. In 2016, Banks and Hill were sentenced to 70 months and 75 months in prison, respectively. In November 2016, Turner pleaded guilty to aggravated identity theft and is currently awaiting sentencing. Senita Dill was sentenced to 324 months and Knowles to 70 in prison for their roles in the conspiracy.

Finally, an area of recent intensity for the Justice Department and IRS is employment tax fraud:

Frank Alton Moody, II, 57, of Arden, the co-founder and former Chairman of the Board of CenterCede Services, Inc., a payroll services company, was ordered to serve 30 months in prison, two years in supervised release, and to pay $2,146,380.97 as restitution, for conspiring to steal over $2 million from client companies. Moody’s co-conspirators, Jerry Wayne Overcash and John Bernard Thigpen, were previously sentenced to 46 months and 21 months in prison, respectively. The three men used the more than $2 million they stole from client companies to fund their exorbitant salaries. Overcash and Thigpen were also ordered to jointly pay $1.3 million as restitution to the victim client companies.

The press release concludes with a reminder to taxpayers to exercise caution during tax season to protect themselves against a wide range of tax schemes ranging from identity theft to return preparer fraud. Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and to prosecute the criminals behind them. The IRS has issued its annual “Dirty Dozen” which lists common tax scams that taxpayers may encounter, particularly during filing season. Taxpayers are urged look out for, and to avoid, the following common schemes:

  • Phishing
  • Phone Scams
  • Identity Theft
  • Return Preparer Fraud
  • Fake Charities
  • Inflated Refund Claims
  • Excessive Claims for Business Credits
  • Falsely Padding Deductions on Returns
  • Falsifying Income To Claim Credits
  • Abusive Tax Shelters
  • Frivolous Tax Arguments
  • Offshore Tax Avoidance

As we have written previously, it is well-known that the IRS and Justice Department typically increase the frequency of their press releases announcing enforcement activity in the weeks leading up to the filing deadline. In fact, academic research confirms that these agencies issue a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

As “Tax Day 2017” approaches, expect to see similar announcements intended to deter would-be tax cheats from filing false tax returns.