DoJ Seeks Tenfold Increase in Criminal Sentencing for Offshore Tax Matters!

The US Department of Justice (DoJ) has announced a significant change in its criminal sentencing policy regarding offshore tax violations. The DoJ had previously Warn Potential Tax Cheats: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences, And Fines on April 6, 2017.

Now at the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas on December 7, 2017, Mark Daly, DOJ Tax Division Senior Litigation Counsel announced a major new shift in how the Department of Justice plans to argue offshore tax prosecution defendants should be sentenced.

Instead of turning to the standard Part 2T of the United States Sentencing Guidelines (Offenses Involving Taxation), the DOJ will now assert that Part 2S1.3 (Money Laundering and Monetary Transaction Reporting) is the correct guideline for offshore tax cases.

Why does this matter? Two reasons: 

First, Part 2T uses the amount of TAX LOSS as the primary determinant of the offense level. Part 2S1.3 instead uses the ENTIRE VALUE of the Offshore Bank Accounts.

• For your offshore tax defendants, instead of a sentencing base level determined by the amount of tax loss to the IRS as determined from the flow through of that undisclosed income on the relevant tax return, instead the DOJ will argue that the full value of the offshore bank account should be used to determine the offense level.
• Daly gave the example of his United States v. Kim case in the Eastern District of Virginia, where the Part 2T tax loss was on the order of $150,000, but the Part 2S1.3 value was $28 million. Depending upon the circumstances, that could be a ten-fold increase in the sentence. 
• In Kim, the DOJ asserted that Part 2S1.3 was the correct guideline, but due to a prior agreement with the defendant, the DOJ would in that case agree to sentencing based on Part 2T. Daly stated that the DOJ intended its language asserting that Part 2S1.3 was the correct guideline as a warning to the defense bar in other such cases.

The second problem is that Part 2S1.3 allows for a 2-level enhancement where a defendant has also been convicted of an offense under subchapter II of chapter 53 of title 31, which includes filing a false or misleading FBAR.

• Because an FBAR must be filed each year along with the tax return, the DOJ will now seek to add charges under title 31 chapter 53 to obtain a 2-level enhancement at sentencing.
• Daly stated that the DOJ may still assert that Part 2T is the correct guideline in certain offshore tax cases, but he was unwilling to articulate, despite pointed questions from the audience, just what criteria the DOJ would use to make such distinctions.
• This means that the USDoJ will, in future, press for tax evaders to be sentenced based on the value of the undeclared offshore accounts, rather than the unpaid tax, as in previous cases. The result could be that penalties will, in some cases, be increased by a factor of ten. 

The first case in which this new principle has been applied is United States v Kim. In United States v Kim, the Part 2T tax loss was only around USD150,000, but the Part 2S1.3 value, based on the value of Kim's bank accounts at Credit Suisse, UBS, Bank Leu, Clariden Leu, and Bank Hofmann, was USD 28 million.

At this point you have to consider that this may be the DoJ's position, but you should also be prepared to argue that this is vastly different and inconsistent with  the pattern of sentencing in the past and contend that the sentence for your Client/Defendant be consistent with what has historically been done in prior cases.

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Sources

• JD Supra
• Mitchell Williams