Paul Schmidt, Jay Nanavati Talk to Bloomberg about Tax Compliance Emphasis under Trump

Pens pointed in globePartners Paul Schmidt and Jay Nanavati are quoted in an article published by Bloomberg BNA’s “Daily Tax Report” on Jan. 13, 2017. The article “Will Trump Keep Spotlight on Multinationals’ Tax Compliance?” discusses the future of the federal government’s crackdown on tax cheats in coming months.

Read the article: Reproduced with permission from Daily Tax Report, 09 DTR G-3 (Jan. 13, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <>

Tax Compliance Will Trump Keep Spotlight on Multinationals’ Tax Compliance?

By Alison Bennett

The incoming Trump administration is likely to continue a crackdown on tax cheats in coming months, though the vigorous hunt for misbehavior by U.S. multinationals could ease.

That issue is a huge one for dozens of companies with business overseas that have been under the intense scrutiny of the Internal Revenue Service and the Treasury Department for the past eight years.

Opinions differ on whether that focus might dim, according to Bloomberg BNA interviews with practitioners.

Although President-elect Donald Trump has vowed in tweets that he will go after multinational companies and put a stop to inversions designed to dodge U.S. taxes, that may not last forever, one attorney said. “I think that this will blow over,” said Kimberly S. Blanchard, a tax partner with Weil, Gotshal & Manges LLP.

Trump and his Cabinet need to do that now to shore up support for a rewrite of the tax code, said Blanchard, who specializes in cross-border acquisitions and mergers, internal restructurings, business formations and joint ventures. But once the new president takes office, she said, he may become “educated that changing domicile has nothing to do with taking away jobs.”

Tax enforcement questions surround the new administration, with many companies in the midst of audits, litigation and other efforts to get them to pay what the IRS says they owe.

Many practitioners said they don’t expect those efforts to change much in the short term, with Trump’s government in need of revenue as much as President Barack Obama’s administration.

No ‘Fresh Start’ Anticipated

“Some companies may have up to 10 open tax years” where revenue collectors are engaged in enforcement, said Brian Kittle, co-leader of the Tax Controversy & Transfer Pricing practice at Mayer Brown LLP.

With Trump likely in need of money to pay for some of his costly infrastructure and other proposals, Kittle said, tax collectors might be even more aggressive. “I don’t think the IRS is going to give you a fresh start,” he said.

Even if the administration eventually calls for a shift in enforcement, it is going to take time, said Scott Michel, a member of Caplin & Drysdale Chartered who has done extensive work with overseas financial institutions caught in the U.S. hunt for noncompliance.

Michel said he expects IRS agents to conduct audits and other types of compliance activity “in the usual comprehensive and sometimes aggressive manner, barring a further decline in resources or some massive restructuring. If it turns out the administration wants to change the IRS’s enforcement priorities, it will take a couple of years to shift,” he said.

‘Business-Friendly’ Approach?

Some attorneys, however, said it is possible that big companies—including multinationals—may be able to breathe a sigh of relief, to a certain extent. Phil West, chairman of Steptoe & Johnson LLP, said whether the IRS backs away from audits and enforcement depends to some extent on the agency’s top attorney.

William J. Wilkins, the current IRS chief counsel, has tendered his resignation, which takes effect at noon on Jan. 20, according to a Jan. 11 Office of Chief Counsel notice (CC-2017-003). William M. Paul will become the acting chief counsel.

West said this might allow for a change in direction by the Trump government. “As Bill leaves his post, it may be an opportunity for the new administration to adjust course on enforcement priorities or intensity,” he said. If a Trump appointee is “in the mold of appointments so far,” West said, “you might expect a business-friendly approach,” although that may not come in the form of specific instructions.

The chief counsel selection “sets a tone at the top that filters down, rather than a directive,” West said. A new appointee could take the tone that businesses have every right to pay as little tax as possible, he said.

Daily Tax Report Page 1 of 2 2/3/2017

Side by Side

Another big question regarding tax enforcement under Trump is how it would co-exist with his expected plan to overhaul the U.S. tax system.

Paul Schmidt, tax chair at Baker & Hostetler LLP, said he expects the two to move forward side by side, but said it is likely that more of the administration’s resources will be devoted to a tax revamp in coming months.

“I do think reform will be their priority” and that will address tax misbehavior, at least in part, by giving taxpayers more incentives to comply, Schmidt said. Once that tax law is on the books, however, Schmidt said it would be a policy call as to how much effort to put into enforcement actions.

Jay Nanavati, a Baker & Hostetler partner who previously worked in the Department of Justice’s Tax Division, said he wouldn’t be surprised if the Trump government clamped down hard on noncompliance after a tax overhaul is enacted.

“The administration could be more galled by evasion that takes place in this new post-reform landscape,” Nanavati said. He said he doesn’t expect the Trump administration to back away from legal tax cases, in large part because those cases offer a big return on the government’s DOJ funding.

“I don’t see a change and one of the main reasons is that when budget issues come up, tax is the big selling point,” Nanavati said. With a return of about $17 on every dollar spent to fund the Tax Division, “I just think, regardless of politics, it’s a wise investment,” he said.

Shift From Guidance Expected

Despite differing views on the administration’s expected focus on enforcement, practitioners said they expect a sharp shift from the current administration’s continuous work on major tax guidance.

The Obama administration “spent a tremendous amount of energy regulating”—including guidance on specific controversial issues—and it is highly unlikely that will continue, Schmidt said.

According to John Harrington, a tax partner at Dentons US LLP, the issue is “what do they do about those regulations that have already come out?” The former Treasury international tax counsel said it is a certainty that major corporate guidance will be under the microscope.

“They could be suspended or withdrawn,” Harrington said. “Whether Congress does that or whether Treasury does that, is the big question.” To contact the reporter on this story: Alison Bennett in Washington at

To contact the editor responsible for this story: Meg Shreve at

Reproduced with permission from Daily Tax Report, 09 DTR G-3 (Jan. 13, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <>

Owner of Professional Employer Organization Pleads Guilty to Employment Tax Charge

Bribes and handcuffs. Close-up shotOn Jan. 6, 2017, Janis Edwards, the owner of a professional employer organization, pleaded guilty to tax evasion arising from failing to pay over to the IRS between $3.5 million and $25 million in withholdings that her organization had collected from the paychecks of her clients’ employees. Professional employer organizations, often called “PEOs,” have presented the IRS and the DOJ with substantial employment-tax enforcement issues over the years. This is because PEOs and their owners are not employers and therefore do not technically have a duty to collect and pay over employment taxes. (I will reserve for another blog post any discussion of the impact of the Tax Increase Prevention Act of 2014 and the resulting Internal Revenue Code sections 3511 and 7705.) Normally, the DOJ would charge an employer who had committed the acts that Ms. Edwards admitted to committing with willful failure to collect or pay over employment taxes instead of tax evasion. Because of the wrinkle that the PEO presented, though, the DOJ had to find a different charge, in this case tax evasion. The maximum penalty for tax evasion is five years in prison. The court has not yet set a sentencing date.

Digital Currency Exchange Customers Targeted in IRS Information-Gathering Sweep

DollarCoinbase, one of the largest digital currency exchange companies in the world, will likely be asked to provide the Internal Revenue Service (IRS) with transactional data and other information on all U.S. customers who used its services over a three-year period. Using what is known as a “John Doe” summons, the IRS has formally requested permission from a federal court to seek extensive information on all “United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency” through Coinbase.

If the summons is served as approved by a federal court this week, Coinbase will face the substantial burden of producing a long list of customer-related and other records. However, this data production will only be the first step in a process that may ultimately impact accountholders whose information is turned over to the IRS. The accountholders (corporate and individual) may become subject to IRS audits and potentially fines if there are any unpaid taxes related to their virtual currency transactions.

While the action states that it is civil in nature, the IRS is clearly seeking customer information to open separate investigations of potential tax avoidance, which could become criminal cases in certain circumstances. The information that is collected in this investigation may also be used in other investigations undertaken by IRS itself or any other part of the U.S. Department of the Treasury, including the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN). Other digital currency exchangers and their customers could also become targets in similar actions, either directly or potentially as a result of information collected from this summons, or in follow-on investigations. Even noncustomer receivers of virtual currency could become the subjects of investigation.  Continue Reading

Tax Delinquencies to Jeopardize Contract Eligibility Under New Final Rule

Tax Return BWOn Friday, Sept. 30, 2016, the Department of Defense, the General Services Administration and the National Aeronautics and Space Administration issued a Final Rule aimed at blocking tax evaders and convicted felons from receiving federal contracts. The Rule, which was unchanged from the version first proposed last December, significantly expands the circumstances under which contractors will be barred from awards due to tax delinquencies.

Although the Federal Acquisition Regulation (FAR) has historically required prospective contractors to make limited certifications regarding their tax payment history, the new Rule broadens that policy by extending it to virtually all federal government contracts. The principal provision of the Final Rule – the new contract clause found at FAR 52.209-11, Representation by Corporations Regarding Delinquent Tax Liability or a Felony Conviction Under Any Federal Law – differs from these previous policies in three key respects. First, unlike existing provisions, which require the disclosure only of federal tax delinquencies exceeding $3,500 in the preceding three years, the Final Rule requires the disclosure of any existing federal tax delinquency not currently in dispute. Second, where existing provisions have applied only to contracts whose value exceeded a certain monetary threshold (generally $150,000), the new provisions apply to all contracts. Finally, and most importantly, in contrast to the existing rules, which afforded contracting officials discretion over whether to disqualify contractors for tax delinquencies, the Final Rule expressly prohibits contracting with tax delinquents except under very narrow circumstances.

Importantly, federal tax liabilities that are the subject of judicial or administrative challenge do not constitute delinquencies for the purposes of the Rule.

Heat Rises on Indicted Former Tax Court Judge Diane Kroupa as Husband-Codefendant Pleads Guilty

Bribes and handcuffs. Close-up shotOn September 23, 2016, Robert Fackler, the husband and now co-defendant of former Tax Court Judge Diane Kroupa, pleaded guilty to corruptly impeding the IRS, a felony that carries a maximum three-year prison sentence. It is unclear whether the plea agreement calls for Fackler to cooperate with the government’s prosecution of his wife. Considering that the indictment charged him with six felony counts, five or which will be dismissed under the plea agreement, chances are good that he has agreed to testify against his wife if she goes to trial. She now occupies the exceedingly uncomfortable sole defendant’s chair. The Minneapolis Star-Tribune has a good recitation of the facts of the case here.

Treasury and Other Agencies Issue Guidance to Banks on Correspondent Accounts

bank pillars_000015013886_LargeOn Aug. 30, 2016, the Treasury Department, the Federal Reserve, the FDIC, the National Credit Union Administration and the Office of the Comptroller of the Currency issued guidance to U.S. banks that hold correspondent accounts for foreign financial institutions. The Joint Fact Sheet on Foreign Correspondent Banking seeks to clarify U.S. banks’ obligations when hosting these accounts. Among other things, the fact sheet emphasizes that “Under existing U.S. regulations, there is no general requirement for U.S. depository institutions to conduct due diligence on an FFI’s [a foreign financial institution’s] customers. In determining the appropriate level of due diligence necessary for an FFI relationship, U.S. depository institutions should consider the extent to which information related to the FFI’s markets and types of customers is necessary to assess the risks posed by the relationship, satisfy the institution’s obligations to detect and report suspicious activity, and comply with U.S. economic sanctions.”

As we have noted before in this blog, “Any bank in the world that wishes to allow its customers to hold U.S. dollar-denominated accounts and conduct transactions in U.S. dollars must have access to the U.S. banking system. This requires foreign banks to open accounts at banks in the U.S., known as correspondent banks.” Any clarification of U.S. banks’ obligations in this area will be welcomed by both U.S. banks and their foreign correspondent banking customers.


Tennessee Legislator Convicted of Tax Fraud

On August 8, 2016, Tennessee State Rep. Joseph Armstrong (D-Tenn.) was convicted by a federal district court jury of filing a false federal income tax return, and acquitted of tax evasion and conspiracy. Armstrong’s conviction arose from an ingenious but morally dubious scheme to profit personally from a tax increase that he helped push through the legislature. Armstrong supported and voted in favor of a cigarette tax increase from 20 cents to 62 cents per pack. Cigarette wholesalers place tax stamps on packs to show that the taxes have been paid. Knowing that the stamps would increase in value from 20 cents to 62 cents, Armstrong got together with a wholesaler, hoarded the stamps, and resold them after the tax increase took effect for a 300 percent profit, or roughly $321,000. The jury convicted Armstrong of willfully filing a false tax return by failing to report this income.

The lesson from this scandal, unsurprisingly, is that the cover up is often worse than the crime. Armstrong’s tax stamp scheme was not illegal; it was only distasteful in the extreme. His attempt to cover it up by failing to report the income on his tax return, though, was a felony. He now faces a maximum of three years in prison and is being ejected from the Tennessee Legislature.

U.S. Tax Court Gives Strong Boost to Computer-Assisted Review

On July 13, 2016, in Dynamo Holdings Limited P’ship v. Comm’r, the U.S. Tax Court strongly defended the taxpayer’s use of computer-assisted review in a dispute with the IRS. In a 2014 decision in the same case, the Tax Court had already endorsed computer-assisted review, namely predictive coding, as a general matter. “Predictive coding is an expedited and efficient form of computer-assisted review that allows parties in litigation to avoid the time and costs associated with the traditional, manual review of large volumes of documents.” Dynamo Holdings, 143 T.C. 183 (2014). Read more >>

Asset Forfeiture Reform Bill Moving Through Congress

The “Restraining Excessive Seizure of Property through the Exploitation of Civil Asset Forfeiture Tools Act” (tortuously abbreviated as the RESPECT Act) (H.R. 5523) continues to make its way through Congress, with a markup  session held on July 7, 2016. The bill follows an IRS change of policy in October 2014 to correct perceived abuses in the seizure of the proceeds of criminal structuring of currency transactions. It is a crime to structure currency transactions with the intention of preventing a financial institution from reporting the transaction to the Treasury. Since banks must file a Currency Transaction Report with Treasury’s  FinCEN for currency transactions greater than $10,000, people sometimes conduct multiple sub-$10,000 transactions to evade this reporting. In such cases, in addition to criminal charges, the IRS often civilly seizes the structured funds with the intention of forfeiting them. Controversy arose over the fact that the IRS lawfully seized structured funds even when the funds were not the proceeds of some other crime. To be clear, structuring “clean” currency is no less illegal than structuring illegal-source currency. Still, many people thought that such seizures went too far.

To address this, the IRS announced in October 2014 that it “would no longer pursue the seizure and forfeiture of funds associated solely with ‘legal source’ structuring, unless there are exceptional circumstances justifying the seizure and forfeiture.” In June 2016, the IRS went further and “established a special procedure for people whose assets were involved in structuring to request a return of their forfeited property or funds.” Members of Congress apparently are uncomfortable with this being merely an internal IRS policy, and are seeking to give it the force of law.

Is a Hurry-Up Wire Transfer of $3 Billion on Behalf of a Malaysian Government Fund to a Little-Known Private Bank Suspicious? Apparently Goldman Sachs Didn’t Think So.

Multiple news sources (for example, here and here) are reporting that the U.S. government is conducting an investigation into whether Goldman Sachs violated the so-called Bank Secrecy Act (real and less-Orwellian name: Currency and Foreign Transactions Reporting Act of 1970) by conducting a highly suspicious wire transfer and failing to file a Suspicious Activity Report with the U.S. Treasury.

The Bank Secrecy Act, among other things, requires financial institutions to file Suspicious Activity Reports with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) when a customer’s transactions are, well, suspicious. Banks face serious penalties for failing to file Suspicious Activity Reports. Additionally, the electronically filed reports provide tips that often trigger IRS criminal investigations of the customers that engaged in the transactions. FinCEN closely guards the criteria for when a financial institution must file Suspicious Activity Reports to avoid tipping off would-be wrongdoers on how to avoid behaviors that might trigger the reports. Still, it’s not hard to see why the federal government might view the transaction at issue as suspicious. Continue Reading