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The Impact Of Exchange OF Information Between Tax Authorities And Inconsistency

04 March 2010   (0 Comments)
Posted by: Author: TaxTalk
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The Impact Of Exchange OF Information Between Tax Authorities And Inconsistency In Defining Tax Evasion On Licensed  Professionals
Mandatory Taxation

Governments levy taxes. Simply put, taxes generate revenues for intended beneficial outcomes.Paying taxes, however, is not voluntary.Governments have made paying taxes the legal responsibility of individuals.Tax evasion remains a global sensation. Although tax evasion is a worldwide state of affairs, governments have failed to provide the taxpayers with cross-border consistency and fastidiousness in definitions of tax evasion  allowing the distinction between tax evasion and tax avoidance  to be altered as needed through the legal system.Former British Chancellor Denis Healey distinguished between the ways to lower your tax liability by stating,"The difference between tax avoidance and tax evasion is the thickness of a prison wall”.As a result, an increase by revenue authorities to broaden co-operation in the exchange of notably reliable information in cross-border tax matters has put a caution alert on those taxpayers and advisers still hoping to get a rush from the risk of playing the international game of avoidance vs. evasion. 

Presumption of innocence lost? The Role Of Licensed Professionals In The International Tax Planning Industry
Almost as if an accommodation amongst gentlemen, there was an era in the not-too distant past where the investigation and prosecution of licensed professionals was a rare occasion.Perhaps now an old-fashioned notion, accountants and lawyers have traditionally been viewed as a more refined, educated and privileged class of professional holding a broad fiduciary role affirmatively to protect against wrong-doers.Those quasi-public obligations led to a separate system of rules, ethics codes and internal ‘self-regulation’, often administered or supervised by the courts, to ensure the appropriate discharge of their obligations to the public.A sense of trust and correctness tended to follow the involvement of a licensed attorney or accountant.

These professionals have been amongst the most critical players in the tax planning and wealth management arenas.Clients armed with a legal opinion that the structure of their ownership interests and the reporting of income were in compliance with the law were practically guaranteed to avoid a serious threat of prosecution.For their part, errant professionals could suggest that missteps were the function of material omissions or even deceptions by clients, or that at worst, they fell within a professionally acceptable range of mistake or misjudgment in dealing with complex legal systems and complicated transactions.
Even today, the investigation and prosecution of professionals in the wealth management industry is viewed as requiring special effort, even if only because of the need to be able to convince juries and sometimes skeptical judges that the professional before them – likely a person who has achieved substantial social and professional success and who has done good deeds in his or her career – has committed an act with the ‘specific intent’ to defraud and cheat.The prosecution of specific intent crimes, never an easy undertaking, is viewed by many prosecutors as a particularly daunting endeavor, requiring the meticulous assembly of incriminating evidence to overcome the natural presumption of regularity and correctness that a jury is likely to apply at the outset of a trial.

The prosecution of licensed professionals has increased dramatically since the sharing of information has become prevalent cross border.The last decade has seen an increased willingness of US legislators and regulators to examine transactions and business and investment activities regardless of international boundaries.Congress has, with increasing frequency, enacted legislation that has looked specifically at activities overseas that ostensibly adversely affect interests of the United States.
Regulators and law enforcement officials have in recent years applied their jurisdiction more expansively to investigate, sanction or prosecute businesses and persons based on transactions occurring primarily abroad.To better grasp the exposure to professionals as they design international tax plans for their clients, one must appreciate that the purpose of the exchange of information is to ascertain the facts in relation to which the rules of an income tax treaty are applied. Information is used to assist one of the countries in both the administration and enforcement of its own domestic law.
Investigations and prosecutions of gatekeepers due to information sharing In this very vein, the US Justice Department was successful in banning from preparing federal tax returns for a tax fraud scheme including securing an indictment in a 2007 North Carolina case.Gatekeepers were accused of knowing that they were conducting trust and tax-fraud schemes that would harm the government by fraudulently reducing taxpayers’ liabilities.The Internal Revenue Service identified 993 federal individual income tax returns and 50 federal tax trust returns in the case that resulted in a tax scheme to cheat the government out of taxes of almost $3 million. 

Whether the wealth advisers are labelled architects, promoters, brains or the like, sharing of information again finds prosecutors aggressively in pursuit of professionals who aid and abet tax cheats.Cross-border transactions will not stop the government. Seattle prosecutors land another attorney."In an 18-count indictment filed in US District Court in Seattle, Greenstein and Wilk, an attorney with Quellos, are accused of creating a shell investment fund based on the Isle of Man solely to create false losses.”

More and more attorneys have shifted their roles from legal advisers to business and wealth consultants specialising in international tax planning.The scandals of the corporate giants have brought the legal profession into the limelight and the millions of Dollars evidenced by the financial scams have shown that attorneys as gatekeepers may lose their professional judgment giving in to their own financial gain.Legal professionals are very much under the microscope for aiding and abetting their clients, as are the accountants and other wealth management advisers.More cases where cross-border information sharing exists have proven that attorneys are under the same scrutiny as the more traditional wealth management advisers, and that the wrath of the public and the regulators and enforcement authorities is far from restricted to the misdeeds of those wealth management professionals to the exclusion of attorneys.
Importantly, a distinct attitudinal change among financial regulators and law enforcement personnel has resulted often in the affirmative targetting of lawyers and accountants for investigation and prosecution on the theory that, as ‘gatekeepers’, these professionals should, in fact, be held to a higher standard and that the goal of effective deterrence is best achieved when the specialists who are at time indispensable to the successful commission of complex fraud schemes are prosecuted.

Advocating international tax management efficiency to clients does not relieve tax practitioners of their fiduciary responsibilities and ethical duty to the public. When the tax plan is the product of a colourfully alluring tax avoidance scheme designed to tap into loopholes in tax law fin vague definitions that are inconsistent within treaties, international tax codes, regulations and the like, the counsel arguably results in evasion in disguise.

Lawyers may have caught a break in the Enron scandals, perhaps because advice that crossed into misdeeds was protected partly by the Central Bank v. First Interstate Bank case, from 1994, that said "lawyers are not liable for aiding and abetting in securities fraud just because they advise a corporate client who commits it, if they are not actively involved in creating and manipulating misinformation and are not principal actors in the fraud.This case supports the idea that lawyers involved with Enron are not liable just because they were involved when the fraud went on”.As seen below, Central Bank was not as favourable to the lawyers at Milberg Weiss & Bershad.
Lawyers need to beware Information sharing agreements and vehicles has uncovered evidence that wealth managers/international tax planners are littered with players from the legal community. Accounting and investor fraud have been the eye-popping runners at the forefront.The legal adviser is no newcomer to the gate-keeping community that aids and abets the tax liars and cheats.Lawyers are becoming more visible on the forefront of indictments and conviction.

The 2006 securities class action suit against the law firm of Milberg Weiss & Bershad is representative of a prominent confrontation between the government and a law firm resulting in a major law firm facing criminal indictment. "Prosecutors investigated secret payments to lead plaintiffs in securities class-action suits brought by Milberg.The payments rewarded what prosecutors described as a ‘stable’ of ready clients who held stock in companies.The payments meant that the lead plaintiffs stood to receive more money than they would if they had simply been members of the class, and that as a result they might not have looked out for the best interests of the entire class, as lead plaintiffs are supposed to do.”

"The settlement with Milberg reflects the seriousness of what was probably the longest running scheme ever conducted by a law firm,” said Thomas P O’Brien, the United States Attorney.According to his office, Milberg paid secret kickbacks to plaintiffs in more than 165 lawsuits over 25 years that garnered nearly $240 million in legal fees.Lerach, the partner at Milberg who plead guilty to the charges, was not stopped by the prison walls that engulf his trademark claim to fame.In a recent article for the business magazine Portfolio, he wrote, "Paying plaintiffs was an industry practice.”
Intent on following the money, information exchange agreements have brought regulators and governments globally to gear up on their efforts to reign in the wealth management advisers.While the activities they engage in to assist taxpayer-clients in tax avoidance schemes may not routinely result in breaking any laws and committing any crimes, the escape of the law by specifically abiding by it has become the ultimate criminal stigma.Legal definitions are such that the very greyness of them allows for abiding by the letter of the law and has afforded wealth advisers and institutions the very opaqueness of abuse that demands that they go forward with the same degree of stigma that is associated with the crime. The regulators are armed and ready to charge the wealth management advisers with the view that these fiduciaries are the radical stimuli that perpetrate cross-border tax evasion.

In the wake of the global aggressiveness to share information, the passage of the Sarbanes-Oxley Act and actions by the US Securities and Exchange Commission imposed new requirements on auditors, corporate boards and management.The passage of the Public Company Accounting Reform and Investor Protection Act of 2002, later renamed the Sarbanes-Oxley Act, attempted to address the root of the unethical and illegal problems: "The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants; lack of auditor independence; weak corporate governance procedures; stock analysts’ conflict of interests; inadequate disclosure provisions; and grossly inadequate funding of the Securities and Exchange Commission.”
The SEC is now funded appropriately and will use the funds to bring in sophisticated and upper-level experts to man the investigations and oversight and enforcement areas to be sure that ‘gatekeepers must be gatekeepers’.
The government’s efforts to enforce the law against gatekeepers who promote tax fraud schemes are rapidly increasing.The government will not be deterred. Another indictment recently brought in Boston alleges that seven US citizens in New England conspired to defraud the US by promoting and using multiple tax fraud schemes.One of the conspiracy counts in the indictment focuses on a warehouse banking scheme.The scheme helped those who subscribed to conceal income and assets from the IRS. Several banks were used to deposit and commingle business receipts with other funds to mask the ownership of the receipts totalling over $16 million, of which some were delivered in ‘wrappers of aluminium foil’ to the true subscribers.

The IRS Criminal Division is hot on the pursuit of international tax planners who act unscrupulously to assist in defrauding the government of rightful tax monies from US citizens.The evidence that resulted in the conviction in National City, California, of a licensed tax prepare after a nine-day trial for aiding and assisting in the preparation of false tax returns, and for failure to pay taxes, also showed that the prepare wired over $100 000 to the Philippines.Those in a position of trust and higher level of fiduciary duty to the public had best not abuse that position for their own personal gain.

Treaty Shopping
The majority of taxpayers seek the services of professionals in order to avoid taxes.This suggests that the professional guidance given to clients seeking to avoid taxes stems directly from the lawyer’s interpretation of the treaties,codes and moral attitude in his or her own practice of law, as well as the attorney’s skill in using precedents and statutes in the convincing arguments.Lawyers will seek to rigorously pursue ways to avoid taxes that complement the adrenalin flow of their clients in the risk-taking game of minimising liability.
Treaty shopping becomes a sieve of alternatives for attorneys to interpret the context of evasion and avoidance.Most countries have a mechanism in place for sharing of information that is criminal in nature.There are mutual legal assistance treaties available as well as other legislative tools.Not all offshore countries decipher tax evasion as criminal, nor do they interpret avoidance and evasion in the same way as other countries. 

Treaties themselves are not guarantees of turning over tax evaders or information.Instead, treaties are merely documents that reflect mutual accommodation Information sharing resulting in investigations prove big is not too big to be bad Gone is the notion that obtaining the assistance of a large conventional institutional provider of accounting, legal and investment services will immunise the client from tough scrutiny or that the open marketing of tax or other financial planning ‘products’ by those entities will deter the government from investigating and actually prosecuting those who have designed the products and services.By now, the examples of such high profile investigations are too many to list.

The high profile accounting scandals and fraud cases are far from few.While Enron and Arthur Anderson held the limelight in the public eye, they are not the only ones on the list of public tax abuse shenanigans sported by Federal Regulators.In fact, the list is exhaustive. "The number of fraud cases investigated by the Securities and Exchange Commission alone jumped 41 per cent in the last three years, according to agency data, resulting in tens of millions of Dollars in fines to settle the charges.”
While the regulators claim that client pressures to make numbers soar force the ethical breaches of the wealth managers and international tax advisers, there are others who believe that the professional accountants don’t have sensitivity to the harming effect of numbers and believe that this particular group of gatekeepers learns from the onset the necessity to ‘shave the truth’.
Pressure is on international tax planners from their clients.Tight relationships between wealth advisers and their clients foster a thicker than blood union between the professionals and their clients, and even though information is being shared cross-border, attorneys believe they can use the attorney-client privilege as their shroud. An ostrich attitude exists where the professionals pray that if no one notices, then the risk factor of getting pinched by the regulators will most probably be a query at best, if at all.

The target on wealth advisers is global.The Canadian Coalition for Good Governance Chairman wants to form a national enforcement agency to accelerate fraud cases."We’re seeing some cases of adviser fraud now in Quebec,” said the Chairman, who is also the chief executive officer of Canada Pension Plan Investment Board, the country’s second biggest pension fund.
Artful Dodgers

Taxpayers go to attorneys for assistance in avoiding taxes bearing the viewpoint that the art of practicing law brings results based on the attorney’s creative ability and that those results are nothing more than a gamble. Attorneys are skilled in the art of framing legal interpretations to define what is acceptable.Using the ambiguous international legal definitions and combination of uses and acceptance in treaties of tax avoidance and tax evasion, the taxpayers’ weight on the penalties and criminal possibilities of being punished, let alone caught, are reduced.The challenge to not provide information to taxing authorities makes the game even more exciting to play.One should question whether uses of loopholes in the law are amoral when it comes to tax evasion As attorneys assist taxpayers through escape clauses or alternatives from the obligation to pay taxes; then, perhaps, the reason why taxpayers have difficulties in understanding the distinction between evasion and avoidance is not really criminal, but instead a technicality. 
The borderline between what seems morally right and wrong does not always coincide with the border between what is legal and illegal.This should be kept in mind when considering the theoretical literature on tax evasion, where the basic assumption is that the taxpayer wishes to hide his actions from the tax collector.Taxpayers approach paying taxes as part of business.The cost of paying their attorneys for designing international or domestic tax plans, no matter how complex or simple, may cancel out the probability that they will be audited, investigated or even charged for noncompliance. Even then, the cost of paying their attorneys to defend their tax position of whether they fall into the grey or confusing area of tax avoidance or tax evasion still tips the scales favourably in their mindset that the chances of getting caught or that the payment that could be negotiated on any tax liability or penalty might outrival the shelter and advice provided by their attorney.To further assist in their decision to go with the game of legal advice for tax avoidance over paying taxes, is the ability of any lawsuit to be dragged out without possibility of making early restitution.Coupled with knowledge of others who have avoided taxes by using professionals gives a false comfort level to the client-taxpayer.

But tax attorneys do not run amok without the blessings of the Court.One should pay attention to the classic words of Judge Learned Hand:"Over and over again, the courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.Everybody does so rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced extractions, not voluntary contributions.To demand more in the name of morals is mere cant.”
Tax avoidance – evasion in sheep’s clothing Advocating tax management efficiency to clients does not relieve tax practitioners of their fiduciary responsibilities and ethical duty to the public.When the tax plan is the product of a colourful alluring tax avoidance scheme designed to tap into loopholes in tax law founded in vague definitions that are inconsistent within treaties, international tax codes, regulations and the like, the counsel arguably results in evasion in disguise.Public policy leans toward the view that it would be better to have lower taxes and less escape clauses to bring the situation into a more above board and efficient position.

The Long Arm Of The IRS

The global reach of tax investigators and prosecutors and the practical consequences to professionals in the tax planning industry It is submitted that the traditional notion that criminal investigations and prosecutions are uniquely sovereign exercises largely constrained to conduct committed within the boundaries of the jurisdiction whose laws are being enforced is being defused by the willingness, if not eagerness, of Congress to extend the international reach of US laws.Further, the increased willingness of countries to share information, including financial data, has enhanced the ability of US prosecutors to investigate matters globally and, with it, the ability to mount prosecutions of cross border tax schemes.

The last decade has seen an increased willingness of US legislators and regulators to examine transactions and business and investment activities regardless of international boundaries.In part fuelled by challenge of combating international terrorism, Congress has with increasing frequency enacted legislation that has looked specifically at activities overseas that ostensibly adversely affect interests of the US.

The Second Circuit issued an opinion in, In re Terrorist Bombings of United States Embassies in East Africa, 552 F.3d 157 (2d Cir. 2008),  and became the first appellate court to hold that the government does not need a warrant when it conducts an extraterritorial search or seizure affecting an American citizen.In doing so, the court sanctioned the government’s practice of conducting searches and seizures abroad without first demonstrating probable cause to an impartial magistrate.The US Government can now expand its extraterritorial searches in response to this case Hence, targets of criminal investigations may think twice about fleeing to other countries.Of grave interest to both prosecutors and the public at large is the court’s hand in expanding the traditionally limiting extraterritorial statute known as the Honest Services Statute.

Originally, prosecutors were limited to the elements of wire fraud under the interpretation of The Federal Criminal Code to charge government officials with criminal wrongdoing under the theory that they committed wire fraud, usually in accepting bribes but have now taken it and applied it to private, non-governmental persons.Of grave importance to gatekeepers is the trend has shifted from holding them accountable and as owing a fiduciary duty to shareholders and creditors, not only for material nondisclosure, but for instance by entering into or approving transactions while having a conflict of interest, such as that held in a Ninth Circuit Court of Appeals case.

Blurred Vision

Creating confusion between legal tax avoidance and criminal tax evasion may be a popular tactic to pressure those being accused of promoting unfair tax competition. While there appears to be a clearer definition as to what is illegal, the concept of tax avoidance is now clouded with moral acceptability and a not-so-transparent meaning.Donald Johnston, Secretary-General of the Organisation for Economic Co-operation and Development (OECD) said that, "Tax evasion is easy: it involves breaking the law.By tax avoidance, OECD means unacceptable avoidance.This can be contrasted with acceptable tax planning.What is critical is transparency.” What may be acceptable legally may be so blurry that it is re-characterised as unclean. "Tax avoidance thrives where there is some structural defect (loophole) in the tax legislation.” Accordingly, legal definitions are such that the very greyness of them that allows for abiding by the letter of the law demands that they go forward with the same degree of stigma that is associated with crime.


It is clear that the perception of taxpayers with regard to tax evasion, avoidance and information sharing is reactionary to not only the advice provided them by their tax attorneys, but to the synergy that flows from the practice of law.Without a universal, non-interpretative and harmonious definition of tax evasion, tax avoidance and tax compliance, the law, as practiced by attorneys, will continue to be the radical stimulus that perpetrates cross-border tax evasion.In conclusion,"We can no longer hide behind the excuse that there is no acceptable definition of avoidance.”
Source: By TaxTALK



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