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Permanent Resident Lawyer’s Attempt to Dismiss Enabling Alleged FBAR and Tax Noncompliance Enforcement Action Fails

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    On this blog, we have long warned readers that a duty to file taxes and comply with FBAR and other offshore account disclosure laws will generally apply to dual citizens and U.S. tax residents. Recently, the esteemed Federal Tax Crimes blog noted the latest development in an already years long FBAR and tax enforcement matter concerning a U.K. lawyer living in the United States. The lawyer, Michael Little, was initially indicted on multiple grounds including a Klein conspiracy, a conspiracy to violate Sections 7201 and 7212(a) and (b), and one count of tax obstruction under 7212(a).

    However, over time, Mr. Little’s tax problems continued to grow and he eventually found himself facing 19 separate tax and foreign disclosure charges. The tax charges filed against the attorney are:

    • 1 count of tax obstruction under § 7212(a).
    • 6 counts of failure to file taxes for the 2005 through 2010 tax years.
    • 1 count of a willful failure to file a Report of Foreign Bank and Financial Account (FBAR).
    • 1 count of conspiracy.
    • 10 counts of aiding and abetting the filing of false tax forms.

    Faced with the potential for significant penalties, the attorney attempted to avoid prosecution through Constitutional concerns raised in a motion to dismiss.

    Defendant Raises Constitutional Vagueness Concerns Regarding FBAR Violation

    Likely recognizing the extent of penalties that can be imposed for willful violations of FBAR and other tax crimes, the defendant filed a motion for dismissal based on Constitutional vagueness. A willful FBAR violation can carry a penalty that is the greater of $100,000 or 50 percent of the account balance. Tax felonies carry a federal prison sentence.

    In his motion for partial dismissal of the Second Superseding Indictment, Mr. Little seeks the dismissal of his prosecution for failure to file individual income tax returns and FBAR.  Mr. Little claims that continuing this prosecution would lead to an improper curtailment of his due process rights through the Fifth Amendment. Mr. Little’s motion is premised on the fact that, at the time of his alleged actions, he was a U.K. citizen and a lawful permanent resident of the United States. He argued that:

    …the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and FBARs, when read in conjunction with the U.S./U.K. Tax Treaty (the “Treaty”), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law.

    Essentially, the taxpayer argued that the body of law surrounding his FBAR obligation, in the context of a U.K. citizen with U.S. permanent residency status, was overly vague and ambiguous.

    Court Is Not Receptive to the Taxpayer’s Vagueness Arguments

    In addressing the taxpayer’s claims, the court recognized that a claim for vagueness not relating to First Amendment concerns should be analyzed under the framework where:

    …the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.” United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) (quoting Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983)).

    The court stated that a two-step analysis should be applied. The first step of the analysis concerns whether a person of average intelligence would have a reasonable opportunity to determine the conduct that is prohibited. Next, the court should consider where the law provides standards for those who apply it.

    In applying this test to the various arguments made by the taxpayer, the court was not persuaded to dismiss the charges. Generally, the court found that the obligation for U.S. tax residents to file taxes is well-established. Furthermore, the court also found that when a tax treaty applies, “tie-breaker” rules are set forth for residency purposes. Thus, Little’s arguments regarding potential vagueness of tax filing obligations were not seen as persuasive or granted by the court.

    Regarding the FBAR charges, the court also did not find the vagueness argument persuasive. The court recognized that the term, “United States resident” was, at the time, not defined in the FBAR regulations. However, the court noted that the term was defined throughout the Tax Code. It determined that based on the availability of this information, a permanent resident of ordinary intelligence would, indeed, understand themselves to have an obligation to report. Furthermore, the court found that to the extent that there was any ambiguity regarding the duty to file FBAR, “that ambiguity is remedied for the purposes of this void for vagueness analysis by the fact that criminal penalties only apply to a failure to file an FBAR if such failure to file was willful…”

    Thus, concerning the criminal charges, the federal government was required to prove that Little had acted willfully beyond a reasonable shadow of a doubt. Because theses criminal penalties have a “scienter” requirement – the accused needs to have knowledge that his or her act is wrong – the vagueness challenge was not appropriate.  Essentially, the government must prove that a taxpayer did not file taxes, an FBAR, or some other required report and they knew that his or her actions were wrongful. Since the government must prove a higher standard, that the defendant knew his or her actions are wrong, it is illogical to allow the defendant to raise issues regarding their lack of awareness that actions were unlawful.

    Taxpayer Faces Tax, FBAR Trial in 2018

    Due to the failure of this motion to dismiss any of the charges faced by the taxpayer, the next step in the process are responses to a pre-trial conference which are due no later than June 16, 2017. The final pretrial conference is scheduled for March 7, 2018, at 2:00 p.m. Mr. Little is currently scheduled to go to trial on March 19, 2018, at 10:00 a.m.

    Concerns Regarding Tax or FBAR Mistakes?

    The government pursues tax and foreign disclosure noncompliance aggressively. The IRS and DOJ will not hesitate to launch audits and tax enforcement actions against wealthy individuals, dual citizens, and even lawyers. To schedule a confidential reduced rate initial consultation with the experienced tax attorneys and CPAs of the Tax Law Offices of David W. Klasing, call 800-681-1295 today.


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