According to a Department of Justice press release, Wells Fargo faced a defeat at the Eighth Circuit Court of Appeals, recently. On April 24th, the Eight Circuit issued its opinion after hearing Wells Fargo v. United States, in which the bank appealed the decision of a U.S. District Court in Minnesota that ruled against Wells Fargo, imposing a 20-percent accuracy-related penalty for its use of the popular STARS tax shelter. Although this case involves a large banking entity, it provides a glimpse into the tax enforcement strategy of the IRS. Taxpayers who have failed to comply with the international taxation and information reporting aspects of U.S. tax law should consult with an experienced tax defense attorney to determine the next steps.
According to a Department of Justice press release, Wells Fargo lost on appeal to the Eighth Circuit after a defeat at a lower District Court in Minnesota. At the trial court level, the Department Justice argued that Wells Fargo’s participation in the STARS tax shelter lacked any economic substance and was a sham, under the sham transaction doctrine. The Eighth Circuit agreed with the lower court and ruled that tax return accuracy-related penalties of 20-percent were warranted.
STARS Tax Planning and the Sham Transaction Doctrine
The STARS tax planning technique involves an arbitrage of the U.S. and U.K. tax rules. Specifically, the structure triggers a U.K. tax that allows a U.S. bank, such as Wells Fargo, to pay and accumulate foreign tax credits under I.R.C. section 901. Wells Fargo’s U.K. partner (Barclays, in this case) also receives a benefit under the U.K. tax law and makes a reimbursing payment to the U.S. bank. Although the transaction is relatively complicated in nature, the net result is Barclays obtaining a zero-percent effective tax rate on its income that is part of the structure and Wells Fargo achieving no residual tax in the U.S. after its utilization of the foreign tax credit.
The Eighth Circuit agreed with the District Court that the transaction was only established for tax purposes and that the transaction did not provide for any pre-tax profit opportunity. Thus, had taxes not been at play as a part of the arrangement, Wells Fargo would have failed to benefit from the transaction.
The IRS and Department of Justice Are Cracking Down on Tax Evasion, Regardless of Taxpayer Size
Although Wells Fargo and its use of the STARS tax shelter may not resonate with many individuals and business taxpayers, it is important to take away that the IRS and the Department of Justice are consistently working together to ensure that the international provisions of the U.S. tax code and regulations are complied with. For instance, Foreign Bank Account Reporting (FBAR) laws can affect Americans at any income level. With laws like FATCA, which require the transmittal of identifying information of U.S. account holders at foreign banks flowing into the Treasury Department, it is only a matter of time until the government weeds out any remaining non-compliers.
Whether you have failed to file the requisite FBAR disclosures or have engaged in another type of non-compliance or abusive tax activity, there are steps that can be taken to mitigate the potential negative consequences that come along with an IRS examination or investigation. Meeting with an experienced tax defense attorney generally serves as a worthwhile endeavor. You and your tax lawyer will work together to establish the facts and circumstances surrounding your case and conclude the best go-forward strategy.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one-stop-shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
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The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing a diverse group of taxpayers. From individuals to middle market businesses and beyond, our team of zealous advocates will assist in the development of a strategy to help you reach your specific goals and objectives. Whether you are under a tax examination or are in need of tax planning advice, contact the Tax Law Offices of David W. Klasing today, online or by phone at (800) 681-1295, for a reduced-rate consultation.
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