Tags: paul manafort | taxes | trial | irs

Things Might Have Turned Out Differently For Paul Manafort

Things Might Have Turned Out Differently For Paul Manafort
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Friday, 31 August 2018 06:49 AM Current | Bio | Archive

On October 27, 2017, a District of Columbia grand jury indicted Paul J. Manafort, Jr. and Richard W. Gates III.

The indictment charged conspiracy to defraud the United States; transferring money into the United States with intent to violate 22 USC § 612 and 618 and 18 USC § 1956(a)(2)(A) (“money laundering”); conducting banking transactions knowingly involving the proceeds of unlawful activity, to-wit money laundering and tax evasion (“bank fraud’); conspiracy to commit tax evasion, 72 USC § 7201, or to file a false tax return, 26 USC § 7206(1); willful failure to file FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”); willful failure to register with the United States government as an agent of a foreign principal, in violation of the Foreign Agents Registration Act (“FARA”); and making materially false statements to the United States government concerning the defendants’ lobbying efforts in the United States on behalf of a foreign principal, in violation of the FARA.

On August 21, 2018, an Arlington, Virginia jury convicted Manafort on five counts of conspiracy to commit tax evasion, one count of willful failure to file an FBAR, and two counts of bank fraud. Gates testified against Manafort at trial, undoubtedly in exchange for leniency in the prosecution of Gates.

Manafort faces a lengthy prison term. He also faces imposition of additional income tax in the millions of dollars, a civil fraud penalty equal to 75% of the tax, and a “draconian” civil penalty for failure to file FBARs. The FBAR penalty is so named because it equals 50% of the high aggregate balance of his foreign financial accounts. The tax and penalties could be imposed as restitution, in connection with Manafort’s criminal sentence, or in separate civil proceedings.

Grand jurors, prosecutors, and court personnel are bound to secrecy concerning grand jury proceedings. But others are not bound to secrecy about grand jury proceedings. Witnesses subpoenaed to produce records or testify before a grand jury are free to share with others the subpoena which they received from the grand jury, the questions they were asked by the prosecuting attorney before the grand jury, and the testimony thy gave before the grand jury. Indeed, it is not uncommon for a witnesses to be debriefed by counsel for the target immediately after testifying before a grand jury.

The point is that a person who is under investigation by a grand jury knows of the investigation. Manafort surely knew of the grand jury investigation of him not later than a short time after the May 17, 2017 appointment of Robert S. Mueller, III as Special Prosecutor.

As soon as possible after learning of his obligation to file FBARs, and in any event upon learning of the investigation of him, Manafort should have filed his delinquent FBARs. Doing so would have undermined the willfulness needed to convict Manafort of willful failure to file FBARs. Indeed, filing the delinquent FBARs would have corrected the statutory offence. The statutory offence is failure to file FBARs, not failure to timely file FBARs.

Filing Manafort’s delinquent FBARs should have prevented assessment of the draconian civil penalty against him.

As soon as possible after learning of the investigation of him, Manafort should have filed amended income tax returns. He needed to amend his federal income tax returns to report income from the foreign accounts, to correctly answer questions about his interest in foreign financial accounts on Schedule B, Interest and Ordinary Dividends, Line 7a; to file Form 8938, Statement of Specified Foreign Financial Assets; and to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Filing amended income tax returns would have undermined the elements of a tax evasion case that the defendant filed income tax returns materially understating his tax liability, and that he did so willfully.

The IRS has acknowledged in administrative authority that the filing of amended tax returns can undermine willfulness as to the originally-filed tax returns. I would have requested a jury instruction to this effect.

Federal tax laws are complicated, as is compliance with them. The more bewildering the laws, the tougher it is for the government to prove that noncompliance with them was willful.

Filing amended income tax returns for Manafort could have prevented assessment of a civil fraud penalty against him.

Yet, the Indictment charged Manafort with willful failure to file FBARs. Inexplicably, Manafort’s delinquent FBARs apparently had not been filed by the date of the Indictment, October 27, 2017. It is unknown whether Manafort’s FBARs remained at the time of trial.

The Indictment does not say anything about amended income tax returns. Apparently none were filed.

The elements of the crime of conspiracy are an agreement to commit the target offence, and at least one act in furtherance of the agreement. The Indictment charges two target tax offences in the alternative: tax evasion, 26 USC § 7201; and willful filing of a false tax return, 26 USC § 7206(1). The elements of tax evasion, 26 USC § 7201, are (1) the filing of an income tax return materially understating tax liability; (2) willfulness; and (3) an affirmative act of evasion. The elements of 26 USC § 7206(1) are (1) willfully (2) filing a tax return materially understating tax liability.

An agreement to violate 26 U.S.C §§ 7201 or 7206(1) seemingly would include the elements of each offence. The Indictment is bereft of the elements of either offense.

The Indictment alleges that “No” was answered to questions on an organizers from Manafort’s accountant about whether Manafort had interests in foreign financial accounts during the year. I address accountants’ organizers in a separate post. But the Indictment also alleges that the organizers were completed and returned to Manafort’s accountant not by Manafort, but by Gates.

Manafort did not testify at trial. But Manafort needed to testify at trial to counter Gates’ testimony that Manafort instructed him to understate Manafort’s income to Manafort’s accountant.

In sum, filing Manafort’s delinquent FBARs should have prevented his conviction for willful failure to file FBARs. Filing the delinquent FBARs may also have also shielded Manafort from the draconian civil penalty for willful failure to file FBARs.

It is difficult to say whether filing amended income tax returns could have prevented the conviction of Manafort for conspiracy to commit tax offences. Surely Manafort’s filing of amended income tax returns would have produced no worse circumstances for Manafort than those in which he now finds himself.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.
 

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StephenJDunn
Surely Manafort’s filing of amended income tax returns would have produced no worse circumstances for Manafort than those in which he now finds himself.
paul manafort, taxes, trial, irs
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2018-49-31
Friday, 31 August 2018 06:49 AM
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