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DoJ Seeks Tenfold Increase in Criminal Sentencing for Offshore Tax Matters!

The US Department of Justice (DoJ) has announced a significant change in its criminal sentencing policy regarding offshore tax violations. The DoJ had previously Warn Potential Tax Cheats: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences, And Fines on April 6, 2017.

Now at the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas on December 7, 2017, Mark Daly, DOJ Tax Division Senior Litigation Counsel announced a major new shift in how the Department of Justice plans to argue offshore tax prosecution defendants should be sentenced.

Instead of turning to the standard Part 2T of the United States Sentencing Guidelines (Offenses Involving Taxation), the DOJ will now assert that Part 2S1.3 (Money Laundering and Monetary Transaction Reporting) is the correct guideline for offshore tax cases.

Why does this matter? Two reasons: 

First, Part 2T uses the amount of TAX LOSS as the primary determinant of the offense level. Part 2S1.3 instead uses the ENTIRE VALUE of the Offshore Bank Accounts.

    • For your offshore tax defendants, instead of a sentencing base level determined by the amount of tax loss to the IRS as determined from the flow through of that undisclosed income on the relevant tax return, instead the DOJ will argue that the full value of the offshore bank account should be used to determine the offense level.
    • Daly gave the example of his United States v. Kim case in the Eastern District of Virginia, where the Part 2T tax loss was on the order of $150,000, but the Part 2S1.3 value was $28 million. Depending upon the circumstances, that could be a ten-fold increase in the sentence. 
    • In Kim, the DOJ asserted that Part 2S1.3 was the correct guideline, but due to a prior agreement with the defendant, the DOJ would in that case agree to sentencing based on Part 2T. Daly stated that the DOJ intended its language asserting that Part 2S1.3 was the correct guideline as a warning to the defense bar in other such cases.

The second problem is that Part 2S1.3 allows for a 2-level enhancement where a defendant has also been convicted of an offense under subchapter II of chapter 53 of title 31, which includes filing a false or misleading FBAR.

    • Because an FBAR must be filed each year along with the tax return, the DOJ will now seek to add charges under title 31 chapter 53 to obtain a 2-level enhancement at sentencing.
    • Daly stated that the DOJ may still assert that Part 2T is the correct guideline in certain offshore tax cases, but he was unwilling to articulate, despite pointed questions from the audience, just what criteria the DOJ would use to make such distinctions.
    • This means that the USDoJ will, in future, press for tax evaders to be sentenced based on the value of the undeclared offshore accounts, rather than the unpaid tax, as in previous cases. The result could be that penalties will, in some cases, be increased by a factor of ten. 

The first case in which this new principle has been applied is United States v Kim. In United States v Kim, the Part 2T tax loss was only around USD150,000, but the Part 2S1.3 value, based on the value of Kim's bank accounts at Credit Suisse, UBS, Bank Leu, Clariden Leu, and Bank Hofmann, was USD 28 million.

At this point you have to consider that this may be the DoJ's position, but you should also be prepared to argue that this is vastly different and inconsistent with  the pattern of sentencing in the past and contend that the sentence for your Client/Defendant be consistent with what has historically been done in prior cases.

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Key differences between the Senate and House 2017 Tax Reform Bills

On December 2, 2017 we posted Senate Passes $1.4 Trillion Tax Cut Legislation  where we discussed that the U.S. Senate passed an expansive tax cut bill early Saturday that is projected to add more than $1 trillion to the deficit, after garnering enough support from faltering and fiscally conservative Republicans.

Now the Senate and the House have each passed their own version of the “Tax Cuts and Jobs Act.” The two versions of the bill have many similar provisions, but they also have a number of key differences that will have to be reconciled by the Conference Committee as the two bills are merged into a single piece of legislation.

It is unclear at this point how these differences will be resolved. However, there is generally an inclination that the Senate's provisions carry somewhat more weight because, since the Senate is subject to budgetary restraints as part of the reconciliation process, there is less flexibility to make changes to their bill.

The following are among the more significant differences between the two versions of the bill.

tax bill chart

Individual Provisions

Sunset provision. The Senate bill, in order to comply with certain budgetary constraints, provided an expiration date of Jan. 1, 2026 for many of the tax breaks in its bill, especially those for individuals. The House, on the other hand, largely made the changes in its bill permanent.

Individual rates and brackets. The Senate bill has seven tax brackets for individuals with rates ranging from 10% to 38.5%. The House bill has four tax brackets ranging from 12% to 39.6%, retaining the top rate under current law.

Individual alternative minimum tax (AMT). The House bill would repeal AMT for individuals. The Senate bill would retain the individual AMT, with increases to the exemption amounts.
Estate tax. Both bills would significantly increase the estate and gift tax exemption, but the House would also repeal the estate tax after Dec. 31, 2024.

Individual mandate. The Senate bill would effectively repeal the individual mandate (i.e., by reducing the penalty amount to zero). The House version has no such provision.

Mortgage interest deduction. The Senate bill would leave the deduction for interest on acquisition indebtedness intact but would suspend the deduction for interest on home equity indebtedness. The House bill would allow the deduction for interest on acquisition indebtedness, but would, for newly purchased homes, reduce the current $1 million limitation to $500,000 ($250,000 for married individuals filing separately), and would allow the deduction only for interest on a taxpayer's principal residence. Interest on home equity indebtedness incurred after the effective date of the House bill would not be deductible.

Medical expense deduction. The House bill would repeal deductions for medical expenses under Code Sec. 213 outright, but the Senate bill would take a step in the opposite direction and temporarily (and retroactively) reduce the floor from 10% under current law to 7.5% for all taxpayers for tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, after which time the 10% floor would be scheduled to return.

Child tax credit. The Senate bill would increase the child tax credit from $1,000 under current law to $2,000, increase the age limit for a qualifying child by one year (for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2025), increase the income level at which the credit phases out ($75,000 for single filers and $110,000 for joint filers under current law) to $500,000, and reduce the earned income threshold for the refundable portion of the credit from $3,000 to $2,500. The House bill would increase the amount of the credit to $1,600 and increase the income levels at which the credit phases out to $115,000 for single filers and $230,000 for joint filers.

Both bills would also provide a non-child dependent credit, which would be $500 under the Senate bill and $300 under the House bill. The House bill would also provide a “family flexibility credit”; the Senate bill has no equivalent.

Business Provisions

Effective date of corporate tax reduction. Both bills would reduce the corporate tax rate to 20%, but the House's version would go into effect for tax years beginning after Dec. 31, 2017, whereas the Senate's version would go into effect for tax years beginning after Dec. 31, 2018.

Corporate AMT. The House bill would repeal the corporate AMT. The Senate bill, however, would retain the corporate AMT at its current 20% rate.

The 20% corporate AMT rate is equal to the 20% corporate rate that would go into effect under the Senate bill in tax years beginning after Dec. 31, 2018, which would effectively negate the value of corporate tax breaks for many businesses.

Section 179 expensing. Both bills would increase the expensing cap and phase-out under Code Sec. 179, but the Senate would increase the cap to $1 million and begin the phase-out at $2.5 million (up from $520,000 and $2,070,000 for 2018 under current law), whereas the House would increase the cap to $5 million and start the phase-out at $20 million.

Pass-through provision. The Senate bill would generally allow a non-corporate taxpayer who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship to claim a deduction equal to 23% of pass-through income. The House bill would provide a new maximum rate of 25% on the “business income” of individuals, with a series of complex anti-abuse rules to prevent the re-characterization of wages as business income.

Need Tax Help?

We Can Advise on How These Tax Cuts Can Benefit You!
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The Heritage Foundation 

Thompson Reuters Checkpoint

The Wall Street Journal


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Treasury Expanding Magnitsky Act as a Basis for Applying Sanctions

According to DiazReus, as of December 2017, the United States Treasury Department’s Office of Foreign Asset Control (“OFAC”) will begin using an expanded version of the Magnitsky Act as a basis for applying sanctions to individuals and entities suspected of corruption related activities.  

The Magnitsky Act, formally known as the Russia and Moldova Jackson–Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, is a bipartisan bill passed by the U.S. Congress and signed by President Obama in November–December 2012, intending to punish Russian officials responsible for the death of Russian tax accountant Sergei Magnitsky in a Moscow prison in 2009.

December 2016, Congress enlarged the scope of the Magnitsky Act to address human rights abuses on a global scale. The current Global Magnitsky Act (GMA) allows the US Government to sanction corrupt government officials implicated in abuses anywhere in the world.

In September 2017, a group of NGOs and anti-corruption organizations identified fifteen international cases where alleged crimes were committed. Individuals from countries, including Azerbaijan, Bahrain, China, the Democratic Republic of the Congo, Egypt, Ethiopia, Liberia, Mexico, Panama, Russia, Saudi Arabia, Tajikistan, Ukraine, Uzbekistan, and Vietnam, were nominated for sanctions.

In early August 2017, Bill Richardson's Center for Global Engagement also identified a case where alleged crimes were committed in Bulgaria: nominated perpetrators include Bulgaria's General Prosecutor Sotir Tsatsarov and controversial media mogul and Member of Parliament Delyan Peevski.

OFAC will publish the names of these newly designated individuals and entities as it currently does with its Specially Designated Nationals and Blocked Persons List, and Specially Designated Narcotics Traffickers List. 

The Potential Sanctions Associated with Such a Listing
May Include Prohibition to Enter the United States,
Visa Cancellation, Freezing of Assets in the United States, and a Prohibition of Engaging in Business with
US Persons and Entities.

The United States moves forward and is initiating its first prosecution​. (Read Article in Spanish).

 Have an International Business or Tax Issue? 

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243


Read more at: Tax Times blog