"RELIANCE" DEFENSE WAIVES WORK PRODUCT & ATTORNEY-CLIENT PRIVILEGE PROTECTION

In litigation, the work-product doctrine and the attorney-client privilege protect materials and communications from discovery by an adversary in litigation. The work-product doctrine excludes from discovery materials prepared in anticipation of litigation because discovery of such materials would hamper the orderly prosecution and defense of legal claims in adversary proceedings.

The attorney-client privilege extends to communication between a taxpayer and a “federally authorized tax practitioner” with respect to tax advice, to the extent the communication would be privileged if it were between a taxpayer and an attorney. 

Many tax penalties will not apply if the taxpayer had reasonable cause for its tax position. At times, reliance on the advice of counsel in adopting a tax position constitutes reasonable cause.

The reliance on counsel defense has saved many a taxpayer from penalties. It is unknown if the taxpayer in this case knew that by using that defense it would be forfeiting the above evidence protections – perhaps the benefits of the defense outweighed the negatives relating to the disclosure of the subject items and thus was intentional.

Just a reminder to litigating taxpayers that a reliance on counsel “reasonable cause” defense may result in a waiver of protections otherwise available under the work-product doctrine and the attorney-client privilege.

(See Rubin's comment regarding SALEM FINANCIAL, INC v. U.S., 109 AFTR 2d 2012-XXXX, (Ct Fed Cl 01/18/2012)).

How will the IRS find out? Perhaps Whistlebolower?

Internal Revenue Service Whistleblower Office Director Stephen Whitlock told practitioners that the number of claims on which IRS is paying awards has grown dramatically in his five years in the office, and is likely to keep on growing.

The IRS Whistleblower Office has received 3,500 submissions since the beginning of fiscal year 2011, with approximately 115 awards paid out to individuals who provided information that resulted in the collection of taxes, interest, or penalties from a noncompliant taxpayer.

About 10 percent of the total 350,000 claims IRS has received in the last 15 months resulted in awards of $2 million or more.

For more on the Whistleblower Office or its Director Stephen Whitlock go to: http://www.irs.gov/newsroom/article/0,,id=167542,00.html

Denmark Urges Agreement on EU Savings Tax Changes to Get FATCA Deal With U.S.

EUROPOLITICS BRUSSELS—Denmark urged European Union member states to promptly resolve differences over proposals to revise the EU Savings Tax directive as a way to bridge differences with the U.S. Treasury Department over compliance with the Foreign Account Tax Compliance Act (FATCA).


As the current holder of the EU presidency, Denmark stated at a special meeting of EU member state officials that the United States has expressed a willingness to agree to a “government to government” solution on complying with FATCA, instead of having EU financial institutions provide the required information.


FATCA, which will enter into force on 1 January 2013 (certain implementing arrangements have nevertheless been postponed to 2014 and 2015), will impose full transparency obligations on European financial institutions with respect to deposits and assets held by all persons obliged to file returns with the US tax administration. Financial penalties will be imposed on banks that fail to play by the rules.

“It is urgent to work out a solution with the United States on the many problems the FATCA will cause for European financial institutions,” particularly in terms of administrative overload, writes Copenhagen.

The EU has already started negotiations with Washington. In this context, it is trying to convince the United States to be more flexible by playing on the “broad similarity” of aims between the FATCA and EU legislation on savings taxation – combating tax evasion – and ways of achieving them.


However, “the American authorities responded that the scope of the existing savings taxation directive is more limited than the FATCA’s scope,” writes Copenhagen. “So it is clear that early agreement on its extension would considerably help us obtain satisfying results in discussions with the United States.”

Stay tuned as the World works out its tax transparency issues!

Swiss Bank Wegelin Indicted for Hiding $1.2 Billion From IRS

Wegelin & Co., the oldest Swiss bank, was indicted Feb. 2 for conspiring with U.S. taxpayers to hide more than $1.2 billion in secret accounts from the Internal Revenue Service, the Justice Department announced in unsealing the grand jury indictment from a federal court in Manhattan (United States v. Wegelin,S.D.N.Y., No. 81 12 Cr. 02 (JSR), indictment 2/2/12).

Seizing more than $16 million from Wegelin's bank account in the United States under civil forfeiture laws, DOJ said Wegelin had been charged in the U.S. District Court for the Southern District of New York with participating in a conspiracy with three client advisors who have already been charged.

Although Wegelin has no banks in the U.S., it is accused of using a UBS AG account to carry out the conspiracy, which involved opening and servicing dozens of undeclared accounts for U.S. taxpayers to capture clients who were fleeing UBS after news broke that IRS was investigating that Swiss bank.

According to the indictment, Wegelin told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. authorities because the bank had a long tradition of secrecy and that the lack of offices in the United States made the company less vulnerable to U.S. authorities.

Federal Court Orders Iowa Man and Eight Companies to Pay Employment Taxes

Watts Trucking Service, Inc., and Other Corporations Allegedly Owe Over $30 Million.

A federal court has ordered James Watts and eight corporations to begin paying employment taxes to the United States on a timely basis, the Justice Department announced today. According to the government complaint in the case, Watts, of Bettendorf, Iowa, is the president of Watts Trucking Service, Inc., an Iowa corporation, of which the other seven corporations are subsidiaries. The complaint alleges that the companies fail to pay over to the Internal Revenue Service (IRS) all of their employment and unemployment taxes, including the income and social security taxes withheld from their employees’ wages.

Chief Judge James E. Gritzner of the U.S. District Court for the Southern District of Iowa entered the preliminary injunction order, which requires Watts and the companies to comply with federal employment tax filing, deposit, and payment requirements, and to certify to the government that they have done so.The injunction also prohibits the defendants from closing a waste-handling business and reopening it under a new name without the written consent of the government.

According to the complaint, Watts has formed and controlled at least 23 different business entities over the past two decades, most of which have accrued delinquent tax liabilities.The complaint states that the defendant corporations, along with 15 inactive entities, owe the government over $30 million in federal employment and unemployment taxes.

The preliminary injunction will remain in effect while the case proceeds to final judgment. Violation of an injunction can result in civil and criminal sanctions, including fines and imprisonment.

Swiss Turn Over Encrypted Bank Data to U.S. Prosecutors

NEW YORK TIMES ZURICH — Switzerland has turned over to the U.S. authorities encrypted data on bank employees who served American clients suspected of dodging taxes, and will only provide the key to decipher the information once a legal dispute is settled, the Swiss Finance Ministry said Tuesday.

Swiss banks have provided tens of thousands of pages of encrypted data on their U.S. businesses, including names of client advisers, a Finance Ministry spokesman said.

 

Three UBS Clients Accused of Hiding Offshore Money From IRS

Bloomberg - Three ex-UBS AG (UBSN) clients, including two who ran venture capital firms, were indicted on charges of hiding millions of dollars in assets from U.S. tax authorities through the use of secret offshore accounts.