Jim de Bree | Putting the Manafort Case Into Perspective

Jim de Bree
Jim de Bree

Much has been said about the recent decisions finding Paul Manafort guilty on eight of 18 counts in his first criminal trial. Yet, based on my conversations with others, it is clear that many people do not understand the context of the tax laws that Mr. Manafort violated.

First of all, the charges have nothing to do with President Trump, other than they arose out of the investigation being conducted by Special Counsel Robert Mueller.

The charges relate to tax evasion — the same crime of which Al Capone was convicted 80 years ago. The tax law has evolved since the days of Scarface and that evolution is worth noting.

For years the Republicans in Congress have been loath to raise taxes. Grover Norquist and many Republican fundraisers have stated they will not back Republican candidates who support tax increases.

To circumvent this constraint, Republicans have sought to eliminate the so-called “compliance gap,” which is usually defined as the difference between the amount of tax legally owed and the amount voluntarily paid. Enforcing compliance is technically not a tax increase, but it does raise the amount collected by tax authorities without upsetting political donors.

During President George W. Bush’s term, the Treasury Department became increasingly concerned about wealthy Americans who hid bank accounts and other assets overseas. Since those assets were not reported to the IRS, it was easy for taxpayers to avoid reporting the income earned from them.

Countries with strict bank secrecy laws, like Switzerland, contributed to the compliance gap. About 12 years ago, the IRS became aware of a prominent Swiss bank providing overseas banking services to approximately 52,000 wealthy U.S. taxpayers.

In 2008, a federal grand jury indicted the bank’s CEO. In February 2009 the bank paid a $780 million fine and released the names of the 52,000 customers to the IRS.

In 2009, the IRS commissioner testified that the IRS had no credible estimate of the amount of unreported taxes resulting from taxpayers’ failure to report income from offshore assets. Several other sources, however, estimated that the annual loss of tax revenue was between $40 billion and $100 billion.

In 2009, the Foreign Account Tax Compliance Act (“FATCA”) legislation was introduced into Congress. The bill was eventually added to an appropriations bill that was signed into law by President Obama in 2010.

Among other provisions, FATCA requires taxpayers to report certain foreign financial interests to the IRS. Failure to file the required forms can result in both civil and criminal penalties. Since FATCA’s enactment, thousands of taxpayers have voluntarily entered into settlement agreements with the IRS in order to avoid criminal prosecution.

FATCA also imposed reporting requirements on foreign financial institutions that hold deposits from U.S. citizens and gave the U.S. government the ability to sanction foreign financial institutions that did not comply.

Mr. Manafort apparently created a number of companies that deposited millions of dollars into accounts at the Bank of Cyprus. These accounts are not only subject to the FATCA reporting requirements (by both the bank and Mr. Manafort), but they were evidently funded by millions of dollars of foreign source fees received by Mr. Manafort’s entities. At some point, these amounts were taxable to Mr. Manafort personally.

The jury found that Mr. Manafort was guilty of failing to report millions of dollars of income for 2010-2014 in his tax returns. They also found that he was guilty of failing to comply with the FATCA reporting requirements for 2011. Furthermore, 11 of 12 jurors found him guilty of failing to comply with FATCA reporting requirements for 2010 and 2012-2014. There also were numerous charges of bank fraud. Mr. Manafort was convicted on two of those charges.

As stated above, these charges have nothing to do with President Trump. However, they arose during the ordinary course of procedures undertaken during the special prosecutor’s investigation. Apparently the Bank of Cyprus did not commence complying with the FATCA requirements until 2014, so it is plausible, if not likely, that the IRS would eventually have uncovered Mr. Manafort’s unreported income anyway.

Irrespective of how Mr. Manafort’s criminal activity was uncovered, he should not be pardoned by President Trump. Thousands of taxpayers have failed to report and pay taxes on billions of dollars of offshore income. Many of them voluntarily came clean and have made the government whole (including the payment of steep civil penalties).

Mr. Manafort chose to sidestep the system by deliberately failing to pay millions of dollars in taxes owed to the government. This is not fair to the millions of Americans who pay their taxes.

If President Trump pardons Mr. Manafort, he will ensure that justice is denied, will demonstrate that his swamp is murkier than that of his predecessors and will encourage others to engage in tax evasion.

Jim de Bree is a semi-retired CPA who resides in Valencia.

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