Thursday, June 28, 2018

Volkswagen's Emissiongate May Include Tax Crimes

This post was originally published on Forbes Oct 9, 2015

According to USA Today Volkswagen HQ was raided by German police yesterday "in a bid to secure documents and databases that could shed light on which employees were responsible for cheating pollution tests".  The story did not indicate whether IRS CI was along on the raid, but it may be that they will be inspecting the document trove that the German police seized.  Because on top of all the other woes that will be heaped on Volkswagen in light of what I will call Emissiongate, there may have been some tax crimes.  I should start though with just a bit of a hat tip to the VW minions who conceived and executed this plan.

It Was Pretty Clever

When I first heard that VW had rigged its emission control software, so that the emission controls, which apparently interfered with performance, only worked when they were being tested, my inner villain was quite impressed.  The only comparison that popped into my mind was one of the dodges that my more prosperous high school classmates had worked out.  Back in the day, all the students of Xavier High School were members of the JROTC regiment and commuted to school in Manhattan in uniforms loosely based on the US Army uniform of 1847, the year the school was founded.  We had to pass inspection every week, which had a variety of aspects including ridiculously short hair, but only slightly less onerous were the spit-shined shoes, which as we played our colorful role as "subway commandos" were tough to keep bright.  Some of the "rich kids" had mirror-like Corfam "inspection shoes" in their lockers that were never exposed to city streets or subway platforms.

Applying that type of thinking to an automobile that had to pass emission control inspection was sheer genius.  If they thought they could get away with it forever, that was probably really stupid, but it may be that whoever was involved had more short-term motivations.  I'll bet they did not consider that some of the people involved in this might have been committing tax crimes.  It certainly did not cross my mind, when I heard about Emissiongate, but then a letter from the Senate Finance Committee to Volkswagen's management was released.

The Tax Piece Of Emissiongate

Individual taxpayers were entitled to credits for buying "qualifying fuel efficient vehicles".  Whether a vehicle qualified or not was determined by a number of factors including whether the vehicle met emission standards.  The determination was made by a certification by the manufacturer.  In 2008 Volkswagen certified the 2009 Jetta TDI Sedan and Sport Wagon. Later some 2010 models were certified. All in, the letter estimates that Volkswagen buyers claimed about $50 million in tax credits. All those credits, it seems were claimed, on the basis of certifications on which somebody was fibbing.

The Committee is requesting a raft of documents from VW in order to determine who knew what when.  According to this story, there are claims that it was a few rouge engineers, who were influenced by a toxic "failure is not an option" tone from the top.
The success-or-else philosophy at Volkswagen dates back at least to the time when Ferdinand Piech, who retired earlier this year as Volkswagen AG Chairman, was appointed CEO in 1992.
What Is The Tax Crime?

For that I turned to Jack Townsend author of Federal Tax Crimes.  As it turned out Jack had already posted on the issue, but some of you may be intimidated by the warning at the top of Jack's blog - "Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers". Don't let that scare you.  Mainly he is just letting you know that his free blog is not a substitute for hiring a lawyer when you need one.

Jack lists seven statutes that VW Emissiongate minions might be charged under (There are probably more).  Some of them might surprise you.  For example it is possible to be charged with tax evasion for enabling otherwise innocent taxpayers to improperly reduce their reported tax liability.  That's a three-year felony.  Also a three-year felony are "Attempts to interfere with administration of internal revenue laws".  More apparent are tax perjury, a three-year felony, and false statements, a five-year felony.

Just so you know, there will not be somebody named Hans charged with 60,000 counts of tax evasion and sentenced to 180,000 years.  How much time anybody serves will likely be ultimately limited by the Federal Sentencing Guidelines.  One of the factors considered in tax crimes, however, is the size of the tax loss, which in this case might be, as we say, a number.

The other thing to remember is that most tax crimes go unprosecuted as IRS CI resources are limited, so the tax part of this mess may end up being civil.

I thought up Emissiongate on my own, but it was obvious enough to occur to others.

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