Officially On: Revocation/Denial of Passport For Americans With Seriously Delinquent Tax Debt

 

The IRS has now posted a notice on its website indicating that it has began sending certifications of unpaid tax debt to the State Department in February 2018. Americans with seriously delinquent tax debt (totaling more than $51,000 (including interest and penalties) , per IRC § 7345 will be certified as such  to the State Department for action. The State Department reportedly will not issue passports to to individuals after receipt of certification from the IRS.

Back in December 2015, we first reported in this blog  about the “Fixing America’s Surface Transportation Act,” or “FAST Act” which includes Section 7345 that provides for the revocation or denial of U.S. passports to applicants with certain tax delinquencies considered ‘seriously delinquent tax debt’ –that is, a tax liability that has been assessed, which is greater than $50,000 and a notice of lien has been filed. That law was passed and the IRS was supposed to start certifying in early 2017 but that did not happen.

According to the recent IRS notice, upon receiving certification, the State Department shall deny the tax delinquent individual’s  passport application and/or may revoke his/her current passport. If the passport application is denied or the passport is revoked while said individual is overseas, the State Department may issue a limited validity passport but only for direct return to the United States. Read more here via IRS.gov

Note that the guidance also says that the State Department is held harmless in these matters and cannot be sued for any erroneous notification or failed decertification under IRC § 7345.  Affected individuals can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. “If the court determines the certification is erroneous or should be reversed, it can order the IRS to notify the State Department that the certification was in error.”

The State Department’s statement on this issue is available here with IRS contact details.

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IRS to Start Certifying Unpaid Taxes of $50K+ in Early 2017 For Revocation/Denial of US Passports

Posted: 1:16 am  ET
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In December 2015, we reported in this blog  about the “Fixing America’s Surface Transportation Act,” or “FAST Act.” One item included in the FAST Act, which had been signed into law, affects the State Department and the traveling American public. Section 7345 provides for the revocation or denial of U.S. passports to applicants with certain tax delinquencies considered ‘seriously delinquent tax debt’ –that is, a tax liability that has been assessed, which is greater than $50,000 and a notice of lien has been filed. (see New Law Authorizes Revocation or Denial of U.S. Passports to Certain Tax Delinquents).

A recent IRS notice says that the agency has not yet started certifying tax debt to the State Department but that such certifications will begin in early 2017. The website here currently provides information “for informational purposes only” but will be updated to indicate when the process has been implemented. Excerpt:

If you have seriously delinquent tax debt, IRC § 7345 authorizes the IRS to certify that to the State Department. The department generally will not issue or renew a passport to you after receiving certification from the IRS.

Upon receiving certification, the State Department may revoke your passport. If the department decides to revoke it, prior to revocation, the department may limit your passport to return travel to the U.S.

Certification Of Individuals With Seriously Delinquent Tax Debt

Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000* (including interest and penalties) for which a:

–Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or

–Levy has been issued

Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. It includes tax debt:

–Being paid in a timely manner under  an installment agreement entered into with the IRS

–Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department

–For which a collection due process hearing is timely requested in connection with a levy to collect the debt

–For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made

Before denying a passport, the State Department will hold your application for 90 days to allow you to:

–Resolve any erroneous certification issues

–Make full payment of the tax debt

–Enter into a satisfactory payment alternative with the IRS

There is no grace period for resolving the debt before the State Department revokes a passport.

Read more here: https://www.irs.gov/businesses/small-businesses-self-employed/revocation-or-denial-of-passport-in-case-of-certain-unpaid-taxes.

Note that the passport denial for individuals who owe more than $2500 in past-due child support, based on a certification by the responsible State child-support agency to the Department of Health and Human Services (HHS) has been challenged and upheld in two cases before Federal courts: Eunique v. Powell, 281 F.3d 940, 2002 (9th Cir. Cal. 2002 – statute does not violate Fifth Amendment freedom to travel internationally); Weinstein v. Albright, 261 F.3d 127; 2001 (2nd Cir. 2001 – statutory and regulatory scheme comports with due process and equal protection).

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Renunciation of U.S. Citizenship May Not Necessarily Keep the Tax Man Away

Posted: 4:08 am EDT
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Via MainSt:

Last year, 4,279 U.S. citizens ended their long-term U.S. residency, according to the Treasury Department. That’s up 25.3% from the 3,415 individuals who shed their U.S. citizenship in 2014 and just adds to the 10,693 total who dropped their citizenship between 2013 and 2015.
[…]
Passed in 2010 as a means of cracking down on tax dodgers, FATCA implemented rigid reporting rules for overseas banks and investment firms that hold the assets of U.S. citizens. It also imposes similarly strict rules on U.S. citizens who hold money in foreign accounts. Because the more underhanded elements of U.S. business made a habit of using accounts in Switzerland, the Cayman Islands and elsewhere to shield taxable income from the U.S. government, FATCA uses huge penalties to drop the hammer on those who won’t comply.

Read more below:

Renunciation of U.S. citizenship may not necessarily keep the Internal Revenue Service away. Last month, the Justice Department announced that a former U.S. citizen pleaded guilty to tax fraud related  to his Swiss financial account.  The DOJ announcement does not mention the Foreign Account Tax Compliance Act (FATCA) but it says that in 2012, the individual who has resided in Switzerland since 2007, went to the U.S. Embassy in Bratislava, Slovakia, to renounce his U.S. citizenship and informed the U.S. Department of State that he had acquired the nationality of St. Kitts and Nevis by virtue of naturalization. Below is part of the DOJ announcement:

Former U.S. Citizen Pleads Guilty to Tax Fraud Related to Swiss Financial Account

Used Hong Kong Entity and Foreign Accounts in Switzerland, Monaco and Singapore to Conceal Funds

A former U.S. citizen residing in Switzerland pleaded guilty today to one count of filing a false income tax return, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division and U.S. Attorney Dana J. Boente of the Eastern District of Virginia.

“U.S. taxpayers have been given ample opportunity to come forward, disclose their secret foreign accounts, and come into compliance,” said Acting Assistant Attorney General Ciraolo.  “Those individuals and entities who rolled the dice in the hope of remaining anonymous are facing the consequences.  The Tax Division remains committed to investigating and prosecuting individual taxpayers with undeclared foreign financial accounts, as well as the financial institutions, bankers, financial advisors and other professionals who facilitate the concealment of income and assets offshore.  And as today’s guilty plea clearly indicates, the department’s reach is well beyond Switzerland.”

According to court documents, in 2006, Albert Cambata, 61, established Dragonflyer Ltd., a Hong Kong corporate entity, with the assistance of a Swiss banker and a Swiss attorney.  Days later, he opened a financial account at Swiss Bank 1 in the name of Dragonflyer.  Although he was not listed on the opening documents as a director or an authorized signatory, Cambata was identified on another bank document as the beneficial owner of the Dragonflyer account.  That same year, Cambata received $12 million from Hummingbird Holdings Ltd., a Belizean company.  The $12 million originated from a Panamanian aviation management company called Cambata Aviation S.A. and was deposited to the Dragonflyer bank account at Swiss Bank 1 in November 2006.

“IRS Criminal Investigation will continue to pursue those who do not pay the taxes they owe to the United States,” said Special Agent in Charge Thomas Jankowski of the Internal Revenue Service-Criminal Investigation, Washington, D.C. Field Office.  “Today’s plea is a reminder that we are committed to following the money trail across the globe and will not be deterred by the use of sophisticated international financial transactions that hide the real ownership of income taxable by the United States.”

On his 2007 and 2008 federal income tax returns, Cambata failed to report interest income earned on his Swiss financial account in the amounts of $77,298 and $206,408, respectively.  In April 2008, Cambata caused the Swiss attorney to request that Swiss Bank 1 send five million Euros from the Swiss financial account to an account Cambata controlled at the Monaco branch of Swiss Bank 3.  In June 2008, Cambata closed his financial account with Swiss Bank 1 in the name of Dragonflyer and moved the funds to an account he controlled at the Singapore branch of Swiss Bank 2.

In 2012, Cambata, who has lived in Switzerland since 2007, went to the U.S. Embassy in Bratislava, Slovakia, to renounce his U.S. citizenship and informed the U.S. Department of State that he had acquired the nationality of St. Kitts and Nevis by virtue of naturalization.

U.S. District Judge Claude Hilton of the Eastern District of Virginia set sentencing for April 15.  Cambata faces a statutory maximum sentence of three years in prison and a fine of up to $250,000.  As part of his plea agreement, Cambata agreed to pay $84,849 in restitution to the Internal Revenue Service (IRS).

Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.

FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. For access to the regulations and administrative guidance related to FATCA and to learn about taxpayer obligations visit the Internal Revenue Service FATCA Page.

Click here for the list of countries where the United States has an agreement under FATCA.

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New Law Authorizes Revocation or Denial of U.S. Passports to Certain Tax Delinquents

Posted: 12:58 am EDT
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On December 4, 2015, President Obama signed into law the “Fixing America’s Surface Transportation Act,” or “FAST Act.” This is the first law enacted in over ten years that provides long-term funding certainty for surface transportation. DOT says that the FAST Act largely maintains current program structures and funding shares between highways and transit. It is a down-payment for building a 21st century transportation system, increasing funding by 11 percent over five years.  Read more here from the Department of Transportation.

Screen Shot 2015-12-27 at 9.50.33 PMThere is also one item included in the FAST Act that’s related to the State Department and the traveling American public. Section 7345 provides for the revocation or denial of U.S. passports to applicants with certain tax delinquencies considered ‘seriously delinquent tax debt’ –that is, a tax liability that has been assessed, which is greater than $50,000 and a notice of lien has been filed. To be clear, the Internal Revenue Service (IRS) is not actually able to revoke or deny any American taxpayer a passport for delinquent taxes. Revocation or denial or passports can only be done by the Department of State. It looks like the IRS Commissioner will need to make a certification of “seriously delinquent tax debt” to the Secretary of Treasury, who must then transmit the certification to the Secretary of State for the actual revocation. The new law provides for a humanitarian and emergency exception, and issuance of a limited passport for direct return to the United States.

This is similar to the arrangement on passport revocation with child support obligation enforcement.  The State Department works with the Health and Human Services on Child Support Arrearage.  Under the HHS passport denial program,  noncustodial parents certified by a state as having arrearages exceeding $2,500 are submitted by the Federal Office of Child Support Enforcement (OCSE) to the Department of State (DoS), which denies them U.S. passports upon application or the use of a passport service.

Via ‘‘Fixing America’s Surface Transportation Act’’ or the ‘‘FAST Act’’ (PDF):

SEC. 32101. REVOCATION OR DENIAL OF PASSPORT IN CASE OF CERTAIN UNPAID TAXES.

‘‘SEC. 7345. REVOCATION OR DENIAL OF PASSPORT IN CASE OF CERTAIN TAX DELINQUENCIES.

‘‘(a) IN GENERAL.—If the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.

‘‘(b) SERIOUSLY DELINQUENT TAX DEBT.—

‘‘(1) IN GENERAL.—For purposes of this section, the term ‘seriously delinquent tax debt’ means an unpaid, legally enforceable Federal tax liability of an individual—

‘‘(A) which has been assessed,

‘‘(B) which is greater than $50,000, and

‘‘(C) with respect to which—

‘‘(i) a notice of lien has been filed pursuant to section 6323 and the administrative rights under section 6320 with respect to such filing have been exhausted or have lapsed, or

‘‘(ii) a levy is made pursuant to section 6331.

‘‘(2) EXCEPTIONS.—Such term shall not include—

‘‘(A) a debt that is being paid in a timely manner pursuant to an agreement to which the individual is party under section 6159 or 7122, and

‘‘(B) a debt with respect to which collection is suspended with respect to the individual—

‘‘(i) because a due process hearing under section 6330 is requested or pending, or

‘‘(ii) because an election under subsection (b) or (c) of section 6015 is made or relief under subsection (f) of such section is requested.

‘‘(c) REVERSAL OF CERTIFICATION.—

‘‘(1) IN GENERAL.—In the case of an individual with respect to whom the Commissioner makes a certification under subsection (a), the Commissioner shall notify the Secretary (and the Secretary shall subsequently notify the Secretary of State) if such certification is found to be erroneous or if the debt with respect to such certification is fully satisfied or ceases to be a seriously delinquent tax debt by reason of subsection (b)(2).

[…]

(e) AUTHORITY TO DENY OR REVOKE PASSPORT.—

(1) DENIAL.—

(A) IN GENERAL.—Except as provided under subparagraph (B), upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section.

(B) EMERGENCY AND HUMANITARIAN SITUATIONS.—Not- withstanding subparagraph (A), the Secretary of State may issue a passport, in emergency circumstances or for humanitarian reasons, to an individual described in such subparagraph.

(2) REVOCATION.—

(A) IN GENERAL.—The Secretary of State may revoke a passport previously issued to any individual described in paragraph (1)(A).

(B) LIMITATION FOR RETURN TO UNITED STATES.—If the Secretary of State decides to revoke a passport under subparagraph (A), the Secretary of State, before revocation, may—

(i) limit a previously issued passport only for return travel to the United States; or

(ii) issue a limited passport that only permits return travel to the United States.

(3) HOLD HARMLESS.—The Secretary of the Treasury, the Secretary of State, and any of their designees shall not be liable to an individual for any action with respect to a certification by the Commissioner of Internal Revenue under section 7345 of the Internal Revenue Code of 1986.

According to the WSJ, the Treasury Inspector General for Tax Administration, or Tigta, a watchdog agency, found that the IRS sent 855,000 notices to U.S. citizens abroad in 2014.

Treasury OIG notes that as of May 2014, the State Department estimated that approximately 7.6 million U.S. citizens live in a foreign country. It also reports this:

Even though the IRS sent approximately 855,000 notices and letters to U.S. taxpayers living in other countries during Calendar Year 2014, it cannot determine taxpayer response rates.  The lack of data on response rates for international taxpayers is problematic because this information is needed to determine the effectiveness of international correspondence on increasing taxpayer compliance and to make program improvements.

7 FAM 1380 which provides guidance on passport denials, limitations, and revocations is unfortunately behind the firewall so we are unable to see the specific updates in the Foreign Affairs Manual.

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Congress Seeks Information on Obamacare Coverage of Foreign Diplomats

— Domani Spero
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On October 29, 2014,  the House Foreign Affairs Committee Chairman Ed Royce (R-CA) and Ways and Means Committee Chairman Dave Camp (R-MI) wrote to IRS Commissioner John Koskinen seeking information after learning that foreign diplomats working in the United States are eligible for subsidized health coverage under the Affordable Care Act (ACA). Excerpt from their letter:

The Committees on Foreign Affairs and Ways and Means are investigating the extent to which these diplomats receive taxpayer-subsidized premium tax credits and cost-sharing subsidies under the Affordable Care Act.  We are seeking to determine how many such individuals participate in these programs and the total cost of such benefits.  As the agency principally responsible for administering health coverage tax credits, we request that you provide this information as soon as possible.

According to the Department of Health and Human Services, foreign diplomats holding “A” or “G” visas are eligible to participate in an array of medical programs administered by the federal government, including participation in Health Insurance Marketplaces governed by the Affordable Care Act (ACA). The Secretary of Health and Human Services has informed the Committee on Foreign Affairs that, if they meet basic ACA requirements, “a foreign diplomat could satisfy the statutory criteria to be eligible for a premium tax credit and cost-sharing reductions.”  The State Department has gone so far as to advertise to Foreign Missions, Permanent Missions to the United Nations, and the United Nations Secretariat that health care exchanges and “the benefits of the United States Affordable Care Act are available” to them.

The Foreign Affairs Committee has sought to determine the number of diplomats receiving coverage and subsides under the ACA.  Unfortunately, the State Department has informed the Foreign Affairs Committee that it “is not involved in the process through which foreign diplomats obtain government-funded benefits” and cannot provide that data.  The Department of Health and Human Services is likewise unable to provide this information.  Specifically, it noted that “[t]he Department does not collect data that identify whether individuals receiving services through our medical programs have diplomatic status.”  Similarly, “the Department does not collect data that identifies whether individuals receiving tax credits and/or cost sharing reductions have diplomatic status.”  Copies of these letters are attached for your reference.

We fully support the ability of foreign diplomats to purchase health care coverage in the United States.  We do not, however, believe that American taxpayers should subsidize these services.  To assist with our oversight of this matter, we ask that you please provide the following information as soon as possible, but not later than 5:00 p.m. on November 12, 2014.

  1. The total number, including from which country, of all non-immigrant, non-citizen “A” and “G” visa holders who are eligible for, and who have received, premium tax credits for qualified health plans under the Affordable Care Act;
  1. The total number, including from which country, of all non-immigrant, non-citizen “A” and “G” visa holders who are eligible for, and who have received, cost-sharing reductions for qualified health plans under the Affordable Care Act; and
  1. The total cost, and cost per individual, of all subsidies provided to the individuals above.

The signed letter and referenced attachments are available here.

Did you know about this? Do you know the rationale for this?  International relations is based on reciprocity, are our American diplomats eligible for healthcare subsidies in countries that avail of Obamacare subsidies here? Since the State Department is “is not involved in the process through which foreign diplomats obtain government-funded benefits,” in the United States, how is it supposed to press countries for reciprocal treatment on behalf of our diplomats?

According to a notice circulated (pdf) by the State Department in February 2014, individuals who are lawfully present in the United States, including U.S. citizens, permanent residents (green card holders), and “A” and “G” visa holders (principal or dependent), may purchase coverage through the health insurance marketplace/exchange. Additionally, the notice states that “Those Permanent Missions whose employees do not receive health and medical insurance benefits through the sending state, or Permanent Missions who have not entered into a health and medical insurance plan with a private insurance provider, may find the benefits provided by the ACA a cost effective way to insure their employees against high physician, hospital, and prescription drug costs.”

Note that A-1 – 2 visas are for foreign government diplomats and officials and their immediate family members while G-1 – 4 visas are for international organization officials and employees and their immediate family members.

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-02/20/14   OAS Note No. 07-B: OAS Affordable Care Act Guidance  [98 Kb]
-02/18/14   Notice: Town Hall Meeting – Health Insurance and the Affordable Care Act [280 Kb]
-11/26/13   USUN Diplomatic Note HC-115-(S)-13: UN Secretariat Affordable Care Act Guidance  [43 Kb]
-11/26/13   USUN Diplomatic Note HC-115-13: USUN Affordable Care Act Guidance  [42 Kb]
-11/21/13   Diplomatic Note 13-1117: Affordable Care Act Guidance  [33 Kb]

Couple in State Dept $53 Million Contract Fraud Gets 18-24 Months in Prison

— Domani Spero

In May and September 2013 we blogged about this case (See State Dept Contract Employee/Husband Indicted For Alleged Secret Scheme to Steer More Than $60 Million Contracts to Their Company and Ex-State Dept Contract Employee And Husband Plead Guilty To $53 Million Fraud. The Daily Caller broke this story in July 19, 2013.  The contractor, Kathleen McGrade was reportedly fired the day after.

Last week, the same couple at the center of this contracting fraud was sentenced by U.S. District Judge Liam O’Grady in the Eastern District of Virginia.  Kathleen D. McGrade, age 64, and Brian C. Collinsworth, age 47, of Stafford, Va., were sentenced to 24 and 18 months incarceration, respectively.  Given that each defendant faced a maximum penalty of 360 months or 30 years imprisonment, the 18-24 months incarceration is a bargain.

WaPo reports additional details during the sentencing:

In a lengthy speech before she was sentenced, McGrade offered various explanations for her misdeeds and told a federal judge in Alexandria that she was in court only because she had “been told that somehow the procurements that took place were illegal.”
[…]

As O’Grady handed down the two-year sentence — far short of the five years and 10 months that federal sentencing guidelines had called for as a minimum — he said McGrade had nearly persuaded him to impose a stiffer penalty.

“That was almost a delusional recitation of what has occurred here,” O’Grady said. “To convince yourself that it’s everybody else’s fault is astonishing, given the facts of this case.”

Via USDOJ:

Former State Department Contract Employee And Husband Sentenced For $53 Million Fraud | December 6, 2013

ALEXANDRIA, Va. – Kathleen D. McGrade, age 64, and Brian C. Collinsworth, age 47, of Stafford, Va., were sentenced today to 24 and 18 months incarceration, respectively, by U.S. District Judge Liam O’Grady in the Eastern District of Virginia for committing major fraud against the government, conspiracy to launder monetary instruments, and engaging in unlawful monetary transactions.

Dana J. Boente, Acting United States Attorney for the Eastern District of Virginia; Steve A. Linick, Inspector General for the Department of State; and Thomas J. Kelly, Special Agent in Charge of the Internal Revenue Service, Criminal Investigation Section, Washington, D.C. Field Office, made the announcement following the sentencing hearing.

According to Court records, McGrade and Collinsworth admitted that McGrade was a contract employee for the Department of State and performed the role of a contract specialist for an office that awarded construction contracts for work done at U.S. embassies worldwide.  Collinsworth worked at one of the companies that received contracts.  In 2006, the defendants married, but did not tell others at the Department of State.  The defendants started a company, the Sterling Royale Group, or SRG, with McGrade being the president and Collinsworth the vice-president and project manager.

In late 2007, McGrade caused a State Department contracting officer to sign a contract between the Department of State and SRG, when McGrade failed to disclose her role in SRG, her marriage, or that proper contracting competitive procedures had not been followed.  The contract made SRG eligible to receive task orders for work to be done at embassies and McGrade  began steering work to the company.  She acted as the contract negotiator between the Department of State engineers responsible for getting the jobs done, on the one hand, and Collinsworth, who was acting on behalf of SRG and the subcontractors, on the other.  Between 2008 and 2011, McGrade caused  Department of State contracting officers to sign 17 task orders awarding work worth almost $53 million.  In 2010, the defendants also lied about their marriage to investigators conducting McGrade’s background investigation regarding renewal of her security clearance.

In the summer of 2011 a news article disclosed the defendants’ marriage, and the Department of State terminated her employment.  The Department of State, however, had paid SRG about $39 million, and after the defendants had paid their subcontractors, they still had millions of dollars.  Among other things, they bought houses, a condominium, a yacht, a Lexus automobile, jewelry, and a Steinway piano with the fraudulently obtained money.  The defendants were ordered to forfeit all of those items in the amount of $7,864,795.

This case was investigated by the Department of State, Office of Inspector General, and the Global Illicit Financial Team, a task force led by the Criminal Investigation Section of the Internal Revenue Service.  Assistant United States Attorneys Jack Hanly and Mark D. Lytle are prosecuting the case on behalf of the United States.

A copy of this press release may be found on the website of the United States Attorney’s Office for the Eastern District of Virginia at http://www.justice.gov/usao/vae. Related court documents and information may be found on the website of the District Court for the Eastern District of Virginia at http://www.vaed.uscourts.gov or on https://pcl.uscourts.gov.

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