Court Grants Compassionate Release to High Profile Tax Felon Morris Zukerman

COVID-19 is spreading throughout prisons. The first federal prisoner died of the virus on March 28th. A week later Attorney General Barr ordered the federal Bureau of Prisons to prioritize the release of vulnerable inmates. In today’s post I will explore the impact of COVID-19 on one high profile tax felon.


In 2016, wealthy investor Morris Zukerman pled guilty to one count of tax evasion and one count of corruptly endeavoring to obstruct and impede the administration of the internal revenue laws. He was sentenced to 70 months in prison for evading $45 million in federal income and state taxes. His crime included a phony $1 million charitable donation which actually funded his purchase of land on tony Block Island, providing fake documents to his accountants and lawyers representing him during the IRS audit, and funneling corporate funds to pay personal expenses.

In sentencing Zukerman, Federal District Court Judge Analisa Torres said that “Zukerman’s crimes were driven by unmitigated greed,” and that he “thought himself to be above the law.”

Zukerman reported to federal prison in Otisville New York in June of 2017. 

Fast forward to 2020. Prison populations are especially vulnerable to COVID-19, with prisoners living and eating in close quarters, and much of the prison population elderly and suffering from pre-existing health conditions. This has led to the early release of some high profile felons, including President Trump’s former fixer Michael Cohen, a fellow inmate of Zukerman’s at Otisville, who left prison last week to serve the balance of his term in home confinement.

On March 27th, the day before the first reported death in federal prisons, Zukerman filed a request with his warden asking for compassionate release. Three days later and prior to any response from the warden, Zukerman filed a motion in federal district court asking that the court grant his request. The government opposed the motion, and the same judge who sentenced Zukerman granted his request. Zukerman is now finishing his term in home incarceration. 

Under what authority can federal prisoners like Cohen or Zukerman seek early release? The First Step Act of 2018 amended Title 18 USC § 3582 and provides that a court may modify a sentence “upon motion of the Director of the Bureau of Prisons, or upon motion of the defendant after the defendant has fully exhausted all administrative rights to appeal a failure of the Bureau of Prisons to bring a motion on the prisoner’s behalf…” The statute grants the court power to reduce a sentence or impose supervised release if the court finds that  “extraordinary and compelling reasons warrant such a reduction … and that such a reduction is consistent with applicable policy statements issued by the Sentencing Commission.”

Under normal circumstances, a prisoner seeking compassionate release is required to present an application to the BOP and then either (1) administratively appeal an adverse result if the BOP does not agree that his sentence should be modified, or (2) wait for 30 days to pass and then appeal.  

On March 27, 2020, Zukerman submitted a request for compassionate release to his warden. Three days later, after not receiving a response, Zukerman filed a motion in court to modify his sentence in light of the COVID-19 pandemic. The motion included information about Zukerman’s risk factors for getting COVID-19 in light of his age, health and Otisville’s dorm-like living arrangements:

Zukerman is 75 years old and suffers from diabetes, hypertension, and obesity. He is currently serving his sentence at Otisville, where, as of March 27, 2020, at least one inmate has tested positive for COVID-19…. At Otisville, 120 inmates eat elbow-to-elbow at the same time, share one large bathroom with a handful of stalls and a handful of showers, and sleep together in bunks beds only a few feet apart that are divided principally between two dormitories (as opposed to individual cells). The two dormitories are separated only by the shared bathroom.

As Zuckerman’s motion describes, the dorm like setting makes it impossible to isolate. The response at the prison has been to quarantine all prisoners to their dorms or other common areas (Otisville, as one might surmise from the description, is a minimum security federal “camp”–for more on Otisville, see this New York Times article from a year or so ago). 

Zukerman’s doctor wrote in support of the motion that based on the Centers for Disease Control and Prevention guidelines for COVID-19, Zukerman is in “the highest risk category for complications and death from the disease.” 

The government’s opposed the motion on two grounds. First, it argued that Zukerman failed to exhaust the administrative process, a process that the statute seems to mandate. Second, it argued that the severity of Zukerman’s crimes warranted against finding that there were extraordinary and compelling reasons to grant the request.

The Exhaustion Requirement

In finding that Zukerman could bypass the requirement that prisoners exhaust the administrative process, the court noted that while it is strictly construed, there are circumstances when courts could waive it:

 “Even where exhaustion is seemingly mandated by statute … , the requirement is not absolute.”… There are three circumstances where failure to exhaust may be excused. “First, exhaustion may be unnecessary where it would be futile, either because agency decisionmakers are biased or because the agency has already determined the issue.” . Second, “exhaustion may be unnecessary where the administrative process would be incapable of granting adequate relief.” Id. at 119. Third, “exhaustion may be unnecessary where pursuing agency review would subject plaintiffs to undue prejudice.” 

In light of the potential harm of the virus, the court concluded that “requiring [Zukerman] to exhaust administrative remedies, given his unique circumstances and the exigency of a rapidly advancing pandemic, would result in undue prejudice and render exhaustion of the full BOP administrative process both futile and inadequate.”

The court’s brush off of the exhaustion requirement warrants a bit more discussion. I note that in the block quote above there is a footnote I omitted discussing a recent Supreme Court case where the Supreme Court seemed to make it very clear that in considering exhaustion “Congress sets the rules” and “courts have a role in creating exceptions only if Congress wants them to.”, citing Ross v. Blake , 136 S. Ct. 1850, 1857 (2016). Despite that admonition, the district court stated that some times the claimant’s interest is so great that courts can sidestep strictly following the rules so long as the person has made some request to the agency, citing the 1976 Supreme Court case Mathews v Eldridge and Washington v Barr, a 2019 Second Circuit opinion discussing how that in extraordinary circumstances the courts can relax the exhaustion requirements. As Zukerman did submit a release request to the warden three days before he filed his motion in court, and in light of the risks to his health, the court found that Zukerman need not go through normal channels. 

Extraordinary and Compelling 

Given that Zukerman was able to convince the court to waive the exhaustion rules, it also is not surprising that the judge found that his motion presented extraordinary and compelling reasons for his release.  In discussing this issue, the opinion notes that the statute gives the US Sentencing Commission  (USSC) authority to define what is extraordinary and compelling. USSC comments on the standard focus on whether “[t]he defendant is … suffering from a serious physical or medical condition … that substantially diminishes the ability to provide self-care within the environment of a correctional facility and from which he or she is not expected to recover.”

The opinion discusses a number of cases in the last month where other courts have looked at the health, age and prison conditions, and concluded that the pandemic justified early release from prison.

Yet the government also argued that the severity of Zukerman’s tax crimes warranted against finding that the reasons for early release were extraordinary and compelling. While acknowledging Zukerman’s offenses, the court noted however that the pandemic was a game changer: 

The Court does not disagree that Zukerman’s misconduct was egregious. As the Court observed at sentencing, “Zukerman evaded taxes totaling millions of dollars. He was driven not by need, but by unmitigated greed. He entangled himself in a web of lies and deceit, lying to his tax preparer, and then hiring lawyers to defend his lies. He went to such extraordinary lengths in order to cheat. These frauds were deliberate and calculated. Zukerman thought himself to be above the law.” The severity of Zukerman’s conduct remains unchanged. What has changed, however, is the environment where Zukerman is serving his sentence. When the Court sentenced Zukerman, the Court did not intend for that sentence to “include incurring a great and unforeseen risk of severe illness or death” brought on by a global pandemic.  Citing United States v. Rodriguez , 03 Cr. 271-1, 2020 WL 1627331, at *12 (E.D. Pa. Apr. 1, 2020) (emphasis added)


The upshot of the opinion is that Zukerman was able to leave prison at least a year before he was otherwise eligible to do so. I do not have any special expertise in requests to modify prison sentences. The Zukerman opinion and order highlights just one of the many ways that the pandemic is having an impact on tax administration. With many well-heeled felons like Zukerman able to afford the costs of getting a motion for early release before a court, one hopes that the BOP takes a proactive approach with other inmates who do not have the same resources. While the pandemic should not necessarily amount to a get out of jail card for all felons, it should not amount to a pass for only those who can pay for their freedom.

Trump, Tax Crimes, and Tilting at Windmills

We welcome guest blogger Scott A. Schumacher. Professor Schumacher is the Associate Dean of the University of Washington Law School and has for many years headed the low income taxpayer clinic there as well as its graduate tax program. Prior to joining the faculty at the University of Washington Professor Schumacher worked for several years in the Criminal Section of the Tax Division of the Department of Justice. His work in his prior life provides him with an insider’s view of the workings of criminal tax cases which he shares with us today. Some of us are old enough to remember a criminal tax case that ended the political career of Vice President Spiro Agnew. While President Trump’s taxes continue to be the focus of much discussion, Professor Schumacher explains why the recent news story does not signal anything of current tax significance. Usually we leave the discussion of criminal taxes to the excellent federal tax crimes blog written by Jack Townsend but the currency of the recent article concerning the taxes of the President’s family causes us to veer temporarily into a different procedural area. Keith

Earlier this month, the New York Times published an extensive expose on the tax strategies allegedly employed by President Trump and his family in the 1990s. New York State tax authorities quickly announced that they were beginning an investigation into these matters, and the typical political and media firestorm followed. Among the questions raised were: Can Trump be prosecuted for this conduct? Can both the State of New York and the U.S. government prosecute him for the same conduct? If he is continuing to engage in similar strategies, can he be prosecuted for tax crimes? Are Fred Trump and former Secretary of State Dean Acheson the same person?


As to the first question, there is virtually no chance of the conduct discussed in the New York Times article resulting in either a federal or New York State tax prosecution.  Under federal law, the statute of limitations for tax evasion and other tax crimes is six years, and it’s five years under New York law. The statute begins to run from the last act of evasion, which generally means the filing of the tax return for the year at issue. As noted, all of the events discussed in the Times article occurred in the 1990s, and the statute of limitations has long since run on those years.

As to the second question, there is nothing that absolutely bars both a federal and state tax prosecution for the same tax year. The laws of separate sovereigns have been violated, and the conduct involves separate criminal conduct –the filing of two different tax returns. Hence, the Double-Jeopardy Clause is not implicated.

Nevertheless, parallel or sequential federal and state tax prosecutions are rare. Under the Department of Justice’s Petite Policy (named after Petite v. United States, 361 U.S. 529 (1960)), federal prosecutors will generally not bring a case following a prior state prosecution based on substantially the same acts. The purpose of the policy is to promote the efficient use of resources, to encourage federal and state cooperation, and to protect persons from multiple prosecutions and punishments for essentially the same conduct. The Petite Policy is followed by the Tax Division of DOJ, which must approve indictments for all federal crimes.  As a result, it is extremely rare for a federal prosecution to follow a state prosecution in tax matters.  In reality, even without a formal policy, given that there are so few tax prosecutions, if someone has been convicted by either a state or federal government, it is highly unlikely that another prosecution for essentially the same conduct would be brought. They have bigger fish (or at least other fish) to fry.

What if the conduct described in the Times article continues to today, couldn’t that form a successful tax prosecution? Without getting into the specifics of the alleged conduct, which is well beyond the scope of the PT Blog, such a prosecution is highly unlikely. The heart of any tax prosecution is the mental state that the government is required to prove – willfulness. Willfulness is defined as an “intentional violation of a known legal duty.” Thus, the taxpayer and putative defendant must know what the law provides and intentionally violate the law. In this regard, reliance on the advice of a professional generally constitutes a complete defense to the element of willfulness.

Given the complexity of the tax laws, it is difficult for prosecutors to prove that someone who was advised by lawyers and accountants knew that their conduct violated the law and intentionally engaged in that conduct. Despite the President’s claim that he understands the complex tax laws better than anyone who has run for president, he has always been well represented by competent tax professionals.

Okay, nobody asked the final question, but Google it.


Government Files Brief in Chamber of Commerce Case/Supreme Court Resolves Circuit Split on Tax Obstruction Statute

Today’s post will bring readers up tp date on two significant developments, the first involving the heavily watched Chamber of Commerce case in the Fifth Circuit and the other a Supreme Court opinion in Marinello v US that resolved a circuit split that concerned an important criminal tax issue.

Chamber of Commerce Appeal

One of the more significant tax procedure cases of last year was Chamber of Commerce v IRS, where a district court in Texas invalidated Treasury’s temporary regulation that attempted to put a stop to corporate inversions.

The government appealed the decision to the Fifth Circuit, and this week the government filed its brief spelling out why the circuit court should reverse. In addition to arguing that the district court erred in finding that the plaintiff had standing, the government urges the Fifth Circuit to find that the Anti-Injunction Act bars a pre-enforcement challenge to the regulations, and argues that Section 7805 allows it to issue prospective temporary regs without notice and comment.

Treasury’s view on temporary regulations I find strained, as I discuss in the latest update to Chapter 3 Saltzman and Book IRS Practice and Procedure, but I suspect that the AIA may allow the Fifth Circuit to sidestep that issue.

Here is the summary of the government AIA argument from its brief:

But even if plaintiffs have standing, their suit is barred by the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act, which ban the issuance of declaratory and injunctive relief against the assessment or collection of federal taxes. Plaintiffs cannot have it both ways: their contention that they have standing because their members are threatened with increased tax liabilities would necessarily mean that their suit falls squarely within the AIA’s prohibition against suits “for the purpose of restraining the assessment or collection of any tax.” The District Court erred in its overly restrictive construction of the AIA. The AIA’s prohibition on injunctive relief applies broadly, reaching not only actions directly involving assessment or collection, but also those that might affect assessment or collection indirectly. The AIA clearly bars attempts, such as this one, to enjoin a Treasury Regulation affecting the existence or amount of a tax liability.

The AIA has long been an important barrier walling off IRS/Treasury guidance from pre-enforcement challenges. As we have discussed on PT, with cases like Direct Marketing, which considered the reach of an analogous statute that bars challenges to state tax statutes, advocates have been probing for ways to get courts to consider the procedural and substantive validity of rules such as in this case.

The brief discusses and distinguishes Direct Marketing. No doubt the Chamber of Commerce disagrees. We will keep an eye on this case.

Supreme Court Resolves Split in Circuits on Obstruction Statute

In Marinello v US, the Supreme Court resolved a circuit split involving Section 7212(a),  involving the tax specific obstruction statute. The Court held that a conviction under the statute requires that there be an ongoing investigation of the defendant, with the defendant both knew about and intended to obstruct. The opinion leaves open, however, the possibility for a conviction if the proceeding was reasonably foreseeable by the defendant.

In addition to resolving the split, the opinion provides a nice window into competing strands of statutory interpretation. The dissent, penned by Justice Thomas and joined by Justice Alito, relied on a more literal approach. The statute prohibits “corruptly . . . obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration of this title.” Noting that the title at issue was Title 26, and that encompasses all aspects of the tax code, the dissent, as a few other circuits, would have not limited the statute’s application to situations when there is awareness of (or reason to be aware of) the investigation.

As support for that view, the dissent looks to the Direct Marketing discussion of tax administration, which identified the four components of tax administration as involving “information gathering, assessment, levy, and collection.”

‘[D]ue administration of this Title’ refers to the entire process of taxation, from gathering information to assessing tax liabilities to collecting and levying taxes.

The majority opinion leans on context, looking to related interpretations of the general obstruction statute, a concern that the government’s approach leaves too much discretion to prosecutors and the potential use of the tax obstruction statute to encompass more run of the mill tax misdemeanors.


Sentencing Fight in Former Judge Kroupa’s Criminal Case

We have reported before on the rather shocking criminal tax case of a former Tax Court judge.  We reported on her indictment in April of last year, her guilty plea in the fall of last year and of the fallout in some of her cases stemming from the criminal matter.  The case has moved into the phase in which the judge must sentence former Judge Kroupa for the crime to which she plead guilty.  The sentencing phase has moved slower in this case than I would have anticipated; however, it has been many years since I worked regularly on criminal tax cases and my expectation of the tempo may be outdated.

The sentencing phase usually involves a review of the situation and then a write-up of facts and recommendations by a probation officer followed by an opportunity for the defendant and the government to offer comments on a proposed sentence.  At the time of the plea, the parties knew that the sentencing guidelines would produce a recommended prison sentence in the range of 30-37 months.  Although the guidelines do not bind the judge, the parties know that the guidelines have a significant influence in most cases and certainly serve as a starting point for the judge’s decision.  Based on the crime to which she pled guilty and some upward and downward adjustments for knowledge, position and cooperation, the parties knew when they reached the plea agreement where the starting point for sentencing would place this case.

In recent filings with the district court, the defendant and the government have set out their positions.  The defendant takes the position that 20 months would be an appropriate sentence under the circumstances.  The government argues for the guideline amount of time in prison.  Both documents bear reading if you want to gain a better understanding of the process in general.  The document filed by former Judge Kroupa lays open her life in a way that you would not want to do unless compelled to do so by the circumstances existing here.

In recent posts, we have talked about privacy of information in a court proceeding.  In last Friday’s post concerning designated orders, Samantha Galvin described for us a recent order concerning the privacy of information.  In a post earlier this week, I described the efforts of a taxpayer in a refund suit to keep his name out of the public record.  In this criminal case where the defendant fights for her freedom with a difference of potentially 17 months (or more because the sentencing judge is not bound by the guidelines or the recommendation of the government) of incarceration hanging in the balance, she does not raise privacy as a concern.  The case demonstrates how naked one becomes in a criminal case and how rights of privacy that can cause such concern in a civil case do not apply.  Because our blog focuses on civil and not criminal tax matters, we will not delve further into the arguments by the parties.  Even for those of us who practice in the civil arena, knowing what happens in the worst case, a criminal indictment, benefits us and our clients as we work to keep them from committing a tax crime.

Some Updates to Prior Posts and Tax Procedure Conferences of Note

In today’s post I will update readers on some past cases we have discussed and highlight a couple of conferences that relate to tax procedure and administration.

First, to the updates.


Senyszen v Commissioner: Tax Court Holding Insufficient to Free Convicted Former IRS Employee

Readers may remember the Tax Court case of Senyszen v Commissioner. Keith discussed it twice, first in Collateral Estoppel in Civil Tax Case Following Conviction of Tax Evasion and also Motion for Reconsideration. In that case, Mr. Senyszen, a former CPA who was working for the IRS, pled guilty to 1) filing false returns; (2) tax evasion; (3) structuring financial transactions; and (4) bank fraud. The Tax Court considered the impact of his tax evasion conviction on the amount of his civil liability. The evasion charge included allegations in the information that he embezzled about $250,000 from a former business associate.

At Tax Court IRS argued that Senyszen was subject to collateral estoppel on the issue of his civil tax liability stemming from the embezzled $250,000. The Tax Court, however, found that Senyzsen had actually returned the embezzled funds and held that the IRS cannot use collateral estoppel to impose a liability where it otherwise does not exist. The IRS did not like that outcome and filed a motion for reconsideration. On reconsideration the Tax Court refined its reasoning but stuck to its guns and held that without an actual tax liability the prior tax evasion conviction was not enough to justify his civil tax liability.

As a result of the Tax Court victory, Mr. Senyszen filed a motion with a federal district court in New Jersey for relief from his criminal conviction. The court considered the pro se motion as a writ of error coram nobis, which gives the court the power to overturn a prior conviction if he could establish, in light of all the evidence, it was more likely than not that no reasonable juror would have convicted him.

Senyszen essentially argued that the district court should reconsider his conviction in light of the Tax Court finding that he had no taxable income from the embezzlement (an issue he had raised previously with the district court and Third Circuit when he tried unsuccessfully to withdraw his tax evasion plea). The district court opinion took note of the significance of the Tax Court outcome on the evasion charge:

The Tax Court’s finding certainly contradicts a portion of the second count of the Information, which alleged tax evasion as a product of “embezzled taxable income from the sale of real estate.”…To that extent, the Court acknowledges that the Tax Court’s decision conclusively establishes that Petitioner is not guilty of evading taxes through the embezzlement of taxable income in 2003.

The district court did not go as far as Senyszen wanted:

[H]owever, that is not all that the Information alleges. Notably, the first paragraph under the second count reads: “The allegations contained in paragraphs 1 through 10 of Count One of this Superseding Information are repeated, realleged and incorporated by reference as though fully set forth herein.” In other words, Petitioner’s conduct under the first count was also sufficient to establish his guilt under the second count. The Tax Court confirmed: “[Petitioner’s] preparation of a fraudulent return on behalf of [the corporation] were themselves sufficient grounds to justify his conviction for tax evasion.”

The upshot is that for now Senyszen’s 36 month sentence stands. The court’s power to overturn a conviction is narrow; the Tax Court holding only went so far and did note that the Senyszen’s preparation of a false return on behalf of the corporation was sufficient to justify the evasion conviction.

For more detail on the opinion check out Jack Townsend, who in his Federal Tax Crimes blog has discussed the Tax Court case, and he also reports on the case’s latest chapter. Jack notes that the oft-litigating Senyszen has filed a motion for reconsideration and suggests that another appeal is likely.

More on the Secret Subpoena in Tax Court

The law firm of McDermott Will & Emery has an excellent tax controversy practice and that group publishes a blog called Tax Controversy 360. Last week Andy Roberson, a PT guest poster, partner in the firm’s tax controversy group, petitioner’s counsel in the important penalty decision in Rand which Keith discussed in Government Drops Appeal in Rand Case, and prior winner of the ABA Tax Section Janet Spragens Award for his commitment to pro bono, discussed the Tangel case. In his post he noted the differing approach Judges Chiechi and Holmes have on whether parties have a notice requirement before service of non-party subpoenas for the production of documents, information or tangible things, a topic I also discussed last week. Andy offers some practical tips for overcoming the surprise that is the harm from allowing a party to issue a subpoena without notifying the other side:

Until the Tax Court adopts a uniform rule against “secret subpoenas,” taxpayers should routinely and regularly issue discovery requests on the IRS seeking: (1) a list of all third-party contacts, including the documents sent and received; (2) copies of all subpoenas, including a copy of all documents sent and received; and (3) a list of the dates on which the third-party contacts occurred, including phone calls and meetings. These requests should be made at the beginning of every case, and it should be stated that the requests are continuing in nature.

Conferences on Tax Administration and Procedure of Note

There are some interesting tax procedure conferences that Keith and I are involved in, one very near term and another in March of next year.

 Low Income Taxpayer Workshop

This afternoon in Washington at the offices of McDermott Will & Emery the ABA Tax Section is cohosting a low income taxpayer representation workshop that will cover important developments, property tax issues, criminal tax matters and health insurance marketplace issues. The session includes Keith and Andy Roberson talking about their so far unsuccessful actions seeking to get the IRS to abate the penalties made against taxpayers that the IRS agrees were wrongfully made based on the Tax Court decision in Rand (for more on Counsel guidance after the 2015 PATH legislation see Keith’s January 2016 post here), Tax Court Special Trial Judge Judge Diana Leyden, Harvard Tax Clinic fellow Caleb Smith and Vermont Legal Aid’s Christine Speidel, Treasury’s Rochelle Hodes, and many others.

Second International Taxpayer Rights Conference

This March in Vienna the Institute for Austrian and International Tax Law at Vienna University of Economics and Business is hosting the second international taxpayer rights conference. It is sponsored by Tax Analysts and is convened by the US’s National Taxpayer Advocate. The first international taxpayer rights conference in 2015 brought together many administrators, practitioners and academics. It was a terrific conference, with panelists discussing issues like transparency, privacy, rights to administrative and judicial appeal, the relationship of trust to ensuring tax compliance and the role of ombuds offices. The above link takes you to the 2015 proceedings. Keith and I were speakers at that conference. If you would like to read our conference papers, Keith wrote about tax collection and taxpayer rights which you can see here; I discussed how IRS can learn from nontax scholars who have looked at the ways that administrative agencies interact with low-income individuals; that paper is here.

The second conference is accepting registrations at the conference website; the agenda includes the following topics:

  • Taxpayer Rights in Multi-Jurisdictional Disputes
  • Privacy and Transparency in Tax Administration
  • Access to Taxpayer Rights: The Right to Quality Service in Today’s Environment
  • Transforming Cultures of Agencies and Taxpayers
  • Impact of Penalty Administration on Taxpayer Trust

I will be speaking about taxpayer rights with a focus on refundable credits and am in the process of writing a paper on that important topic.

I was reminded of the importance of taxpayer rights as last week I watched parts of Senator Harry Reid’s farewell speech to the Senate. It was a personal and deeply moving speech, touching on topics like the suicide of Senator Reid’s father and the stigma of growing up poor in Searchlight, Nevada. As part of his talk Senator Reid discussed some of his legislative highlights. The first item he mentioned was his role, along with Senators Pryor, Grassley and others, in getting the first Taxpayer Bill of Rights enacted. Taxpayer rights have come a long way since that legislation but there is considerable room for improvement. Conferences like the International Taxpayer Rights Conference help situate some of the issues and identify common global challenges and best practices.

Tax Crime Snapshot: Ministers, Congressional Staffers and Restaurant Owners

I enjoy reading police blotters. I am not sure why. I am not alone in this pursuit. An article a few years ago in the Washington Post provides an “appreciation of America’s police blotters, featuring nearly all 50 states, and favorites from a few police blotter writers themselves.” When a paper (like the Durango Herald) reports that “someone reported a stolen inflatable dinosaur” that to me is newsworthy. It is easy to see why the NY Times reported in 2007 when discussing police blotters in Connecticut that people read it religiously, though also worth noting (as the NY Times did) that the blotters often just reflect the newspaper’s publishing police reports uncensored, with the potential for damaging the reputation of those mentioned. After all, the blotter reflects arrests, not convictions, and we thankfully live in a country where one is presumed innocent.

How does this connect to tax procedure and tax administration? The Department of Justice Tax Division has its own digital press room where in straightforward often one or two page announcements it discusses the work of the government’s efforts to punish tax wrongdoers. The last few weeks have shown a cross-section of Americans with tax problems, and I discuss some of them in this post.


Thai Restaurant Owner 

Just last week DOJ reported on a restaurant owner from Ukiah, California who pleaded guilty to “corruptly endeavoring to obstruct the due administration of the internal revenue laws and to harboring illegal aliens for profit.” The release discusses the sordid facts:

[She] admitted that she knowingly hired Thai nationals who were illegally present in the United States to work at her restaurants, Ruen Tong Thai Cuisine and Walter Café, both located in Ukiah.

Ritdet further admitted that she underpaid employees and instructed them not to speak to anyone about their immigration status.  Ritdet also admitted that she willfully filed false individual income tax returns for tax years 2007 through 2011, failing to disclose gross receipts, sales and income received from her two restaurants, as well as rental income and a foreign bank account and failed to accurately report employment taxes owed for her restaurant employees, who were paid in cash.

That is a sad tale but one I suspect is not uncommon around the country. People are desperate to come to the US, and someone who takes advantage of those who are in a weak place in society, and fails to pay their fair share at the same time, is especially reprehensible.

Traveling Minister Tax Scam

When a local paper runs a story on a tax crime, that gets my attention. This past weekend I was in Cleveland, the Paris of the Midwest, to drop my stepdaughter off for her freshman year at Case Western. In addition to catching an Indians game with my wife and son (prior to an unfortunate case of food poisoning from at the time tasty ceviche), and catching up with an old friend and former PT guest poster, I read the Plain Dealer. The paper featured an article about an Arkansas traveling minister who was sentenced to 13 years in prison for “his role in a scheme to steal people’s identities and hundreds of thousands of dollars in ill-gotten tax refunds.” The scheme here was particularly obnoxious, with the minister telling “people that they needed their personal information to apply for what they called a “government stimulus program.” He would then recruit “ministers and church leaders in other states to obtain personal identification information from congregants.” The minister would take a cut of about $125 from each of the refunds and at the end of the day was responsible for filing 2,750 false returns with people receiving about $4.8 million in refunds and the minister walking away with about a quarter of a million dollars. Many of the victims were from Canton and were on social security and did not have a filing requirement. His crime was a complete abuse of trust by preying on low income church going elderly.

I gather the minister exploited Form 8888, which allows taxpayers to allocate refunds to up to three bank accounts (though all have to be in the taxpayer’s name). As an aside, the Form 8888 is subject to abuse, and it is in part responsible for the growth in refund anticipation checks over the past few years, a topic that warrants a different post on a different day. To be sure, those who filed the tax returns may not be completely blameless and they face the possibility that the SOL on assessment is open indefinitely due to the preparer’s fraud. I am not sure if the IRS has been tracking down the victims to seek repayment of the refunds they received, though it is possible that the victims might qualify for an effective tax administration offer, also an issue that warrants another post.

Congressional Staffer Alleged to Not Willfully Fail to File Returns

Here is another in the line of cases of someone who should know better allegedly violating the internal revenue laws. Courtesy of our tax prof blogging colleague David Herzig at The Surly Subgroup, Politico reported this week that “Isaac Lanier Avant, chief of staff to Rep. Bennie Thompson (D-Miss.) and Democratic staff director for the Homeland Security Committee, allegedly did not file returns for the 2009 to 2013 tax years.” The DOJ press release lays out the allegations:

For tax years 2009 through 2013, Avant earned annual wages of over $170,000, but did not timely file a personal income tax return for any of those years.  In May 2005, Avant filed a form with his employer that falsely claimed he was exempt from federal income taxes.  Avant did not have any federal tax withheld from his paycheck until the Internal Revenue Service (IRS) mandated that his employer begin withholding in January 2013.

Homeland security is a resource-intense activity. Over 46% of tax revenues from come from the individual income tax. While there are millions of individuals who fail to file income tax returns, and there are few prosecutions of those non filers, when someone with responsibilities relating to protecting our security allegedly flouts the internal revenue laws it is sure to attract a prosecutor’s interest.

Update: Jack Townsend covers this extensively here in Federal Tax Crimes Blog

NYC Restaurant Owner in Hot Water

One last story as reported by Bloomberg late last week; this one addressing a celebrity restaurant owner who “made the gossip pages for getting socked by Diane von Furstenburg’s son and multimillion-dollar court fights he’s waging with celebrity chef Gordon Ramsay.” Last Friday he “was sentenced to one month behind bars for using undeclared Swiss bank accounts and a Panamanian shell company to hide more than $1 million from the Internal Revenue Service.” The Bloomberg piece discusses how the conduct that led to the sentencing started when the restaurateur graduated from business school and went to Switzerland with his mother to set up a secret UBS bank account (working with Bradley Birkenfeld along the way). When news circulated about UBS in the limelight he shifted the funds into a new Swiss bank and set up a Panamanian shell company to cover the traces.

Jack Townsend discusses this case extensively here in his Federal Tax Crimes blog, which is the place to turn for deep insight on criminal tax matters. I find it particularly revolting when super rich people (ultra high net worth individuals in financial planner world) take multiple affirmative steps to cover their tracks and evade their responsibilities to pay their fair share. The NY Times earlier this summer discussed the efforts of UHNW Americans and their advisors in Panama Papers Show How Rich United States Clients Hid Millions Abroad. And while there are some legitimate purposes for the creation of layers of offshore accounts, I think it is a safe bet to assume that a high percentage of those who affirmatively create layers of offshore accounts (as opposed to say those who inherit funds from rich Uncle Wilhelm) do so with a purpose of evading tax obligations.


Criminal prosecution and even the consideration of criminal prosecution is one extreme end of tax procedure thankfully reserved only for a small number of egregious cases each year. Neither I nor my PT colleagues have particular expertise in criminal tax or sentencing matters. Because criminal cases do represent one end of the spectrum of tax procedure, we will occasionally comment on criminal tax matters but as mentioned above we recommend Jack Townsend’s excellent blog on the subject if you want more or want a deeper understanding. I do find it odd that judges appear to have more sympathy for the very rich tax evaders when it comes to sentencing times (Jack Townsend discusses this and more in The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! as well as in his recent post on the NYC restaurant owner). If I understood criminal tax better, perhaps I could provide an insightful reason for this apparent paradox. As it is, I will leave it for you to find the reason for this phenomenon yourself.




8th Circuit Strikes Down Restrictions on Internet and Computer Use Special Conditions for Convicted Tax Evader

The Department of Justice goes about the business of prosecuting tax defiers as one of its principal activities. I suspect that there is a long list of possible targets. A recent tax evasion case out of the 8th Circuit, US v West, caught my attention. In West, the court struck down conditions of supervised release relating to computer and internet use that the government sought to impose to limit a tax defier from spreading his ideas after his 51 month jail sentence ended.

I will describe the case and the court’s reason for its failing to allow those conditions below.


West was a computer technician. West informed his employer that he was exempt from taxes and withholding and his employer complied with West’s request to withhold nothing. West deposited his pay into corporate bank accounts he formed to assist in concealing his income. IRS eventually contacted his employer and served a levy. West resigned as an employee and set up an LLC that performed services for his former employer as an independent contractor, continuing to receive funds free of withholding.

In addition to not paying taxes or fling tax returns, West actively spread his tax ideas to others. The opinion notes that he “proselytized his beliefs in an e-book self-published and sold through, entitled Are You a Taxpayer? Really? Prove It! In addition, the presentence investigation report (PSIR) identified West as “the owner/manager of several websites and/or online blogs which promote his fraudulent tax scheme and contain non-taxpayer propaganda, among other information.”

West was indicted and convicted on three counts of evasion for the years 2007 2008 and 2009. He was sentenced to fifty-one months’ imprisonment and three years’ supervised release. The government requested and the district court granted the following conditions associated with the supervised release:

  • The defendant shall not engage in the creation of or establish any new websites, and he is required to remove any websites, past or present, which are currently active. (Condition 13)
  • The defendant is prohibited from using or possessing any computer(s) (including any handheld computing device, any electronic device capable of connecting to any online service, or any data storage media) without the prior written approval of the U.S. Probation Officer. This includes, but is not limited to, computers at public libraries, Internet cafes, or the defendant’s place of employment or education. Furthermore, he shall consent to the search of his computer for content related to criminal activity, at the request of his probation officer. (Condition 14)

West appealed the special conditions of supervised release, claiming that they were an abuse of discretion and violated his First Amendment rights. (he also appealed an evidentiary issue, which I skip).

Background on Special Conditions

The court set out the context for the district court’s imposition of the special conditions as well as the appellate court’s review of conditions that the trial court imposed:

The district court’s broad discretion to impose special conditions if they comport with the strictures of 18 U.S.C. § 3583(d) that the condition is: (1) reasonably related to the nature and circumstances of the offense, the history and characteristics of the defendant, adequate deterrence, public protection, and the needs of the defendant; (2) involves no greater deprivation of liberty than reasonably necessary for the sentencing purposes of adequate deterrence, public protection, and the needs of the defendant; and (3) is consistent with applicable policy statements by the United States Sentencing Commission.

The opinion describes the appellate court’s review of the district court’s imposition of special conditions is based on an abuse of discretion though also noted that a closer review than generally associated with abuse of discretion accompanies conditions that may impinge on constitutional rights.

The 8th Circuit first addressed the condition that prohibited West’s creation of any new websites. West argued that it was overbroad and also violated his First Amendment rights, though he conceded that if the condition were restricted to not setting up websites that related to disseminating tax advice it might be legitimate. The government argued that it was not overbroad and consistent with 18 USC 3583(d) and that the speech was commercial speech not within First Amendment protection.

In resolving this in favor of West, the 8th Circuit noted that most of the cases where such a condition has been imposed relate to those convicted of criminal sex offenses. After going through the cases in the sex offense context, the opinion concluded that the restriction imposed on West was too broad, even assuming that the government’s “questionable” position that he was only engaged in commercial speech. It noted that given that West did engage and assist others in violating tax laws “there may be a plainly legitimate sweep of restrictions the district court could have placed on West’s ability to promote his ideas through the Internet.”

Despite the possible legitimate restrictions, the 8th Circuit noted that the district court’s special condition “prohibits West from creating and maintaining any website irrespective of its content.” It noted the importance of the web and the reluctance to impose such a broad restriction on the right to speech:

Although West misused his access to the Internet, websites present an important mode of communicative and commercial intercourse in our society through which West can exercise his right to speak. Because “[t]his court is ‘particularly reluctant to uphold sweeping restrictions on important constitutional rights,’ … such [absolute] bans are disfavored.” Bender, 566 F.3d at 753 (quoting Crume, 422 F.3d at 733). We agree with West that Special Condition #13 deprives him of a greater amount of liberty than necessary to achieve the sentencing purposes.

The 8th Circuit similarly struck down the condition limiting his use or possession of any computer without Probation Officer approval. First, it noted that while there were no individualized findings that West used a computer to promote tax evasion schemes, “[t]his likely can be inferred from his Internet activity. The use of a computer could also arguably be inferred from West’s two-level enhancement for sophisticated means in the creation of multiple accounts for different businesses and complex transactions made between them in an effort to conceal income.”

That computer usage in furtherance of the tax offense was insufficient to justify the broad ban on computer usage:

But if these activities comprise the full extent of findings justifying the ban on computers, then clearly the restriction is broader than necessary, as computers may be used in myriad ways not related to promoting tax evasion online or concealing funds. We are convinced the district court could have crafted a narrower restriction that would have adequately achieved the sentencing purposes of deterrence and public protection without hindering West in continuing his career as a computer technician

Parting Thoughts

Peter Hardy, a partner at Ballard Spahr, former federal prosecutor for over a decade and expert on criminal tax law, offers some interesting thoughts on the opinion.  Peter notes that it is “good to see a court put some teeth into the substantive limits of Section 3583(d) (“no greater deprivation of liberty than reasonably necessary . . . “), particularly given the deferential standard on appeal.” In addition, Peter believes that “the court appropriately distinguishes the cases involving child pornography.  Putting aside the general exception to the Constitution for drug and child porn offenses (I am joking, sort of), in those cases the electronic transmissions/images are themselves contraband – i.e., it’s actually illegal to possess any electronic device containing the images.  Perhaps a similar distinction could be made as well with cases involving hacking, in which it is literally impossible to commit the crime without using an electronic device.”

Peter offers more on why he thinks the 8th Circuit’s approach was correct:

I am sure that the defendant’s websites were obnoxious, but his use of the Internet to facilitate his offenses (and there was no doubt an aspect of opinion and advocacy in his anti-tax railings) hardly distinguishes him from other federal felons.  Most fraud offenses – as the use of the wire fraud statute can attest – are facilitated one way or another through the Internet or e-mail, given the ubiquity of that form of communication.  Even drug schemes are often facilitated through texting.   However, you don’t really see courts prohibiting the average fraudster (health care fraud/securities fraud/consumer fraud/mortgage fraud/whatever) or drug dealer from using computers.  I am not raising an Equal Protection point so much as noting that such prohibitions don’t happen in other cases because I think it is implicitly understood that such a prohibition would be overkill.  Here, the district court just seemed to be annoyed with the content of the defendant’s beliefs, and reacting on that basis.

Peter’s thoughts are sensible. I understand the frustration that judges must feel when confronted with cases such as this. Yet, sharing a vacation house with teenagers this week where the internet is spotty brings home how important computer and internet usage is to everyday life. Today’s technology obviously facilitates a greater spreading of ideas; that carries heavy risk when the ideas are bad and encourage others to likewise break the law. Yet this opinion I think rightfully limits broad restrictions on computer usage for general tax evasion offenses.

UPDATE: 8/4 For a discussion of the part of the opinion I did not discuss, West’s argument that the trial court erred in not allowing to present his Cheek defense properly, see Jack Townsend’s Federal Tax Crimes post here

Recent Case Highlights How Taxpayer Can Refresh the Statute of Limitations for Tax Evasion Even By Speaking (and Lying) to IRS

On Procedurally Taxing, we do not often dip our toes directly in criminal tax matters. Yet the civil and criminal are often closely related; see, for example Keith’s excellent post last week on collateral estoppel in a civil case following a criminal prosecution.

US v Galloway, a district court opinion out of the eastern district in California, caught my attention. It highlights a key difference in civil statute of limitations cases as compared to criminal cases. While there is no SOL on assessment for a fraudulent return there is a SOL for prosecuting tax crimes.

Galloway involves the statute of limitations for criminal tax evasion under Section 7201. Section 6531 provides a general 3 year statute of limitations for many tax crimes, though as Chapter 12.05[9] in Thomson Reuters SaltzBook IRS Practice and Procedure discusses, that general rule is “swamped” by the 6-year exception for many tax crimes, including evasion. Our colleague at the Federal Tax Crimes blog, Jack Townsend, is the principal author for the rewritten chapter on tax crimes, and in Chapter 12.05[9] he discusses the start date for statute of limitations as including events beyond the filing of the return:

By the filing, all the elements of tax evasion exist. Does that mean that tax evasion attempted by filing that return cannot be charged after six-years from the date of filing? No. As we shall see, the taxpayer can do some subsequent affirmative act to further the original attempted evasion via the return.

The Galloway case provides a further example of the “as we shall see” variety.


From the opinion:

Defendant Michael Galloway was charged on May 29, 2014, by way of grand jury indictment, with four counts of tax evasion in violation of 26 U.S.C. § 7201. (Doc. No. 1.) The four counts involve the tax years 2003 through 2006 with the defendant having filed the returns in question on October 24, 2005, November 7, 2005, November 6, 2006 and August 18, 2008. (Id.) With respect to each of the counts the Indictment specifically alleges affirmative acts of tax evasion including by “on or about February 23, 2010, making false statements to IRS Special Agents and a Tax Compliance Officer to conceal the defendant’s income during” each of the tax years in question.

Galloway argued that the SOL on prosecution commenced from the return filing date. The government disagreed, noting that Galloway’s alleged false statements to the IRS “were made within six years of the return of the indictment in this case on May 29, 2014.”

More on the government’s view:

According to the government, the statute of limitations for a tax evasion prosecution commences at the time of the defendant’s last affirmative act of evasion and an act of evasion is any conduct which serves the purpose of evasion and the likely effect of which is to mislead or conceal.

The district court agreed with the government, referring extensively to a 2013 8th Circuit case, US v Perry, 714 F3d 570 (8th Cir. 2013) which detailed a taxpayer’s evasive communication with the IRS as pegging the start date for the SOL.

Parting Thoughts

So the government survived the taxpayer’s motion to dismiss. That does not mean that the SOL issue goes away. At trial, government will have the burden to prove beyond a reasonable doubt that Galloway’s statements to the IRS agents constituted an affirmative act of evasion. A statement in and of itself to the IRS is not the trigger for the refresh; as Jack discusses in the Saltz/Book chapter, the inquiry at trial will likely be whether Galloway in his discussions with the IRS was not truthful (including being evasive or providing half truths) with the intent to hide the original return’s evasion. The moral of the story is that taxpayers who may have crossed the wrong side of the law should be very careful when asked to discuss their past actions. If they answer in a way that is false, evasive or incomplete they can find themselves extending the date for prosecution.