TIGTA Report on Restitution

Last week I wrote about a recent Tax Court order regarding restitution.  In that case, the taxpayer fully paid the tax included in the restitution order.  At issue in the case were penalties the IRS proposed against the taxpayers.  I pointed out at the conclusion of that post the significant benefit to the IRS of the ability to assess based on the restitution order because without that ability the IRS might have needed to wait years, until the conclusion of the Tax Court case, before it could assess and begin collection on the underlying tax liability.

A TIGTA report issued on June 7, 2021 suggests that the IRS fumbles the opportunity to make restitution based assessments in a number of criminal cases and that it makes the assessments much slower than the target dates for doing so.  In its response to the TIGTA report, the IRS basically said it agreed with the TIGTA findings and would work to improve the process.  In addition to the findings that the IRS failed to make some restitution assessments and made other assessments much slower than expected, TIGTA also found that the IRS was making assessments of interest and penalties through the restitution assessment process even though it should not.  In short, the report shows the IRS fumbling a very advantageous assessment process Congress handed to it in 2010.

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At the outset TIGTA gave some figures on the total amount of restitution ordered and collected.  It also noted that not every restitution order gives the IRS the right to assess:

From FYs 2016 to 2020, the courts ordered defendants to pay over $2.7 billion in criminal restitution to the IRS. During that same period, a total of $844 million in restitution was paid to the IRS, only 31 percent of the amount ordered. Figure 2 lists the amounts of restitution ordered and paid from FYs 2016 to 2020.

Figure 2: Amount of Restitution Ordered and Paid (FYs 2016–2020)
Fiscal YearsRestitution OrderedRestitution Paid18% of Restitution Paid
2016$603,400,000$322,903,34554%
2017$808,400,000$98,561,94912%
2018$444,800,000$149,900,66134%
2019$536,800,000$121,591,60123%
2020$328,800,000$151,436,04346%
Total$2,722,200,000$844,393,59831%
Source: Information Provided by CI and the SB/SE Division.

The low percentage of restitution paid to the IRS in recent years may not be indicative of the effectiveness of the law change providing for the assessment of restitution. As we previously described, the IRS only has the authority to assess the restitution ordered by the courts if the criminal offense was for a tax-related crime. Since the law change in Calendar Year (CY) 2010, CI devoted significant resources investigating cases for which the IRS did not have the authority to assess any restitution ordered. For instance, the IRS was unable to assess any restitution ordered if defendants were sentenced for crimes involving identity theft because the restitution is attributable to fictitious tax returns. During FYs 2013 through 2017, CI initiated over 4,000 investigations involving identity theft.

TIGTA then analyzed the cases in which the IRS made a restitution based assessment and those where it did not.  It found that the IRS collected almost 50% of the tax when it made a restitution based assessment and a very low percentage when it did not (or could not) make a restitution based assessment.  Based on this data, it seems that the IRS should seek even more expanded authority to make restitution based assessments, assuming it could show Congress that it would appropriately use the power granted to it.  Following the passage of the law allowing restitution based assessments, the IRS developed procedures for identifying the appropriate cases and processing the request for assessment from CI to SBSE.  As mentioned above, the IRS has done a weak job of following the procedures it established:

According to the IRM, CI is required to close its case and notify the civil functions of the amount of restitution ordered no later than 30 calendar days after final adjudication by a court. CI notifies the applicable functions within the SB/SE and W&I Divisions of the amount of restitution ordered by completing Form 13308, Criminal Investigation Closing Report, and Form 14104, Notification of Court Ordered Criminal Restitution Payable to the IRS, (hereafter we will refer to these as “closing documents”) and attaching the Judgment and Commitment Order (J&C). The closing documents sent to the civil functions can also include the plea agreement, indictment, and Special Agent Report.

We conducted testing to determine if the IRS properly assessed restitution when the courts sentenced and ordered 3,435 defendants to pay just over $2.5 billion in restitution to the IRS for tax-related crimes during FYs 2016 through 2019. Our analysis of CIMIS revealed that 418 of the 3,435 cases for which a total of $244 million in restitution was ordered were SIRF cases with no IRS conditions of probation or supervised release. The restitution ordered in these types of cases was not assessable. We compared the remaining 3,017 cases, for which restitution of nearly $2.3 billion was ordered, to Master File data obtained from the DCW. Our testing determined that the IRS made restitution assessments in 1,958 cases where defendants were ordered to pay nearly $1.3 billion in restitution. This left 1,059 cases for which the defendants were ordered to pay nearly $1 billion in restitution that was not assessed. Figure 4 presents the results of this testing to determine if restitution was assessed.

Figure 4: Analysis to Determine If the IRS Assessed Restitution
Restitution Assessment CategoryNumber of DefendantsTotal Restitution Ordered
Restitution Assessed1,958$1,295,060,577
SIRF418$244,134,937
Not Assessed1,059$979,749,303
Total3,435$2,518,944,817
Source: Analysis of CIMIS and Individual Master File data.

We selected a statistical sample of 140 of the 1,059 unassessed restitution cases and reviewed the associated Form 14104 to determine if CI indicated that the restitution was assessable. Our analysis identified 33 cases for which CI determined that restitution of more than $21.6 million was assessable. For the other 107 cases, among the more prevalent reasons the IRS did not assess the restitution was that CI determined that the restitution was not assessable (94 cases) or the case was currently under appeal (seven cases). We provided information for 33 cases to the SB/SE Division, and it responded that:

– In 19 cases, the restitution of just over $9 million was not assessed because the Technical Services Unit indicated that it did not receive the closing documents from CI. In 12 instances, CI acknowledged that the closing documents were never sent or were not sent timely. In seven instances, CI asserted that the documents were sent. The Technical Services Unit had to request the pertinent information from CI.

– In seven cases, restitution assessments of more than $10.2 million were delayed because of COVID-19. The Technical Services Unit eventually assessed the restitution in all seven cases by December 2020.

– In seven cases, restitution of almost $2.4 million was not assessable. This included * * * 1* * * for which the restitution was ordered solely as a condition of supervised release or probation. In these instances, the Technical Services Unit indicated that it would assess the restitution when the defendant is released from prison.

When we projected the results to the population, we estimate that restitution of $69 million was not assessed in 144 cases because CI did not send the closing documents or the documents could not be located. When forecast over five years, we estimate that a total of $345 million in restitution was not assessed in 720 cases.

By failing to follow its own procedures in CI in making the referral of the case for the restitution based assessment, the IRS appears to be leaving money on the table from individuals it has identified as tax cheats.  These individuals are likely to pay the tax if it keeps them from further time in prison but could become very difficult to pursue thereafter.  Fumbling the handoff from CI back to SBSE for assessment and collection seems most unfortunate after it has spent so many hours developing the criminal case and when the percentage of collection of restitution based assessments is relatively high.

In cases where CI made the handoff to SBSE, problems persisted because SBSE could not make the assessment in a timely fashion.  Speed can matter here because the assets of this group will diminish quickly.

Once CI prepared the closing documents, it took the Technical Services Unit an average of 198 calendar days to assess the restitution. Technical Services Unit personnel told us they face barriers in their efforts to timely assess restitution, including receiving incomplete or late packages from CI and the process of posting the actual assessments, which must pass through other Campus functions to be established. They indicated that they established a process to track restitution assessments to evaluate timeliness, but they agreed with the need to conduct periodic reviews. Figure 5 contains a breakdown of the number of days it took to assess the restitution.

Figure 5: Analysis of Days to Assess Restitution for the 68 Sample Cases
Restitution Assessment CategoryExpected Days to Complete51Average Days to Complete
From the Date of Final Adjudication by a Court Until the Date CI Forwarded the Closing Package to the Technical Services Unit3057
From the Date CI Forwarded the Closing Package Until the Date the Technical Services Unit Assessed Restitution75198
Total Days From the Date the Court Filed the J&C Until the Date the Technical Services Unit Assessed Restitution105255
   

In addition to these problems, TIGTA found that the IRS was not following the Tax Court decision in Klein v. Commissioner, 149 T.C. No. 15 (2017), which held that the IRS may not assess and collect interest and penalties on restitution ordered for a criminal conviction for failure to pay tax.  TIGTA notes the IRS actions after Klein provide another example of the IRS not protecting taxpayer rights reminiscent of its actions after losing the Rand case.  Rather than proactively abating the interest and penalty it knew was wrong, Chief Counsel’s office advised the IRS to wait and only make the abatement if a taxpayer brought up the issue. Despite this advice, the IRS did decide to identify and abate interest and penalties but so far has done so in only 31 of 676 cases TIGTA identified.  So, if you have a client in this situation, you may need to be proactive to get the penalty removed.

The final part of the report shows that the IRS was not following up on taxpayers meeting the conditions of probation and reporting violations to the probation officer.  This type of monitoring can be critical to success in collection.  From the description it appears that the handoff between CI and SBSE creates some of this problem.  While TIGTA did not make a formal recommendation on this point because it knows that IRS resources are strained, it stated:

The inability to properly monitor the conditions of probation or supervised release could be a contributing factor for why U.S. courts rarely revoked the probation or supervised release for defendants sentenced for tax-related crimes. The courts revoked probation in only 12 of the over 9,000 CI criminal investigations for which a defendant was sentenced for tax-related crimes during FYs 2016 through 2019. Courts will generally not revoke probation unless the failure to comply was willful. Because this can be hard to prove, this remedy is not widely invoked. One Special Agent in Charge we contacted also indicated that the resources of the USAOs are also limited, and * * * 1 * * *.

All in all, the report provides a picture of a program with much promise that is not meeting its potential.  The IRS has had a decade to work out these issues.  It can see from the percentage of dollars collected in cases in which a proper restitution based assessment occurs that the benefits of making this type of assessment are high.  It needs to find a way to reap the maximum benefits from this program and obtain money from the individuals it has determined represent the worst taxpayers.

Imposing Penalties After Restitution Assessment

The recent case of Ervin v. Commissioner, T.C. Memo 2021-75 affirms the ability of the IRS to impose penalties after it makes a restitution assessment.  This case does not create precedent or cover new ground but does provide a reminder of how the restitution based assessments work.  We have previously written about restitution based assessments most of which are collected in this post.  TIGTA issued a report on restitution based assessments earlier this month which I plan to discuss in a future post.

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Mr. Ervin and his wife owned a real estate management company in Alabama and apparently received cash payments for many of the properties.  They were indicted in 2011 not only on tax evasion, IRC 7201, but also on title 18 charges of conspiracy to defraud the United States and aiding and abetting.  The conspiracy charge appears to stem from their efforts to avoid reporting of cash deposits by structuring the deposits to keep them under $10,000.  A jury convicted them on most counts, including tax evasion, for the years 2004-2006. 

A couple of things are a little unusual about their criminal case.  First, they were convicted of evasion even though they did not file tax returns from 2000-2009.  Proving evasion based on non-filing can be difficult.  No doubt the structuring aspect of the case was crucial to this proof.  The second thing I found a bit unusual was the ten-year length of their sentence.  As we discussed in the post describing the sentence of former Tax Court Judge Kroupa, sentencing in tax cases primarily turns on the dollars lost to the government.  Here, the IRS could calculate the loss not only over the years of the conviction but the other years of non-filing causing a total of over $1.4 million.  Because they went to trial, the Ervins would not have received any positive points in the sentencing calculation for acceptance of responsibility.  This is a substantial sentence for a financial crime of this type but not necessarily an inappropriate sentence under the guidelines or otherwise.

In addition to the sentence of time in prison, the court ordered restitution to the government of $1,436,508 for the estimated tax loss to the government for the ten years of unfiled returns.  The IRS made restitution based assessments and actually collected the full amount of the liability; however, it did not stop there.  In 2014, it sent petitioner Monty Ervin two notices of deficiency – one for 2002-2004 and one for 2005-2007.  These notices were based on penalties, additions to tax, the IRS felt he owed for these tax years.  The IRS imposed four separate penalties, though not for each period.  The penalties were for failure to file, failure to pay, failure to pay estimated tax and fraudulent failure to file.  The penalties total another several hundred thousand dollars.

From prison Mr. Ervin contested the imposition of the penalties, making two arguments: 1) the IRS could not impose penalties after making the restitution based assessments and 2) the IRS had already determined he could not pay so it should not impose the penalties and make assessments in this situation. 

The Court provided a brief overview of the applicable law which foretells the outcome of the case:

Section 6201(a)(4)(A) provides that “[t]he Secretary shall assess and collect the amount of restitution * * * [ordered by a sentencing court] for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.” The IRS may not make such an assessment until the defendant has exhausted all appeals and the restitution order has become final. See sec. 6201(a)(4)(B). The restrictions on assessment imposed by section 6213 do not apply to restitution-based assessments. See sec. 6213(b)(5). The IRS therefore is not required to send the taxpayer a notice of deficiency before making an assessment of this kind.

[*9] In Klein v. Commissioner, 149 T.C. 341, 362 (2017), we held that “additions to tax do not arise on amounts assessed under section 6201(a)(4).” That is because a defendant’s restitution obligation “is not a civil tax liability,” id. at 361, or a “tax required to be shown on a return,” ibid. (quoting section 6651(a)(3)). Rather, restitution is assessed “in the same manner as if such amount were such tax.” Sec. 6201(a)(4)(A) (emphasis added). But we explained that the IRS was not thereby disabled from collecting such sums. “If the IRS wishes to collect * * * additions to tax, it is free to commence a civil examination of * * * [the taxpayer’s] returns at any time.” Klein, 149 T.C. at 362.

The IRS properly followed that procedure here. It made the assessment after the restitution order became final. It subsequently commenced a civil examination of petitioner’s individual liabilities for 2002-2007 and prepared SFRs, allocating him a portion of the relevant income and deductions. See supra ap. 4-5. It then calculated additions to tax based on the deficiencies so determined.

While the Court’s explanation of the law signals the ability of the IRS to follow a restitution based assessment with proposed penalty assessments, the Court analyzed each proposed penalty to determine if the imposition of the penalty appropriately matched the facts of the case.  After finding that the IRS appropriately applied the penalties, the Court granted summary judgment.

Petitioner may never pay this amount, as collection from someone coming off of 10 years of incarceration will be extremely difficult, but the legal principle here follows from prior determinations of the manner in which restitution based assessments work.  The design seeks to allow the IRS to make an assessment of the core amount of the tax determined in the criminal proceeding without having to wait many years for the end of the tax merits process to come to a conclusion.  The way this case played out demonstrates the benefit to the IRS of the restitution based assessment.  The criminal case essentially ended with the sentencing in June of 2012.  Now it is nine years later before the Tax Court case ends.  Prior to the restitution based assessment provisions, the IRS would have had to sit on its hands regarding collection until the end of the Tax Court case which would have allowed it to assess.  By making the restitution based assessment shortly after the end of the criminal case, the IRS stands a much better chance of collecting, and here it appears to have collected all of the tax.  The delay caused by the deficiency process and six years in the Tax Court may make its chances to collect the penalty portion of the case difficult, but the core of the liability in this case was recovered.  That’s a victory for the process.

Can the Taxpayer Bill of Rights Assist in Overturning a Criminal Conviction?

No.

That’s the short answer.  We have written before about ability, or lack of ability, of the Taxpayer Bill of Rights (TBOR) to protect someone from IRS action or inaction that the taxpayer views as a violation of TBOR here, here and here.  I wrote a law review article on this subject you can read here.  It was part of a symposium at Temple a couple years ago that looked at TBOR broadly.

In the case of United States v. James D. Pieron Jr., No. 1:18-cr-20489 (E.D.  Mich. 2021), the taxpayer sought to raise TBOR to overturn his conviction.  In a result that seems rather predictable, the court denied his motion.  While the result provides no surprises, this is the first case I have noticed where a taxpayer sought to use TBOR to find protection from criminal prosecution or conviction and deserves some mention because of that.  While Mr. Pieron’s lawyers, who seemed to be a bit of a revolving door, score points for inventiveness, the court did not spend too much time disposing of this argument.

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Mr. Pieron was convicted of tax evasion related to the sale of a business and his failure to pay the tax on the significant gain resulting from the sale.  During the trial he put into evidence, over the objection of the IRS, the TBOR list.  I have not read the pleadings but from the statements by the court, I believe that the core of his argument relates to the failure of the IRS to provide him with information.  I am guessing, but he may have been frustrated during the criminal investigation that the rest of the IRS would not talk to him and would not provide him with information.  This is normal IRS practice.  If a revenue agent is auditing a taxpayer and reaches the point of deciding that criminal prosecution is warranted, the agent will go silent, not wanting to use the civil process to build a criminal case.  At some point out of the silence will emerge the special agent whose only focus is determining if a criminal case exists.  Only at the end of the criminal case does the revenue agent return to the scene.  A frustrated taxpayer seeking information when the revenue agent goes silent but before the special agent appears may feel that a violation of the right to know has occurred.  It’s possible that the taxpayer alleged other violations of TBOR but this is the one that appeared to be the core of the concern.

The district court did not find this to be a concern that should cause the overturning of the conviction.  It stated:

Defendant has, throughout these proceedings, attempted to portray his prosecution as the undue product of an unresponsive bureaucratic machine that has refused to engage with him in any reasonable way. During the cross-examination of IRS Revenue Agent Robert Miller, defense counsel introduced the Taxpayer Bill of Rights and attempted to elicit testimony regarding its application. See ECF No. 51 at PageID.423–26. Defendant’s primary contention seemed to be that the IRS had wrongfully entered a “freeze code” in his case that prevented any communication between him and the IRS once the criminal investigation was pending. Id. at PageID.422–23. Over the objection of the Government, the Taxpayer Bill of Rights was admitted into evidence. Id. at PageID.425. Defense counsel later referenced the Taxpayer Bill of Rights in closing argument while discussing Defendant’s alleged mistreatment. Defendant’s briefing is likewise replete with alleged instances of IRS misconduct, including the Service’s apparent failure to provide him with notice of his tax deficiency or meet with him and his accountant to resolve his tax liabilities.

In some ways, the taxpayer wants to be relieved of his conviction because the IRS followed the rules laid down in prior criminal cases that require it to stop its civil activities once it reaches the point of believing a crime might have occurred.  He seeks to pit TBOR against the rules designed to protect taxpayers from an end run around criminal notification.  Alternatively, he argues that the IRS should continue its civil investigation parallel with the criminal one.  The court does not frame this clash of policies the same way that I have, perhaps because it simply does not believe that TBOR plays a role here.  In its conclusion on this issue it says:

Defendant has identified no authority supporting his theory that a violation of the Taxpayer Bill of Rights offends the Fifth Amendment. Defendant correctly notes that, in some instances, an “agency’s failure to follow its own regulations . . . may result in a denial of due process.” ECF No. 177 at PageID.4007 (citing Wilson v. Comm’r of Soc. Sec., 378 F.3d 541, 545 (6th Cir. 2004)). But no court in this circuit or any other circuit has ever held that the Service’s failure to comply with the Taxpayer Bill of Rights violates due process or otherwise warrants dismissal of the indictment. Indeed, the remedy that the Internal Revenue Code provides for violations of the Code and Treasury Regulation is a civil action for damages. See 26 U.S.C. § 7433(a). With similar reasoning, the Ninth Circuit previously declined to vacate a criminal conviction based on the Service’s violation of the Taxpayer Bill of Rights. See United States v. Bridges, 344 F.3d 1010, 1020 (9th Cir. 2003) (noting that the “Taxpayer Bill of Rights [does not] authorize the suppression of evidence or the reversal of a criminal conviction.”); accord United States v. Tabares, No. 115CR00277SCJJFK, 2016 WL 11258758, at *8 (N.D. Ga. June 3, 2016), report and recommendation adopted, No. 1:15-CR-0277-SCJ-JFK, 2017 WL 1944199 (N.D. Ga. May 10, 2017).

As you know from our prior discussions, TBOR has not been successfully used to make a dent in civil cases as of yet.  It would be quite surprising if it plays much of a role in criminal cases but the failure here does not mean that the next defendant cannot find a different way to try to interject TBOR into the outcome of a criminal prosecution.

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.

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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)

Conclusion 

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?

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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.

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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.