IRS Criminal Investigation in the News

August 31, 2022 by Leave a Comment

Last week in The Fear of Funding I discussed the blowback on the Inflation Reduction Act and its funding for the IRS. Writing about the often byzantine world of tax procedure and tax administration typically does not engender much passion. My Op-Ed for NBC News discussing why the heated rhetoric about the IRS funding is dangerous and misleading triggered a different (mostly offline) response then my typical takes on, for example, whether dissipated assets are part of a taxpayer’s reasonable collection potential.

It is always helpful to focus on facts when considering policy issues, especially issues that can excite or inspire fear.  One issue that politicians and others have not covered with great clarity is what exactly IRS Criminal Investigation does. To that end, I encourage a read of CI’s 2021 Annual report, which explores CI’s unique role in tax administration and its relationship to law enforcement more generally.

The bulk of what CI does in terms of time and agent hours is work on tax matters and general tax fraud investigations:

Building a fraud case is time intensive and can often involve high profile people and businesses. For example, as reported widely last week, IRS CI assisted with the investigation and arrest of three key ringleaders of Yoga To The People, and what has allegedly been a multi-year scheme to siphon money from yoga students without the key YTTP executives reporting the proceeds or filing tax returns. (As an aside, the mainstream press loves to report yogi misdeeds, with NY Times, WAPO and TMZ running stories on this; TMZ has best photos….).

CI also assists on non tax investigations like its Illegal Source Financial Crimes Program. According to the CI Annual Report, in these cases, “special agents’ investigations focus on individuals who receive income from illegal sources, such as embezzlement, bribery, and fraud. They also focus on money-laundering schemes, where individuals launder their ill-gotten gains by making the money appear as if it came from legitimate source.”

There is lots more in the report, including solid numbers on investigations, prosecutions and employee numbers.

CI is a key part of our tax system, with its employees investigating and at times recommending prosecution of criminal tax violations and other related financial crimes to the Department of Justice. While most taxpayers will never interact with CI, it is an important part of a system that depends on the community at large respecting and complying with the law.

Filed Under: Criminal Penalties

Attorneys Behaving Badly

February 3, 2022 by Leave a Comment

A Tax Court press release noting suspensions and disbarment came out on the heels of the 9th Circuit sustaining the conviction of a former IRS Chief Counsel attorney for tax evasion.  Like a moth drawn to a candle, I could not resist reading about these situations.  The criminal case raises a statute of limitations issue while the cases in the press release provide pretty standard fare for discipline received.  Aside from closely following the criminal case of former Tax Court Judge Kroupa and occasionally reporting on Tax Court disciplinary matters, here, here and here, we leave these types of discussions to Jack Townsend and his excellent Federal Tax Crimes Blog which focuses on this area of the law and brings his expertise to bear.  He blogged the Orrock case on January 27, 2022 for anyone wanting his take on the case.

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In United States v. Orrock, D.C. No. 2:16-cr-00111-JAD-DJA-1 (9th Cir. 2022) the taxpayer concealed the sale of real property he controlled.  He did not report the sale on his personal return and belatedly disclosed the sale in the return of a partnership where he significantly underreported the amount of the sale.  From reading the Ninth Circuit opinion, the case looks like a rare prosecution of a single transaction.  Most tax evasion cases involve a pattern ,not because it’s necessary for the IRS to establish a pattern, but because establishing a pattern knocks out the defense of the mistaken treatment of a single item or a single year.  Because of the background of the defendant, a single event or single year case becomes easier to sell.

I don’t teach criminal tax but in the clinic I do spend a few minutes on criminal tax provisions each semester because inevitably some client has done something that could give rise to criminal tax prosecution.  The students, and possibly the client, have concerns which we must take seriously, but I also explain to the students the types of factors that go into the consideration of which taxpayers to prosecute among the many people the IRS could choose.  I let them know that the IRS would very much like to prosecute Harvard lawyers because that brings good publicity but would not be as interested in low income taxpayers both because the sentencing guidelines will generally not produce much of a sentence and the appearance of prosecuting individuals who are struggling economically.

The basis for Mr. Orrock’s appeal of his conviction rests on an argument that the IRS took too long to bring the case and not that the IRS failed to prove the offense.  I thought that the timing issue he raises was settled and Jack’s post indicates that he did as well.  The specific issue is the date from which the statute of limitations to bring the prosecution runs.  Mr. Orrock argues that it runs from the date of the filing of the fraudulent return.  He is certainly right that it runs from that date and based on that date the IRS brought its case against him too late.  The problem, however, is that the date to bring a prosecution of this type also runs from the date of each affirmative act of evasion and he committed an affirmative act of evasion after filing the return and that act restarted the statute of limitations.

On the civil side, the act of evasion in filing the return would create an unlimited statute of limitations to assess so you don’t get into the issue of subsequent affirmative actions.  On the civil side, subsequent acts of contrition, like filing an amended return properly reporting the tax liability, don’t restart the statute of limitations as the Supreme Court explained in Badaracco v. Commissioner, 464 U.S. 386, 394 (1984).  The Orrock case highlights the fact that once you start with a fraudulent return things can go very bad.  While in the criminal context the fraudulent return does not create the same unlimited statute of limitations for criminal prosecution that the fraudulent return creates for civil assessment, it’s still possible to create a long period for the criminal prosecution statute of limitations to run because subsequent affirmative acts often take place.

The Tax Court’s January 24, 2022 press release describes the suspension of two attorneys and the disbarment of a third.  In each case the attorney’s problem arises not from actions taken in a case before the Tax Court but from collateral disciplinary action stemming from action taken by their state bar.  The Tax Court attaches the relevant order it issues with respect to each individual.  The orders set out the path that led to the action by the Tax Court.  If you are the subject to disciplinary action by the state bar or the bar of another court, you have a duty to notify the Tax Court within 30 days.

I don’t know how many people in this situation actually report the disciplinary action to the Tax Court within that period though I suspect that’s a small number, and I don’t know how the Tax Court finds these cases, but I do know from reading enough of these orders over the years that the Tax Court takes it seriously.  Read the press release if you want the more details on the cases.  When the Tax Court’s action simply follows as a collateral matter, the lurid details require going further down the chain.  If it weren’t tax filing season, I would expect a comment from Bob Kamman providing those details in the near future on any of the cases with especially interesting fact situations. 

Filed Under: Criminal Penalties, Fraud, Tax Court

TIGTA Report on Restitution

June 28, 2021 by Leave a Comment

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.

Filed Under: Assessment, Criminal Penalties, Restitution

Imposing Penalties After Restitution Assessment

June 25, 2021 by 1 Comment

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.

Filed Under: Assessment, Criminal Penalties, Restitution

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

June 16, 2021 by 2 Comments

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.

Filed Under: Criminal Penalties, TBOR

Court Grants Compassionate Release to High Profile Tax Felon Morris Zukerman

April 20, 2020 by 8 Comments

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.

Filed Under: Criminal Penalties

Trump, Tax Crimes, and Tilting at Windmills

October 22, 2018 by 6 Comments

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.

 

Filed Under: Criminal Penalties

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

March 22, 2018 by 1 Comment

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.

 

Filed Under: AIA, Criminal Penalties
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