Trail Of A Tax Fraud Case, A Prosecutor's Perspective

Jail In Tax Cases

Statistically speaking the odds of being prosecuted for tax offenses are small - less than 1% of those who are required to file tax returns. The odds of being convicted, once prosecuted, however, are high - greater than 95%. Further, once convicted, the odds of going to jail are also substantial - greater than 75% in the author's experience. The Department of Justice, Tax Division, Criminal Enforcement Section, has historically required their attorneys to affirmatively request jail in all tax cases.

At best the defendant would seek, as part of a plea agreement, to obtain the United States. agreement that it would remain silent at sentencing on the issue of incarceration. On November 29, 1996, the Tax Division issued Blue Sheet 6.005, which represented a shift in sentencing policy. In limited circumstances, the United States may now affirmatively recommend probation.

In order to affirmatively recommend a sentence of probation the defendant must

1. plead guilty,
2. have a final guideline range of 0-6 months, and,
3. the AUSA must submit a written memorandum seeking Tax Division prior approval that is
4. personally approved by the United States Attorney.

Where probation is sought the policy also recommends that prosecutors also insist on some form of intermittent confinement or community confinement. Most Assistant United States Attorneys seek such approval only sparingly.

Important considerations from the prosecutor's standpoint in determining whether to recommend probation, stand silent or seek incarceration include:

1. The timing of the plea - the earlier the better.
2. The extent of cooperation both as to the defendant's own tax situation, and as to other defendants - if the latter is relevant.
3. The ability and willingness of the defendant to pay restitution to the IRS and how quickly he can pay some or all of the restitution. If the defendant pays a substantial portion of restitution prior to sentencing it certainly helps his sentencing prospects.
4. The amount of tax loss and the number of years involved in the offenses. Criminal tax cases often take years to investigate and bring to the indictment stage.Thus, it is not unusual to have a situation where the prosecution years in a false return case are 1990, 1991, and 1992 and the defendant has not filed returns for 1993, 1994 and 1995 because of the pending investigation. An interesting consideration from a plea standpoint is whether the government has analyzed the tax loss for the non-prosecution years. If they have not, an early plea may keep the loss figure low if those calculations are not performed. An added consideration here is that some United States Attorney's Offices incorporate U.S.S. Guidelines Section 1B1.8 into their plea agreement so that any tax loss provided by the defendant will not be used to enhance his Guideline level. Some United States Attorney's Offices, however, do not include Section 1B1.8.
5. The defendant's criminal record.

Tax Statutes

Title 26

• 26 U.S.C. ' 7201 - Traditionally, 26 U.S.C. ' 7201, the tax evasion statue, was the statute most frequently used to prosecute tax offenders. With the advent of the Sentencing Guidelines and the fact that the dollar loss drives the sentence, Section 7206 has supplanted Section 7201 with some prosecutors.
• 26 U.S.C. ' 7206(1) - The advantage of Section 7206 is that neither an intent to evade taxes nor a tax loss is required as an element of the offense under Section 7206(1). The Government must prove that the defendant made and subscribed (signed and filed) a return that is false as to a material matter (capable of affecting the tax calculation). Usually this false item consists of overstated deductions, or understated income, or both.

Prior to United States v. Gaudin, 115 S.Ct. 2310 (1995), materiality in a tax case was solely a question of law for the court. Though Gaudin concerned 18 U.S.C. ' 1001, the practical effect of the decision is that prosecutors and courts treat materiality as a question of fact for the jury. Post Gaudin cases include: United States v. Aramony, 88 F.3d 1369 (4th Cir. 1996); United States v. David, 83 F.3d 638 (4th Cir. 1996); and United States v. Klausner, 80 F.3d 55 (2d Cir. 1996). The practical consequence of treating materiality as a question of fact is that it is incumbent on the Government to prove a tax loss.

• 26 U.S.C. ' 7206(2) - Section 7206(2) makes it a crime to willfully assist in the preparation of a false tax return. This statute has been used even where the defendant assisted in the preparation of his own return. United States v. Hirschfeld, 964 F.3d 318 (4th Cir. 1992), cert. denied,506 U.S. 1087 (1993).
• 26 U.S.C. ' 7212(a) - Another title 26 statute that is finding increasing favor with prosecutors is Section 7212(a), which is sometimes referred to as a one-man conspiracy statute. Section 7212(a)'s omnibus provision makes it a crime to corruptly endeavor to obstruct or impede, the due administration of justice. See, United States v. Mitchell, 985 F.2d 1275 (4th Cir. 1993); United States v. Workinger, 90 F.3d 1409 (9th Cir. 1996) [six year statue of limitation for Section 7212(a)].

Section 7212(a) is useful as a prosecution tool because it allows a prosecutor to fold fraudulent acts involving different returns into one offense. The Tax Division imposes an heightened review of requested Section 7212(a) charges so that use of Section 7212(a) will not overshadow other traditionally used statutes.

Title 18 Offenses

• Conspiracy - 18 U.S.C. ' 371 - Section 371 allows a prosecutor to charge either: a conspiracy to commit a specific offense or a conspiracy to defraud the United States. United States v. Rankin, 870 F.2d 109 (3d Cir. 1989); Hammerschmidt v. United States, 265 U.S. 182, 188 (1924). When the defraud prong of Section 371 is used, the government usually charges a conspiracy to defraud the United States by impeding and impairing the lawful functions of the Internal Revenue Service in the ascertainment, computation, assessment and collection of the revenue. When the defraud prong is used, Section 371 is essentially the equivalent of 26 U.S.C. ' 7212 except that a conspiracy requires two or more persons.

Grand Jury Practice

The government has broad subpoena power at the grand jury stage to determine whether a crime has been committed or to satisfy the grand jury that one has not been. United States v. R. Enterprises, 498 U.S. 292 (1991). There is no requirement that the government show that the subpoenaed material is relevant to the grand jury inquiry.

As a practical matter, the government will usually make some showing of relevance to the court, preferably in camera and ex parte. If an individual is going to attack a grand jury subpoena, it will usually be done on the basis of being unduly burdensome by virtue of being overly broad. See Rule 17, Fed. R. Crim. Pro.

The government may also inquire into certain attorney- client privileged communications if the government can show that there is a crime fraud exception. Under this exception, even attorney-client fact work product may be obtainable. Opinion work product is much harder for the government to obtain. In re Grand Jury Proceedings, 102 F.3d 748 (4th Cir. 1996); In re Grand Jury Proceedings, 87 F.3d 377 (9th Cir. 1996); In re Grand Jury Proceedings, 33 F.3d 342 (4th Cir. 1996).

In grand jury investigations where the target is closely associated with or works for a corporation, labor union or other formal association (including partnerships), the target may be subpoenaed to the grand jury in his capacity as a custodian of records. Such a custodian, even where the target is the sole owner of the corporation, does not have 5th Amendment protection as to the act of production, though the government is usually precluded from showing the identity of the custodian at trial. See, Braswell v. United States, 487 U.S. 99 (1988); United States v. Doe, 465 U.S. 605 (1984).

If the Government provides act of production immunity, some Circuits hold the Government to a rigorous standard as to the prior knowledge necessary to avoid tainting the criminal case should the Government seek to indict the individual to whom it provided act of production immunity. See, United States v. Hubbell, 167 F. 3d 552 (D.C. Cir. 1999), petition for certiorari pending, No. 99-166.

Pre-Trial Discovery

Rule 16(a)(1)(A) - Defendant's statements, whether before or after arrest, made pursuant to interrogation by a government agent, which the government intends to use at trial.

1. Volunteered statements are not made pursuant to interrogation. United States v. Von Stoll, 726 F.2d 584, 587 (9th Cir. 1983).
2. Are statements made to a Revenue Agent in the course of a civil audit before referral to CID discoverable under Rule 16)?

Rule 16(a)(1)(E) - Expert Witness. Rule 16(a)(1)(E) requires the government to disclose a written summary of expert testimony the government intends to use at trial.

Is the IRS summary witness an expert witness under Rule 16? From a prosecutor's perspective, the answer may be no. Consider:

United States v. Bakker, 925 F.2d 728, 737 (4th Cir. 1991); United States v. Smith and Wilcoxson, No. 92-1612 (5th Cir. Aug 11, 1993), Aff.d 3 F.3d 436 (5th Cir. 1993) (unpublished).United States v. Winn, 948 F.2d 145, 148 (5th Cir. 1991), cert. denied, 112 S.Ct. 1599 (1992); and United States v. Baker, 10 F.3d 1374 (9th Cir. 1993).

Rule (16)(a)(1)(C) - Documents and tangible items. This is where the bulk of discovery lies. Usually the government will make available all documents gathered during the civil and criminal phases. Generally the Special Agent Report (SAR) (that portion constituting Jencks material), memoranda of interviews of prospective witnesses, and grand jury material (Jencks material) are withheld until closer to the trial date.

Jury Selection.

Constitutional Considerations - Neither the defendant nor the government may exercise peremptory challenges for a constitutionally impermissible reason, such as race, gender, religion, national origin. See, Batson v. Kentucky, 476 U.S. 79 (1986); Powers v. Ohio, 499 U.S. 400 (1991); Georgia v. McCollum, 505 U.S. 42 (1992); J.E.B. v. Alabama, ex rel. J.B., 114 S.Ct. 1419 (1994); Purkett v. Elem, 115. S.Ct. 1770 (1995). It is appropriate to consider appearance, dress, body language, attitude, etc. . .

Types of Jurors

Defendants

1. Appear to prefer woman over men.
2. Prefer uneducated.
3. Self-employed.
4. Postal Workers?
5. Tax Protestors.
6. Young.

Government

1. Prefers W-2 wage earners.
2. Working class, blue collar.
3. Educated over uneducated.
4. Accountants.
5. Not attorneys.
6. Not clergy.

Trial by Jury?

Rule 23(a) Fed. R. Crime. Pro. requires that both parties agree to waive jury trial. As a practical matter the court will impose its will on the government if the defendant waives jury trial. Defendants generally prefer jury trials, hoping for the hung jury temporary victory (it usually will be tried again). Sometimes complex defenses, technical defenses, or small potatoes cases (this does not belong in federal court) fair well with a bench trial.

Opening Statement.

Government's Opening

The government's opening should identify the theme of the case at the outset. Greed, not too surprisingly, usually rears its head quickly:

• This is a case of greed.
• This is a case of the defendant who was making money hand over fist and even that was not enough.
• This is a case of lying, cheating and stealing.
• This is a case about one defendant who had it all, fame, fortune, family - but even that was not enough.

The discussion of those interesting, compelling, facts that prove the theme should then follow with a weaving in of the charges and the elements that must be proved. Sometimes the government will take the opportunity to also discuss what it does not need to prove as well.
For example, in a conspiracy case, the government does not have to prove, that the scheme (the government uses scheme a lot) was successful, or that all of the defendants had to know of all the details, or (in a multi-object conspiracy) that they had to agree to all the objects - rather they only had to agree to one object (though you must be unanimous as to that object).
In 7206 cases the government may tell the jury that it does not have to prove a tax deficiency, or more likely, the government will often tell the jury that it does not have to prove that the return overstated the deductions or understated income in the amounts alleged, only that they were overstated or understated by some amount.

In a 7206(2) return preparer case, depending on the particular facts alleged, the government may point out that the client did not have to know the accountant prepared a false return in order for the accountant to be convicted.

In a 7206(2) case involving a non-return preparer (e.g., tax shelter) the government may point out that the defendant does not have to have actually prepared the return to be guilty of Section 7206(2). Rather, it is sufficient if he supplied false information or documents that were used to prepare the return.

Defendant's Opening

In rare circumstances a defendant in a tax case will waive opening statement and reserve it until the start of his case. On one hand, such a tactic provides the government less notice of where the defense is headed. On the other hand, and likely more to the defendant's detriment, it completely misses the opportunity to educate the jury as to the defendant's theory of innocence, and thus the jury is not provided guidance on how they should evaluate evidence and witnesses and the holes they should look for in the prosecution's case.

While the presumption of innocence is an important weapon in the defendant's arsenal, it should not necessarily be the focal point or theme of the defense (unless that is all you have). The defendant should address in some detail the facts that its expects will support its theory of innocence. From the government.s perspective, whether the defendant will testify is one of the most significant decisions in the trial. Most tax cases devolve to one issue - whether the defendant acted willfully. The question is extremely difficult for the defendant to answer without testifying at trial. Being able to assure the jury in opening that the defendant will tell them he is innocent is a powerful weapon. Of course, such an assurance to the jury reduces one.s options later and also telegraphs to the government to prepare for the defendant's testimony.

The Government's Case

The Service Center Representative - The government often will call an IRS Service Center Representative as its first witness to introduce tax returns and transcripts. Often the government will also use the Service Center witness to discuss the contents of some of the tax returns - for example to show the jury that for each of the years charged the defendant.s tax returns reported zero taxable income and zero tax.

Consideration should be given whether to offer to stipulate to the Service Center Representative - a defendant usually does not need this witness unless there are questions as to the reliability of certain IRS records. While there are occasional reports of the IRS losing a return, the odds of losing multiple years returns are astronomical. Thus, when the IRS says that the defendant did not file for three years, it is likely true.

Special Agent - The investigating, case agent, will usually testify in the government's case only if he interviewed the defendant and the defendant made incriminating, useful, admissions.
From the defendant's viewpoint, if the Special Agent testifies about his interview with the defendant, it may provide the opportunity to introduce the defendant's theory of innocence through the other statements he made to the agent, which avoids the defendant having to testify at trial. (e.g., it was a mistake, I didn't pay attention to the return, I was sloppy, they were bookkeeping errors, my wife was ill, I was going through a divorce). However, the defendant's self-serving claims of innocence are not always admissible just because the Special Agent testified as to some admissions. United States v. Wilkerson, 84 F.3d 692 (4th Cir. 1996).

Summary Witness - The government will usually employ an agent to testify as to the tax computations in the case. As discussed above, this witness is not offered as an expert witness under Rule 702, Fed. R. Evid. The government does this in part to avoid providing discovery under Rule 16(a)(1)(E). For similar tactical reasons, the summary witness usually will not be the revenue agent who assisted the CID agent in the investigation. That revenue agent will often have an RAR (revenue agent.s report).

If the tax loss is a real issue in the case for the defense, then cross-examination of the revenue agent to show math errors may be productive to harm the government.s credibility. Sometimes the math errors can be serious - for example where the agent calls income a dividend or a constructive dividend, but has not performed an earnings and profits analysis.

The Defendant's Case - Whether the defendant should testify. Where lack of willfulness is the primary defense it is important that the defendant testify if possible. Many acquittals involve cases where the defendant testified.

An important consideration against the defendant testifying is that if he fabricates an elaborate defense, he likely will receive a 2-level enhancement under the Sentencing Guidelines Section 3 C1.1 for obstruction of justice. From the government's perspective, cross-examination of the defendant is one of the most important aspects of the trial. A poor, unprepared, cross can lose the governemnt's case. The goal for the government is not to lose the case on cross-examination. The defendant obviously is going to be hostile; he will not agree with the points the government seeks to make.

Character Witnesses - It is improper to cross-examine a character witness concerning whether their opinion would be affected by the verdict. It is fair, and sometimes effective cross-examination, to show a character witness' lack of familiarly with the defendant's tax affairs.

Jury Instructions - It is error to not instruct on the defendant.s theory of defense, though he is not entitled to a precise wording. United States v. Mitchell, 495 F.2d 285 (4th Cir. 1979).

Sentencing Guidelines

Ex Post Facto

• Generally the newer Guidelines (post November 1, 1993) are more severe on tax offenses that the old Guidelines.
• Those Guidelines in effect at the time of sentencing are required to be used unless the Guidelines in effect at the time of the offense are less severe.
• At the time of offense. means at the time the offense is completed not begun.
• For conspiracy cases, especially, there is an opportunity for the Government to use the newer guidelines United States v. Thomas, 12 F.3d 1350, 1370-71 (5th Cir. 1994). United States v. Dale, 991 F.2d 819, 853 (D.C. Cir 1993) (tax conspiracy): and United States v. Reetz, 18 F.3d 595, 598 (8th Cir. 1994).

Tax Loss

Means intended or attempted tax loss, e.g., had the scheme been successful. United States v. Hirschfeld, 964 F.2d 318, 324-325(4th Cir. 1992); United States v. Moore, 997 F.2d 55 (5th Cir.1993); and USSG 2T1.1(c)(1)

Relevant Conduct

• Very broad. Court may consider uncharged years, acquitted years, years prior to the guidelines. United States v. Harvey, 996 F.2d 919, 922 (7th Cir. 1993).
• In conspiracy cases, taxes evaded by various parties may be added together.
  - Harvey, supra; and United States v. Atkins, 25 F.3d 1401 (8th Cir. 1994).

*article courtesy of David G. Barger, former Assistant United States Attorney, Eastern Division of Virginia.